<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 28, 1996
REGISTRATION NO. 333-11111
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
RIDGEVIEW, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
NORTH CAROLINA 2251 & 2252 56-0377410
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
RIDGEVIEW, INC.
2101 NORTH MAIN AVENUE
NEWTON, NORTH CAROLINA 28658
(704) 464-2972
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
---------------------
HUGH R. GAITHER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
RIDGEVIEW, INC.
2101 NORTH MAIN AVENUE
NEWTON, NORTH CAROLINA 28658
(704) 464-2972
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
<TABLE>
<S> <C>
DUMONT CLARKE, IV R. DOUGLAS HARMON
MOORE & VAN ALLEN, PLLC SMITH HELMS MULLISS & MOORE, L.L.P.
NATIONSBANK CORPORATE CENTER 214 NORTH CHURCH STREET
100 NORTH TRYON STREET, FLOOR 47 P.O. BOX 31247
CHARLOTTE, NORTH CAROLINA 28202-4003 CHARLOTTE, NORTH CAROLINA 28231
(704) 331-1000 (704) 343-2000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 28, 1996
1,600,000 SHARES
(LOGO) RIDGEVIEW(R)
COMMON STOCK
Of the 1,600,000 shares of Common Stock offered hereby, 1,520,000 are being
sold by Ridgeview, Inc. (the "Company") and 80,000 are being sold by certain
shareholders of the Company (the "Selling Shareholders"). See "Selling
Shareholders." The Company will not receive any of the proceeds from the sale of
the shares by the Selling Shareholders.
Prior to this offering (the "Offering"), there has been no public market
for the Common Stock of the Company (the "Common Stock"). It currently is
anticipated that the initial public offering price will be between $9.00 and
$11.00 per share. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The Common Stock
has been approved for listing on the Nasdaq National Market under the symbol
"RIDG."
Immediately prior to the completion of this Offering, the Company will
acquire, by issuing 240,000 shares of Common Stock pursuant to a share exchange
agreement, all of the issued and outstanding shares of a corporation affiliated
with the Company through common ownership of its shares by directors, officers
and employees of the Company. The consummation of the proposed share exchange is
conditioned upon all of the conditions to the issuance and sale of the shares of
Common Stock offered hereby, other than the condition that the proposed share
exchange be consummated, having been met or waived. See "Certain
Transactions -- Transactions with and Acquisition of Affiliate."
SEE "RISK FACTORS," BEGINNING ON PAGE 6, FOR A DISCUSSION OF CERTAIN
INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) SHAREHOLDERS
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
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Total(3).......................... $ $ $ $
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</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses, payable by the Company estimated to be $600,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
240,000 additional shares of Common Stock on the same terms and conditions
as set forth above to cover over-allotments, if any. If the Underwriters
exercise this option in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
---------------------
The shares of Common Stock are offered by the several Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
the certificates for the shares of Common Stock will be available for delivery
at the offices of Interstate/Johnson Lane Corporation, Charlotte, North
Carolina, on or about , 1996.
---------------------
INTERSTATE/JOHNSON LANE SCOTT & STRINGFELLOW, INC.
CORPORATION
The date of this Prospectus is , 1996
<PAGE> 3
Photographs of certain of the Company's products, socks and women's
hosiery, as worn by various individuals, registered trademarks licensed by the
Company for use on its products and the names and trademarks of certain of the
Company's major customers appear here.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. Prospective investors should carefully consider the
information discussed under "Risk Factors." Except as set forth in the financial
statements and unless otherwise indicated, all information in this Prospectus
(i) gives effect to an approximate 129 for 1 split of the Company's outstanding
Common Stock effected October 8, 1996 in the form of a stock dividend, (ii)
reflects the issuance of 240,000 shares of Common Stock pursuant to a share
exchange agreement by and among the Company and the shareholders of an
affiliated corporation, which will occur immediately prior to the completion of
this Offering, and (iii) assumes no exercise of the Underwriters' over-allotment
option. Unless otherwise indicated, references to years in this Prospectus refer
to the Company's fiscal year ending December 31 in such year. This Prospectus
contains forward-looking statements and information which involve risks and
uncertainties. The Company's actual results could differ materially from the
results anticipated in these forward-looking statements as a result of certain
risks and uncertainties described under the heading "Risk Factors" and elsewhere
in this Prospectus.
THE COMPANY
Founded in 1912, the Company designs, manufactures and markets a complete
range of sports, rugged outdoor and heavyweight casual socks as well as a wide
variety of women's hosiery products, including tights, trouser socks, pantyhose
and knee-highs. The Company believes it is one of the leading vendors of sports
socks to sporting goods and active apparel stores. The Company also sells its
products to department stores, discount stores and a variety of other retailers.
In addition, the Company produces sports socks for sale by others under such
brand names as adidas, ASICS, Bass, Brooks, Fila, Head Sportswear, IZOD, New
Balance and Reebok and women's hosiery products for sale under the Liz Claiborne
and Elisabeth brand names. Under license agreements, the Company produces and
sells socks and women's hosiery directly to retailers under the brand names
Converse, Ellen Tracy, Evan-Picone, Jacques Moret and Woolrich. See
"Business -- Women's Hosiery Products." The Company is currently negotiating
licensing terms to produce and sell socks under the Coleman and Rockport brand
names. The Company expects that approximately two-thirds of its net sales in the
current year will be derived from sales of socks with the balance derived from
sales of women's hosiery products. As of September 30, 1996, the Company had
more than 3,500 customers in the United States, Europe and other parts of the
world. Only one of such customers, Target, accounted for more than 10% of the
Company's 1995 net sales and is expected to account for more than 10% of the
Company's 1996 net sales.
In recent years the Company has diversified geographically and modernized
its production capacity, increased its domestic customer base, expanded its
contract manufacturing business, negotiated the rights to manufacture and sell
socks and women's hosiery under widely-recognized brand names and increased its
marketing activities and sales in Europe and other foreign markets. These steps
included in 1994 and 1995 establishing a manufacturing facility with high speed
electronic knitting equipment in Ft. Payne, Alabama to produce
promotionally-priced, multi-pair pack sports socks and replacing all of the
mechanical sock knitting equipment in the Company's facilities in Newton, North
Carolina with similar electronic equipment. In 1994, the Company entered the
designer segment of the women's hosiery market through a licensing agreement to
manufacture and sell women's hosiery under the Ellen Tracy brand name in the
United States. Ellen Tracy hosiery products manufactured by the Company are
available in tights, trouser socks and pantyhose in department stores, including
Neiman Marcus, Nordstrom, Saks Fifth Avenue, Macy's, Dillard's and
Bloomingdale's. The Company recently negotiated a license to manufacture and
sell women's hosiery under the Evan-Picone trademark, an established brand of
women's hosiery. See "Business -- Women's Hosiery Products."
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE> 5
In June 1995, the Company expanded its manufacturing capacity and customer
base by acquiring Seneca Knitting Mills Corporation ("Seneca") located in Seneca
Falls, New York (the "Seneca Acquisition"). See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations -- The Seneca Acquisition." Seneca has been engaged since 1954
exclusively in producing rugged outdoor and heavyweight casual socks under
various private labels for customers such as Kmart, J.C. Penney and Structure (a
division of The Limited, Inc.), and under Seneca's own brand, Oyster Bay. In
1995, the Company obtained through a strategic alliance with another domestic
manufacturer, Chipman-Union Co., a new sports sock manufacturing program for
adidas. To accommodate growth from the adidas program, the Company has doubled
the capacity of its manufacturing facility in the Republic of Ireland, which was
established in 1986 to serve European customers. See "Business -- Sales and
Marketing -- Sports, Rugged Outdoor and Heavyweight Casual Socks."
During the last three years, the Company has experienced substantial
growth. Net sales increased 52.8% from $35.6 million in 1993 to $54.4 million in
1995, a compound annual growth rate of 23.6%. On a pro forma basis (giving
effect to certain acquisitions -- see "Summary Consolidated Financial Data"),
for the six months ended June 30, 1996, net sales increased 25.7% compared to
net sales in the same period in the prior year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- General." The
Company's future growth strategy includes the following elements:
INCREASING SALES TO EXISTING CUSTOMERS. Many of the Company's existing
customers in the sporting goods industry, such as Just for Feet, The Sports
Authority, Sports & Recreation and Oshman's Sporting Goods, are rapidly
expanding the number of stores they operate, and the Company expects its sales
to these customers will increase as a result of their unit growth. The Company
also expects to be able to increase its sales to other existing customers such
as Target, the Company's largest customer, as well as J.C. Penney and Nordstrom.
EXPANDING SALES RELATIONSHIPS THROUGH CROSS-SELLING. The Company is
seeking to establish relationships with certain major retailers with which the
Company has not historically done business. Management believes that the
Company's expanded customer base of major retailers resulting from the Seneca
Acquisition and the Evan-Picone hosiery program creates opportunities for
cross-selling the Company's other products.
OBTAINING ADDITIONAL LICENSING ARRANGEMENTS. The Company is seeking to
license additional nationally and internationally recognized consumer brand
names to complement the Converse, Ellen Tracy, Evan-Picone, Jacques Moret and
Woolrich licensed brand names. Management is currently negotiating licensing
terms to produce and sell socks under the Coleman and Rockport brand names.
ADDING COMPLEMENTARY PRODUCT CATEGORIES THROUGH SELECTIVE
ACQUISITIONS. Women's casual socks and men's dress socks are complementary
product categories that could be added to the Company's existing product lines
through selective acquisitions of other manufacturers of socks or women's
hosiery or through internal product diversification. Although the Company has no
proposal, agreement, understanding or arrangement relating to the acquisition of
any other company at this time, future acquisitions could also be expected to
expand production capacity and add to the Company's customer base.
INCREASING INTERNATIONAL SALES. The Company plans to build on the existing
customer base served by its manufacturing facility in the Republic of Ireland
and on the Company's base of export sales of domestically manufactured products.
See "Business -- Sales and Marketing -- International Sales and Marketing of
Socks."
In recent years, manufacturers of socks and women's hosiery have
experienced a period of rapid technological change and encountered a demanding
retail environment characterized by customers' expectations of immediate order
fulfillment and depth in all product categories. See "Business -- Industry
Overview." The Company is investing in new technology and strengthening its
ability to provide a significant share of major retailers' total socks and
women's hosiery requirements. The Company's core operating strategy includes the
following elements:
- Manufacturing a broad range of products, including sports socks, rugged
outdoor and heavyweight casual socks, tights, trouser socks, pantyhose and
knee-highs, for sale under widely-recognized brand names as well as for
large retailers' private label programs and under the Company's own
brands.
2
<PAGE> 6
- Replacing most of its mechanical sock knitting machines with more
flexible electronic machines capable of operating at significantly higher
production levels with lower per unit costs.
- Making additional capital investments required to make the Company a
lower-cost, higher volume producer of a wide variety of products with the
capability of responding to tighter shipment schedules and increased
production capabilities demanded by large retailers. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Industry and Business Trends."
- Outsourcing the manufacturing of a variety of styles of socks and women's
hosiery products to meet peak demand and accommodate major new women's
hosiery programs such as Evan-Picone, allowing the Company to operate its
own manufacturing facilities at more efficient production levels.
- Focusing on consistent product quality and providing rapid order
fulfillment to a large and diverse customer base.
The Company believes the sock and women's hosiery manufacturing industry is
entering a period of consolidation. Management believes the pace of
consolidation will increase in future years in part as a result of a trend among
large retailers to do business with a smaller group of vendors that are capable
not only of providing a significant share of a large retailer's total sock and
women's hosiery requirements but also of satisfying large retailers' increasing
inventory management demands. Although the Company does not currently have any
proposal, agreement, understanding or arrangement regarding any particular
acquisition, management believes manufacturers such as the Company that have the
commitment and resources to remain independent will be presented with attractive
acquisition opportunities in future years.
The Company's executive offices are located at 2101 North Main Avenue,
Newton, North Carolina 28658, and its telephone number is (704) 464-2972.
ACQUISITION OF AFFILIATE
Immediately prior to the completion of this Offering, the Company will
acquire all of the 500 issued and outstanding shares of Interknit, Inc.
("Interknit"), a corporation affiliated with the Company through common
ownership of its shares by eight persons who are also shareholders of the
Company, including the Company's five executive officers (four of whom are
members of the Company's Board of Directors), one director who is not an
executive officer and one greater than 5% shareholder of the Company who was
formerly a director and executive officer of the Company (the "Interknit
Acquisition"). Interknit was established by these persons and five other
employees of the Company in January 1994 for the purpose of providing a
consistent, reliable supply of high quality "greige goods" (unfinished socks and
women's hosiery) for the Company's sock finishing and shipping facility in Ft.
Payne, Alabama. During 1995, approximately 82% of Interknit's output of greige
goods was sold to the Company, and Interknit purchased approximately 11% of its
raw materials requirements from the Company. Pursuant to a share exchange
agreement entered into on August 27, 1996 by and among the Company and the
shareholders of Interknit (the "Share Exchange Agreement"), the shareholders of
Interknit will, immediately prior to the completion of this Offering, transfer
all of the 500 shares of outstanding capital stock of Interknit to the Company
in exchange for an aggregate of 240,000 shares of Common Stock. Assuming the
market price of the Common Stock on the date this Offering is completed is equal
to the initial public offering price (and assuming an initial public offering
price of $10.00 per share), the 240,000 shares when issued will have an
aggregate fair market value of $2.4 million. The Interknit Acquisition will be
accounted for as a "pooling of interests." The obligations of the shareholders
of Interknit under the Share Exchange Agreement are conditioned upon all of the
conditions to the issuance and sale of the shares of Common Stock offered hereby
to the Underwriters, other than the condition that the proposed share exchange
be consummated, having been met or waived. See "Certain Transactions --
Transactions with and Acquisition of Affiliate" for a more complete description
of the terms and conditions of the Interknit Acquisition.
3
<PAGE> 7
Unless the context otherwise requires, all references to the "Company" in
this Prospectus are to the Company, including its subsidiaries, and Interknit,
collectively, and all references to the Company's outstanding Common Stock
include the 240,000 shares of Common Stock to be issued to the shareholders of
Interknit.
THE OFFERING
Common Stock offered by the
Company............................ 1,520,000 shares
Common Stock offered by the Selling
Shareholders..................... 80,000 shares
Common Stock to be outstanding
after this Offering................ 3,120,000 shares(1)
Use of proceeds by the Company..... To reduce outstanding debt and fund
capital expenditures, including
construction of a new distribution
facility and purchase of additional
electronic knitting equipment. See "Use
of Proceeds."
Risk factors....................... Investors should carefully consider the
risks and uncertainties that may
adversely affect the Company's future
results of operations or financial
condition, which are described under the
heading "Risk Factors" on page 6 of this
Prospectus.
Nasdaq National Market symbol...... RIDG
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(1) Excludes (i) 245,000 shares of Common Stock available for future grants of
stock options, restricted stock and other stock-based awards under the
Company's stock incentive plans and (ii) 75,000 shares of Common Stock that
may be issued in connection with future purchases by employees under the
Company's employee stock purchase plan. See "Management -- Employee Benefit
Plans."
4
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------- -------------------------------------
PRO PRO PRO
FORMA FORMA FORMA
1991 1992 1993 1994 1995 1995(2) 1995 1996 1995(2) 1996(3)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
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STATEMENT OF OPERATIONS DATA:
Net sales..................... $32,283 $32,438 $35,605 $40,093 $54,408 $59,602 $21,474 $31,799 $26,026 $32,712
Gross profit.................. 7,232 6,259 7,792 9,130 10,685 11,658 4,552 6,143 5,422 6,474
Operating income.............. 1,760 944 1,760 2,362 2,016 2,210 838 1,242 986 1,522
Interest expense.............. (721) (630) (661) (829) (1,584) (2,014) (520) (1,064) (906) (1,130)
Income before income
taxes....................... 1,159 610 1,433 1,587 535 314 335 207 104 420
Net income.................... $ 912 $ 533 $ 1,084 $ 1,014 $ 296 $ 105 $ 238 $ 129 $ 37 $ 271
Net income per share.......... $ 0.67 $ 0.40 $ 0.80 $ 0.75 $ 0.22 $ 0.07 $ 0.18 $ 0.10 $ 0.02 $ 0.17
Weighted average shares
outstanding................. 1,362 1,359 1,353 1,350 1,350 1,590 1,353 1,355 1,593 1,595
OTHER DATA:
Operating income before
depreciation and
amortization(4)............. $ 2,447 $ 1,768 $ 2,661 $ 3,279 $ 3,216 $ 3,736 $ 1,342 $ 1,988 $ 1,725 $ 2,391
Depreciation and
amortization................ 687 824 901 917 1,200 1,526 504 746 739 869
Capital expenditures.......... 2,066 1,512 840 1,881 3,619 4,383 1,794 606 1,834 624
As adjusted for certain
charges(5):
Gross profit................ 11,306 12,279 4,862 5,732
Operating income............ 3,137 3,331 1,148 1,296
Operating income before
depreciation and
amortization(4)........... 4,337 4,857 1,652 2,035
Net income.................. $ 969 $ 778 $ 424 $ 223
Net income per share........ $ 0.72 $ 0.49 $ 0.31 $ 0.14
</TABLE>
<TABLE>
<CAPTION>
AT JUNE 30, 1996
AT DECEMBER 31, ---------------------------------
----------------------------------------------- PRO PRO FORMA AS
1991 1992 1993 1994 1995 ACTUAL FORMA(6) ADJUSTED(7)
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BALANCE SHEET DATA:
Working capital........................ $ 7,205 $ 6,885 $ 7,616 $11,696 $11,911 $15,112 $15,090 $ 15,158
Total assets........................... 18,094 19,145 21,614 24,487 38,534 44,445 46,401 46,119
Long-term debt (less current
portion)............................. 5,693 5,859 5,771 9,492 14,624 17,516 18,771 5,585
Total debt............................. 7,964 9,651 10,918 11,292 21,511 25,423 27,052 13,516
Shareholders' equity................... 5,924 6,119 6,690 7,776 7,986 8,106 8,243 21,779
</TABLE>
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(1) The summary historical consolidated financial data have been derived from
the Company's annual consolidated financial statements and unaudited interim
financial statements appearing elsewhere in this Prospectus. The summary
consolidated pro forma financial data have been derived from the Company's
unaudited pro forma financial statements also appearing elsewhere in this
Prospectus.
(2) Gives effect to the Seneca and Interknit Acquisitions as if each of such
events had occurred on January 1, 1995. See the unaudited pro forma
condensed consolidated financial statements and notes thereto.
(3) Gives effect to the Interknit Acquisition as if such event had occurred on
January 1, 1996.
(4) Operating income before depreciation and amortization is net sales minus
cost of goods sold, selling, general and administrative expenses and
supplemental retirement benefit expense plus depreciation and amortization
expense. The measure does not represent cash generated from operating
activities determined in accordance with generally accepted accounting
principles, is not necessarily indicative of cash available to fund cash
needs and should not be considered an alternative to net income as an
indicator of the Company's operating performance or as an alternative to
cash flow as a measure of liquidity.
(5) Gross profit for the year ended December 31, 1995 and the six months ended
June 30, 1995 reflects charges for the write-off of obsolete, unfinished
women's hosiery products in excess of normal reserves in the amounts of
$621,000 and $310,000, respectively. Operating income for the year ended
December 31, 1995 reflects the recognition of a supplemental retirement
obligation in the amount of $500,000 to the Company's former chairman. See
"Certain Transactions -- Supplemental Retirement Benefit." The data
presented have been adjusted to eliminate the effect of these one-time
charges.
(6) Gives effect to the Interknit Acquisition as if such event had occurred on
June 30, 1996.
(7) Adjusted to give effect to this Offering and the use of the net proceeds
thereof as described in "Use of Proceeds."
5
<PAGE> 9
RISK FACTORS
In addition to other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby.
Competition. As the result of increasing retail concentration and
overcapacity in certain segments of the industry, competition in the sock and
women's hosiery manufacturing industries, which is based on price, quality and
service, is becoming increasingly intense. The Company faces competition in both
its sock and women's hosiery businesses from a large number of manufacturers
located in the United States, many of which have substantially greater market
shares and financial and other resources than the Company. Competition from
foreign manufacturers is a factor primarily affecting competition for sales of
women's sheer hosiery only. Increased competition from these and future
competitors could reduce sales and prices, adversely affecting the Company's
results of operations. Accordingly, there can be no assurance that the Company
will be able to compete effectively with its competitors in the future. See
"Business -- Competition."
Reliance on Target. In 1995, sales to Target represented approximately 13%
of the Company's total net sales (approximately 12% on a pro forma basis
assuming the Seneca Acquisition had occurred at the beginning of 1995). The
Company could be adversely affected in the event of the bankruptcy or insolvency
of, or a downturn in the business of, Target or in the event that Target were to
increase its purchases of private label women's hosiery from other
manufacturers. See "Business -- Major Customers."
Seasonality and Fluctuations in Operating Results. Sales of certain of the
Company's products, particularly rugged outdoor and heavyweight casual socks,
ski socks and heavyweight tights, are seasonal in nature and generally occur
during the fall and winter selling seasons, which begin in August and end in
December. Historically, the majority of the Company's net sales have been
generated, and most of the Company's profits have been earned, in the third and
fourth quarters of its fiscal year. The seasonal nature of some of the Company's
products requires management to engage in extensive advance planning and
scheduling. In the event actual sales of seasonal products are lower than sales
that are projected and planned for, there is a risk that the Company may have to
carry over excess inventory to the next season or sell excess inventory at
discounted prices. Carrying over substantial amounts of excess inventory to the
next season would increase outstanding indebtedness under the Company's line of
credit. This would reduce the amount of working capital available to the Company
to finance its inventory requirements for other products, restrict the Company's
ability to finance needed capital expenditures and result in increased interest
expense with an adverse impact on the Company's results of operations. Sales of
significant amounts of excess inventory at discounted prices in excess of normal
reserves could also adversely impact the Company's results of operations. The
Company's operating results may also fluctuate significantly on an annual and
quarterly basis as a result of a number of other factors, including general
economic and political conditions (such as recessions or military conflicts),
the timing of domestic and international orders from large customers such as
Target, the timing of capital expenditures, increased competition and variations
in the product mix of the Company's sales. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Risks Associated with Licensed Brands. Sales of socks and women's hosiery
products under licensed brand names represented approximately 7.5% of the
Company's total net sales in 1995. As part of its future growth strategy, the
Company is seeking to license additional nationally-recognized brand names to
complement the Converse, Ellen Tracy, Evan-Picone, Jacques Moret and Woolrich
licensed brand names. The Company's right to manufacture and sell socks under
these and any additional licensed brand names is, and will be, dependent on
license agreements with the owners of the registered trademarks. In general, the
Company's current license agreements give it the right to use the trademarks
with respect to certain specified categories of products for terms ranging from
one to three years, with renewal rights if certain minimum annual sales
thresholds are satisfied, in exchange for the payment of a royalty equal to a
percentage of the Company's net sales of products under the trademark. Each of
these license agreements provides for payment of a minimum guaranteed royalty
for each annual period during the term of the agreement and requires the Company
to spend a specified percentage of its net sales for each annual period on
advertising. Each of the
6
<PAGE> 10
agreements also gives the owner of the trademark the right to terminate the
agreement under certain circumstances, including the failure by the Company to
meet manufacturing and distribution standards required under the license and, in
some instances, failure by the Company to meet specified annual sales targets.
There can be no assurance that the Company's sales of products under these or
other licensed brand names will be sufficient to satisfy minimum annual sales
thresholds. The Company's net sales of Ellen Tracy products in 1995 represented
only 84% of the annual sales target of $3.0 million for such year, and the
Company expects its sales of Ellen Tracy products in the current year to achieve
approximately 65% to 70% of the higher annual sales target for 1996 of $5.0
million. In 1995, the Company paid minimum guaranteed royalties based on the
$3.0 million annual sales target for such year and intends to do so again in the
current year based on the $5.0 million annual sales target. The Company does not
consider the additional payments made in 1995 and expected to be made in 1996
under minimum guaranteed royalty payment provisions of the Ellen Tracy license
agreement to be material. Management believes its performance as licensee has
otherwise been satisfactory to date and has recently been advised that the
licensor is willing to renew the Ellen Tracy license agreement when the
contract's initial three-year term expires at the end of the current year. The
renewal is expected to be for a term of one year with a right to renew at
expiration of the term based on achievement by the Company of the annual sales
target and other goals to be included in the new license agreement. There can be
no assurance, however, that the Company will be able to renew the Ellen Tracy
license agreement, any of the other license agreements it currently has, or any
additional license agreements the Company may be able to obtain in the future
upon the expiration of their respective terms. With the exception of the
Evan-Picone license agreement, which was entered into in July 1996 and has an
initial term ending December 31, 1999, the Company believes the termination or
nonrenewal of any of the existing license agreements would have only a
short-term adverse impact on the Company's consolidated results of operations
and no material adverse impact on the Company's consolidated financial
condition. The nonrenewal or termination of one or more existing license
agreements could make it more difficult, however, for the Company to license
additional brand names in the future. See "Business -- Operations -- Women's
Hosiery Products."
Operational Risks Associated with Transition of Evan-Picone Women's Hosiery
Program. In July 1996, the Company negotiated a license for the Evan-Picone
women's hosiery program, which was previously held by another manufacturer,
Ithaca Industries, Inc. ("Ithaca"). The Company does not have the manufacturing
capacity to satisfy the current demand for Evan-Picone products, and Ithaca will
continue to manufacture a portion of the Evan-Picone women's hosiery program
until the Company has arranged to outsource all of its manufacturing
requirements to other manufacturers, which the Company expects to accomplish by
the end of 1996. Outsourcing by its very nature complicates the quality
assurance risks associated with textile manufacturing. Should any of the
contract manufacturers involved in the Evan-Picone program fail to meet the
quality standards established by the Company or encounter financial or
operational difficulties, the program could suffer. The Company is also
contracting with an independent warehouse distribution center for inventory and
order fulfillment services with respect to Evan-Picone products. Dependence upon
this service provider further complicates the risks associated with the
Evan-Picone program. To facilitate the transition of the operational aspects of
the program, the Company has employed the individual who managed the Evan-Picone
program for the prior licensee and expects to contract for the services of the
nationwide independent sales force and network of merchandisers used by the
prior licensee to sell Evan-Picone women's hosiery and provide merchandising
services to retailers. There can be no assurances, however, that the transition
of the operations will occur in accordance with the Company's plans and without
significant disruptions that could adversely affect the Evan-Picone program and
the Company's operating results. Ithaca recently filed a voluntary petition
under Chapter 11 of the United States Bankruptcy Code seeking confirmation of a
prepackaged plan of reorganization. Ithaca is continuing to operate its business
as debtor-in-possession, and management of the Company believes Ithaca will be
able to perform satisfactorily as a manufacturing source for a portion of the
Evan-Picone women's hosiery program until the Company has completed its plans to
outsource all of its requirements to other manufacturers.
Net sales of women's hosiery under the Evan-Picone brand name by the prior
licensee, which were $17.5 million in such licensee's fiscal year ended January
31, 1996, declined by approximately 33% from such licensee's fiscal 1994 to 1996
and are expected to decline significantly in the twelve months ending January
31,
7
<PAGE> 11
1997. Notwithstanding this declining sales trend, based on discussions with
representatives of the major department and discount stores handling the
Evan-Picone women's hosiery products, the Company believes the Evan-Picone brand
name continues to be well-recognized by consumers. There can be no assurances,
however, that consumer recognition of the brand will continue, that the Company
will be successful in stabilizing the program or that the declining sales trend
of recent years will not continue. The largest single customer for Evan-Picone
women's hosiery, May Department Stores Co., accounted for approximately 20% of
the net sales of this program by the prior licensee in its most recent fiscal
year. The loss of this customer or another major customer for the Evan-Picone
brand of women's hosiery would have a material adverse impact on the Company's
sales and profitability under the Evan-Picone program and could lead to the
Company's failure to meet minimum sales thresholds. See
"Business -- Operations -- Women's Hosiery Products."
Management of Growth and Dependence on Key Personnel. During the last
three years, the Company has experienced substantial growth and expects in the
future to devote significant resources to enhancing and marketing existing
products, developing and marketing new products and increasing personnel to
support its anticipated growth. If the Company's management is unable to manage
growth effectively, this could have a material adverse effect on the Company.
The success of the Company is largely dependent on the personal efforts and
abilities of its President and Chief Executive Officer, Hugh R. Gaither, its
Executive Vice President of Sales and Marketing, William D. Durrant, and its
Executive Vice President and Chief Financial Officer, Walter L. Bost, Jr. The
loss of the services of any one of the Company's executive officers could have a
material adverse effect upon the Company's business and development. None of
these executive officers has an employment agreement with the Company. The
Company has purchased key man life insurance on Messrs. Gaither, Durrant and
Bost in the amounts of $2.0 million, $1.0 million and $1.0 million,
respectively. See "Management."
Risks Associated with Possible Acquisitions. As part of its growth
strategy and in order to achieve greater product diversification, the Company
may pursue acquisitions of other sock and women's hosiery manufacturers. The
Company does not currently have any proposal, agreement, understanding or
arrangement regarding any particular acquisition. With respect to any future
acquisitions, there can be no assurance that the Company will be able to locate
or acquire suitable candidates or that any operations which are acquired can be
effectively and profitably integrated into the Company. Furthermore, any future
acquisitions may negatively impact the Company's operating results, particularly
during the periods immediately following the acquisition, and may place
significant demands on the Company's managerial and financial resources. In
order to provide funds for any acquisitions, the Company will likely need to
incur, from time to time, additional indebtedness to banks and other financial
institutions and to issue, in public or private transactions, equity and debt
securities. The availability and terms of any such financing will depend on
market and other conditions, and there can be no assurance that such additional
financing will be available on terms acceptable to the Company, if at all. See
"Business -- Growth Strategy."
Risk of Price Increases and Quality of Raw Materials. The principal raw
materials used by the Company in the manufacture of its products are yarns made
by others from cotton, nylon, wool, spandex and a variety of other synthetic
fibers. The Company does not maintain any long-term supply contracts (contracts
having a term of more than one year) for any of the Company's principal raw
materials requirements. The Company periodically purchases significant
quantities of yarn made from synthetic fibers at prices negotiated at the time
of purchase that fluctuate as the raw material and other costs of the Company's
yarn suppliers fluctuate. Prices for yarns made from cotton and wool generally
experience greater fluctuation than do prices for yarns made from synthetic
fibers. Most of the Company's purchases of cotton yarn are made pursuant to
fixed-price contracts with three to five different suppliers (having terms
ranging from six to twelve months) that are entered into during the fall months
of each year based on the results of that year's cotton production and projected
demand for cotton yarn during the following year. With recent declines in cotton
prices, United States cotton prices are close to their ten-year average price,
but there can be no assurance that as a result of shortages in the cotton supply
by reason of weather, crop disease or other factors, prices will not increase.
Furthermore, there can be no assurance that price increases of yarns made from
natural or synthetic fibers will not adversely affect the Company's results of
operations. In addition, the Company's failure to discover raw material defects
could adversely affect the Company's results of operations. See "Business -- Raw
Materials."
8
<PAGE> 12
Financial Condition of Customers. In recent years a number of large
retailers, including certain customers of the Company, have filed for bankruptcy
protection or experienced financial difficulties, thus increasing the risk of
extending credit to such customers. Historically, the bankruptcies and financial
difficulties of the Company's customers have not had a material adverse effect
on the Company's financial condition. There can be no assurance, however, that
additional customers will not file for bankruptcy protection or experience
financial difficulties in the future and that such events will not adversely
affect the Company's operating results or financial condition. See
"Business -- Credit and Collections."
Unaffiliated Manufacturers. The Company outsources the manufacturing of a
variety of styles of socks and women's hosiery. The inability of an outside
manufacturer to ship the Company's products in a timely manner or to meet the
Company's quality standards could adversely affect the Company's ability to
deliver products to its customers in a timely manner. The Company does not have
long-term contracts with any outside manufacturers. Outsourcing is generally
accomplished by issuing a purchase order to another manufacturer with which the
Company has an established relationship for the purchase of greige or finished
goods that the Company either cannot or chooses not to manufacture itself. In
those instances where the Company expects to have a continuing relationship with
another manufacturer for the manufacture of a particular product, such as the
manufacturers to which the Company is outsourcing the manufacturing of
Evan-Picone sheer hosiery, the Company will project its demand for the product
over a period of several months and then periodically issue purchase orders to
the other manufacturer that normally conform to those projections.
Fashion Trends and Retail Cyclicality. The Company's business depends in
part on its ability to anticipate, gauge and respond to changing consumer
demands and fashion trends in a timely manner. There can be no assurance,
however, that the Company will continue to be successful in this regard. The
Company attempts to minimize the risk of changing fashion trends and product
acceptance by closely monitoring retail sales trends. The retail apparel
industry has been subject to substantial cyclical variation, and a recession in
the general economy or uncertainties regarding future economic prospects that
affect consumer spending habits could have an adverse effect on the Company. See
"Business -- Seasonality."
Environmental Matters. The Company's manufacturing operations are subject
to compliance with various federal, state and local governmental laws and
regulations. The Company believes that it is currently in compliance in all
material respects with applicable environmental laws and regulations. In the
event additional environmental requirements are imposed, the expense of
compliance could be substantial. See "Business -- Regulation."
Possibility of Additional Unionization. The employees of the Company at
its manufacturing facilities in Seneca Falls, New York and the Republic of
Ireland are currently represented by unions. If the balance of the Company's
employees should elect to be represented by a union in the future, increased
costs may be incurred and the financial results of the Company could adversely
be affected. See "Business -- Employees."
Exchange Rate Fluctuations. Approximately 12%, 10% and 9% of the Company's
net revenue for the fiscal years ended December 31, 1993, 1994 and 1995,
respectively, were derived from the Company's operations in the Republic of
Ireland. Since the revenues and expenses of the Company's operations in the
Republic of Ireland are generally denominated in the Irish punt, exchange rate
fluctuations between the Irish punt and the United States dollar will subject
the Company to currency translation risk with respect to the reported results of
its operations in the Republic of Ireland. See note 1 to the Company's
consolidated financial statements. The Company does not generally engage in
hedging activities with respect to its sales denominated in foreign currencies.
The sales of some of the Company's sport sock products manufactured at the
Company's facility in the Republic of Ireland are denominated in the British
pound. To mitigate the risk of exchange rate fluctuations on these sales, the
Company maintains a depository account at a financial institution in the United
Kingdom to which it deposits payments received from customers in British pounds
and from which it pays accounts payable to suppliers of yarn and others that are
also denominated in that currency.
Control by Existing Shareholders. Upon completion of this Offering, the
Company's 64 existing shareholders, most of whom are lineal descendants of the
Company's founders, will beneficially own a total of
9
<PAGE> 13
49% of the outstanding shares of Common Stock. As a result, subsequent to this
Offering, these shareholders, acting together with a limited number of other
shareholders, would be able to elect all of the Company's directors, amend the
Company's Articles of Incorporation, effect a merger, sale of assets or other
business acquisition or disposition, and otherwise effectively control the
outcome of other matters requiring shareholder approval. See "Principal and
Management Shareholders" and "Description of Capital Stock."
Anti-Takeover Provisions; Possible Issuance of Preferred Stock. The
Company's Articles of Incorporation and Bylaws contain various provisions that
may make it more difficult for a third party to acquire, or may discourage
acquisition bids for, the Company and could limit the price that certain
investors might be willing to pay in the future for shares of the Common Stock.
In addition, the Articles of Incorporation provide for 2,000,000 shares of
authorized but unissued Preferred Stock, the terms of which from time to time
may be fixed by the Board of Directors who also have the right to determine the
price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the shareholders
of the Company. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of such Preferred Stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire control of the outstanding voting stock of the
Company. See "Description of Capital Stock."
No Prior Market for Common Stock; Possible Volatility of Stock
Price. Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiations among the Company and the representatives of the Underwriters
and may not be indicative of the market price of the Common Stock after this
Offering. There can be no assurance that an active trading market will develop
or continue after this Offering or that the market price of the Common Stock
will not decline below the initial public offering price. The trading price of
the Common Stock could be subject to significant fluctuations in response to
variations in the Company's operating results, announcements by the Company, its
competitors and others, general trends in the sock and women's hosiery industry
and other factors. In addition, in recent months and years the equity markets
have experienced significant price and volume fluctuations which have affected
the market prices for many companies and often have been unrelated to the
operating performance of specific companies or market segments. Broad market
fluctuations may, after completion of this Offering, adversely affect the market
price of the Common Stock. See "Shares Eligible for Future Sale" and
"Underwriting."
Related Party Transactions and Conflicts of Interest. In the past, the
Company has engaged in transactions with affiliates of the Company which were
not the result of arm's length negotiations, including selling raw materials to
and purchasing significant quantities of greige goods from Interknit. Interknit
is a corporation affiliated with the Company through common ownership of its
shares by eight persons who are also shareholders of the Company, including the
Company's five executive officers, Albert C. Gaither, Hugh R. Gaither, William
D. Durrant, Walter L. Bost, Jr. and Susan Gaither Jones (four of whom are also
directors), one director who is not an executive officer of the Company, J.
Michael Gaither, and one greater than 5% shareholder of the Company, J. Robert
Gaither, Jr., who was formerly a director and executive officer of the Company.
Immediately prior to the completion of this Offering, the Company will acquire
all of the 500 issued and outstanding shares of Interknit from these eight
persons and the other five shareholders of Interknit, who are either current or
former employees of the Company, in exchange for 240,000 shares of the Common
Stock. As guarantors of the debt incurred to finance the start-up costs of
Interknit, the shareholders of Interknit may derive an additional benefit from
this Offering should the lender subsequently release them from their personal
guaranties. See "Certain Transactions -- Transactions with and Acquisition of
Affiliate." To address the conflicts of interest the directors of the Company
who are also shareholders of Interknit had between their fiduciary duties as
directors and their personal interests as shareholders of Interknit, the Board
of Directors created a special committee comprised of Hugh R. Gaither, William
D. Durrant and two directors who are not shareholders of Interknit to consider
the issue and make a recommendation to the Board of Directors. The Board of
Directors also engaged Interstate/Johnson Lane Corporation to perform a
valuation of Interknit and issue an opinion to the Board, prior to the Board's
approval of the Share Exchange Agreement, regarding the fairness from a
financial point of view to the shareholders of the Company of the exchange
ratio. The Company has adopted a policy that all related party transactions be
on terms no less
10
<PAGE> 14
favorable than could be obtained from third parties and that to the extent they
are outside the ordinary course of business they be presented for the approval
of the Company's disinterested directors. See "Certain Transactions -- Policy on
Related Party Transactions."
Shares Eligible for Future Sale. Sales of a substantial number of shares
of the Common Stock in the public market following this Offering, or the
perception that such sales may occur, could adversely affect the market price of
the Common Stock. Upon completion of this Offering, there will be 3,120,000
shares of Common Stock outstanding (3,360,000 shares if the Underwriters'
over-allotment option is exercised). Of these shares, the 1,600,000 shares
offered hereby (1,840,000 if the Underwriters' over-allotment option is
exercised) will be freely tradeable without restriction under the Securities
Act, except for any shares held by "affiliates" of the Company, which will be
subject to the resale limitations of Rule 144 under the Securities Act. An
additional 1,264,547 additional shares will be eligible for sale in the public
market beginning 180 days after the date of this Prospectus upon the expiration
of certain lock-up agreements with the Underwriters, subject to the provisions
of Rule 144. See "Shares Eligible for Future Sale" and "Underwriting."
Dilution. Purchasers of the Common Stock in this Offering will suffer
immediate and substantial dilution in the net tangible book value per share of
the Common Stock from the initial public offering price. See "Dilution."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,520,000 shares of
Common Stock offered hereby by the Company (assuming an initial public offering
price of $10.00 per share and after deducting underwriting discounts and
commissions and estimated expenses of this Offering) are estimated to be $13.5
million ($15.8 million if the Underwriters' over-allotment option is exercised
in full). The Company intends to use approximately $10.7 million of the net
proceeds (approximately $12.9 million if the Underwriters' over-allotment option
is exercised in full) to repay outstanding indebtedness under its revolving
credit facility (the "Revolving Credit Facility"). The Revolving Credit Facility
is a $20.0 million credit line with a bank secured by substantially all of the
Company's property, which bears interest at a rate equal to the bank's prime
rate plus 1% (currently 9.25%) and expires in January 1999. As of September 30,
1996, borrowings outstanding under the Revolving Credit Facility were $16.4
million. The Company expects to continue using the Revolving Credit Facility for
working capital needs and to fund the growth of its business after completion of
this Offering. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
The Company will use $850,000 of the net proceeds to pay a $500,000
promissory note the Company issued in June 1995 to the former principal
shareholder of Seneca in connection with the Seneca Acquisition and a $350,000
note payable to the estate of one of his immediate family members. The $500,000
promissory note bears interest at 7% per annum and is due and payable in full in
September 1997, unless the Company completes a public offering of the Common
Stock sooner, in which event the note provides that it shall become due and
payable in full. The $350,000 note bears interest at 9% per annum and is due and
payable in full in December 1996, but contains the same acceleration provision
relating to a public offering of the Common Stock by the Company.
Of the balance of the net proceeds, approximately $1.5 million will be used
to construct a distribution facility on Company-owned land adjacent to the
Company's existing facility in Newton, North Carolina, and approximately
$500,000 will be used to fund a portion of the estimated $1.5 million total cost
of purchasing and installing over the next 18 to 24 months approximately 60
electronic knitting machines to replace the more than 100 knitting machines
currently installed in the Company's women's hosiery division. Pending
application of the balance of the net proceeds for such purposes, the Company
intends to use the $2.0 million balance of the net proceeds to temporarily repay
additional amounts of outstanding indebtedness under its Revolving Credit
Facility.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Shareholders.
11
<PAGE> 15
DIVIDEND POLICY
Although the Company has paid regular cash dividends on the Common Stock in
the past, the Company intends to cease paying dividends and to retain earnings
to support the growth and development of its business. Accordingly, the Company
does not anticipate that any dividends will be declared on the Common Stock for
the foreseeable future. The payment of future dividends, if any, will be at the
discretion of the Board of Directors and will depend upon the Company's
earnings, financial condition, cash requirements, restrictive covenants under
the Revolving Credit Facility or any other indebtedness, future prospects and
other factors deemed relevant by the Company's Board of Directors.
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1996 (i) on an actual basis, (ii) on a pro forma basis to reflect the
Interknit Acquisition and (iii) on a pro forma, as adjusted basis to reflect the
Interknit Acquisition and the sale by the Company of 1,520,000 shares of Common
Stock in this Offering (at an assumed initial public offering price of $10.00
per share) and the application of the estimated net proceeds therefrom. See "Use
of Proceeds."
<TABLE>
<CAPTION>
AT JUNE 30, 1996
-----------------------------------------
PRO FORMA,
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt, including current portion
of long-term debt.................................... $ 7,907 $ 8,281 $ 7,931
-------- -------- --------
Long-term debt, less current portion................... 17,516 18,771 5,585
-------- -------- --------
Shareholders' equity:
Common Stock, $.01 par value; 20,000,000 shares
authorized; 1,360,000 shares issued and
outstanding, actual; 1,600,000 shares issued and
outstanding, pro forma; and 3,120,000 shares
issued and outstanding, pro forma, as
adjusted(1)....................................... 14 16 31
Additional paid-in capital........................... 1,108 1,131 14,652
Foreign currency translation adjustments............. 91 91 91
Retained earnings.................................... 6,893 7,005 7,005
-------- -------- --------
Total shareholders' equity........................ 8,106 8,243 21,779
-------- -------- --------
Total capitalization......................... $33,529 $35,295 $35,295
======== ======== ========
</TABLE>
- ---------------
(1) Excludes (i) 245,000 shares of Common Stock available for future grants of
stock options, restricted stock and other stock-based awards under the
Company's stock incentive plans and (ii) 75,000 shares of Common Stock that
may be issued in connection with future purchases by employees under the
Company's employee stock purchase plan. See "Management -- Employee Benefit
Plans."
12
<PAGE> 16
DILUTION
On a pro forma basis giving effect to the Interknit Acquisition as if such
event had occurred on June 30, 1996, the net tangible book value at June 30,
1996 was approximately $6,305,000, or $3.94 per share of Common Stock. Pro forma
net tangible book value per share represents the amount of the Company's net
tangible assets less total liabilities divided by the number of shares of Common
Stock outstanding. After giving effect to the sale of 1,520,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $10.00 per
share, and after deducting underwriting discounts and commissions and estimated
offering expenses, the Company's pro forma as adjusted net tangible book value
at June 30, 1996 would have been $19,841,000, or $6.36 per share. This
represents an immediate increase in pro forma net tangible book value of $2.42
per share to existing shareholders and an immediate dilution of $3.64 per share
to new investors purchasing shares of Common Stock in this Offering. The
following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share........................... $10.00
-----
Pro forma net tangible book value per share at June 30, 1996.... $3.94
Increase per share attributable to new investors................ 2.42
-----
Pro forma net tangible book value per share after this Offering... 6.36
-----
Net tangible book value dilution per share to new investors....... $ 3.64
=====
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid and the average price per share paid by the existing
shareholders and by the new investors at an assumed initial public offering
price of $10.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders... 1,600,000 51.3% $ 1,147,000 7.0% $ 0.72
New investors........... 1,520,000 48.7 15,200,000 93.0 10.00
--------- ----- ----------- -----
Total......... 3,120,000 100.0% $16,347,000 100.0%
========= ===== =========== =====
</TABLE>
The above computations exclude (i) 245,000 shares of Common Stock available
for future grants of stock options, restricted stock and other stock-based
awards under the Company's stock incentive plans and (ii) 75,000 shares of
Common Stock that may be issued in connection with future purchases by employees
under the Company's employee stock purchase plan. See "Management -- Employee
Benefit Plans."
13
<PAGE> 17
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data (except the pro forma
data), insofar as they relate to each of the years 1991 through 1995, have been
derived from the Company's annual audited consolidated financial statements,
including the consolidated balance sheets at December 31, 1994 and 1995 and the
related consolidated statements of operations for each of the three years in the
period ended December 31, 1995 and notes thereto appearing elsewhere in this
Prospectus. The data for the six months ended June 30, 1995 and June 30, 1996
(except the pro forma data) have been derived from the Company's unaudited
financial statements also appearing elsewhere herein, which, in the opinion of
management, include all adjustments, consisting only of normal recurring
adjustments and an adjustment for an obsolete inventory write-off in excess of
normal reserves, necessary for a fair statement of the results of operations for
the unaudited interim periods.
Historically, the majority of the Company's sales have been generated, and
most of the Company's profits have been earned, in the third and fourth quarters
of the year. Accordingly, the data for the six months ended June 30, 1996 should
not be considered indicative of results expected for the year ending December
31, 1996. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's consolidated financial statements and unaudited
pro forma condensed consolidated financial statements included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------------------- -------------------------------------
PRO PRO PRO
FORMA FORMA FORMA
1991 1992 1993 1994 1995 1995(1) 1995 1996 1995(1) 1996(2)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................... $32,283 $32,438 $35,605 $40,093 $54,408 $59,602 $21,474 $31,799 $26,026 $32,712
Cost of goods sold........... 25,051 26,179 27,813 30,963 43,723 47,944 16,922 25,656 20,604 26,238
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit................. 7,232 6,259 7,792 9,130 10,685 11,658 4,552 6,143 5,422 6,474
Selling, general and
administrative expenses.... 5,472 5,315 6,032 6,768 8,669 9,448 3,714 4,901 4,436 4,952
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income............. 1,760 944 1,760 2,362 2,016 2,210 838 1,242 986 1,522
Other income (expense):
Interest expense........... (721) (630) (661) (829) (1,584) (2,014 ) (520) (1,064) (906 ) (1,130 )
Other...................... 120 296 334 54 103 118 17 29 24 28
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes...................... 1,159 610 1,433 1,587 535 314 335 207 104 420
Provision for income taxes... 247 77 349 573 239 209 97 78 67 149
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income................... $ 912 $ 533 $ 1,084 $ 1,014 $ 296 $ 105 $ 238 $ 129 $ 37 $ 271
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
Net income per share......... $ 0.67 $ 0.40 $ 0.80 $ 0.75 $ 0.22 $ 0.07 $ 0.18 $ 0.10 $ 0.02 $ 0.17
Cash dividends per share..... $ 0.08 $ 0.09 $ 0.09 $ 0.11 $ 0.12 $ 0.11 $ 0.06 $ 0.03 $ 0.05 $ 0.03
Weighted average shares
outstanding................ 1,362 1,359 1,353 1,350 1,350 1,590 1,353 1,355 1,593 1,595
OTHER DATA:
Operating income before
depreciation and
amortization(3)............ $ 2,447 $ 1,768 $ 2,661 $ 3,279 $ 3,216 $3,736 $ 1,342 $ 1,988 $1,725 $2,391
Depreciation and
amortization............... 687 824 901 917 1,200 1,526 504 746 739 869
Capital expenditures......... 2,066 1,512 840 1,881 3,619 4,383 1,794 606 1,834 624
As adjusted for certain
charges(4):
Gross profit............... 11,306 12,279 4,862 5,732
Operating income........... 3,137 3,331 1,148 1,296
Operating income before
depreciation and
amortization(3).......... 4,337 4,857 1,652 2,035
Net income................. $ 969 $ 778 $ 424 $ 223
Net income per share....... $ 0.72 $ 0.49 $ 0.31 $ 0.14
</TABLE>
14
<PAGE> 18
<TABLE>
<CAPTION>
AT JUNE 30, 1996
AT DECEMBER 31, ---------------------------------------
----------------------------------------------- PRO FORMA
1991 1992 1993 1994 1995 ACTUAL PRO FORMA(5) AS ADJUSTED(6)
------- ------- ------- ------- ------- ------- ------------ --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................... $ 7,205 $ 6,885 $ 7,616 $11,696 $11,911 $15,112 $ 15,090 $ 15,158
Property, plant and equipment,
net............................. 5,578 6,096 5,740 6,332 10,349 10,242 11,588 11,588
Total assets...................... 18,094 19,145 21,614 24,487 38,534 44,445 46,401 46,119
Long-term debt (less current
portion)........................ 5,693 5,859 5,771 9,492 14,624 17,516 18,771 5,585
Total debt........................ 7,964 9,651 10,918 11,292 21,511 25,423 27,052 13,516
Shareholders' equity.............. 5,924 6,119 6,690 7,776 7,986 8,106 8,243 21,779
</TABLE>
- ---------------
(1) Gives effect to the Seneca and Interknit Acquisitions as if each of such
events had occurred on January 1, 1995. See the unaudited pro forma
condensed consolidated financial statements and notes thereto.
(2) Gives effect to the Interknit Acquisition as if such event had occurred on
January 1, 1996.
(3) Operating income before depreciation and amortization is net sales minus
cost of goods sold, selling, general and administrative expenses and
supplemental retirement benefit expense plus depreciation and amortization
expense. The measure does not represent cash generated from operating
activities determined in accordance with generally accepted accounting
principles, is not necessarily indicative of cash available to fund cash
needs and should not be considered an alternative to net income as an
indicator of the Company's operating performance or as an alternative to
cash flow as a measure of liquidity.
(4) Gross profit for the year ended December 31, 1995 and the six months ended
June 30, 1995 reflects charges for the write-off of obsolete, unfinished
women's hosiery products in excess of normal reserves in the amounts of
$621,000 and $310,000, respectively. Operating income for the year ended
December 31, 1995 reflects the recognition of a supplemental retirement
obligation in the amount of $500,000 to the Company's former chairman. See
"Certain Transactions -- Supplemental Retirement Benefit." The data
presented have been adjusted to eliminate the effect of these one-time
charges.
(5) Gives effect to the Interknit Acquisition as if such event had occurred on
June 30, 1996.
(6) Adjusted to give effect to the Offering and the use of the net proceeds as
described in "Use of Proceeds."
15
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis provides information regarding the
Company's consolidated financial condition as of June 30, 1995 and 1996 and as
of December 31, 1993, 1994 and 1995 and its results of operations for the six
months ended June 30, 1995 and 1996 and for the years ended December 31, 1993,
1994 and 1995. This discussion and analysis should be read in conjunction with
the preceding Selected Consolidated Financial Data and the Company's
consolidated financial statements and notes thereto included elsewhere in this
Prospectus. Data for the six months ended June 30, 1996 are not necessarily
indicative of results expected for the year ending December 31, 1996. The
percentages provided below are calculated using the detailed financial data
contained in the Company's consolidated financial statements and notes thereto.
GENERAL
The Company derives its revenue from the manufacture and sale of sports,
rugged outdoor and heavyweight casual socks and women's hosiery products. The
Company's manufacturing facilities are located in Newton, North Carolina; Ft.
Payne, Alabama; Seneca Falls, New York; and Tralee, in the Republic of Ireland.
The Company believes it is one of the leading vendors of sports socks to
sporting goods and active apparel stores. The Company also sells its products to
department stores, discount stores and a variety of other retailers. In
addition, the Company produces sports socks for sale by others under such
widely-recognized brand names as adidas, ASICS, Bass, Brooks, Fila, Head
Sportswear, IZOD, New Balance and Reebok and women's hosiery products for sale
under the Liz Claiborne and Elisabeth brand names. Under license agreements, the
Company produces and sells socks and women's hosiery directly to retailers under
the brand names Converse, Ellen Tracy, Evan-Picone, Jacques Moret and Woolrich.
The Company is currently negotiating licensing terms to produce and sell socks
under the Coleman and Rockport brand names.
The Company's net sales have increased over the past three years, from
$35.6 million in 1993 to $54.4 million in 1995, a compounded annual growth rate
of 23.6%. The majority of the Company's revenue growth over the past three years
is attributable to increased sales of lightweight sports socks sold at
promotional prices in multi-pair packs, rugged outdoor and heavyweight casual
socks and women's tights and trouser socks. The increased sales of lightweight
sports socks and women's tights and trouser socks were generated internally,
while the increased sales of rugged outdoor and heavyweight casual sock lines
resulted from the Seneca Acquisition in June 1995. The Company's operating
income before depreciation and amortization, as adjusted for certain one-time
items (an obsolete inventory write-off in excess of normal reserves and the
recognition of a supplemental retirement benefit liability in 1995), also
increased over the past three years, from $2.7 million in 1993 to $4.3 million
in 1995. In 1994 and 1995, the Company invested a significant portion of its
capital resources in modernizing its sock manufacturing operations, with
aggregate capital expenditures for modern electronic knitting equipment and
other capital improvements during such years totalling $5.5 million. While the
expenses associated with the Seneca Acquisition and the lost production time and
other costs associated with the Company's modernization program had a negative
impact on the Company's net income for the year ended December 31, 1995 and the
first six months of 1996, management believes the integration of Seneca's
operations has been substantially completed, as has been the Company's
modernization program for its sports sock operations.
16
<PAGE> 20
The following table presents the Company's net sales by product category
for the most recent three years and the first six months of 1995 and 1996,
expressed in thousands of dollars and as a percentage of total net sales. For a
detailed description of each product category, see "Business -- Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------------------- ----------------------------------
1993 1994 1995 1995 1996
--------------- --------------- --------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SOCKS:
Sports specific............. $13,421 37.7% $14,212 35.4% $14,878 27.3% $ 7,380 34.4% $10,287 32.4%
Sports promotional.......... 9,385 26.4 12,035 30.0 13,344 24.5 6,858 31.9 8,932 28.1
Active sport................ 1,654 4.6 1,879 4.8 1,846 3.4 904 4.2 738 2.3
Rugged outdoor and
heavyweight casual........ -- -- -- -- 9,178 16.9 -- -- 4,298 13.5
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total socks............. 24,460 68.7 28,126 70.2 39,246 72.1 15,142 70.5 24,255 76.3
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
WOMEN'S HOSIERY:
Sheer pantyhose and
knee-highs................ 6,147 17.3 5,782 14.4 6,047 11.1 3,522 16.4 3,395 10.7
Tights and trouser socks.... 4,998 14.0 6,185 15.4 9,115 16.8 2,810 13.1 4,149 13.0
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total women's hosiery... 11,145 31.3 11,967 29.8 15,162 27.9 6,332 29.5 7,544 23.7
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total net sales.... $35,605 100.0% $40,093 100.0% $54,408 100.0% $21,474 100.0% $31,799 100.0%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
As illustrated by the table set forth above, socks have accounted for an
increasing percentage of the Company's total net sales, increasing from 68.7% in
1993 to 76.3% in the six months ended June 30, 1996. Within the sock product
lines, the percentage of total net sales attributable to rugged outdoor and
heavyweight casual socks, which were not previously sold by the Company, was
16.9% in 1995, due to the Seneca Acquisition in June 1995, while sales of sports
promotional socks grew at a faster rate than sales of heavier weight sports
specific and active sport socks due primarily to consumer preferences. Within
the women's hosiery product lines, the percentage of net sales attributable to
tights and trouser socks increased from 14.0% in 1993 to 16.8% in 1995 due to
consumer preferences and the success of the Ellen Tracy program, which began in
1994. The net sales by product category for the six months ended June 30, 1996
are not indicative of the net sales by product category expected for the year
ending December 31, 1996, because sales of rugged outdoor and heavyweight casual
socks, tights and trouser socks typically are higher during the third and fourth
quarters and sales of women's hosiery products are expected to increase as a
percentage of total net sales due to implementation of the Evan-Picone program
in the third and fourth quarters of 1996.
RESULTS OF OPERATIONS
Industry and Business Trends
Management believes that the Company's recent operating results have been,
and its future operating results may be, affected by certain industry and
business trends discussed below and elsewhere in this Prospectus. The impact of
these trends on historical operating results can be difficult to identify and
measure and, with respect to future operating results, difficult to predict. The
following discussion of such trends includes forward-looking statements that are
subject to inherent risks and uncertainties. Accordingly, the Company's
performance in future periods may differ materially from those suggested by such
statements.
The Company's success depends in part on its ability to anticipate and
respond to changing customer demands and fashion trends. See "Risk
Factors -- Fashion Trends and Retail Cyclicality." One such trend that the
Company has benefitted from in recent years is a fashion trend toward more
casual dress and active wear. Sales of the Company's socks have increased in
part because socks typically are an integral part of a more casual,
sports-oriented wardrobe. While existing retailers have modified their sales
strategies to emphasize such items, new retailers have emerged that focus
entirely on casual clothing or sporting goods and apparel. Women's hosiery
products also have been affected by the trend toward more casual dress by
shifting the emphasis from traditional sheer products to more durable,
heavyweight products such as tights and trouser socks. This trend has increased
the Company's sales of women's hosiery products as well as its profitability,
due to the emphasis on heavier-weight product lines which carry higher margins.
Selling, general and
17
<PAGE> 21
administrative costs have increased as well, due to development costs incurred
to modify and expand the Company's established product lines to include more
casual and sports-oriented items.
As the market for socks and women's hosiery products has become more
fashion conscious, association with brand names has become an increasingly
important marketing tool. The Company has responded to this trend by entering
into licensing agreements to use designer brand names such as Ellen Tracy,
Evan-Picone and Jacques Moret in its women's hosiery product lines, Woolrich in
its rugged outdoor and heavyweight casual product lines and Converse in its
sports sock product lines. See "Risk Factors -- Risks Associated with Licensed
Brands." Because these licensing agreements typically involve higher margin
products, they have had a positive impact on the Company's revenue and gross
profit margins. Licensing arrangements also tend to result in higher selling,
general and administrative costs due to royalty payments, cooperative
advertising and marketing requirements imposed by licensors. Management expects
to continue to pursue licensing arrangements for brand names that complement the
Company's existing product lines.
As producers of consumer goods, sock and women's hosiery manufacturers are
subject to certain trends in the retailing industry. Of considerable importance
in recent years has been the trend toward consolidation of apparel retailers
into large regional or national chains. See "Business -- Industry Overview."
This trend has been particularly prevalent among the sporting goods retailers
and discount and department stores where the bulk of the Company's products are
sold. The centralized purchasing departments for these chains have the leverage
to demand preferential pricing and tend to favor vendors who can supply a
variety of related products in large quantities, accommodate strict packaging
and shipping requirements and maintain substantial finished goods inventories
managed by computerized information networks that are compatible with electronic
ordering systems. These retailers also expect manufacturers to play an expanding
role in the marketing and managing of their product lines. In order to maintain
and increase sales to such retailers, the Company has modernized and expanded
its production facilities, developed outsourcing relationships with other
manufacturers, invested approximately $400,000 since 1990 to update its
information systems and hired key sales people who are familiar with the
preferences and practices of such retailers. Implementation of this strategy has
resulted in substantial increases in revenues, narrower gross profit margins on
higher production volumes and increased selling, general and administrative
expenses.
The Company believes a trend toward consolidation in the sock and women's
hosiery industry has developed in recent years, due in part to powerful
incentives for manufacturers to become low cost, high volume producers. Smaller
companies that have not modernized their production facilities, focused on
profitable niche markets and developed effective channels of distribution are
finding it increasingly difficult to survive as independent manufacturers. This
consolidation trend periodically creates attractive acquisition opportunities
for companies that have the commitment and resources to remain independent.
While any future acquisitions by the Company will be designed to contribute to
the Company's long-term profitability by expanding capacity and adding
complementary product lines, they may initially have a negative impact on the
Company's gross profit and selling, general and administrative expenses as the
operations of the acquired company are integrated into the Company's existing
operations. To the extent any future acquisitions are financed by or involve the
assumption of additional debt, interest expense also will increase. The Seneca
Acquisition, for example, enabled the Company to broaden its product line to
include rugged outdoor and heavyweight casual socks. While the Seneca
Acquisition is expected to have a positive impact on the Company's long-term
profitability, increased interest expense and the expenses associated with the
integration of Seneca's operations into the Company's had an adverse effect on
the Company's operating results for the second half of 1995 and the first six
months of 1996. The Interknit Acquisition, however, will be effected to achieve
the benefits of vertical integration rather than in response to the trend toward
consolidation in the industry. Because the operations of Interknit and the
Company's facility in Ft. Payne, Alabama are already closely coordinated,
management expects that the administrative expenses associated with the
integration of Interknit into the Company's operations will be minimal. See
"Certain Transactions -- Transactions with and Acquisition of Affiliate."
In late 1994, the Company replaced all of its mechanical sports sock
knitting machines with electronic machines capable of operating at significantly
higher production levels with lower per unit costs. The efficiencies achieved
through this modernization program were initially offset to some degree by a
greater than
18
<PAGE> 22
expected negative manufacturing variance (direct manufacturing costs in excess
of budget) incurred as a result of the downtime associated with the installation
of, training and break-in period for the new knitting machinery. Management
estimates that approximately $200,000 of the negative manufacturing variance for
1995 was attributable to the initial operating inefficiencies associated with
the new knitting machinery. See "Business -- Manufacturing." The anticipated
replacement over the next 18 to 24 months of the more than 100 knitting machines
currently used by the Company to manufacture women's hosiery products with
approximately 60 new electronic knitting machines is expected to produce similar
results in future periods. The replacement program for the women's hosiery
division will be effected over a period of several months in order to minimize
the manufacturing disruptions experienced in 1995 with the replacement program
for the sock division. See "Use of Proceeds."
The Seneca Acquisition
In June 1995, the Company expanded its manufacturing capacity and customer
base for rugged outdoor and heavyweight casual socks by acquiring all of the
issued and outstanding capital stock of Seneca for $3.0 million in cash and the
issuance of $4.0 million in notes payable. The purchase price exceeded the fair
value of Seneca's net tangible assets by $1.9 million. Because the acquisition
was accounted for as a purchase, goodwill equal to that amount is being
amortized using the straight-line method over a period of 15 years. Seneca's
historical financial statements and pro forma financial statements of the
Company reflecting the acquisition are included elsewhere in this Prospectus.
Although the Company operates Seneca as a separate subsidiary, promptly after
the acquisition was consummated management began to integrate Seneca's
operations and sales and marketing efforts with those of the Company. While the
acquisition increased the Company's sales in the last six months of 1995 by $9.2
million and by $4.3 million in the first six months of 1996, expenses
attributable to the acquisition and these integration efforts had an adverse
effect on the Company's operating results for the last six months of 1995 and
the first six months of 1996. Seneca's net sales and profitability generally
experience stronger performance in the third and fourth quarters. See
"-- Seasonality." Net income attributed to Seneca, which includes interest
expense of $387,000 and amortization expense of $77,000, was $134,000 for the
six months ended December 31, 1995, and net loss attributed to Seneca, which
includes interest expense of $383,000 and amortization expense of $77,000, was
$471,000 for the six months ended June 30, 1996. See "-- Comparison of 1995 to
1994," "-- Comparison of Six Months Ended June 30, 1995 to Six Months Ended June
30, 1996" and "-- Liquidity and Capital Resources" for a detailed analysis of
the impact of the acquisition on the Company's consolidated financial position
and results of operations during these periods.
In order to improve the profitability of Seneca, the Company has instituted
cost accounting and quality control procedures similar to those in place at its
other manufacturing facilities, discontinued Seneca's inefficient wool spinning
operation and reduced the size of Seneca's workforce by approximately 30
employees. These steps have been taken under the supervision of experienced
operations personnel on temporary reassignment from the Company's other domestic
divisions. Steps also have been taken in the sales and marketing area to
increase Seneca's profitability, including the cross-selling of Seneca's product
lines to established customers of the Company. In addition, the Company's
product development staff has begun to modify and expand Seneca's product lines
in reaction to changes in customer preferences.
19
<PAGE> 23
Results of Operations as a Percentage of Net Sales
The following table presents the Company's results of operations as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales........................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............................... 78.1 77.2 80.4 78.8 80.7
----- ----- ----- ----- -----
Gross profit................................... 21.9 22.8 19.6 21.2 19.3
Selling, general and administrative expenses..... 16.9 16.9 15.9 17.3 15.4
----- ----- ----- ----- -----
Operating income............................... 5.0 5.9 3.7 3.9 3.9
Interest expense................................. (1.9) (2.1) (2.9) (2.4) (3.3)
Other income, net................................ 0.9 0.1 0.2 0.1 0.1
----- ----- ----- ----- -----
Income before income taxes....................... 4.0 3.9 1.0 1.6 0.7
Income tax expense............................... 1.0 1.4 0.4 0.5 0.3
----- ----- ----- ----- -----
Net income..................................... 3.0% 2.5% 0.6% 1.1% 0.4%
===== ===== ===== ===== =====
</TABLE>
Comparison of Six Months Ended June 30, 1996 to Six Months Ended June 30, 1995
Net sales for the six months ended June 30, 1996 were $31.8 million, an
increase of $10.3 million, or 48.1%, over the same period for the prior year.
Seneca accounted for $4.3 million, or 41.6%, of the net sales increase. In
addition, the Company's subsidiary in the Republic of Ireland experienced a
72.0% increase in net sales for the first six months of 1996, compared to the
same period in 1995 primarily as the result of a strategic alliance entered into
with Chipman-Union Co., another domestic hosiery manufacturer, pursuant to which
the Company is the primary manufacturer to fill orders for sports socks from
European distributors of products bearing the adidas brand name. Sales of sports
socks bearing the adidas name, which were not sold by the Company in 1995, were
$2.2 million for the first six months of 1996. See note 13 to the Company's
consolidated financial statements. The Company's domestic divisions, excluding
Seneca, experienced an average of 24.3% net sales growth due to increased demand
for sport specific and sports promotional socks and women's hosiery products. On
a pro forma basis, net sales for the six-month period ended June 30, 1996 were
$32.7 million, compared to $26.0 million for the comparable period of 1995, or
an increase of 25.7%.
Gross profit for the first six months of 1996 was $6.1 million, an increase
of $1.6 million, or 35.0%, over the same period for the prior year. As a
percentage of net sales, gross profit decreased from 21.2% in 1995 to 19.3% in
1996. Included in the cost of goods sold for the first six months of 1995,
however, is a charge of $310,000 related to accumulated unfinished women's
hosiery products determined during the period to be obsolete, which exceeded the
Company's normal estimate for reserves for obsolete and discontinued inventory.
This charge in excess of normal reserves reduced gross profit, as a percentage
of net sales, by 1.4%. Although the Company experienced significant growth in
net sales compared to the prior six-month period, this sales growth came from
products that generally carried gross profit margins lower than the gross profit
margins of the products sold in the prior period. During the first six months of
1996, $4.3 million in sales of rugged outdoor and heavyweight casual socks by
Seneca carried a gross profit margin of 15.6%, while $2.2 million in sales by
the Company's subsidiary in the Republic of Ireland were from the new adidas
program that carried a gross profit margin of less than 10%. Price increases on
selected products are expected to increase the gross profit margins generally
realized on products sold by Seneca and the Irish subsidiary. The pricing of a
significant private label program in the women's hosiery division also was
reduced early in 1996 to increase sales volume. Management believes that
continued sales growth even at generally lower gross profit margins will
maximize the Company's use of its production facilities, increase its operating
efficiencies and allow fixed costs to be more efficiently absorbed. The overall
effect of increased sales during the 1996 period of products that carried lower
gross profit margins was partially offset by slight increases in gross profit
margins during the period on sport specific and active sports sock products.
Gross profit on a pro forma basis increased
20
<PAGE> 24
$1.1 million, or 19.4%, from $5.4 million for the six months ended June 30, 1995
to $6.5 million for the first six months of 1996.
Selling, general and administrative expenses for the six months ended June
30, 1996 were $4.9 million, compared to $3.7 million for the same period in
1995, an increase of $1.2 million. This increase was primarily due to the
additional expenses associated with the integration of the Seneca Acquisition.
As a percentage of net sales, selling, general and administrative expenses
decreased from 17.3% in the six-month period ended June 30, 1995, to 15.4% for
the same period in 1996. This reduction is largely due to net sales increasing
at a faster rate than selling, general and administrative expenses. On a pro
forma basis, selling, general and administrative expenses increased 11.6%, from
$4.4 million for the first six months of 1995 to $4.9 million for the comparable
period of 1996.
Operating income increased from $838,000 to $1.2 million for the six months
ended June 30, 1996. As a percentage of net sales, operating income was 3.9% for
each of the six-month periods of 1995 and 1996. For the pro forma six-month
period ended June 30, 1996, operating income increased $536,000 from the same
pro forma period of 1995. This represents a pro forma increase of 54.4% and is
primarily attributable to the profitability of Interknit during the first six
months of 1996 versus an operating loss during the comparable period of 1995.
Interest expense increased 104.6% from $520,000 in the first six months of
1995 to $1.1 million in the comparable 1996 period due to the debt incurred for
the Seneca Acquisition. See "-- Liquidity and Capital Resources." The
acquisition debt of $7.0 million was incurred at June 28, 1995, and as a result,
no interest expense related to that debt is reflected in the six months ended
June 30, 1995, whereas the six-month period ended June 30, 1996 reflects
interest relating to that debt. Pro forma interest expense for the six-month
periods ended June 30, 1996 and 1995 was $1.1 million and $906,000,
respectively.
Other income for the first six months of 1996 was $29,000 compared to
$17,000 for the same period in 1995. Relative to net sales, other income
remained stable on both a historical and pro forma basis.
Income tax for the six-month period for 1996 was $78,000, compared to
$97,000 for 1995. The decrease in income tax expense was largely due to the loss
incurred at Seneca.
Net income for the six months ended June 30, 1996 was $109,000 less than
net income for the comparable period of 1995. This decrease is primarily
attributable to the net loss incurred by Seneca during the six months ended June
30, 1996. Since the Seneca Acquisition was effective on June 28, 1995, a
comparison of the historical operating results for the six-month periods ended
June 30, 1996 and 1995 is not meaningful. Without giving effect to Seneca's net
loss during the first six months of 1996, the Company's net income would have
increased $363,000, or 153%, over the comparable period of 1995. Pro forma net
income for the six months ended June 30, 1996 was $271,000, compared to pro
forma net income of $37,000 for the comparable period of 1995. The increase in
pro forma net income is primarily attributable to the profitability of Interknit
during the first six months of 1996 versus an operating loss during the
comparable period in 1995.
Comparison of 1995 to 1994
Net sales for 1995 were $54.4 million, compared to $40.1 million in 1994,
an increase of $14.3 million, or 35.7%. The Seneca Acquisition in June 1995 was
responsible for $9.2 million of the overall increase in net sales. The balance
of the increase was attributable to growth in demand for certain of the
Company's women's hosiery products and sport socks from new and existing
customers.
Gross profit for 1995 was $10.7 million, or 19.6% of net sales, as compared
to $9.1 million, or 22.8% of net sales, for 1994. The decrease in gross profit
as a percentage of net sales for 1995 was due in part to a trend towards higher
sales volume at lower gross profit margins. Included in the cost of goods sold
for 1995, however, is a charge of $621,000 related to accumulated unfinished
women's hosiery products determined during the year to be obsolete, which
exceeded the Company's normal estimate for reserves for obsolete and
discontinued inventory. This charge in excess of normal reserves reduced gross
profit, as a percentage of net sales, by 1.1%.
21
<PAGE> 25
Selling, general and administrative expenses increased $1.9 million in 1995
to $8.7 million, as compared to $6.8 million in 1994. The majority of the
increase was attributable to costs associated with the integration of Seneca
into the Company's operations during the second half of 1995. The Company also
recorded a one-time charge of $500,000 during 1995 to recognize its future
liability under an agreement entered into in December 1995 to pay a supplemental
retirement benefit to the Company's former Chairman over a seven-year period.
See "Certain Transactions -- Supplemental Retirement Benefit." As a percentage
of net sales, selling, general and administrative expenses nonetheless decreased
in 1995 to 15.9% compared to 16.9% in 1994. The Company attributes this
percentage decrease primarily to net sales increasing at a faster rate than
selling, general and administrative expenses.
Although the Company experienced significant growth in net sales during
1995, operating income decreased to $2.0 million compared to $2.4 million in
1994. The decrease was the result of the one-time charges for the write-off of
obsolete inventory and to recognize the Company's future liability to pay a
supplemental retirement benefit. Had these one-time charges, which totaled $1.1
million, not been incurred, operating income in 1995 would have been $3.1
million, or a 32.8% increase over operating income in the prior year.
Interest expense in 1995 was $1.6 million compared to $829,000 in 1994.
Interest on the additional borrowings incurred to fund the Seneca Acquisition
and increased borrowings under the Revolving Credit Facility to support higher
levels of inventory and accounts receivable accounted for most of this 91%
increase in interest expense.
Other income for 1995 was $103,000, compared to $54,000 for 1994. The lower
amount of other income for 1995 was primarily due to losses incurred on the sale
or disposal of equipment in 1994 that offset other income in that year. There
were no offsetting losses from the sale or disposal of equipment in 1995.
Income taxes for 1995 decreased by $334,000 from 1994. The effective tax
rate in 1995 was 44.7% compared to 36.1% in 1994. The increase in the effective
tax rate for 1995 was the result of a decrease in the percentage of the
Company's total income represented by income from the Company's operations in
the Republic of Ireland, which is not subject to United States income tax.
Net income for 1995 was $296,000 compared to $1.0 million in 1994. The
decrease was the result primarily of the one-time charges incurred during 1995
for the write-off of obsolete inventory in excess of normal reserves and to
recognize the Company's future liability to pay a supplemental retirement
benefit to a former executive officer. Without these charges, income before
income taxes for 1995 would have been $1.7 million and net income would have
been $969,000. The Company's net income for 1995 was also adversely impacted by
the 91% increase in interest expense over the prior year described above.
Comparison of 1994 to 1993
Net sales for 1994 were $40.1 million, as compared to $35.6 million for
1993, for an increase of $4.5 million, or 12.6%. The increase in net sales was
primarily attributable to sales of Ellen Tracy women's hosiery products, which
the Company began selling in 1994, and steady growth in sports sock sales
resulting primarily from strong demand for sport specific socks from large
format sporting goods retailers.
Gross profit for 1994 was $9.1 million, or 22.8% of net sales, as compared
to $7.8 million, or 21.9% of sales, for 1993. The increase in gross profit as a
percentage of net sales resulted from a combination of increased sales of
tights, trouser socks and other higher margin products in the women's hosiery
division and operating efficiencies achieved from steady production at close to
capacity in the women's hosiery and promotional sports sock divisions.
Selling, general and administrative expenses increased 12.2% to $6.8
million in 1994 from $6.0 million in 1993. As a percentage of net sales,
however, selling, general and administrative expenses remained constant at
16.9%. The Company attributes this result primarily to net sales increasing at a
faster rate than selling, general and administrative expenses.
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The changes in sales, margins and expenses during 1994 described above
combined to result in an increase in operating income of 34.2% from $1.8 million
in 1993 to $2.4 million in 1994. As a percentage of net sales, operating income
increased from 5.0% in 1993 to 5.9% in 1994.
Interest expense in 1994 of $829,000 was 25.4% higher than interest expense
of $661,000 in 1993. The increase was attributable to increased borrowings to
support accounts receivables and inventories and an increase in prevailing
interest rates during 1994.
Other income decreased 83.8% to $54,000 in 1994 from $334,000 in 1993. The
unusually large amount of other income in 1993 was attributable to the
recognition in such year of $108,000 in foreign currency exchange gains upon the
repayment of debt, denominated in U.S. dollars, owed to the Company by its
foreign subsidiary conducting operations in the Republic of Ireland, which had
been recorded, at the date of incurrence, on the foreign subsidiary's balance
sheet in a foreign currency. The Company also received in 1993 an extraordinary
grant of $104,000 from the Republic of Ireland to offset the adverse effect of
currency exchange losses incurred during 1993 on outstanding receivables of the
Company's foreign subsidiary when the exchange rate for certain European
currencies, particularly the British pound, began floating on the open market
without limits.
Income taxes for 1994 increased by $224,000 compared to 1993. The effective
tax rate was 36.1% in 1994 compared to 24.8% in 1993. This increase in the
effective tax rate for 1994 was the result of a decrease in the percentage of
the Company's total income represented by income from the Company's operations
in the Republic of Ireland, which is not subject to United States income tax.
Net income for 1994 was $1.0 million compared to $1.1 million for 1993. The
decrease in net income was primarily a result of higher income taxes in 1994
caused primarily by decreasing income from the Company's operations in the
Republic of Ireland.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities for the years ended December 31, 1993,
1994 and 1995 were $(102,000), $984,000 and $2.0 million, respectively. Cash
flows from operating activities during the six months ended June 30, 1995 and
1996 were $924,000 and $(3.0 million), respectively. The negative cash flows
from operating activities during the first six months of 1996 were the result of
a $4.3 million increase in inventories and a $1.7 million increase in accounts
receivable since year end. The $4.3 million increase in inventories was largely
due to increased inventories to support higher levels of sales in the women's
hosiery division and to support sales of Seneca's rugged outdoor and heavyweight
casual socks, which are higher in the last six months of the year. The $1.7
million increase in accounts receivable was the result of increased net sales by
the Company's other divisions.
In addition to cash flow from operations, the Company obtains working
capital and, on a temporary basis, finances its capital expenditures for
equipment modernization, through borrowings under the Company's Revolving Credit
Facility extended by NationsBank, N.A. (South) ("NationsBank"). Borrowings under
the Revolving Credit Facility were also used to fund a portion of the costs of
the Seneca Acquisition. The Revolving Credit Facility, which was recently
increased by $3.0 million to provide the additional working capital needed to
support the Evan-Picone women's hosiery program, provides for borrowings of up
to $20.0 million through January 1999. As of September 30, 1996, $16.4 million
was outstanding under the Revolving Credit Facility, and there was $3.6 million
available for additional borrowings. Funds borrowed under the Revolving Credit
Facility bear interest at a rate equal to NationsBank's prime rate plus 1% per
annum (currently 9.25%) and are secured by the Company's accounts receivable,
inventory, equipment and certain real property. Amounts outstanding under the
Revolving Credit Facility may not exceed the sum of specified percentages of the
Company's accounts receivable and the value of the Company's inventory.
The Revolving Credit Facility imposes several financial and other covenants
that the Company must satisfy including, among other things, maintenance of
specified levels of working capital, maintenance of a specified tangible net
worth, debt service coverage ratios and positive cash flow. The covenants also
impose limits on capital expenditures and dividends. Pursuant to grant
agreements with the Republic of Ireland, the
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retained earnings of the Company's Irish subsidiary are subject to certain
restrictions based upon the amount of government grants received to date. See
note 12 to the Company's consolidated financial statements.
In addition to the Revolving Credit Facility, the Company has two term
loans outstanding with NationsBank. As of September 30, 1996, the term loans had
an aggregate principal balance of approximately $5.2 million. The first loan,
which was entered into as a source of permanent financing for the Company's
capital equipment modernization program and at September 30, 1996 had an
outstanding principal balance of $4.2 million, bears interest at NationsBank's
prime rate plus 1% (currently 9.25%) and is payable in four monthly installments
of $41,667 each, with a balloon payment of approximately $4.0 million due in
January 1997. This loan is secured by the same collateral as the Revolving
Credit Facility and imposes similar restrictive covenants on the Company. The
Company expects to extend, and increase the principal balance of, this term loan
prior to its due date. Any additional principal the Company is able to borrow
will be used to reduce the outstanding balance under the Revolving Credit
Facility, thereby increasing the amount available for additional borrowings
thereunder to support future sales growth. The second term loan with
NationsBank, which at September 30, 1996 had an outstanding principal balance of
$964,000, was obtained in connection with the Seneca Acquisition in June 1995.
This loan bears interest at NationsBank's prime rate plus 1% (currently 9.25%)
and is payable in 31 monthly installments of $12,000 each, with a balloon
payment of approximately $640,000 due in January 1999.
NationsBank has issued a commitment letter, subject to completion of this
Offering and satisfactory loan documentation, to change the interest rates on
both the Revolving Credit Facility and the term loans to give the Company an
option to choose an interest rate based on NationsBank's prime rate or London
Interbank Offered Rates ("LIBOR"). The LIBOR-based option, which the Company
expects to select, ranges from LIBOR plus 2% to LIBOR plus 3 1/4%, depending
upon the Company's leverage ratio (as defined). Based on the Company's pro forma
leverage ratio as of June 30, 1996, as adjusted to reflect the Interknit
Acquisition and the completion of this Offering, the interest rates under the
LIBOR-based option (assuming the Company had selected six-month LIBOR on such
date as the base rate) would be 7.8% as of the date of this Prospectus. Based on
estimates by management, the Company expects the interest rates upon completion
of this Offering under the LIBOR-based option will be the LIBOR base rate
selected by the Company plus 2% or 2 1/4%.
As a result of the Interknit Acquisition, the Company's total debt will
increase by approximately $1.7 million. Interknit's debt, which was incurred to
finance the start-up and capital equipment costs and working capital needs of
Interknit, bears interest at rates ranging from 6.9% to 9.3% and is payable in
monthly installments through 2004.
In payment of a portion of the purchase price of Seneca, the Company issued
a $500,000 promissory note due in June 1997 to Seneca's former principal
shareholder. This note, which is due in September 1997, provides for
acceleration of the due date upon completion of this Offering. In connection
with the Seneca Acquisition, the Company also guaranteed an existing obligation
of Seneca in the amount of $350,000 owed to the estate of a family member of the
former principal shareholder of Seneca that similarly provides for acceleration
of the due date upon completion of this Offering. The Company will use $850,000
of the net proceeds of this Offering to satisfy these obligations. See "Use of
Proceeds."
The Company intends to use the balance of the estimated net proceeds of
this Offering to temporarily repay borrowings outstanding under the Revolving
Credit Facility. During the 18 to 24 month period following the completion of
this Offering, the Company plans to reborrow approximately $2.0 million under
the Revolving Credit Facility to provide a partial source of funding for capital
expenditures the Company plans, but is not legally committed, to make during
such period. These include constructing a distribution facility at an estimated
cost of $1.5 million and purchasing 60 electronic knitting machines at an
estimated cost of $1.5 million to replace the more than 100 knitting machines
currently installed in the women's hosiery division. The source of funding for
the balance of the estimated cost of these planned capital expenditures is
anticipated to be cash flows from operating activities. The Company has no plans
or material commitments to make any other material capital expenditures during
the 24 month period following the completion of this Offering.
Management believes the net proceeds of this Offering, when combined with
the Revolving Credit Facility, other financing arrangements described herein and
anticipated cash flows from operations, will be
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adequate to fund the Company's working capital requirements and planned capital
expenditures for a period of at least 24 months following completion of this
Offering. There can be no assurance, however, that acquisitions, adverse
economic or competitive conditions or other factors will not result in the need
for additional financing or have an adverse impact on the availability and
reasonableness of such additional financing, if required.
SEASONALITY
The Company's business is impacted by the general seasonal trends that are
characteristic of the apparel and retail industries. The Company's net sales and
profitability generally experience stronger performance in the third and fourth
quarters. As the timing of the shipment of products may vary from year to year,
the results for any particular quarter may not be indicative of results for the
full year.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"),
effective for fiscal years beginning after December 15, 1995. SFAS 121
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to these assets and
certain identifiable intangibles to be disposed of. Since the Company's current
policy is consistent with the provisions of SFAS 121, it does not anticipate
that the new pronouncement will impact its financial statements.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
effective for fiscal years beginning after December 15, 1995. SFAS 123
establishes a fair value-based method of accounting for compensation cost
related to stock options and other forms of stock-based compensation plans.
However, SFAS 123 allows an entity to continue to measure compensation costs
using the principles of Accounting Principles Board Pronouncement 25 if certain
pro forma disclosures are made. The Company intends to adopt the provisions for
pro forma disclosure requirements of SFAS 123 in 1996 and anticipates that SFAS
123 will not have a material impact on its financial statements. As of August
15, 1996, the Company had not granted any stock-based awards subject to SFAS
123.
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BUSINESS
GENERAL
The Company designs, manufactures and markets a complete range of sports,
rugged outdoor and heavyweight casual socks as well as a wide variety of women's
hosiery products, including tights, trouser socks, pantyhose and knee-highs. The
Company believes it is one of the leading vendors of sports socks to sporting
goods and active apparel stores. The Company also sells its products to
department stores, discount stores and a variety of other retailers. In
addition, the Company produces sports socks for sale by others under such
widely-recognized brand names as adidas, ASICS, Bass, Brooks, Fila, Head
Sportswear, IZOD, New Balance and Reebok and women's hosiery products for sale
under the Liz Claiborne and Elisabeth brand names. Under license agreements, the
Company produces and sells socks and women's hosiery directly to retailers under
the brand names Converse, Ellen Tracy, Evan-Picone, Jacques Moret and Woolrich.
The Company is currently negotiating licensing terms to produce and sell socks
under the Coleman and Rockport brand names. The Company expects that
approximately two-thirds of its net sales in the current fiscal year will be
derived from sales of socks with the balance derived from sales of women's
hosiery products. As of September 30, 1996, the Company had more than 3,500
customers in the United States, Europe and other parts of the world.
The Company was founded in 1912 in Newton, North Carolina by a group of
individuals, including Joseph Albert Gaither, grandfather of the Company's
Chairman and great grandfather of the Company's President and Chief Executive
Officer, as a manufacturer of women's hosiery. In the mid-1970's the Company
began diversifying its product line to include sports socks, and during the past
ten years the Company has diversified geographically and modernized its
production capacity, increased its domestic customer base, expanded its contract
manufacturing business, acquired the rights to manufacture and sell socks and
women's hosiery under several widely-recognized brand names and increased its
marketing activities and sales in Europe and other foreign markets. In 1986 the
Company established a manufacturing facility in the Republic of Ireland to serve
European customers and in 1992 established a manufacturing facility in Ft.
Payne, Alabama to produce promotionally-priced, multi-pair pack sports socks. In
June 1995, the Company expanded its manufacturing capacity and customer base by
acquiring Seneca, which has been engaged since 1954 exclusively in designing,
manufacturing and marketing these socks. In 1995 the Company also completed a
major expansion of its manufacturing facility in the Republic of Ireland to
accommodate growth from a new sports sock manufacturing program for adidas.
INDUSTRY OVERVIEW
According to statistics compiled by the National Association of Hosiery
Manufacturers ("NAHM"), total retail dollar volume in the United States of total
hosiery, which includes all socks, women's sheer hosiery and tights, increased
by approximately 18% from $6.1 billion in 1990 to $7.2 billion in 1995. During
the same five-year period, total retail dollar volume of (i) socks increased by
26% from $3.0 to $3.8 billion on a 31% increase in retail unit volume, (ii)
women's sheer hosiery remained unchanged at $2.7 billion on an 18% increase in
retail unit volume and (iii) tights increased 96% from $300 million to $589
million on an 88% increase in retail unit volume. From 1990 to 1995, total
retail dollar volume of men's and boy's sport/athletic socks (a category that
includes rugged outdoor and heavyweight casual socks) increased by approximately
28% from $587 million to $754 million on a 32% increase in retail unit volume.
During the same period, annual per capita purchases of socks in the United
States increased from 9.2 to 11.5 pairs while the total United States population
increased from 254 million to 266 million persons.
During the first six months of 1996, total retail dollar volume of total
hosiery increased by 7.6% to $3.3 billion from $3.0 billion in the first six
months of 1995. During the first six months of 1996 compared to the same period
in the prior year, total retail dollar volume of (i) socks increased by 15.4%
from $1.5 billion to $1.8 billion on an 11.5% increase in retail unit volume,
(ii) women's sheer hosiery declined by 2.9% from $1.4 billion to $1.3 billion on
a 9.7% decrease in retail unit volume and (iii) tights increased 25.5% from $150
million to $187 million on a 3.6% increase in retail unit volume.
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Statistics compiled by the NAHM regarding United States foreign trade in
hosiery products indicate that during the past ten years total hosiery imports
have increased approximately one and one-half times from 12,012,000 dozens of
pairs to 29,713,000 dozens of pairs while total hosiery exports have increased
more than five-fold from 3,942,000 dozens of pairs to 22,236,000 dozens of
pairs. From 1990 to 1995, total hosiery imports' share of retail dollars spent
on hosiery in the United States has increased from 5.2% to 8.2% with most of the
increase attributable to increased sales of imported women's sheer hosiery.
Imported socks' share of retail dollars spent on socks in the United States
increased from 6.7% in 1990 to 7.6% in 1995. Imported tights' share of total
retail dollars spent on tights in the United States increased during the same
period from 8.1% to 14.3%.
From 1990 to 1995, exports of socks increased more than three-fold from
2,979,000 dozens of pairs to 9,785,000 dozens of pairs with a corresponding
increase in total dollar value of sock exports from $32.8 million to $98.5
million. The leading countries for United States exports of socks and women's
hosiery in 1995 were Canada, Japan, Mexico and Germany. Analysts for the NAHM
believe that the potential for increased export sales of hosiery to countries
with increasing per capita disposable income is great, particularly for socks,
but that different retail distribution practices and customs in many of these
countries will require United States manufacturers to adapt their sales and
marketing strategies. Companies with foreign operations located in close
proximity to developed and developing markets are expected to have an advantage
over manufacturers having only domestic manufacturing capability.
As part of the current trend in the United States towards more casual
dress, socks are increasingly becoming a fashion statement for style-conscious
consumers. The Company believes that this trend has helped drive the growth in
recent years in sales of socks. Sales of promotionally-priced, multi-pair pack
sports socks have also increased significantly during the past five years and
captured an increasing share of the sports sock retail dollar volume. Influenced
by the same trend towards more casual dress, the market for women's hosiery is
changing from its emphasis on traditional sheer pantyhose to include more
durable, heavyweight products such as tights and trouser socks. Manufacturing of
women's hosiery products is also becoming increasingly concentrated with only 58
manufacturers of sheer hosiery operating in the United States. Of that number,
the 30 largest manufacturers produce most of the women's hosiery sold in the
United States.
Rapid technological change is also affecting all sock and women's hosiery
manufacturers. In the last ten years, manufacturers have been replacing their
existing mechanical knitting machines with a smaller number of higher speed
electronic machines capable of equal or greater production than the machines
they replaced. The newer electronic machines, which have fewer moving parts and
require less maintenance, also provide greater production flexibility since they
can be rapidly changed over to knit a different style or type of product.
Changing over older mechanical machines is a time-consuming, labor intensive
process. The increased production capacity of the latest generation of knitting
machinery has led to production overcapacity in some segments of the industry,
which has been exacerbated by the fact that many of the older machines they
replaced have been purchased by others and put back into production.
In recent years, the industry has also been, and will continue in the
future to be, affected by certain trends in the retailing industry, including a
trend towards consolidation of all categories of retailers into larger units
having greater purchasing power. The retail sporting goods industry, for
example, which was traditionally highly fragmented and comprised of relatively
small sporting goods retailers, sports specific specialty shops, pro shops and
departments within chain and discount stores, is being transformed by the rapid
growth of large format sporting goods retailers. They include customers of the
Company such as The Sports Authority, which operates more than 120 stores under
that name, Sports and Recreation, which operates more than 60 stores principally
under the names "Sports Unlimited," "Sports" and "Sports & Rec" in conjunction
with a local community name, and Oshman's Sporting Goods, which operates, in
addition to its 125 traditional sporting goods stores, a growing chain of large
format stores under the name "SuperSports USA." Similarly, smaller regional
discount chains in many regions of the United States are experiencing increasing
pressure from the growth of the larger national discount stores such as Wal-Mart
Stores and Target. Department stores are also affected by the industry trend
towards consolidation of retailers. In 1995, Federated Department Stores and
Broadway Stores merged, and May Department Stores Co. and J.C. Penney separately
purchased most of
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Woodward & Lothrop, Inc. Industry analysts expect the trend towards
consolidation and bankruptcy reorganizations among retailers to continue.
The large format sporting goods stores and national discount, department
and chain stores to which the Company and its competitors sell their products
are using sophisticated electronic inventory management systems to achieve
optimal in-stock levels of merchandise. These systems with electronic order
placement features require manufacturers to make greater investments in working
capital to maintain a more extensive inventory of finished products and in
information technology that will give them a quick response capability when
orders are placed, usually electronically, by these retailers. Increasingly, the
large format sporting goods stores, national discount stores and large
department store chains are also requiring manufacturers to play a greater role
in marketing and managing their retail sock and women's hosiery business. This
includes placing logistical demands on manufacturers that impose extra
distribution costs and penalizing them through "chargebacks" when they do not
conform to a retailer's rules for packaging, prepricing and shipping goods.
The logistical and other demands retailers are placing on manufacturers and
the rapid technological changes that have created overcapacity in some segments
of the industry have already led to some consolidation of women's hosiery
manufacturers (58 at December 31, 1995, as opposed to 66 at the same date in
1990 and 86 in 1986). While, according to the NAHM, the number of manufacturers
of socks in the United States increased to 309 at December 31, 1995 compared
with 279 at the same date in 1990, the Company expects this number to decline in
the next several years. Industry analysts expect that the sock manufacturing
industry will be increasingly characterized by the presence of a small number of
large manufacturers, relatively few medium-sized manufacturers and a large
number of small manufacturers primarily selling greige goods and finished
hosiery products to the larger manufacturers.
The trend towards consolidation of manufacturers of socks and women's
hosiery is expected to be reinforced by the trend among large retailers such as
the national discount chains and the large format sporting goods stores to do
business with a smaller group of vendors that are capable of providing a
significant share of their total sock and women's hosiery requirements. With the
exception of the very large manufacturers such as Sara Lee Hosiery and
Kayser-Roth, most manufacturers concentrate on making either socks or women's
hosiery products. The Company, which produces socks and women's sheer hosiery
and tights, is one of only a few companies its size that makes all three of
these categories of products. The Company believes that being a diversified
manufacturer will become increasingly important as larger retailers seek to
reduce the total number of vendors with which they do business. The Company also
believes that product diversity will make the Company less vulnerable to
consumer trends and trends in the retailing industry affecting only one segment
of the sock and women's hosiery industry.
GROWTH STRATEGY
During the past ten years, the Company has increased sales by diversifying
its product lines, adding to and geographically diversifying its production
capacity, expanding its domestic customer base, expanding its contract
manufacturing business, acquiring the rights to manufacture and sell products
under licensed brand names and increasing its marketing activities and sales in
Europe and other foreign markets. The Company intends to continue this overall
growth strategy by focusing on the following goals:
INCREASING SALES TO EXISTING CUSTOMERS. Many of the Company's
existing customers in the sporting goods industry, such as Just for
Feet, The Sports Authority, Sports & Recreation and Oshman's Sporting
Goods, are expanding the number of stores they operate, and the
Company expects that its sales to these customers will increase as a
result of their unit growth. The Company also believes that it will be
able to increase its sales to other existing customers such as Target,
J.C. Penney and Nordstrom. The Company also expects to be able to
expand its contract manufacturing of products sold under such
widely-recognized brand names as adidas, Reebok and Fila for major
athletic footwear and apparel companies, and for other companies, such
as Liz Claiborne, that design, contract for the manufacture of and
market products under their own trademarks.
ESTABLISHING SALES RELATIONSHIPS THROUGH CROSS-SELLING. The
Company is seeking to establish relationships with certain major
retailers with which the Company has not historically done business.
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Management believes that the Company's expanded customer base of major
retailers resulting from the Seneca Acquisition and the Evan-Picone women's
hosiery program creates opportunities for cross-selling the Company's other
products. The recent expansion of the Company's manufacturing facility in
Ft. Payne, Alabama that produces multi-pair pack sports socks also
positions the Company to compete effectively for sales to new customers.
OBTAINING ADDITIONAL LICENSING ARRANGEMENTS. The Company is
seeking to license additional nationally and internationally
recognized brand names to complement the Converse, Ellen Tracy,
Evan-Picone, Jacques Moret and Woolrich licensed brand names.
Management is currently negotiating licensing terms to produce and
sell socks under the Coleman and Rockport brand names.
ADDING COMPLEMENTARY PRODUCT CATEGORIES THROUGH SELECTIVE
ACQUISITIONS. Women's casual socks and men's dress socks are
complementary product categories that could be added to the Company's
existing product lines through selective acquisitions of other
manufacturers or through internal product diversification. Although
the Company has no proposal, agreement, understanding or arrangement
relating to the acquisition of any other company at this time, future
acquisitions could also be expected to expand production capacity and
add to the customer base.
INCREASING INTERNATIONAL SALES. The Company plans to build on
the existing customer base served by the Company's manufacturing
facility in the Republic of Ireland and on the Company's base of
export sales of domestically manufactured products. In 1995 the
Company completed an expansion of this facility that approximately
doubled its production capacity.
OPERATING STRATEGIES
In recent years, manufacturers of socks and women's hosiery have
experienced a period of rapid technological change and encountered a demanding
retail environment characterized by customers' expectations of immediate order
fulfillment and depth in all product categories. Through the following core
operating strategies, the Company is investing in new technology and
strengthening its ability to provide a significant share of major retailers'
total socks and women's hosiery requirements.
PRODUCING HOSIERY PRODUCTS FOR SALE UNDER BRAND NAMES. The
Company produces socks for sale under its own brand names and for sale
by athletic footwear companies and others under such widely-recognized
brand names as adidas, ASICS, Bass, Brooks, Fila, Head Sportswear,
IZOD, New Balance and Reebok. Under licensing arrangements, the
Company produces and sells women's hosiery products directly to
retailers under the Ellen Tracy, Evan-Picone and Jacques Moret brand
names and socks under the Converse and Woolrich brand names. The
Company also manufactures women's hosiery products for Liz Claiborne,
Inc. under its brand names. The Company believes its reputation as a
producer of well-known branded products, including the Company's own
branded products in the sporting goods retail industry, distinguishes
the Company from many of its competitors that manufacture socks and
women's hosiery for sale only under retailers' private labels.
INVESTING TO BECOME A LOWER-COST MANUFACTURER. In recent years
the Company has made significant capital investments in manufacturing
technology with the goal of becoming a lower-cost, higher-volume
producer of a broad range of products. Most of these investments have
been made to replace existing mechanical knitting machinery for socks
with higher speed, more flexible electronic knitting machines that
require less maintenance and result in significant productivity
increases. The Company has also invested in sophisticated machinery
that automates the finishing operations at certain of its facilities,
significantly reducing the labor inputs required. The Company will
continue making capital investments in manufacturing and distribution
technology when appropriate to remain competitive.
OUTSOURCING MANUFACTURING TO INCREASE OPERATING EFFICIENCIES. To
meet peak demand, the Company regularly outsources the manufacturing
of certain products. As a result, the Company has been able to operate
its own manufacturing facilities at more efficient production levels.
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MANUFACTURING A BROAD RANGE OF PRODUCTS. For a number of years
the Company has manufactured a complete range of sports socks and
produced a wide variety of women's hosiery products, including tights,
trouser socks, pantyhose and knee-highs. With the Seneca Acquisition,
the Company added rugged outdoor and heavyweight casual socks to its
product lines. The Company has also broadened its product lines beyond
traditional products to include complementary products such as thermal
underwear/leggings, glove liners and gators for skiers and other
outdoor sports enthusiasts.
MAINTAINING A LARGE AND DIVERSE CUSTOMER BASE. As of September
30, 1996, the Company had more than 3,500 customers in the United
States, Europe and other parts of the world. Only one of such
customers, Target, accounted for more than 10% of the Company's 1995
net sales and is expected to account for more than 10% of the
Company's 1996 net sales. Management believes that maintaining a large
and diverse customer base puts the Company in a stronger position to
recover increased raw material and manufacturing costs through price
increases than many of the Company's competitors who are dependent on
a small number of major customers.
PROVIDING RAPID ORDER FULFILLMENT. The Company maintains
finished inventory of many of its products that allows the Company to
fill and deliver customer orders for those products generally within
three days of the date the order is placed. In recent years, the
Company has made capital investments in information technology to
develop and implement its Quick Response system, which coordinates its
manufacturing and order fulfillment systems with the sophisticated
electronic inventory management control systems employed by an
increasing number of the Company's larger customers.
FOCUSING ON CONSISTENT, HIGH QUALITY. The Company believes that
consistent product quality is as important to its customers as rapid
order fulfillment. The Company maintains a rigorous quality assurance
program for its manufacturing operations and enjoys a good reputation
among its customers for product quality.
The Company's intended uses of the proceeds of this Offering will
contribute to the further implementation of the Company's core operating
strategies by reducing outstanding debt, improving cash flow and funding
additional capital expenditures intended to give the Company an advantage as a
lower-cost, higher-volume producer in an increasingly competitive marketplace.
See "Use of Proceeds."
OPERATIONS
Sports Socks
The Company manufactures an extensive collection of sports specific, active
sport and sports promotional socks for men, women and children. The socks are
knitted from a variety of natural and synthetic fibers and are manufactured in a
wide array of styles, including tubes, crews, half-crews, quarters, rolldowns,
slouches and cuffs.
"Sports specific socks," which allow a team or individual athlete to match
their socks to their activity, contain extra cushioning and differ according to
where the protective cushioning is placed (ball, toes, instep, heel, arch,
shin), how thick the cushioning is and the materials used to construct the
socks. The Company produces most of its sports specific socks for athletic
footwear and apparel companies that design, contract for the manufacture of and
market sports socks under such widely-recognized brand names as adidas, ASICS,
Bass, Brooks, Fila, Head Sportswear, IZOD, New Balance and Reebok. Through its
vendor relationships with these athletic footwear and apparel companies, the
Company not only increases its sales but also gains access to changes in styling
trends in the sporting goods industry. The Company also produces its own
collection of sports specific socks, which are sold to retailers under the
Company's SportSox brand name (in packaging and on displays that also bear the
Ridgeview name and trademark). This collection includes socks for seven
different sports, including in-line skating, tennis, cross-training, cycling and
aerobics.
The Company's "team collection" of sports specific socks is designed for
sale to sporting goods dealers that outfit school and recreational athletic
teams. The collection includes basketball, baseball, soccer and
30
<PAGE> 34
volleyball socks. The baseball socks include the traditional nylon stirrup and
sanitary socks worn under the stirrups as well as several styles of one piece,
knitted-in stirrup socks. The soccer socks include acrylic soccer socks for
recreational play and heavier, more expensive nylon socks for the serious soccer
player.
Under the brand name Kidsox, the Company manufactures several styles of
basic cushion socks specifically for children that are made with the same
quality features found in their adult-sized counterparts. The Kidsox line
includes a feature the Company calls "dirt defender," which is a grey color
blend on the bottom of the sock that helps keep that portion of the sock
color-fast despite rough use and repeated washings.
"Active sport socks" are specifically designed for the serious athlete who
participates in active sports such as basketball, tennis, running, cycling and
aerobics. They offer high performance features like special fibers and triple
layer construction to provide cushioning in high impact areas and protection
against abrasion and blisters. The Company's premium line of active sport socks,
which includes socks for eight different sports, is sold at premium prices under
the Company's LINEOne brand name in packaging and on displays that also bear the
Ridgeview name and trademark. The natural and synthetic fibers used in these
socks include mercerized cotton (cotton yarn processed in a caustic solution to
increase the fiber's strength and luster), wool, silk, Duraspun (a Monsanto
synthetic fiber that allows for maximum shock absorbency and offers excellent
wicking properties), CoolMax (a DuPont synthetic fiber that breathes, while
wicking perspiration away from the skin) and Thermastat (a DuPont cold-weather
synthetic fiber that traps warmth while allowing moisture to escape).
Under the brand name SportSox and under private labels of various sporting
goods and discount stores, the Company manufactures and sells in multi-pair
packs a variety of styles of lightweight basic cushion socks designed to be sold
at promotional prices. These socks, which include tubes, crews, quarters,
rolldowns, slouches and cuffs and offer many of the features that are found in
the Company's premium-line socks, are knitted from a cotton-rich blend of yarns.
Rugged Outdoor and Heavyweight Casual Socks
The Company's collection of rugged outdoor and heavyweight casual socks,
which expanded significantly with the acquisition of Seneca, is designed for
hikers and other outdoor enthusiasts as well as consumers who appreciate the
value of heavyweight casual socks. The collection of rugged outdoor and
heavyweight casual socks, most of which are sold under private labels, includes
14 styles of thermal insulated socks, 11 styles of hiking and trekking socks, 15
styles of general outdoor wear socks and 13 styles of heavyweight casual socks.
In June 1995, Seneca began manufacturing rugged outdoor and heavyweight
casual socks under the licensed brand name Woolrich. Under the three-year
license agreement with Woolrich, Inc., the Company has the right to manufacture
and sell rugged outdoor and heavyweight casual socks under the Woolrich name in
the United States. The Company must meet minimum annual sales thresholds that
increase during the license term and pay a royalty equal to the greater of 5% of
its net sales of Woolrich brand socks or the applicable minimum annual sales
amount. The license agreement terminates on June 30, 1998 with an option to
renew for an additional three-year period provided the Company's performance as
licensee has been satisfactory. The Company is currently negotiating licensing
terms to manufacture and sell socks, beginning January 1, 1997, under the
Coleman and Rockport names under similar licensing agreements.
The Company also manufactures and sells a collection of outdoor socks
specifically designed for downhill and cross-country skiers, which includes nine
styles of bright, colorful skiing socks and liners. These socks are sold under
the Ridgeview name or private labels to several large retailers with national
distribution as well as to smaller, resort-oriented ski merchandise shops. The
skier-oriented outdoor collection also includes several styles of thermal
underwear/leggings as well as glove liners and gators. The Company believes the
favorable market response to its thermal underwear/leggings products offers
continued opportunities for sales growth and additional complementary product
development.
The fibers used in manufacturing the rugged outdoor and heavyweight casual
and ski sock collections include wool, wool blend, cotton and silk. They also
include such synthetic fibers as polypropylene (which when blended with wool or
cotton provides a superior level of durability and serves to effectively wick
moisture
31
<PAGE> 35
away from the skin, keeping feet dry), turbo hi-bulk acrylic (a premium grade of
acrylic that provides high bulk, softness and loft), Thermax (a hollow core
fiber used in cold weather socks that traps warmth while wicking moisture away
from the skin) and CoolMax. The thermal underwear/leggings are constructed from
a blend of DuPont's newest cold weather fighting polyester fiber, Thermostat,
and spandex fiber, Lycra.
Women's Hosiery Products
The Company manufactures a complete line of women's private label hosiery,
including more than 600 styles of tights, trouser socks, pantyhose and
knee-highs available in all popular colors and textures. The Company's largest
customer for these private label products is Target. In 1994, the Company
entered the designer segment of the women's hosiery market through the
negotiation of the license to manufacture and sell women's hosiery under the
Ellen Tracy brand name in the United States and Canada. The licensor, Ellen
Tracy, Inc. is a designer and manufacturer of "upmarket" women's ready-to-wear
fashions. In return, the Company must meet certain quality standards, distribute
only to better department and specialty stores, sell only limited quantities of
Ellen Tracy hosiery at off-price and pay a royalty equal to 7% of its net sales
of Ellen Tracy products. In addition, the Company is required to expend in each
year the agreement is in effect an amount equal to 3% of the annual sales
targets on advertising and promotions of Ellen Tracy products. Approximately
one-half of that amount is required to be made in the form of a contribution to
the national advertising budget of the licensor. The Company has recently
broadened the Ellen Tracy product line beyond the original limited product
category of high-end tights and trouser socks to include dress pantyhose and
casual socks and improved the packaging of the entire line of Ellen Tracy
products. Ellen Tracy hosiery products are now available in tights, trouser
socks and pantyhose sold at premium retail prices.
The Company is required to make minimum guaranteed royalty payments in
increasing amounts each year under the Ellen Tracy license agreement. The
minimum guaranteed royalty payments are based on 7% of increasing annual sales
targets for Ellen Tracy products of $1.5, $3.0 and $5.0 million in 1994, 1995
and 1996, respectively, which were established by negotiation with no prior
sales experience by the Company or a prior licensee of this Ellen Tracy hosiery
program to serve as a guide. The Company's net sales of Ellen Tracy products
exceeded $1.5 million in 1994. The Company's net sales of Ellen Tracy products
in 1995 represented only 84% of the $3.0 million sales target for that year, and
the Company does not expect its sales of Ellen Tracy products in the current
year to achieve the higher sales target of $5.0 million for such period.
Although the termination provisions of the license agreement gave the licensor
the right to terminate the agreement if the Company did not achieve the sales
target of $3.0 million for 1995, the licensor did not exercise its right to do
so. Management believes its performance as licensee has otherwise been
satisfactory to date and has recently been advised that the licensor is willing
to renew the license at its expiration in December 1996 for a one-year term with
a minimum guaranteed royalty payment based on an annual sales target of $5.0
million. There can be no assurance, however, that the Company will be able to
renew the Ellen Tracy license upon the expiration of its term.
In July 1996, the Company negotiated a license to manufacture and sell
women's sheer hosiery and medium-weight tights under the Evan-Picone brand name,
a widely-recognized and established brand of women's hosiery. The initial term
of the license agreement ends December 31, 1999, but the license is renewable at
the Company's option for another three years, provided the Company has satisfied
the minimum annual sales threshold of $14.0 million for the twelve-month period
ending June 30, 1999. The Company is required to pay royalties equal to 5% of
net sales of Evan-Picone products (3% of net sales of excess inventory and
close-out sales). In addition, the Company must spend 2% of annual net sales of
Evan-Picone products on advertising. The Company is required to make minimum
guaranteed royalty payments during the term of the agreement in increasing
amounts in each annual period of the license term, which is $450,000 in the
first annual period and increases to $750,000 in the sixth annual period of the
license agreement. The license also requires the Company to use its best efforts
to sell and promote Evan-Picone women's hosiery and provides that the Company
shall be deemed to be not using its best efforts if the Company's net sales fail
to exceed certain specified amounts during each annual period of the license
term. The specified amount of net sales of Evan-Picone products that must be
achieved is $9.5 million for the first annual period of the license agreement
and increases in each annual period thereafter with net sales requirements of
$14.0 and $20.0 million in the
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<PAGE> 36
third and sixth annual periods, respectively. Net sales of women's hosiery under
the Evan-Picone brand name by the prior licensee were $17.5 million in such
licensee's fiscal year ended January 31, 1996. In the event the Company fails to
meet the specified amount of net sales in any annual period, the licensor has
the right to terminate the agreement. The licensor may also terminate the
agreement in certain other events, including a change of control of the Company,
the Company's failure to make payments due under the agreement, abandonment of
the trademark or the granting of a lien or encumbrance on Evan-Picone products.
The Company also manufactures and sells tights packaged under the Jacques
Moret brand name under a one-year license agreement with Jacques Moret, Inc., a
firm that designs, contracts for the manufacture of, markets and sells an
extensive collection of active apparel.
SALES AND MARKETING
During 1995 the Company integrated the sales and marketing of its socks and
women's hosiery products, which have traditionally been segregated by product
category. This reorganization of the Company's direct sales force gives one
executive officer responsibility for sales of all of the Company's products and
allows each member of the direct sales force to offer the entire mix of the
Company's products to customers.
The chart set forth below provides an overview of the sales and marketing
of the Company's products by product category, pricing approach, selected brand
names, market segment, major customers and method of distribution.
<TABLE>
<CAPTION>
SELECTED PERCENTAGE
PRICING BRAND DISTRIBUTION MAJOR OF 1995
PRODUCT CATEGORY GENERAL DESCRIPTION APPROACH NAMES CHANNELS USED CUSTOMERS REVENUE
- -------------------- -------------------- ------------ -------------- ------------------ -------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
SOCKS:
Sports specific Functional, high Moderate adidas, Sporting goods The Sports 27.3%
quality socks with Reebok, Fila, stores, athletic Authority, Sports &
extra cushioning Converse, footwear stores, Recreation, Champs,
that allow an IZOD, Head, athletic footwear Oshman's SuperSports
individual to match ASICS, and apparel USA, SportMart,
socks to a Ridgeview, Pro manufacturers Reebok, Fila
particular sport Am
activity
Sports promotional Lightweight, basic Value Jacques Moret, Sporting goods The Sports 24.5%
cushion socks for a SportSox, stores, athletic Authority, Sports &
variety of uses GAMEsocks footwear stores, Recreation, Champs,
mass market and Oshman's SuperSports
discount stores USA
Rugged outdoor and Heavyweight socks Moderate to Woolrich, Mass market and Kmart, J.C. Penney, 16.9%
heavyweight casual with true rib Premium Oyster Bay, discount stores, The Gap, Lands' End,
construction made Winchester, outdoor specialty Eddie Bauer, WIX
with wool and cotton Seneca stores, department Corporation, Wal-
blends for hiking, stores, mail order Mart Stores,
skiing, hunting and retailers, SportMart, Target
other active outdoor sporting goods
uses stores
Active sport Cushion-engineered Premium LINEOne Sporting goods The Sports 3.4%
socks with fiber and stores, athletic Authority, Sports &
construction footwear stores, Recreation, Champs,
elements intended to athletic footwear Oshman's SuperSports
provide high and apparel USA, SportMart
performance features manufacturers
for the serious
athlete
</TABLE>
33
<PAGE> 37
<TABLE>
<CAPTION>
SELECTED PERCENTAGE
PRICING BRAND DISTRIBUTION MAJOR OF 1995
PRODUCT CATEGORY GENERAL DESCRIPTION APPROACH NAMES CHANNELS USED CUSTOMERS REVENUE
- -------------------- -------------------- ------------ -------------- ------------------ -------------------- ----------
<S> <C> <C> <C> <C> <C> <C>
WOMEN'S HOSIERY:
Tights and trouser Opaque, durable Moderate to Ellen Tracy, Department stores, Target, J.C. Penney, 16.8%
socks pantyhose and Premium Liz Claiborne mass market and Mercantile,
trouser socks made discount stores, Dillard's, Federated
with heavy-weight women's fashion (Macy's, Rich's),
nylon yarns and with specialty stores Neiman Marcus,
spandex in either Parisian, Nordstrom
half or all of the
knitted courses
Sheer pantyhose and Basic ladies Value to Ellen Tracy, Mass market, Target, J.C. Penney, 11.1%
knee-highs pantyhose and Premium Liz Claiborne, discount and Mercantile,
knee-highs made with Evan-Picone department stores Dillard's, Federated
lightweight nylon (Macy's, Rich's),
yarns and nylon/ Neiman Marcus,
spandex yarns for Parisian, Nordstrom
everyday and special
uses
</TABLE>
Sports, Rugged Outdoor and Heavyweight Casual Socks
The Company believes it is one of the leading vendors of sports socks to
sporting goods and active apparel stores. The Company also sells its own and
licensed brand name socks to athletic footwear stores, sporting goods dealers,
department stores and mass merchandisers throughout the United States and
Canada. Among the Company's leading customers for its own sports sock brands are
Just for Feet, The Sports Authority, The Athlete's Foot, Oshman's Sporting
Goods, Sportmart, and Sports & Recreation. Among the Company's leading customers
for its rugged outdoor and heavyweight casual socks, most of which are sold
under various retailers' private labels, are Kmart, J.C. Penney and Structure (a
division of The Limited, Inc.).
The Company also sells sports specific socks to many of the large athletic
footwear and apparel companies, including Adidas AG, Reebok International, Ltd.,
New Balance, Inc. and Fila Holdings SpA, which design, contract for the
manufacture of and market sports socks under their widely-recognized brand
names. Under a strategic alliance entered into in 1995 with Chipman-Union Co.,
another domestic sock manufacturer that holds licenses to manufacture and sell
socks under the adidas brand name, the Company is the primary manufacturer of
sport socks bearing the adidas brand name to fill orders from distributors of
adidas branded products located throughout Europe. To accommodate growth from
the adidas sports sock manufacturing program, in 1995 the Company doubled the
capacity of its manufacturing facility in the Republic of Ireland.
In conjunction with its retailers, the Company employs a sophisticated
marketing program for its own footwear collection designed to increase sales by
educating consumers about the benefits of its active sports, sports specific and
outdoor and rugged casual socks. For example, the Company's LINEOne brand of
active sports socks are packaged in bright, colorful, attention-getting sleeves
printed with extensive information about the benefits of the extra cushioning in
high impact areas, the unique qualities and benefits of the natural and
synthetic fibers used and other features of the LINEOne brand that are designed
to help consumers appreciate the value of these premium-priced socks. The
marketing program includes offering retailers a variety of merchandising aids
such as floor and counter unit displays equipped with signage bearing the
Ridgeview name as well as the Company's brand names. For the Company's
promotionally-priced socks, which are typically sold in packages of three or six
pairs each, the Company offers retailers free-standing, wire-constructed package
bins equipped with similar signage. For most of its socks, the Company also
offers a 'tier' unit sock display system equipped with Ridgeview and brand name
specific signage designed to fit into retailers' existing pegboard or slat wall
product display systems.
Approximately 50% of the Company's sock sales in 1995 were made on a
commission basis by a nationwide network of more than 80 independent sales
representatives, most of whom specialize in sporting goods and athletic apparel
and represent manufacturers of other products in addition to the Company. The
Company has an internal sales force of six employees, four of whom are located
at the Company's
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<PAGE> 38
headquarters and the rest of whom are located at the Company's other facilities.
Two of these sales employees work exclusively with large athletic footwear and
apparel companies for which the Company serves as a manufacturing source and
major private label accounts. Sales of sports socks manufactured at the
Company's facility in the Republic of Ireland, which are sold primarily to
Adidas AG and Reebok International Ltd. for distribution by them to retail
outlets in Europe, are handled by a small group of employees located at that
facility.
Since the Seneca Acquisition in June 1995, the Company has been selling
rugged outdoor and heavyweight casual socks under the licensed brand name
Woolrich. Sales of Woolrich socks are made primarily by the 40-person direct
sales force employed by Woolrich, Inc., who earn commissions from the Company.
In both its branded and private label sock business, the Company engages in
cooperative advertising with major retail accounts, whereby the Company pays a
percentage of the cost of advertising and promotional expenses. In most
instances, the percentage of the Company's contribution to the retailer's
advertising budget is related to the volume of the Company's sales to the retail
account.
International Sales and Marketing of Socks
In 1995, approximately 16% of the Company's sock sales (on a pro forma
basis assuming the Seneca Acquisition had occurred at the beginning of 1995)
were attributable to sales to customers located outside of the United States.
Among the principal countries to which the Company exports socks are the United
Kingdom, France, Japan, Singapore and Finland. All of the production at the
Company's manufacturing facility in the Republic of Ireland is sold in Europe.
To accommodate growth from the new adidas sports sock manufacturing program, the
Company completed a major expansion of this facility in 1995. See note 13 of the
Company's consolidated financial statements.
Women's Hosiery Products
The Company sells private label women's hosiery products to approximately
150 department stores, specialty retailers, mass market and discount stores
throughout the United States in over 5,000 locations. Among the Company's
leading customers for its private label products are Target, J.C. Penney,
Nordstrom and Liz Claiborne, Inc., which designs, contracts for the manufacture
of and markets women's hosiery packaged under various trademarks, including Liz
Claiborne and Elisabeth, to better department and specialty stores. The Company
sells Ellen Tracy women's hosiery to more than 100 department and specialty
stores in over 1,000 locations throughout the United States and Canada.
Principal customers for the Ellen Tracy line of hosiery products include Saks
Fifth Avenue, Neiman Marcus, Nordstrom, Macy's, Bloomingdale's and Dillard's.
In July 1996, the Company began selling the line of Evan-Picone women's
hosiery products, which is distributed through more than 200 department and
specialty stores in over 1,500 locations throughout the United States and
Canada. Principal customers for the Evan-Picone product line include May
Department Stores Co., Dillard's, J.C. Penney and Federated Department Stores.
The Company is selling Evan-Picone product through a nationwide network of
independent sales representatives, most of whom were selling Evan-Picone product
for the company that previously held the license for the Evan-Picone women's
hosiery program. The Company intends to expand the Evan-Picone product line to
include medium-weight tights and trouser socks as well as pantyhose and
knee-highs.
The Company has an internal sales force of six employees located throughout
the United States who handle primarily the private label and Ellen Tracy hosiery
business. For both private label and Ellen Tracy hosiery products, senior
management is actively involved in selling to major accounts and participates
during market weeks and at other times in presentations to department stores and
specialty retailing customers.
The Company works closely with retailers, placing special emphasis on
packaging and design, to develop attractive and economical private label hosiery
programs that will meet with consumer acceptance and
35
<PAGE> 39
generate increased sales for the retailer as well as the Company. For example,
in 1995 the Company made significant changes in product construction and pricing
for its private label programs with Target and took steps to control product
costs by making additional investments in knitting and automated finishing and
packaging machinery to increase the efficiency of the Company's manufacturing
operations.
In both its private label and branded business, the Company engages in
cooperative advertising with major retail accounts, whereby the Company pays a
percentage of the cost of advertising and promotional expenses. In most
instances, the percentage of the Company's contribution to the retailer's
advertising budget is related to the volume of the Company's sales to the retail
account. From time to time, the Company's major yarn suppliers also contribute
to the cost of such cooperative advertising and promotions. The Company is
required to devote 3% of its Ellen Tracy sales to advertising. In 1995,
approximately one-half of that amount was used for cooperative advertising with
retail accounts, and the remainder was paid to Ellen Tracy, Inc. to support
general advertising of the Ellen Tracy brand name in fashion magazines and other
national media.
The Company intends to expand its private label women's hosiery business,
sales of which have increased in each of the last three years, by augmenting
sales under private label programs with existing customers, improving customer
service and pursuing additional private label program business with major
retailers. Following the anticipated purchases of additional electronic knitting
equipment during the next 18 to 24 months, together with the investments in
technology recently made to strengthen women's hosiery manufacturing and the
ability to contract with other manufacturers for finished product when
necessary, the Company will have the capability to expand sales of its private
label business without making significant additional capital expenditures. The
Company intends to expand the sales of Ellen Tracy and Evan-Picone women's
hosiery by adding to the existing styles offered, increasing its sales and
marketing effort and continuing major product development.
MANUFACTURING
The chart set forth below provides an overview of the Company's
manufacturing facilities by geographic location:
<TABLE>
<CAPTION>
AT SEPTEMBER
30, 1996
NUMBER OF ------------
KNITTING APPROXIMATE
NUMBER MACHINES OUTPUT PER
OF INSTALLED IN YEAR APPROXIMATE WEEK IN
LOCATION KNITTING LAST THREE OPERATIONS SQUARE DOZENS OF
OF FACILITY MACHINES YEARS COMMENCED FOOTAGE PRODUCT CATEGORIES PAIRS
- --------------- --------- ------------- ---------- ------------ ---------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Newton, NC 114 12 1912 100,000 Tights, trouser socks, pantyhose 18,000
(women's and knee-highs
hosiery)
Newton, NC 53 53 1976 70,000 Complete range of sports specific 15,000
(sports socks
socks)
Tralee, 79 48 1986 45,000 Complete range of sports specific 15,000
Republic of socks
Ireland
Ft. Payne, AL 71 71 1992 72,000 Complete range of sports 35,000
promotional socks
Seneca Falls, 197 29 1954 180,000 Complete range of rugged outdoor 12,000
NY ----- ----- ------- and heavyweight casual socks -------
Total 514 213 467,000 95,000
=== === ======= ======
<CAPTION>
APPROXIMATE
LOCATION NUMBER OF
OF FACILITY EMPLOYEES
- --------------- ------------
<S> <C>
Newton, NC 160
(women's
hosiery)
Newton, NC 155
(sports
socks)
Tralee, 115
Republic of
Ireland
Ft. Payne, AL 145
Seneca Falls, 190
NY ------
Total 765
===
</TABLE>
Sports, Rugged Outdoor and Heavyweight Casual Socks
The Company manufactures socks primarily for inventory requirements based
on estimated demand but also in response to customer orders on private label
business. The Company maintains finished inventory of its own and licensed brand
products under the Company's Quick Response inventory control system. Products
36
<PAGE> 40
maintained in finished inventory are generally shipped within three days of
receipt of an order, which in the case of the Company's larger customers is
typically received and processed by the Company electronically. Orders for socks
not maintained in finished goods inventory are typically shipped within ten to
thirty days of receipt of the customer's order, depending upon the size of the
order.
The Company manufactures socks at all of its facilities. At its facility
located in Newton, North Carolina, the Company has 53 knitting machines, all of
which are electronic. In its facility located in Ft. Payne, Alabama, where all
of the Company's promotionally-priced, multi-pair pack lightweight cushion socks
are made, the Company has 71 electronic knitting machines. At its facility
located in the Republic of Ireland, where the Company makes sports specific
socks primarily for sale to major athletic footwear and apparel companies, the
Company has 79 knitting machines, 48 of which were installed in the last three
years. At its facility located in Seneca Falls, New York where the Company
produces all of its rugged outdoor and heavyweight casual socks, the Company has
197 "double cylinder" knitting machines, most of which are mechanical machines.
The Company's electronic, CAD/CAM-driven machines allow the Company to vary
its manufacturing runs to adjust quickly to changing patterns in demand without
traditional high change-over or retooling costs. They also allow the Company to
maintain a computer library of pattern and texture designs that can be
electronically transmitted to these knitting machines. When the appropriate
yarns have been installed to feed into them, the machines will automatically
adjust to knit socks conforming to the new pattern and texture design.
The Company generally operates its sock knitting machinery at each facility
five days a week, 24 hours a day, except in Newton where the Company operates
its sock knitting machinery seven days a week, 24 hours a day. Finishing socks,
which includes toe closing, bleaching, scouring and dyeing, boarding, pairing
and packaging, is generally accomplished at each facility by one shift of labor
working five days a week and overtime when necessary. To meet peaks in demand
for finished inventory that cannot be met from its own production, the Company
from time to time purchases greige goods from other manufacturers.
Although the Company expects to continue making regular, and in some years
significant, investments in technology that will increase the productive
capacity, efficiency and competitive position of its sock manufacturing
operations, the Company believes that its sock manufacturing operations,
supplemented by the purchase of greige goods from others when necessary, will be
able to meet current and projected demand for the Company's products.
Women's Hosiery Products
The Company manufactures its women's hosiery products not only in response
to customer orders but also for inventory requirements based on estimated
demand. The Company maintains finished inventory of certain private label and
Ellen Tracy hosiery under the Company's Quick Response inventory system.
Products maintained in finished inventory are generally shipped within three
days of receipt of an order from a retail account, which in the case of the
Company's larger customers, such as Target, is typically received and processed
by the Company electronically. Orders for women's hosiery not maintained in
finished goods inventory are typically shipped within ten to thirty days of
receipt of the customer's order.
The Company's manufacturing of women's hosiery is currently done at the
facility in Newton, North Carolina, where the Company has 114 knitting machines,
automated assembly equipment and static dyeing machines. Eleven of the Company's
machines are electronic, CAD/CAM-driven and allow the Company to vary its
manufacturing runs to adjust quickly to changing patterns in demand without
traditional high change-over or retooling costs. The Evan-Picone hosiery program
and certain other women's hosiery products are outsourced to other
manufacturers. With a portion of the net proceeds of this Offering, the Company
intends to purchase over the next 18 to 24 months approximately 60 new
electronic CAD/CAM knitting machines to replace the existing knitting machines
used in the production of women's hosiery. Not only do modern electronic
knitting machines produce hosiery at a faster rate and reduce change-over and
retooling costs, they provide higher efficiency levels, significantly improve
product quality, reduce "fallout" and enhance product development through
product sophistication and diversity. The Company generally operates its women's
hosiery knitting machinery 24 hours a day, five days a week. The finishing of
women's hosiery, which includes
37
<PAGE> 41
toe closing, fabricating, boarding and packaging, is generally accomplished by
one shift of labor working five days a week. Overtime work is scheduled when
necessary to respond to increased product demand. The Company recently purchased
new assembly and packaging machinery, which by automating several of the steps
in the finishing process has reduced the Company's labor requirements for this
traditionally labor intensive part of the manufacturing process.
For its electronic CAD/CAM-driven knitting machinery, the Company is able
to maintain a computer library of hosiery patterns and texture designs that can
be electronically transmitted to the knitting machines. When the appropriate
yarns have been installed to feed into them, these machines will automatically
adjust to knit hosiery conforming to the new pattern and texture design. The
Company has a small in-house product development staff that develops original
designs on the Company's CAD/CAM system and contracts with an experienced
fashion designer to provide design input on a seasonal basis. The Company is
seeking to hire an experienced fashion designer to provide design input on all
of the Company's socks and women's hosiery programs.
The Company regularly contracts with other manufacturers for greige goods
as well as finished hosiery when orders for the Company's women's hosiery
products exceed its production capacity. Although the Company expects to make
continuing, significant investments in technology to increase the productive
capacity and efficiency of its women's hosiery manufacturing operations, the
Company believes that, with the exception of the Evan-Picone program and a
limited number of other styles of women's hosiery products that will be
outsourced from time to time to other manufacturers, it will have sufficient
technologically advanced production capacity to meet current and projected
demand for its women's hosiery products for the next several years.
QUALITY ASSURANCE PROGRAM
The Company maintains a rigorous quality assurance program for its
manufacturing operations that begins with the purchase of only high-quality
yarns and a program of regular maintenance and constant monitoring, some of
which is done by computer, of the Company's knitting machinery. Greige goods
produced by the Company or purchased from others are carefully inspected prior
to finishing, and randomly selected samples of finished goods are inspected
prior to being packaged and shipped. The Company also emphasizes strong
interaction with its major customers on quality assurance issues and employee
education on the importance of quality assurance. During each of the past five
years, the Company has achieved high-quality standards with less than 1% of its
products in each of such years being returned as defective. Based on their
collective years of experience, management of the Company believes this record
compares favorably with those of others in the industry.
RAW MATERIALS
The Company's products are manufactured from yarns spun from either
synthetic (e.g., nylon and acrylic) or natural (e.g., cotton and wool) fibers,
or a blend of both. The principal yarns used in the manufacture of sports,
outdoor and casual socks are cotton, wool and a variety of synthetic fibers. The
principal yarns used in the manufacture of women's hosiery products are textured
nylon of varying weights and spandex, principally DuPont's Lycra. As the Company
has achieved greater manufacturing efficiencies through investments in modern
knitting machinery and automated finishing and packaging equipment that reduce
labor inputs and as the prices of yarns spun from both natural and synthetic
fibers have increased, the cost of raw materials as a percentage of the
Company's cost of goods sold has increased.
With recent declines in cotton prices, United States cotton prices are
currently just above their ten-year average price of 70 cents a pound after two
years of prices that were significantly above the ten-year average. Prices for
wool, the other major natural fiber the Company uses, have also declined in the
last year after sharp increases in the previous two years, reflecting increased
consumer demand for natural fibers and changes in production. The Company and
other major users of cotton and wool yarns typically enter into fixed-price
contracts, having terms ranging from six to twelve months, during the fall of
the year when much of the cotton crop is being harvested worldwide. By doing so,
the Company and its competitors are able to avoid making
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significant purchases of cotton and wool on the spot market and are able to
establish and maintain pricing for their products using large amounts of these
natural fibers throughout the year with only minor adjustments.
The Company purchases its requirements for textured nylon, polyester,
polypropylene and other yarns made from synthetic fibers from a variety of
suppliers at prevailing prices that are influenced both by changes in demand and
the producers' costs. Many synthetic fibers, such as polyester, are
petrochemical-based, and prices for them are influenced by changes in the price
of petroleum. The Company has reduced the adverse effect of price increases for
synthetic fiber yarns in recent years by negotiating rebates with its major
synthetic yarn suppliers based on the Company's volume of purchases.
The Company has generally been successful in recovering increased raw
material costs on its branded products, many of which include significant
amounts of wool and cotton yarn as well as yarns made from synthetic fibers.
Recovering higher costs for raw materials on the Company's private label women's
hosiery products is generally more difficult because of the highly competitive
nature of this business.
QUICK RESPONSE INVENTORY SYSTEM
The Company has developed its sophisticated Quick Response inventory system
to enable the Company to coordinate its manufacturing operations and order
fulfillment system with the electronic inventory control systems employed by
most of the Company's women's hosiery customers and an increasing number of its
major sport socks customers. The Quick Response inventory system, which combines
bar code technology with electronic data interchange ("EDI"), provides a link
between the customers' and the Company's computers, eliminates inefficiencies by
automating receipt and processing of customers orders and allows the Company to
respond with "just-in-time" manufacturing techniques to the tighter shipment
schedules demanded by large retailers. Using the EDI technology, the Company
receives from certain major customers, via electronic interchange, weekly
updates of sales and inventory levels from store locations nationwide. For
certain customers, such as Target and The Sports Authority, this information
automatically generates orders which the Company then fills.
With a portion of the net proceeds of this Offering, the Company intends to
construct a distribution center at its manufacturing facility in Newton, North
Carolina, which will incorporate sophisticated inventory control and order
fulfillment technology and become an integral component of the Company's Quick
Response inventory system. In the last five years, the Company has made
significant investments in computer hardware and software to implement its Quick
Response system. While the Company will need to continue making significant
capital investments in new information technology to maintain and strengthen its
Quick Response system in response to major retailers' increasingly sophisticated
EDI expectations, the Company believes the current system is adequate for its
current business.
MAJOR CUSTOMERS
In 1995, sales of women's hosiery products and socks to Target accounted
for approximately 13% of the Company's total net sales (approximately 12% on a
pro forma basis assuming the Seneca Acquisition had occurred at the beginning of
1995). During such year, no other single customer accounted for more than 10% of
the Company's business. The Company's business relationship with Target began
more than 20 years ago when Target had less than 100 stores. As the number of
stores operated by Target has increased to over 700, the Company's sales to this
customer have increased commensurately. The Company's five largest women's
hosiery customers, including Target, accounted for approximately 84% of the
Company's total women's hosiery business in 1995. During the same year, the
Company's five largest sock customers accounted for approximately 25% of the
Company's sock business.
CREDIT AND COLLECTIONS
The Company's credit and collection functions are managed by the Company's
credit department at its corporate headquarters, except for credit and
collection on sales of socks manufactured at the Company's facilities located in
Seneca Falls, New York and in the Republic of Ireland, which are handled by
employees at those facilities. The credit of the Company's customers is
evaluated regularly by monitoring of accounts
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<PAGE> 43
receivable and through reports obtained from major business credit evaluation
services. In the case of smaller retail outlets for sports socks, the Company
relies in part on credit evaluation information available through a variety of
credit information sources. The Company believes its credit and collection
management has been a significant factor in minimizing the effect on the Company
of bankruptcy filings of certain customers for its sports socks. In each of the
last five years, the Company's write-off of uncollectible receivables has
averaged less than 1% of net sales.
SEASONALITY
The Company's sales of rugged outdoor and heavyweight casual socks, ski
socks and thermal underwear/leggings are highly seasonal and generally occur
during the fall and winter selling seasons, which begin in August and end in
December. The Company's women's hosiery business is also somewhat seasonal with
hosiery sales, particularly sales of tights (which sell for higher wholesale
prices than women's sheer hosiery) increasing in the fall and winter months.
Historically, the majority of the Company's sales have been generated, and most
of the Company's profits have been earned, in the third and fourth quarters of
its fiscal year.
BACKLOG
As a result of the seasonality of certain products, the Company accumulates
a temporary backlog of orders primarily during the summer and early fall months.
At September 30, 1996, the Company's order book reflected unfilled customer
orders for approximately $8.3 million of products as compared to $8.6 million at
the same date in the prior year. Order book data at any given date is also
materially affected by the timing of recording orders and of shipments, as well
as the status of major private label programs. Recently, certain large customers
who formerly placed firm orders with the Company began instead providing
projections of their demand for the Company's products and transmitting smaller
firm orders on a more frequent basis. Accordingly, order book data should not be
taken as indicative of eventual actual shipments or net sales, or as providing
meaningful period-to-period comparisons. Excluding those products which are
seasonal in nature and major private label programs, the Company receives orders
fairly evenly throughout the year and generally ships within three to thirty
days after receipt of a customer's order.
COMPETITION
The sock manufacturing segment of the hosiery industry is highly fragmented
and competitive. According to the NAHM, at December 31, 1995 there were 309
companies manufacturing socks in the United States at 394 locations. The Company
is subject to competition from a number of these companies that manufacture and
sell a complete range of sports socks or, in many cases, specific categories of
sports socks, such as active sports socks, that are competitive with one or more
of the Company's products. The Company believes that it is one of the leading
vendors of sports socks to sporting goods and active apparel stores. The number
of competitors in the manufacture and sale of rugged outdoor and heavyweight
casual socks is considerably smaller because the number of "double cylinder"
knitting machines required to make these socks is limited.
The women's hosiery industry is highly competitive and is currently
experiencing excess capacity and flat demand for sheer hosiery products. The
women's hosiery industry is dominated by the industry leader, Sara Lee Hosiery,
and by Kayser-Roth. Sara Lee Hosiery not only sells private label and brand name
women's hosiery to department stores, specialty stores and mass merchandisers,
it also sells substantial quantities of its brand name products directly to
consumers through its outlet catalog. Sara Lee Hosiery and Kayser-Roth, as well
as several other large domestic manufacturers of women's hosiery, have
substantially greater market share and financial resources than the Company. The
Company is also subject to competition from a large number of smaller domestic
competitors, which compete primarily based on price for private label business.
Sara Lee Hosiery manufactures and sells women's hosiery in the designer segment
of the market under the licensed Donna Karan brand name in competition with the
Company's Ellen Tracy hosiery. Other women's hosiery manufacturers sell similar
designer name brand women's hosiery with equal or greater consumer recognition,
which is marketed to the same group of fashion-conscious consumers to which the
Company's Ellen Tracy hosiery is marketed.
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Competition among manufacturers of all categories of the Company's products
is primarily on the basis of customer service, product quality, pricing, order
fulfillment capability and relationships forged over time between sales
personnel and buyers for the large national retailers and other major customers.
The Company believes that the most important of these are order fulfillment and
product quality, which encompass the ability to service the customer's needs by
fulfilling and shipping orders for products that are of a consistent quality on
a timely basis. The Company believes its good reputation for order fulfillment
and consistent product quality gives it a competitive advantage over many of its
competitors, including some competitors whose prices are lower than the
Company's prices for similar products.
The Company believes that its increased size, which has occurred as the
result of internal sales growth and the Seneca Acquisition, as well as its
diversified product lines, give the Company an increasing competitive advantage.
The Company believes a manufacturer's size will be particularly important during
a period of anticipated consolidation in the sock and women's hosiery industry
that is being driven in part by increased retail concentration. In this regard,
the Company expects to benefit from an industry trend for retailers to align
with a fewer number of major manufacturers who can provide a significant share
of a major retailer's total sock and women's hosiery requirements, have the
capability of assisting the retailer in managing its hosiery business and are
able to meet increased logistical demands imposed by major retailers.
REGULATION
The Company's business is subject to regulation by federal, state and local
governmental agencies dealing with various aspects of conducting a sock and
women's hosiery manufacturing business such as work place safety, protection of
the environment, wage and hour policies, product labeling, family and medical
leave policies and product flammability standards. Certain of these regulations,
particularly those relating to air quality, water quality and disposal of waste
products, are technical in nature, involve substantial penalties in the event of
breach and require extensive controls to assure compliance with their
provisions. While the Company believes that it has operated and intends to
operate in full compliance with these regulations, such compliance may result in
significant additional costs.
EMPLOYEES
As of September 30, 1996, the Company employed approximately 765 persons,
136 of whom, employed at Seneca, were covered by a collective bargaining
agreement with the International Ladies Garment Workers Union, which in 1995
merged with the Amalgamated Clothing and Textile Workers Union to form the Union
of Needletrades, Industrial and Textile Employees. The employees at the
Company's facility in the Republic of Ireland are not covered by a collective
bargaining agreement, but the Company does recognize Services Industrial
Professional Technical Union as their representative. In April 1995, the Company
signed a three-year collective bargaining agreement covering wages and benefits
for the Company's employees at Seneca. None of the Company's employees
represented by a union has engaged in any kind of work stoppage in the last ten
years. The Company considers its relationships with its employees to be good.
At its manufacturing facility in Newton, North Carolina, the Company
operates a day care center for the benefit of its employees with space for 58
children. The operating costs of the center that are not covered by payments
made by employees using the center, grants received or funds from other sources
are paid by the Company. Approximately 75% of the Company's hourly employees at
this facility are female. In October 1996, Working Mother magazine named the
Company to the magazine's annual list of "100 Best Companies for Working
Mothers," citing the availability of this day care center and the Company's
other family-friendly policies for its employees. Management believes these
policies contribute to a stable and productive work force.
PROPERTIES
The Company's corporate offices, all of its women's hosiery and a
significant portion of its sports sock manufacturing operations are located in
Newton, North Carolina in five Company-owned buildings containing approximately
170,000 square feet of space. The Company plans to construct a distribution
center on
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Company-owned land adjacent to the Company's existing facility in Newton that
will add an additional 75,000 to 100,000 square feet of space. The Company's
facilities in Newton also include a 4,000 square foot building housing a
Company-sponsored child care center.
The Company owns an approximately 60,000 square foot sock finishing and
shipping facility and leases on a month-to-month basis an approximately 12,000
square foot sock knitting and sewing facility in Ft. Payne, Alabama. The Company
also owns a manufacturing facility located in Tralee, Republic of Ireland. With
the assistance of a grant from the Irish Development Authority equal to
approximately one-third of the total capital investment required, the Company
expanded the size of this facility in 1995 to approximately 45,000 square feet.
The Company also owns an approximately 100,000 square foot, three-story building
at Seneca that houses the knitting, sewing and finishing operations for the
Company's production of rugged outdoor and heavyweight casual socks. The Company
owns a nearby 80,000 square foot building on 37 acres of land that serves as a
warehouse and distribution center for Seneca.
LITIGATION
The Company is not a party to any legal proceedings which it believes would
have a material adverse effect on the business, income, assets or operation of
the Company. The Company is not aware of any material threatened litigation
against the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's directors and executive officers and their ages, as of August
15, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------------------------------------- ---- ---------------------------------
<S> <C> <C>
Albert C. Gaither............................ 65 Chairman and Director
Hugh R. Gaither.............................. 45 President, Chief Executive
Officer and Director
William D. Durrant........................... 58 Executive Vice President -- Sales
and Marketing and Director
Walter L. Bost, Jr........................... 41 Executive Vice President and
Chief Financial Officer
Susan Gaither Jones.......................... 36 Vice President and Director
J. Michael Gaither........................... 45 Secretary and Director
Claude S. Abernethy, Jr...................... 69 Director
George Watts Carr, III....................... 53 Prospective Director*
Joseph D. Hicks.............................. 53 Prospective Director*
Charles M. Snipes............................ 63 Prospective Director*
</TABLE>
- ---------------
* Messrs. Carr, Hicks and Snipes have been elected as directors of the Company,
effective upon the completion of this Offering. They have each agreed to serve
upon the effectiveness of their election as directors.
Albert C. Gaither has been a director since 1958 and Chairman of the
Company since January 1992. From January 1980 through December 1991 he served as
the Company's President and from January 1992 until September 1995 was the
Company's Chief Executive Officer. He received his B.A. from Davidson College in
1956 and has been employed by the Company since 1956. Mr. Gaither is Susan
Gaither Jones' father and a cousin of Hugh R. Gaither and J. Michael Gaither.
Hugh R. Gaither has been a director since 1977 and President of the Company
since January 1992. Since September 1995, he has also served as the Company's
Chief Executive Officer. Prior thereto he had served as Vice President of the
Company since January 1980. Mr. Gaither joined the Company in 1975 after
receiving his B.A. from Davidson College and his M.B.A. from the University of
North Carolina at Chapel Hill. During 1994 and 1995, Mr. Gaither served as
Chairman of the NAHM. Mr. Gaither is J. Michael Gaither's brother and a cousin
of Albert C. Gaither and Susan Gaither Jones.
William D. Durrant, who was elected to his current position in September
1995, has been employed by the Company since 1976 and has been a director since
1979. From January 1992 until September 1995, Mr. Durrant served as Senior Vice
President -- Sales and Marketing for the Company's sports sock divisions. From
July 1976 until December 1992, he served as Vice President -- Sales for the
sports sock divisions.
Walter L. Bost, Jr., who is a certified public accountant, was elected to
his current position in September 1995 and has been employed by the Company for
more than eight years, during which entire period he has served as the Company's
Chief Financial Officer. From 1982 until 1987 he was controller of a
privately-owned hosiery manufacturing company located in Hickory, North
Carolina. Mr. Bost received his B.A. in Accounting from the University of North
Carolina at Chapel Hill in 1977.
Susan Gaither Jones has been a Vice President of the Company since January
1992 engaged principally in sales, marketing and customer service activities
related to the Company's women's hosiery division. She has been employed by the
Company in various positions since 1984 and a director since 1991. Ms. Jones
received her B.A. in Psychology from Appalachian State University in 1982. Ms.
Jones is Albert C. Gaither's daughter and a cousin of Hugh R. Gaither and J.
Michael Gaither.
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J. Michael Gaither is Vice President and General Counsel of J.H. Heafner
Company, Inc., a privately-owned firm located in Lincolnton, North Carolina
engaged in the manufacturing and distribution of motor vehicle tires. Mr.
Gaither, who has been a director since 1980, received his B.A. from Duke
University in 1974 and his J.D. from the University of North Carolina at Chapel
Hill in 1977. Mr. Gaither is Hugh R. Gaither's brother and a cousin of Albert C.
Gaither and Susan Gaither Jones.
Claude S. Abernethy, Jr. has been a Senior Vice President of
Interstate/Johnson Lane Corporation, a New York Stock Exchange member firm since
1963. Mr. Abernethy received his B.A. from Davidson College and his M.B.A. from
Harvard University. He has been a director since 1969 and is a director of
Interstate/Johnson Lane, Inc., the parent of Interstate/Johnson Lane
Corporation, and two other publicly-traded companies: Air Transportation Holding
Company, an air freight company, and Carolina Mills, Inc.
George Watts Carr, III is the President of Cone Denim North America, a
division of Cone Mills Corporation, a position he assumed effective October 1,
1996. From 1993 to October 1996, he was employed by the North Carolina
Department of Commerce, first as Director of Business and Industry Development
and most recently as President of the North Carolina Partnership for Economic
Development. From 1991 to 1992 Mr. Carr was employed by Unifi, Inc., one of the
Company's principal suppliers of yarn, as Senior Vice President -- Marketing of
the hosiery division. From 1970 to 1991 he was employed by Macfield, Inc., a
yarn manufacturer, where he held various management positions in customer
service, manufacturing and marketing and served as President of the hosiery
division from 1981 to 1991 and as a director.
Joseph D. Hicks is the President and Chief Executive Officer and a director
of Siecor Corporation, a privately-held fiber optics cable company. Mr. Hicks,
who has worked at Siecor Corporation since 1979, received his B.S.E.E. from the
University of Kentucky in 1966 and his M.B.A. from the University of Maryland in
1970. Prior to his employment by Siecor Corporation, Mr. Hicks held various
positions with Motorola, Inc.
Charles M. Snipes is the President and a member of the Board of Directors
of Bank of Granite Corporation, a bank holding company, and has been President
and Chief Executive Officer since 1994 and a director since 1982 of its
principal subsidiary, the Bank of Granite. He serves as a director of Vanguard
Furniture, Inc., First Factors, Inc. and Ingold Company, Inc., all of which are
privately-held companies. Mr. Snipes received his B.A. from Lenoir-Rhyne College
in 1958.
TERMS OF DIRECTORS AND OFFICERS
All directors hold office until the next annual meeting of shareholders or
until their successors have been duly elected and qualified. The Company's
executive officers are appointed by and serve at the discretion of the Company's
Board of Directors.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established a Compensation Committee to make
recommendations concerning salaries and incentive compensation for executive
officers and other employees of the Company and administer the Company's stock
plans. The Board has also established an Audit Committee to recommend to the
Board of Directors the selection of the Company's independent auditors and
review the results and scope of the audit and other services provided by the
independent auditors. It is currently anticipated that Messrs. Abernethy, Carr,
Hicks and Snipes will be appointed the members of the Compensation and Audit
Committees.
COMPENSATION OF DIRECTORS
Following completion of this Offering, the Company intends to pay its
directors who are not compensated as officers or employees of the Company an
annual retainer fee of $5,000 and a fee of $500 for each meeting of the Board of
Directors or any committee thereof attended (other than any such committee
meeting held in conjunction with a meeting of the full board). The Company will
also reimburse each director for out-of-pocket expenses incurred in attending
meetings of the Board of Directors and any of its committees. Directors
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who qualify as "independent directors" under Schedule D of the National
Association of Securities Dealers, Inc. are eligible to participate in the
Company's Outside Directors' Stock Option Plan. See "Management -- Employee
Benefit Plans -- Outside Directors' Stock Option Plan."
Directors who are officers or employees of the Company will not receive any
compensation for serving as directors.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information with respect to the 1995
compensation of the Company's Chief Executive Officer and four other most highly
compensated executive officers (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION(1)
- ---------------------------------------------------- -------- ------- ---------------
<S> <C> <C> <C>
Hugh R. Gaither..................................... $180,000 $90,165 $ 7,882
President and Chief Executive Officer
Albert C. Gaither................................... 168,000 89,826 14,011
Chairman
William D. Durrant.................................. 166,000 96,570 10,216
Executive Vice President -- Sales and Marketing
Walter L. Bost, Jr.................................. 108,000 35,179 2,104
Executive Vice President and
Chief Financial Officer
Susan Gaither Jones................................. 96,000 21,613 5,649
Vice President
</TABLE>
- ---------------
(1) The amounts shown for Hugh R. Gaither, Albert C. Gaither, William D. Durrant
and Susan Gaither Jones include $3,500 in fees paid to them for serving as
directors. Upon completion of this Offering, directors who are employees of
the Company will not receive any compensation for services as directors. The
amounts shown for Hugh R. Gaither, Albert C. Gaither and Ms. Jones include
$2,882, $9,077 and $325, respectively, representing the present value of the
imputed interest for premiums paid by the Company under a split dollar life
insurance arrangement. The amounts shown for Messrs. Durrant and Bost and
Ms. Jones include $4,400, $374 and $296, respectively, representing the
dollar value of term life insurance premiums paid by the Company during
1995. The amounts shown for Hugh R. Gaither, Albert C. Gaither, Messrs.
Durrant and Bost and Ms. Jones also include contributions made by the
Company to the Company's 401(k) Plan in the amounts of $1,500, $1,434,
$2,310, $1,730 and $1,555, respectively.
SALARY CONTINUATION AGREEMENTS
The Company has entered into salary continuation agreements with each of
the Named Executive Officers. For each Named Executive Officer other than Albert
C. Gaither, the agreements provide that upon retirement, death or disability,
the officer or his or her designated beneficiary, as applicable, will begin
receiving monthly payments equal to 60% of the highest monthly base salary paid
to the officer during the term of his or her employment. The agreements provide
that such payments will continue for a period of 15 years. At 1995 salary levels
the annual benefit that would be payable under these agreements to Hugh R.
Gaither, Messrs. Durrant and Bost and Ms. Jones would be $108,000, $99,600,
$64,800 and $57,600, respectively. The retirement benefits payable to each of
the Named Executive Officers, other than Albert C. Gaither whose retirement
benefit is fully vested, will be 25% vested when the officer reaches age 50, 50%
at age 55 and 100% at age 60. The salary continuation agreement entered into
with Albert C. Gaither provides for monthly payments of $3,000 for a period of
15 years commencing upon Mr. Gaither's retirement or death. The Company's
obligations under all salary continuation agreements are unsecured and are not
required to be funded. The Company has elected to partially fund its obligations
under these agreements through the purchase of life insurance on the Named
Executive Officers that are expected to provide a return to the Company that
will approximately offset its liability. The compensation expense associated
with these
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agreements is recognized over the term of the officers' employment. See note 12
to the Company's consolidated financial statements.
EMPLOYEE BENEFIT PLANS
Omnibus Stock Plan. The Company has an Omnibus Stock Plan (the "Omnibus
Plan"), which is intended to encourage high levels of performance by the
Company's officers and key employees and to enable the Company to recruit,
reward, retain and motivate employees of experience and ability on a basis
competitive with industry practices. The Company has reserved 230,000 shares of
Common Stock for issuance under the Omnibus Plan.
The Omnibus Plan will be administered by the Compensation Committee of the
Board of Directors. Awards under the plan may include, but are not limited to,
incentive stock options or nonqualified stock options, stock appreciation
rights, restricted stock, performance awards, or other stock-based awards, such
as stock units, securities convertible into stock, phantom securities and
dividend equivalents. The Compensation Committee, based on recommendations made
by management, will have sole authority and discretion under the Omnibus Plan to
(i) designate eligible participants in the plan and (ii) determine the types of
awards to be granted and the conditions and limitations applicable to such
awards, if any, including the acceleration of vesting or exercise rights upon a
Change in Control of the Company (as defined in the plan). The awards may be
granted singly or together with other awards, or as replacement of, in
combination with, or as alternatives to, grants or rights under the Omnibus Plan
or other employee benefit plans of the Company. Awards under the Omnibus Plan
may be issued based on past performance, as an incentive for future efforts, or
contingent upon the future performance of the Company.
Options granted under the Omnibus Plan must be exercised within the period
fixed by the Compensation Committee, which may not exceed 10 years from the date
of the option grant, or in the case of incentive stock options granted to any
10% shareholder, five years from the date of the option grant. Options may be
made exercisable in whole or in installments, as determined by the Compensation
Committee. Options will not be transferable other than by will or the laws of
descent and distribution and, during the lifetime of an optionee, may be
exercised only by the optionee. The option price will be determined by the
Compensation Committee; provided, however, that the option price for incentive
stock options may not be less than the market value of the Common Stock on the
date of grant of the option and the option price for incentive stock options
granted to any 10% shareholder may not be less than 110% of the market value of
the Common Stock on the date of grant. Unless otherwise designated by the
Compensation Committee as "incentive stock options" intended to qualify under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
options granted under the Omnibus Plan are intended to be "nonqualified stock
options." No options or other awards have been granted under the Omnibus Plan.
Employee Stock Purchase Plan. The Company has an Employee Stock Purchase
Plan (the "Purchase Plan"), which is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Code. A total of 75,000 shares of Common
Stock are available for purchase under the Purchase Plan and it will be
administered by the Compensation Committee of the Board of Directors. The
Purchase Plan will permit eligible employees of the Company, including executive
officers, to periodically purchase shares of the Common Stock after the
completion of this Offering through payroll deductions. Participating employees
may authorize the Company to withhold up to 6% of their base compensation in
each offering period established under the Plan to purchase shares of Common
Stock. The Purchase Plan provides for 12-month offering periods beginning
January 1 of each year. At the end of each offering period, participating
employees are entitled to use such withheld compensation to purchase the number
of newly issued shares of Common Stock or shares purchased by the Company in the
market determined by dividing the amount of withheld compensation by 85% of the
lower of the market price of the Common Stock on the first or last business day
of the offering period. Participants may terminate their participation in the
Purchase Plan prior to the end of each offering period and obtain a refund of
payroll deductions not yet applied to the purchase of Common Stock. Upon
termination of employment, a participant's right to participate in the Purchase
Price will automatically cease, and all payroll deductions not applied to the
purchase of Common Stock will be refunded.
46
<PAGE> 50
Outside Directors' Stock Option Plan. In September 1996, the Company
adopted an Outside Directors' Stock Option Plan (the "Directors' Plan"),
reserving 15,000 shares of Common Stock for issuance thereunder. Each outside
director serving as such as of the effective date of the Registration Statement
of which this Prospectus constitutes part automatically will receive an option
to purchase 500 shares of Common Stock at the fair market value on such
effective date. Each outside director joining the Board for the first time
following the Offering will automatically be granted an option to purchase 500
shares of Common Stock at the fair market value on the date of his or her
initial election to the Board. On each anniversary of an outside director's
election to the Board, he or she will automatically be granted an option to
purchase 500 shares of Common Stock at the then fair market value, provided that
the director shall have continuously served as a director of the Company and the
number of shares of Common Stock available under the Directors' Plan is
sufficient to permit such grant. Options granted under the Directors' Plan will
be nonqualified stock options, will vest in installments of 33 1/3% on each
anniversary of the option grant and will expire 10 years from the date of grant.
Eligible "outside directors" are persons who qualify as "independent directors"
under Schedule D of the Bylaws of the National Association of Securities
Dealers, Inc. The Directors' Plan is designed to operate automatically and is
not expected to require administration. However, to the extent administration is
required, it will be provided by a committee of the Board of Directors
consisting of two or more disinterested persons appointed by the Board of
Directors who are ineligible to participate in the Directors' Plan.
401(k) Plan. The Company has a tax deferred savings plan (the "401(k)
Plan") that covers all employees age 21 and older who have been employed by the
Company for at least 12 months. Eligible employees may contribute up to 6% of
their compensation to the 401(k) Plan on a pre-tax basis, not to exceed $9,500
per year (adjusted for cost-of-living increases). The Company, at its
discretion, may annually match up to 25% of an employee's pre-tax contributions,
up to a maximum of 6% of compensation. The rates of pre-tax and matching
contributions may be reduced with respect to highly compensated employees, as
defined in the Code, so that the 401(k) Plan will comply with Sections 401(k)
and 401(m) of the Code. Pre-tax and matching contributions are allocated to each
employee's individual account, which is invested in selected mutual funds
according to the directions of the employee. An employee's pre-tax contributions
are fully vested and nonforfeitable at all times. The Company's matching
contributions vest after three years of employment.
CERTAIN TRANSACTIONS
TRANSACTIONS WITH AND ACQUISITION OF AFFILIATE
Immediately prior to the completion of this Offering, the Company will
acquire all of the issued and outstanding shares of Interknit, a corporation
affiliated with the Company through common ownership of its shares by eight
persons who are also shareholders, and five of whom are executive officers, of
the Company. Since beginning operations in January 1994, Interknit has sold
substantially all of its output of greige goods to, and has purchased a portion
of its raw materials requirements from, the Company. In addition, the services
of several of the executive officers of the Company have been provided to
Interknit from time to time without consideration. The purchase and sale
transactions between the Company and Interknit during the Company's two most
recent years and the six months ended June 30, 1996 are summarized in the table
below.
<TABLE>
<CAPTION>
PERCENTAGE
SALES OF
PURCHASES BY PERCENTAGE OF BY THE INTERKNIT'S
THE COMPANY INTERKNIT'S COMPANY TO RAW MATERIAL
FROM INTERKNIT NET SALES INTERKNIT PURCHASES
-------------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1994.................. $2,338,000 100% $266,000 19%
Year ended December 31, 1995.................. 3,162,000 82 289,000 11
Six Months ended June 30, 1996................ 2,363,026 71 25,000 1
</TABLE>
47
<PAGE> 51
When the Company began planning for this Offering in early 1995, the
Company was advised by all prospective underwriters to combine the operations of
Interknit and the Company. A committee comprised of four directors (two of whom
are not shareholders of Interknit) was appointed in 1995 to study the proposed
acquisition and (with one of the independent directors dissenting) subsequently
recommended the Company proceed with the acquisition. On August 15, 1996, the
Board of Directors met and unanimously (including the director who previously
dissented) approved the Share Exchange Agreement pursuant to which the
shareholders of Interknit will, immediately prior to the completion of this
Offering, transfer all of the 500 issued and outstanding shares of capital stock
of Interknit to the Company in exchange for an aggregate of 240,000 shares of
Common Stock (the "Exchange"). When the Exchange is consummated, the following
directors, executive officers and greater than 5% shareholders of the Company
will receive the number of shares of Common Stock set forth opposite their names
below.
<TABLE>
<CAPTION>
NUMBER OF
DIRECTOR, EXECUTIVE OFFICER SHARES
OR GREATER THAN 5% SHAREHOLDER OF COMMON STOCK
--------------------------------------------------------------------- ---------------
<S> <C>
Hugh R. Gaither...................................................... 37,200
William D. Durrant................................................... 37,200
Walter L. Bost, Jr................................................... 24,000
Albert C. Gaither.................................................... 16,800
Susan Gaither Jones.................................................. 16,800
J. Michael Gaither................................................... 8,400
J. Robert Gaither, Jr................................................ 8,400
</TABLE>
The aggregate number of shares to be issued to the shareholders of
Interknit was determined by the Company in part on the basis of a valuation of
Interknit's business performed by Interstate/Johnson Lane Corporation
("Interstate"), one of the managing underwriters of this Offering, by dividing
the value derived by Interstate by $10.00 (the mid-point of the estimated
initial public offering price per share for the Common Stock in this Offering).
The resulting number of shares of Common Stock to be issued in the Exchange is
fixed at 240,000, but the aggregate value of such shares on the date of issuance
will be determined by the market price of the Common Stock on such date, which
will be the closing date of this Offering. The table set forth below shows the
aggregate value of the 240,000 shares at the high, mid- and low points of the
range of the estimated initial public offering price set forth on the cover of
this Prospectus.
<TABLE>
<CAPTION>
AGGREGATE
ESTIMATED INITIAL MARKET
PUBLIC OFFERING VALUE OF
PRICE OF THE 240,000 SHARES
COMMON STOCK OF COMMON STOCK
- ----------------- ---------------
<S> <C>
$ 9.00 $ 2,160,000
10.00 2,400,000
11.00 2,640,000
</TABLE>
The Company has agreed to pay Interstate $25,000 for rendering an opinion
to the Board of Directors of the Company regarding the terms of the Exchange.
The fairness opinion sets forth Interstate's opinion that, taking into
consideration such information about Interknit, the Company and this Offering as
Interstate deemed relevant, the exchange ratio for the Exchange is fair to the
shareholders of the Company from a financial point of view. One of the Company's
directors, Claude S. Abernethy, Jr., who is not a shareholder of Interknit, is a
Senior Vice President of Interstate and a director of Interstate/Johnson Lane,
Inc., the parent of Interstate.
Another important factor in the Board of Directors' determination of the
exchange ratio and approval of the Exchange was its assessment, based on
historical and projected results of operations, of the positive contribution the
Interknit Acquisition is expected to make to the Company's results of
operations. Because it was only recently established and is equipped with modern
electronic knitting machines incorporating recent developments in technology,
Interknit's knitting operations with its 71 machines will be among the Company's
most efficient. Moreover, as Interknit's productive capacity has increased in
the two and one-half years since commencing operations, Interknit's outside
sales to customers other than the Company have also increased. In the first six
months of 1996, outside sales represented approximately 28% of Interknit's total
sales.
48
<PAGE> 52
Since inception, Interknit has incurred approximately $1.7 million in debt
to finance start-up and capital equipment costs and working capital needs.
Although there is no agreement or understanding with Interknit's lenders
regarding a release of their liability, as guarantors of this debt the directors
and executive officers who are shareholders of Interknit may derive an
additional benefit from the Exchange and this Offering if the lenders
subsequently agree to release them from their personal guaranties.
Under the terms of the Share Exchange Agreement, the obligations of the
shareholders of Interknit to complete the Exchange are subject to all of the
conditions to the issuance and sale of the shares of Common Stock offered hereby
to the Underwriters, other than the condition that the Exchange be consummated,
having been met or waived and certain other conditions, none of which are within
the control of any individual shareholders of Interknit in their capacity as
such. The offer and sale of the shares of Common Stock to the shareholders of
Interknit pursuant to the Share Exchange Agreement is exempt from registration
under the Securities Act, pursuant to the exemption from registration set forth
in Section 4(2) of the Securities Act for transactions not involving any public
offering. When and if issued, the 240,000 shares will be "restricted securities"
within the meaning of Rule 144 promulgated under the Securities Act and must be
held for at least two years before they will be eligible for sale under Rule
144.
SUPPLEMENTAL RETIREMENT BENEFIT
In December 1992, J. Robert Gaither, Jr., the Company's former Chairman,
retired after more than 45 years of employment with the Company. Until August
15, 1996, when he submitted his resignation, he continued to serve as a director
of the Company. From the date of his retirement in 1992 until December 31, 1995,
the Company continued to pay Mr. Gaither approximately $105,000 annually. During
such three-year period, the Company also paid him $36,000 annually under a
salary continuation agreement entered into while he was still employed as an
executive officer of the Company.
In December 1995, the Company and Mr. Gaither entered into an amendment to
his salary continuation agreement pursuant to which the Company agreed to pay
him, in addition to the $36,000 the Company is obligated to pay him annually for
another 12 years, a supplemental retirement benefit of $84,000 annually for
seven years. In the event of his death before the end of the seven-year period,
the Company's obligation will continue until the end of such period and the
payments will be made to his designated beneficiary. In 1995, the Company
accrued a liability and recorded an expense of $500,000 for this obligation. See
note 12 of the Company's consolidated financial statements.
POLICY ON RELATED PARTY TRANSACTIONS
The Company has adopted a policy that all transactions with affiliates and
persons owning more than 5% of the Common Stock be on terms no less favorable
than could be obtained from third parties, and that all material transactions
with its affiliates and persons owning more than 5% of the Common Stock, which
are outside the ordinary course of business, if any, will be presented for the
approval of the Company's disinterested directors.
49
<PAGE> 53
PRINCIPAL AND MANAGEMENT SHAREHOLDERS
As of September 30, 1996 there were 64 holders of record of the Company's
Common Stock. The following table sets forth certain information with respect to
the beneficial ownership of shares of Common Stock of the Company as of
September 30, 1996 and as adjusted to reflect the sale of the shares of Common
Stock offered by the Company and the Selling Shareholders, by (i) each person
known by the Company to be the beneficial owner of more than 5% of the shares of
Common Stock outstanding, (ii) each director of the Company, (iii) each of the
Named Executive Officers, and (iv) all directors and executive officers of the
Company as a group. None of the prospective directors of the Company currently
own any shares of Common Stock. Except as otherwise indicated, each person named
below has sole voting and dispositive power with respect to the shares of Common
Stock beneficially owned by such person.
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
BEFORE THIS OFFERING AFTER THIS OFFERING
-------------------- --------------------
NAME NUMBER PERCENT(1) NUMBER PERCENT(1)
- ------------------------------------------------------ ------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Robert E. Cline(2).................................... 217,760 13.6% 186,490 6.0%
J. Robert Gaither, Jr.(3)............................. 204,268 12.8 179,513 5.8
Grace W. Gaither(3)................................... 204,268 12.8 179,513 5.8
James C. Gaither(4)................................... 186,855 11.7 186,855 6.0
Rachel C. Gaither(4).................................. 186,855 11.7 186,855 6.0
Albert C. Gaither(5).................................. 167,597 10.5 167,597 5.4
Ann Heafner Gaither(5)................................ 167,597 10.5 167,597 5.4
Carolina Glove Co.(6)................................. 89,371 5.6 89,371 2.9
Hugh R. Gaither....................................... 51,366 3.2 51,366 1.6
Claude S. Abernethy, Jr.(7)........................... 44,557 2.8 44,557 1.4
William D. Durrant.................................... 42,351 2.6 42,351 1.4
Susan Gaither Jones................................... 35,732 2.2 35,732 1.1
Walter L. Bost, Jr.................................... 29,151 1.8 29,151 *
J. Michael Gaither.................................... 22,566 1.4 22,566 *
All Directors and Executive Officers as a
Group (including persons named above)............... 393,320 24.6% 393,320 12.6%
</TABLE>
- ---------------
* Less than 1%.
(1) For purposes of this table, the percentage of class beneficially owned has
been computed, in accordance with Rule 13d-3(1) under the Securities
Exchange Act of 1934 (the "Exchange Act"), on the basis of 1,600,000 shares
of Common Stock outstanding on August 15, 1996 and 3,120,000 shares
outstanding after this Offering. Beneficial ownership is based upon
information available to the Company or furnished by the respective
shareholders, directors and executive officers.
(2) Robert E. Cline's address is P.O. Box 2343, Hickory, NC 28603.
(3) The address for these shareholders is c/o Ridgeview, Inc., 2101 N. Main
Avenue, Newton, NC 28658. Of the 204,268 shares of Common Stock beneficially
owned by J. Robert Gaither, Jr. and his wife, Grace W. Gaither, prior to
this Offering, 96,611 are owned of record by Mr. Gaither and 107,657 are
owned of record by Mrs. Gaither. Of the 179,513 shares of Common Stock
beneficially owned by Mr. and Mrs. Gaither after this Offering, 84,885 are
owned of record by Mr. Gaither and 94,628 are owned of record by Mrs.
Gaither.
(4) The address for these shareholders is Route 2, Box 199, Conover, NC 28613.
Of the 186,855 shares of Common Stock beneficially owned by James C. Gaither
and his wife, Rachel C. Gaither, prior to and after this Offering, 156,335
are owned of record by Mr. Gaither and 30,520 are owned of record by Mrs.
Gaither.
(5) The address for these shareholders is c/o Ridgeview, Inc., 2101 N. Main
Avenue, Newton, NC 28658. Of the 167,597 shares of Common Stock beneficially
owned by Albert C. Gaither and his wife, Ann Heafner Gaither, prior to and
after this Offering, 136,561 are owned of record by Mr. Gaither and 31,036
shares are owned of record by Mrs. Gaither.
(6) Carolina Glove Co.'s address is P.O. Box 999, Conover, NC 28613.
(7) Of the 44,557 shares of Common Stock beneficially owned by Mr. Abernethy,
prior to and after this Offering, 2,576 are owned of record by his wife,
Raenelle Abernethy, and 22,536 are owned by certain persons with whom Mr.
Abernethy shares voting or dispositive power.
50
<PAGE> 54
SELLING SHAREHOLDERS
The following table sets forth information with respect to the ownership of
Common Stock as of September 30, 1996 by each Selling Shareholder, the number of
shares of Common Stock being sold by each Selling Shareholder and the number of
shares beneficially owned by each Selling Shareholder after this Offering.
<TABLE>
<CAPTION>
SHARES SHARES
OWNED PRIOR OWNED AFTER
TO THIS NUMBER OF SHARES THIS
NAME OFFERING BEING SOLD OFFERING
- -------------------------------------------------------- ----------- ---------------- -----------
<S> <C> <C> <C>
Robert E. Cline(1)...................................... 217,760 31,270 186,490
Grace W. Gaither(2)..................................... 107,657 13,029 94,628
J. Robert Gaither, Jr.(1)(2)............................ 96,611 11,726 84,885
Robert Macon Yount(3)................................... 71,085 10,424 60,661
Comer Gaither........................................... 14,811 7,036 7,775
Cole A. Gaither......................................... 7,727 3,127 4,600
Lawson Gaither.......................................... 4,508 1,824 2,684
Ernest H. Yount, Jr..................................... 12,620 1,564 11,056
----------- ------- -----------
Total.............................................. 532,779 80,000 452,779
========= ============= =========
</TABLE>
- ---------------
(1) Until they resigned on August 15, 1996, Robert E. Cline and J. Robert
Gaither, Jr. were directors of the Company.
(2) The numbers shown for Grace W. Gaither do not include 96,611 and 84,885
shares owned prior to and after this Offering, respectively, by her husband,
J. Robert Gaither, Jr. The numbers shown for J. Robert Gaither, Jr. do not
include 107,657 and 94,628 shares owned prior to and after this Offering,
respectively, by his wife, Grace W. Gaither.
(3) Until he retired on March 19, 1996 after serving 43 years, Robert Macon
Yount was a director of the Company. After this offering Mr. Yount will own
1.9% of the shares of Common Stock outstanding.
51
<PAGE> 55
DESCRIPTION OF CAPITAL STOCK
Upon completion of this Offering, the Company's authorized capital stock
will consist of 20,000,000 shares of Common Stock, par value $.01 per share, and
2,000,000 shares of Preferred Stock (the "Preferred Stock"), and there will be
3,120,000 shares of Common Stock outstanding (3,360,000 if the Underwriters'
over-allotment option is exercised).
The following description of the capital stock of the Company does not
purport to be complete or to give full effect to the North Carolina provisions
of statutory or common law and is subject in all respects to the provisions of
the Company's Articles of Incorporation (the "Articles") and Bylaws.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to prior liquidation rights of
Preferred Stock, if any, then outstanding. The Common Stock has no preemptive or
conversion rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the Common Stock.
All currently outstanding shares of Common Stock are fully paid and
nonassessable, and the shares of Common Stock to be outstanding upon completion
of this Offering will be fully paid and nonassessable.
PREFERRED STOCK
Immediately following the completion of this Offering, the Company will be
authorized to issue 2,000,000 shares of undesignated Preferred Stock. The Board
of Directors, without any further vote or action by the shareholders, will have
the authority to issue the undesignated Preferred Stock in one or more series
and to fix the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of shares of undesignated Preferred
Stock and to fix the number of shares constituting any series and the
designations of such series. The Board of Directors, without shareholder
approval, can issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of the holders of Common Stock. The
issuance of Preferred Stock may have the effect of delaying, deferring or
preventing a change in control of the Company. The Company has no present plans
to issue any shares of Preferred Stock.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
Certain provisions of the Articles and Bylaws described below could have
the effect of delaying, deferring or preventing a change in control of the
Company or the removal of existing management. In addition, the exculpation
provisions in the Articles with respect to directors and the indemnification
provisions in the Bylaws described below may discourage shareholders from
bringing a lawsuit against directors for breach of their fiduciary duty and also
may have the effect of reducing the likelihood of derivative litigation against
directors and officers, even though such an action, if successful, might
otherwise have benefitted the Company and its shareholders. A shareholder's
investment in the Company may be adversely affected to the extent that
litigation costs and damage awards against the Company's directors and officers
are paid by the Company pursuant to the indemnification provisions described
below.
Classified Board of Directors. The Bylaws provide that at any time when
the Board of Directors consists of nine or more directors upon action by the
directors, the Board may be divided into three classes with staggered three-year
terms. This classified board provision could have the effect of discouraging a
third party from making a tender offer or otherwise attempting to obtain control
of the Company, even though such an attempt might be beneficial to the Company
and its shareholders. In addition, this provision could delay shareholders who
do not agree with the policies of the Board of Directors from removing a
majority of the Board for two years. See "Number of Directors; Removal; Filling
Vacancies" below.
52
<PAGE> 56
Special Meetings of Shareholders. The Bylaws provide that special meetings
of the shareholders of the Company may be called only by the Chairman of the
Board of the Company, the President of the Company, or a majority of the
directors. This provision will render it more difficult for shareholders to take
action opposed by the Board of Directors.
Advance Notice Requirements for Shareholder Proposals and Director
Nominations. The Bylaws establish an advance notice procedure for the
nomination, other than by or at the discretion of the Board of Directors or a
committee thereof, of candidates for election as director as well as for other
shareholder proposals to be considered at shareholders' meetings. Notice of
shareholder proposals and director nominations must be timely given in writing
to the Secretary of the Company prior to the meeting at which the matters are to
be acted upon or the directors are to be elected.
Number of Directors; Removal; Filling Vacancies. The Bylaws provide that
the Board of Directors will consist of between three and 15 members, as
determined from time to time by the Board of Directors. The number of directors
has been set at nine. There are currently three vacancies on the Board of
Directors that will be filled by the election of Messrs. Carr, Hicks and Snipes
as directors effective upon completion of this Offering. Further, subject to the
rights of the holders of any series of Preferred Stock then outstanding, the
Bylaws authorize only the Board of Directors to fill newly created
directorships. Accordingly, this provision could prevent a shareholder from
obtaining majority representation on the Board of Directors by enlarging the
Board of Directors and filling the new directorships with its own nominees.
Subject to the rights of the holders of any series of Preferred Stock then
outstanding, the Bylaws also provide that directors of the Company may be
removed only by the affirmative vote of holders of a majority of the outstanding
shares of voting stock.
Limitation of Liability. The Articles eliminate, to the fullest extent
permitted by the North Carolina Business Corporation Act (the "Business
Corporation Act"), the personal liability of each director to the Company or its
shareholders for monetary damages for breach of duty as a director. This
provision in the Articles does not change a director's duty of care, but it
eliminates monetary liability for certain violations of that duty, including
violations based on grossly negligent business decisions that may include
decisions relating to attempts to change control of the Company. The provision
does not affect the availability of equitable remedies for a breach of the duty
of care, such as an action to enjoin or rescind a transaction involving a breach
of fiduciary duty. In certain circumstances, however, equitable remedies may not
be available as a practical matter. Under the Business Corporation Act, the
limitation of liability provision is ineffective against liabilities for (i)
acts or omissions that the director knew or believed at the time of the breach
to be clearly in conflict with the best interests of the Company, (ii) unlawful
distributions described in Section 55-8-33 of the Business Corporation Act, or
(iii) any transaction from which the director derived an improper personal
benefit. The provision also in no way affects a director's liability under the
federal securities laws.
Indemnification. The Bylaws provide that, in addition to the
indemnification of directors and officers otherwise provided by the Business
Corporation Act, the Company's current or former directors, officers and
employees will be indemnified against any and all liability and litigation
expenses, including reasonable attorneys' fees, arising out of their status or
activities as directors, officers and employees, except for liability or
litigation expense incurred on account of activities that were at the time known
or believed by such director, officer or employee to be clearly in conflict with
the best interests of the Company. The Bylaws also provide that this right to
indemnification is not exclusive of any other right now possessed or hereafter
acquired under any statute, agreement or otherwise.
Transactions with Interested Shareholders. The Articles provide that any
purchase by the Company of shares of voting stock of the Company from any
"Interested Shareholder" that has beneficially owned the shares for less than
two years (other than a purchase pursuant to an offer directed by the Company to
all holders of shares of the same class) requires shareholder approval upon the
affirmative vote of the majority of the shares of voting stock not beneficially
owned by the Interested Shareholder, voting as a single class. The Articles
define "Interested Shareholder" to mean any person (other than a person or
entity who or which as of October 1, 1996, beneficially owned 10% or more of the
outstanding voting stock of the Company, any subsidiary of the Company or any
employee benefit plan maintained by the Company or such subsidiary) that (i)
beneficially owns 10% or more of the outstanding voting stock, (ii) is an
affiliate of the Company and
53
<PAGE> 57
within the prior two years was a beneficial owner of 10% or more of the
outstanding voting stock or (iii) is an assignee of or has otherwise succeeded
to any shares of voting stock that were within the prior two years beneficially
owned by a person described in clauses (i) or (ii), other than as a result of a
public offering of such shares within the meaning of the Securities Act.
The Articles further provide that, except as noted below, any of the
following transactions involving an Interested Shareholder requires the
affirmative approval of the holders of a majority of the shares of voting stock
not beneficially owned by the Interested Shareholder, voting as a single class:
(i) any merger or consolidation of the Company or any subsidiary of the Company
with the Interested Shareholder or any corporation affiliated with the
Interested Shareholder, (ii) any sale, lease, exchange, mortgage, pledge,
transfer or other disposition (in one transaction or a series of transactions)
to or with the Interested Shareholder or its affiliate of any assets of the
Company or any of the Company's subsidiaries having an aggregate fair market
value of $10.0 million or more, (iii) the issuance or transfer by the Company or
any subsidiary (in one transaction or a series of transactions) of any equity
securities (including any securities that are convertible into equity
securities) of the Company or any subsidiary having an aggregate fair market
value of $10.0 million or more to the Interested Shareholder or its affiliate in
exchange for cash, securities, or other property (or combination thereof), (iv)
the adoption of any plan or proposal for the liquidation or dissolution of the
Company proposed by or on behalf of an Interested Shareholder or any of its
affiliates, or (v) any reclassification of securities (including any reverse
stock split), or recapitalization of the Company, or any merger or consolidation
of the Company with any of its subsidiaries, or any other transaction (whether
or not with or into or otherwise involving an Interested Shareholder) that has
the effect, directly or indirectly, of increasing the proportionate share of the
outstanding shares of any class of equity securities (including any securities
that are convertible into equity securities) of the Company or any of its
subsidiaries that is directly or indirectly owned by an Interested Shareholder
or any of its affiliates.
Such shareholder approval is not required if (i) the transaction is
approved by a majority of the directors of the Company who are not affiliated or
associated with the Interested Shareholder and who were members of the Company's
Board of Directors at the time the Interested Shareholder became an Interested
Shareholder or are successors to any such disinterested director recommended for
election by a majority of all such disinterested directors or (ii) the
Interested Shareholder has beneficially owned its shares of voting stock for two
years or more.
Amendment of Certain Provisions of the Articles and Bylaws. The Articles
and Bylaws generally require the affirmative vote of the holders of at least
66 2/3% of the outstanding voting stock in order to amend any of the foregoing
provisions of the Articles and Bylaws or the provisions requiring such vote.
These voting requirements will make it more difficult for minority shareholders
to make changes in the Articles and Bylaws which could be designed to facilitate
the exercise of control over the Company. In addition, the requirement for
approval by at least a 66 2/3% shareholder vote will enable the holders of a
minority of the voting securities of the Company to prevent the holders of a
majority or more of such securities from amending such provisions of the
Articles and Bylaws.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the Common Stock will be First Union
National Bank of North Carolina.
54
<PAGE> 58
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, 3,120,000 shares of the Company's Common
Stock will be outstanding (3,360,000 shares if the Underwriters' over-allotment
option is exercised in full). The 1,600,000 shares sold in this Offering
(1,840,000 shares if the Underwriters' over-allotment option is exercised in
full) will be freely tradeable without restriction or further registration under
the Securities Act, unless acquired by an "affiliate" of the Company (as that
term is defined in the Securities Act) which shares will be subject to the
resale limitations of Rule 144 under the Securities Act. Beginning 180 days
after the date of this Prospectus, all but 255,453 of the remaining shares will
be eligible for resale under Rule 144.
In general, under Rule 144 as currently in effect, a shareholder who has
beneficially owned for at least two years shares privately acquired directly or
indirectly from the Company or from an affiliate of the Company, and persons who
are affiliates of the Company, will be entitled to sell within any three-month
period a number of shares that does not exceed the greater of (i) 1% of the
outstanding shares of the Common Stock (approximately 31,000 shares immediately
after completion of this Offering, or approximately 34,000 shares if the
Underwriters' over-allotment option is exercised in full) or (ii) the average
weekly trading volume in the Common Stock during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
requirements relating to the manner and notice of sale and the availability of
current public information about the Company.
The Company, each of its directors and officers and the Selling
Shareholders have agreed with the Underwriters not to offer, sell or otherwise
dispose of any shares of Common Stock for a period of 180 days after the date of
this Prospectus without the prior written consent of Interstate/Johnson Lane
Corporation except for shares offered or sold under the Company's stock-based
benefit plans.
The Company has reserved 320,000 shares of Common Stock for issuance under
the Omnibus Plan, the Purchase Plan and the Directors' Plan. At appropriate
times subsequent to the closing of this Offering, the Company intends to file
registration statements under the Securities Act to register the Common Stock to
be issued under these plans. After the effective date of such registration
statements, shares issued under these plans will be freely tradeable without
restriction or further registration under the Securities Act, unless acquired by
affiliates of the Company.
Prior to this Offering, there has been no market for the Common Stock. No
predictions can be made with respect to the effect, if any, that public sales of
shares of the Common Stock or the availability of shares for sale will have on
the market price of the Common Stock after this Offering. Sales of substantial
amounts of the Common Stock in the public market following this Offering, or the
perception that such sales may occur, could adversely affect the market price of
the Common Stock or the ability of the Company to raise capital through sales of
its equity securities.
55
<PAGE> 59
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Company and the Selling Shareholders have agreed to sell to each of the
Underwriters named below (the "Underwriters"), and each of such Underwriters,
for whom Interstate/Johnson Lane Corporation and Scott & Stringfellow, Inc. (the
"Representatives") are acting as representatives, has agreed severally to
purchase from the Company and the Selling Shareholders, the respective number of
shares of Common Stock set forth opposite its name below. The Underwriters are
committed to purchase and pay for all shares if any shares are purchased.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------------------------------------------------------------------------- ----------------
<S> <C>
Interstate/Johnson Lane Corporation..........................................
Scott & Stringfellow, Inc. ..................................................
--------
Total.............................................................. 1,600,000
========
</TABLE>
The Underwriting Agreement provides that the several Underwriters will be
obligated to purchase all of the shares of Common Stock offered hereby if any
are purchased. Under certain circumstances the commitment of a nondefaulting
Underwriter may be increased.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock to the public at the initial public offering
price set forth on the cover page of this Prospectus and to certain dealers at
such price less a concession of not in excess of per share of which
may be reallocated to other dealers. After the initial public
offering, the public offering price, concession and reallowance to dealers may
be reduced by the Representatives. No such reduction shall change the amount of
proceeds to be received by the Company or the Selling Shareholders as set forth
on the cover page of this Prospectus. The Representatives have advised the
Company that the Underwriters do not intend to confirm sales to any accounts
over which they exercise discretionary authority.
The Company has granted the Underwriters an option for 30 days after the
date of this Prospectus to purchase, at the initial public offering price, less
the underwriting discounts and commissions as set forth on the cover page of
this Prospectus, up to 240,000 additional shares of Common Stock at the same
price per share as the Company and the Selling Shareholders receive for the
1,600,000 shares of Common Stock, solely to cover over-allotments, if any. If
the Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares of Common Stock to be
purchased by each of them, as shown in the foregoing table, bears to the
1,600,000 shares of Common Stock offered hereby. The Underwriters may exercise
such option only to cover the over-allotments in connection with the sale of the
1,600,000 shares of Common Stock offered hereby.
Each of the Company's directors, executive officers and greater than 5%
shareholders has agreed not to offer, sell, contract to sell or otherwise
dispose of Common Stock for a period of 180 days following the date of this
Prospectus, without the prior written consent of Interstate/Johnson Lane
Corporation. The Company also has agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities convertible
into or exchangeable for, or any rights to purchase or acquire, Common Stock for
a period of 180 days following the date of this Prospectus without the prior
written consent of Interstate/Johnson Lane Corporation, except for the granting
of options, stock awards or the sale of stock pursuant to the Company's existing
stock plans.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be negotiated
between the Company and the Representatives. Among the factors to be considered
in determining the initial public offering price of the Common Stock, in
addition to prevailing market conditions, will be the Company's historical
performance, estimates of the business potential
56
<PAGE> 60
and earnings prospects of the Company, an assessment of the Company's management
and the consideration of the above factors in relation to market valuation of
companies in related business.
At the request of the Company, the Underwriters have reserved 75,000 of the
shares of Common Stock being offered hereby for sale at the initial public
offering price to directors, officers, employees and certain individuals
associated with the Company, its directors, its officers or its employees. The
number of shares of Common Stock available to the public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares that are
not so purchased will be offered by the Underwriters to the general public on
the same basis as the other shares offered hereby.
In the Underwriting Agreement, the Company and the Selling Shareholders
have agreed to indemnify the Underwriters against certain liabilities that may
be incurred in connection with this Offering, including liabilities under the
Securities Act, or to contribute payments that the Underwriters may be required
to make in respect thereof.
The aggregate number of shares to be issued to the shareholders of
Interknit was determined by the Company in part on the basis of a valuation of
Interknit's business performed by Interstate/Johnson Lane Corporation, one of
the managing underwriters of this Offering. The Company has agreed to pay
Interstate/Johnson Lane Corporation $25,000 for rendering to the Board of
Directors of the Company a fairness opinion regarding the terms of the Exchange.
One of the Company's directors, Claude S. Abernethy, Jr., who is not a
shareholder of Interknit, is a Senior Vice President of Interstate/Johnson Lane
Corporation and a director of Interstate/Johnson Lane, Inc., the parent of
Interstate/Johnson Lane Corporation.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company and the Selling Shareholders by Moore & Van Allen, PLLC,
Charlotte, North Carolina. Certain legal matters relating to the shares of
Common Stock offered hereby will be passed upon for the Underwriters by Smith
Helms Mulliss & Moore, L.L.P., Charlotte, North Carolina.
57
<PAGE> 61
EXPERTS
The financial statements and schedules included in this Prospectus and in
the Registration Statement have been audited by BDO Seidman, LLP, Mengel,
Metzger, Barr & Co. LLP, KPMG and Whisnant & Company, to the extent and for the
periods set forth in the respective reports of such firms contained herein and
in the Registration Statement. All such financial statements and schedules have
been included in reliance upon such reports given upon the authority of such
firms as experts in auditing and accounting.
Whisnant & Company of Hickory, North Carolina resigned effective September
15, 1995 as the independent auditors for the Company. The change in independent
auditors was made because Whisnant & Company does not routinely prepare
financial statements for filings with the Securities and Exchange Commission
(the "Commission"). The reports of Whisnant & Company regarding the financial
statements as of and for the years ended December 31, 1993 and 1994, which are
not included in this Prospectus, contained no adverse opinion, disclaimer of
opinion or qualifications as to uncertainty, audit scope or accounting
principles. The decision to change independent auditors was made by management
of the Company, but was not voted on or approved by the Board of Directors. The
resignation of Whisnant & Company and the engagement of BDO Seidman, LLP was
effective on September 15, 1995. The Company had no disagreements with Whisnant
& Company on any matter of accounting principle or practice, financial statement
disclosure or auditing scope or procedure during the two years ended December
31, 1994 or the interim period between such date and its resignation on
September 15, 1995. Whisnant & Company was authorized by the Company to respond
fully to inquiries of BDO Seidman, LLP. The Company had not consulted with BDO
Seidman, LLP regarding application of accounting principles prior to such firm's
engagement.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement, including amendments
thereto, relating to the Common Stock offered hereby with the Commission. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Statements contained in this
Prospectus as to the contents of any contract or other document to which
reference is made are not necessarily complete and in each instance reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement. For further information with respect to the Company and
the Common Stock offered hereby, reference is made to such Registration
Statement, exhibits and schedules. A copy of the Registration Statement may be
inspected without charge at the Commission's principal office at 450 Fifth
Street N.W., Washington, D.C. 20549, and at the following Regional Offices of
the Commission: Northeast Regional Office, 7 World Trade Center, Suite 1300, New
York, New York 10048; and Midwest Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of all or any part of the
Registration Statement, including the exhibits thereto, may be obtained, upon
payment of the prescribed fees, at such offices of the Commission. In addition,
registration statements and certain other filings made with the Commission
through its Electronic Data Gathering and Retrieval System ("EDGAR") are
publicly available through the Commission's site on the Internet's World Wide
Web, located at http://www.sec.gov. The Registration Statement, including all
exhibits thereto, has been filed with the Commission via EDGAR.
The Company has not previously been subject to the informational
requirements of the Exchange Act. Upon completion of this Offering, the Company
intends to register the Common Stock under the Exchange Act and, in accordance
therewith, will file reports, proxy statements, and other information
periodically with the Commission. Such reports, proxy statements and other
information will be available for inspection and copying at the Commission's
Washington, D.C. office and the Northeast and Midwest Regional Offices. The
Company intends to furnish its shareholders with annual reports containing
audited financial statements.
58
<PAGE> 62
TRADEMARK INFORMATION
The following trademarks are mentioned in this Prospectus: adidas, which is
a registered trademark of Adidas AG, ASICS, which is a registered trademark of
ASICS Corporation; Bass, which is a registered trademark of Phillips-Van Heusen
Corporation; Brooks, which is a registered trademark of Brooks Sports, Inc.;
Coleman, which is a registered trademark of The Coleman Company, Inc.; Converse,
which is a registered trademark of Converse, Inc.; Ellen Tracy, which is a
registered trademark of Ellen Tracy, Inc.; Evan-Picone, which is a registered
trademark of Jones Investment Company, Inc.; Fila, which is a registered
trademarks of Fila Holdings SpA; IZOD, which is a registered trademark of
Phillips-Van Heusen Corporation; Jacques Moret, which is a registered trademark
of Jacques Moret, Inc.; GAMEsocks, Kidsox, LINEOne, Oyster Bay, Pro Am,
Ridgeview, SportSox, Thinskins and Seneca which are registered trademarks of the
Company; Reebok, which is a registered trademark of Reebok International, Ltd.;
New Balance, which is a registered trademark of New Balance Athletic Shoe, Inc.;
Liz Claiborne and Elisabeth, which are registered trademarks of Liz Claiborne,
Inc.; Rockport, which is a registered trademark of The Rockport Company, Inc.;
Winchester, which is a registered trademark of Kmart Corporation; and Woolrich,
which is a registered trademark of John Rich & Sons Investment Holding Company.
59
<PAGE> 63
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
RIDGEVIEW, INC. AND SUBSIDIARIES
Report of BDO Seidman, LLP....................................................... F-2
Report of KPMG................................................................... F-3
Report of Mengel, Metzger, Barr & Co. LLP........................................ F-4
Consolidated balance sheets as of December 31, 1994 and 1995 and June 30, 1996
(unaudited)................................................................... F-5
Consolidated statements of income for the years ended December 31, 1993, 1994 and
1995 and the six months ended June 30, 1995 (unaudited) and June 30, 1996
(unaudited)................................................................... F-6
Consolidated statements of shareholders' equity for the years ended December 31,
1993, 1994 and 1995 and the six months ended June 30, 1996 (unaudited)........ F-7
Consolidated statements of cash flows for the years ended December 31, 1993, 1994
and 1995 and the six months ended June 30, 1995 (unaudited) and June 30, 1996
(unaudited)................................................................... F-8
Notes to consolidated financial statements....................................... F-10
SENECA KNITTING MILLS CORPORATION AND SUBSIDIARIES
Report of Mengel, Metzger, Barr & Co. LLP........................................ F-22
Consolidated balance sheets as of April 1, 1995 and April 2, 1994................ F-23
Consolidated statements of income and retained earnings for the years ended April
1, 1995, April 2, 1994 and April 3, 1993...................................... F-24
Consolidated statements of cash flows for the years ended April 1, 1995, April 2,
1994 and April 3, 1993........................................................ F-25
Notes to consolidated financial statements....................................... F-26
INTERKNIT, INC.
Report of Whisnant & Company..................................................... F-31
Balance sheets as of June 30, 1996 (unaudited) and December 31, 1995 and 1994.... F-32
Statements of retained earnings for the six months ended June 30, 1996
(unaudited) and the years ended December 31, 1995 and 1994.................... F-33
Statements of income for the six months ended June 30, 1996 and 1995 (unaudited)
and the years ended December 31, 1995 and 1994................................ F-34
Statements of cash flows for the six months ended June 30, 1996 and 1995
(unaudited) and the years ended December 31, 1995 and 1994.................... F-35
Notes to financial statements.................................................... F-37
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF RIDGEVIEW, INC.
AND SUBSIDIARIES
Introduction..................................................................... F-41
Pro forma condensed consolidated balance sheet as of June 30, 1996............... F-42
Pro forma condensed consolidated statement of income for the six months ended
June 30, 1996................................................................. F-43
Pro forma condensed consolidated statement of income for the six months ended
June 30, 1995................................................................. F-44
Pro forma condensed consolidated statement of income for the year ended
December 31, 1995............................................................. F-45
Pro forma condensed consolidated statement of income for the year ended
December 31, 1994............................................................. F-46
Notes to pro forma condensed consolidated financial statements................... F-47
</TABLE>
F-1
<PAGE> 64
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
Ridgeview, Inc.
Newton, North Carolina
We have audited the accompanying consolidated balance sheets of Ridgeview, Inc.
and subsidiaries as of December 31, 1994 and 1995, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1995. 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 did not audit the
financial statements of The Irish branch of Ridgeview Limited (a wholly-owned
subsidiary), which statements reflect total assets of $4,183,000 and $7,038,000
as of December 31, 1994 and 1995, respectively, and total revenues of
$4,227,000, $4,065,000 and $4,724,000 for each of the three years in the period
ended December 31, 1995, respectively. Also, we did not audit the financial
statements of Seneca Knitting Mills Corporation and subsidiaries (a wholly-owned
subsidiary), which statements reflect total assets of $9,898,000 as of December
31, 1995 and total revenues of $9,178,000 for the period from the date of
acquisition (June 28, 1995) through December 31, 1995. Those statements were
audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for these subsidiaries,
is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly in all
material respects, the financial position of Ridgeview, Inc. and subsidiaries as
of December 31, 1994 and 1995, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1995 in
conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
Greensboro, North Carolina
February 2, 1996, except for the stock split discussed in Note 10,
which is as of October 8, 1996
F-2
<PAGE> 65
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS OF RIDGEVIEW LIMITED
We have audited the financial statements of the Irish branch of Ridgeview
Limited ("the financial statements") for the three years ended 31 December 1995
which have been prepared by branch management in accordance with the basis of
preparation set out below. These branch financial statements are not attached to
this report. The latest audit report we issued is in respect of the audit for
the year ended 31 December 1995 and this was dated 18 March 1996.
BASIS OF PREPARATION
The financial statements have been prepared solely for the purposes of
incorporating the results of the Irish branch into the financial statements of
Ridgeview Limited.
The financial statements, which are prepared in Irish punts, have been
prepared under the historical cost convention and in accordance with generally
accepted accounting principles in the Republic of Ireland which do not vary
substantially from generally accepted accounting principles in the United
States.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
The company's directors and branch management are responsible for the
preparation of the financial statements. The directors are required to prepare
the financial statements for each financial year which give a true and fair view
of the state of affairs and of the profit and loss for that period. It is our
responsibility to form an independent opinion, based on our audit, on those
statements and to report our opinion to you.
BASIS OF OPINION
We conducted our audits in accordance with Auditing Standards issued by the
Auditing Practices Board of the Republic of Ireland, which do not vary
substantially from those of the United States. An audit includes an examination,
on a test basis, of evidence relevant to the amounts and disclosures in the
financial statements. It also includes an assessment of the significant
estimates and judgements made by branch management in the preparation of the
financial statements, and of whether the accounting policies are appropriate to
the branch's circumstances, consistently applied and adequately disclosed.
We planned and performed our audits so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of information in the financial statements.
OPINION
In our opinion the financial statements which we audited, none of which are
attached to this report, give a true and fair view of the state of affairs of
the branch at 31 December 1993, 31 December 1994 and 31 December 1995, and of
the profit for the branch for the years ended 31 December 1993, 31 December 1994
and 31 December 1995.
/s/ KPMG
Chartered Accountants
Registered Auditors
90 South Mall
Cork, Ireland
Date: 4 October 1996
F-3
<PAGE> 66
INDEPENDENT AUDITORS' REPORT
Board of Directors
Seneca Knitting Mills Corporation
We have audited the consolidated balance sheet of Seneca Knitting Mills
Corporation (a wholly-owned subsidiary of Ridgeview, Inc.) as of December 31,
1995, and the related consolidated statements of income and retained earnings
and cash flows for the six months then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Seneca Knitting
Mills Corporation as of December 31, 1995, and the consolidated results of its
operations and its consolidated cash flows for the six months then ended in
conformity with generally accepted accounting principles.
/s/ MENGEL, METZGER, BARR & CO. LLP
Rochester, New York
January 31, 1996
F-4
<PAGE> 67
RIDGEVIEW, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash.......................................................... $ 86 $ 223 $ 144
Accounts receivable (less allowance for doubtful accounts of
$195, $371 and $379) (Note 8).............................. 7,196 9,997 11,630
Inventories (Note 3).......................................... 9,994 14,780 19,075
Prepaid expenses (Note 14).................................... 24 297 464
Deferred income taxes (Note 7)................................ 69 -- --
------- ------- -------
Total current assets.................................. 17,369 25,297 31,313
PROPERTY, PLANT AND EQUIPMENT, less accumulated depreciation and
amortization (Note 4)......................................... 6,332 10,349 10,242
DEFERRED INCOME TAXES (Note 7).................................. 15 -- --
OTHER ASSETS.................................................... 771 1,027 1,093
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED, less
accumulated amortization of $0, $56 and $167 (Note 2)......... -- 1,861 1,797
------- ------- -------
Total assets (Note 6)................................. $24,487 $38,534 $44,445
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings (Note 5)................................ $ 1,156 $ 1,255 $ 1,869
Accounts payable.............................................. 2,515 4,922 6,439
Accrued expenses and other liabilities........................ 724 852 1,225
Income taxes payable (Note 7)................................. 488 -- 14
Deferred income taxes (Note 7)................................ -- 581 518
Current portion of long-term debt (Note 6).................... 644 5,632 6,038
Current portion of deferred compensation (Note 12)............ 146 144 98
------- ------- -------
Total current liabilities............................. 5,673 13,386 16,201
LONG-TERM DEBT, less current portion (Note 6)................... 9,492 14,624 17,516
DEFERRED COMPENSATION, less current portion (Note 12)........... 874 1,434 1,491
DEFERRED CREDIT (Note 12)....................................... 672 1,064 1,024
DEFERRED INCOME TAXES (Note 7).................................. -- 40 107
------- ------- -------
Total liabilities..................................... 16,711 30,548 36,339
------- ------- -------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 12)
SHAREHOLDERS' EQUITY: (Notes 10 and 12)
Common stock -- authorized 20,000,000 shares of $.01 par
value; issued 1,350,087 shares, 1,349,701 shares and
1,360,000 shares, respectively............................. 14 14 14
Additional paid-in capital.................................... 1,078 1,077 1,108
Retained earnings, including amounts reserved of $460, $475
and $955 (Note 12)......................................... 6,678 6,806 6,893
Foreign currency translation adjustments...................... 6 89 91
------- ------- -------
Total shareholders' equity............................ 7,776 7,986 8,106
------- ------- -------
Total liabilities and shareholders' equity.......... $24,487 $38,534 $44,445
======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 68
RIDGEVIEW, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------- -------------------------
1993 1994 1995 1995 1996
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
NET SALES (Notes 8 and 11)................... $35,605 $40,093 $54,408 $21,474 $31,799
COST OF SALES (Note 11)...................... 27,813 30,963 43,723 16,922 25,656
------- ------- ------- ------- -------
GROSS PROFIT................................. 7,792 9,130 10,685 4,552 6,143
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 6,032 6,768 8,169 3,714 4,901
SUPPLEMENTAL RETIREMENT BENEFIT (Note 12).... -- -- 500 -- --
------- ------- ------- ------- -------
OPERATING INCOME............................. 1,760 2,362 2,016 838 1,242
------- ------- ------- ------- -------
OTHER INCOME (EXPENSE)
Interest expense........................... (661) (829) (1,584) (520) (1,064)
Foreign currency exchange gains............ 108 -- -- -- --
Grant income............................... 163 117 75 41 39
Other, net................................. 63 (63) 28 (24) (10)
------- ------- ------- ------- -------
Total other income (expense)....... (327) (775) (1,481) (503) (1,035)
------- ------- ------- ------- -------
INCOME BEFORE INCOME TAXES................... 1,433 1,587 535 335 207
PROVISION FOR INCOME TAXES (Note 7).......... 349 573 239 97 78
------- ------- ------- ------- -------
NET INCOME................................... $ 1,084 $ 1,014 $ 296 $ 238 $ 129
======= ======= ======= ======= =======
EARNINGS PER SHARE........................... $ 0.80 $ 0.75 $ 0.22 $ 0.18 $ 0.10
======= ======= ======= ======= =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING......................... 1,353 1,350 1,350 1,353 1,355
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 69
RIDGEVIEW, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
AND SIX MONTHS ENDED JUNE 30, 1996
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY
------------------ PAID-IN RETAINED TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENTS TOTAL
--------- ------ ---------- -------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992........... 1,355,367 $ 14 $1,090 $4,841 $ 174 $6,119
Net income........................... 1,084 1,084
Cash dividends ($.09 per share)...... (115) (115)
Redemption of common stock........... (5,151) (12) (12)
Foreign currency translation
adjustment........................ (386) (386)
--------- --- ------ ------ ----- ------
Balance at December 31, 1993........... 1,350,216 14 1,078 5,810 (212) 6,690
Net income........................... 1,014 1,014
Cash dividends ($.11 per share)...... (146) (146)
Redemption of common stock........... (129)
Foreign currency translation
adjustment........................ 218 218
--------- --- ------ ------ ----- ------
Balance at December 31, 1994........... 1,350,087 14 1,078 6,678 6 7,776
Net income........................... 296 296
Cash dividends ($.12 per share)...... (168) (168)
Issuance of common stock............. 5,151 15 15
Redemption of common stock........... (5,540) (16) (16)
Foreign currency translation
adjustment........................ 83 83
--------- --- ------ ------ ----- ------
Balance at December 31, 1995........... 1,349,698 14 1,077 6,806 89 7,986
Six months ended June 30, 1996
(unaudited):
Net income........................... 129 129
Cash dividends ($.03 per share)...... (42) (42)
Issuance of common stock............. 10,302 31 31
Foreign currency translation
adjustment........................ 2 2
--------- --- ------ ------ ----- ------
Balance at June 30, 1996 (unaudited)... 1,360,000 $ 14 $1,108 $6,893 $ 91 $8,106
========= === ====== ====== ===== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 70
RIDGEVIEW, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ -------------------------
1993 1994 1995 1995 1996
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers............ $ 34,808 $ 38,764 $ 53,231 $ 20,561 $ 29,065
Cash paid to suppliers and employees.... (34,236) (36,689) (48,793) (18,715) (30,965)
Foreign currency exchange gains realized
in cash.............................. 108 -- -- -- --
Interest paid........................... (613) (730) (1,403) (442) (1,005)
Income taxes paid, net of refunds....... (190) (373) (937) (437) (54)
Other cash receipts..................... 21 12 16 25 15
Other cash disbursements................ -- -- (126) (68) (83)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities........................... (102) 984 1,988 924 (3,027)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for organizational costs....... -- -- (133) (68) --
Payments for investments in
subsidiaries......................... -- -- (76) -- (65)
Payments for purchase of 100% of Seneca
capital stock, net of cash
acquired............................. -- -- (2,097) (2,097) --
Proceeds from sale of property and
equipment............................ 24 435 174 114 28
Payments for purchase of property, plant
and equipment........................ (840) (1,881) (3,619) (1,794) (606)
-------- -------- -------- -------- --------
Net cash used in investing activities... (816) (1,446) (5,751) (3,845) (643)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term borrowings............... 1,426 1,057 99 (313) 304
Proceeds from long-term debt............ 595 56 58,729 25,928 30,588
Repayment of long-term debt............. (860) (761) (55,254) (22,442) (27,290)
Dividends paid.......................... (115) (146) (168) (84) (42)
Proceeds from issuance of common
stock................................ -- -- 15 15 31
Payments for stock redemption........... (12) -- (16) -- --
Proceeds from government grants......... 104 56 490 -- --
-------- -------- -------- -------- --------
Net cash provided by financing
activities........................... 1,138 262 3,895 3,104 3,591
-------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE ON CASH........... (17) 20 5 (4) --
-------- -------- -------- -------- --------
Net increase (decrease) in cash......... 203 (180) 137 179 (79)
CASH, beginning of period................. 63 266 86 86 223
-------- -------- -------- -------- --------
CASH, end of period....................... $ 266 $ 86 $ 223 $ 265 $ 144
======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 71
RIDGEVIEW, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONCLUDED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
--------------------------- -------------------------
1993 1994 1995 1995 1996
------- ------- ------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
Net income................................. $ 1,084 $ 1,014 $ 296 $ 238 $ 129
------- ------- ------- ------- -------
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Depreciation and amortization........... 901 917 1,200 504 746
Provision for doubtful accounts
receivable............................ 4 162 126 45 28
Capital grants recognized............... (163) (117) (75) (32) (39)
Decrease in government grants........... -- -- (43) -- --
(Gain) loss on sale of assets........... (15) 66 (13) 27 25
Increase in deferred compensation
liability............................. 138 139 557 15 12
Decrease in deferred income taxes....... (30) (60) (243) (35) 4
Changes in operating assets and
liabilities, net of effects from
purchase of Seneca:
(Increase) decrease in accounts
receivable............................ (659) (1,329) (1,119) (841) (1,675)
(Increase) decrease in inventories...... (2,065) (884) 946 (814) (4,291)
(Increase) decrease in prepaid expenses
and other assets...................... (25) (153) (303) (72) (198)
Increase (decrease) in accounts
payable............................... 444 813 1,403 2,330 1,530
Increase (decrease) in income taxes
payable............................... 161 260 (455) (304) 19
Increase (decrease) in accrued expenses
and other liabilities................. 123 156 (289) (137) 683
------- ------- ------- ------- -------
Total adjustments to net income.... (1,186) (30) 1,692 686 (3,156)
------- ------- ------- ------- -------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES................................. $ (102) $ 984 $ 1,988 $ 924 $(3,027)
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR
ENDED
SCHEDULE OF NONCASH INVESTING DECEMBER 31,
AND FINANCING ACTIVITIES 1995
------------
<S> <C>
Purchase price of 100% of Seneca capital stock............................. $ 7,000
Less: Short-term notes issued.............................................. (4,000)
Less: Cash acquired........................................................ (903)
-------
Payment for purchase of Seneca capital stock, net of cash acquired......... $ 2,097
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
<PAGE> 72
RIDGEVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of Ridgeview, Inc. and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions are eliminated in
consolidation.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS. The consolidated
financial statements as of June 30, 1996 and for the six months ended June 30,
1995 and 1996 are unaudited, and have been prepared on the same basis as the
audited financial statements included herein. In the opinion of management, such
unaudited financial statements include all adjustments consisting of normal
recurring accruals and an adjustment for an obsolete inventory write-off in
excess of normal reserves of $310,000 for the six month period ended June 30,
1995, necessary to present fairly the information set forth therein. Results for
interim periods are not indicative of results to be expected for an entire year.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
INVENTORIES. All inventories except those at Seneca are stated at the
lower of cost (first-in, first-out) or market. Inventories for Seneca are stated
at the lower of cost (last-in, first-out) or market.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. Expenditures for maintenance and repairs, which do not improve or extend
the life of an asset, are charged to expense as incurred. Expenditures for
renewals and improvements that significantly add to productive capacity or
extend the useful life of an asset are capitalized.
Depreciation is provided over the estimated useful lives of the individual
assets by the straight-line method. The estimated useful lives used in the
computation of depreciation are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements.................................... 8-39
Machinery and equipment....................................... 5-12
Automobiles and trucks........................................ 5
Office furniture and equipment................................ 5-10
</TABLE>
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED. The excess of cost
over fair value of net assets acquired represents the excess of purchase price
over the fair value of net tangible assets of businesses acquired and is
amortized using the straight-line method over the estimated useful life of 15
years. Recoverability of the excess of cost over the fair value of net assets
acquired (goodwill) is reviewed annually unless circumstances indicate that such
review should be performed sooner. The underlying business which gave rise to
the goodwill is evaluated based upon expectations of non-discounted cash flows
and operating income to determine whether any impairment has occurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Financial instruments of the Company
include long-term debt. Based upon the current borrowing rates available to the
Company, estimated fair values of these financial instruments approximate their
recorded carrying amounts.
INCOME TAXES. Effective January 1, 1993, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes,
which requires an asset and liability approach to financial accounting and
reporting for income taxes. The difference between the financial statement and
tax basis of assets and liabilities is determined annually. Deferred income tax
assets and liabilities are computed for those differences that have future tax
consequences using the currently enacted tax
F-10
<PAGE> 73
RIDGEVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
laws and rates that apply to the periods in which they are expected to affect
taxable income. The cumulative effect of adopting SFAS No. 109 was not
significant.
REVENUE RECOGNITION. Sales and related costs are recorded by the Company
upon shipment of its products.
ADVERTISING COSTS. Advertising costs, included in selling, general and
administrative expenses, are expensed as incurred and were $462,000, $629,000
and $851,000 for the years ended December 31, 1993, 1994 and 1995, respectively,
and $384,000 and $444,000 for the six months ended June 30, 1995 and 1996,
respectively.
FOREIGN CURRENCY TRANSLATION. The Company's subsidiary, Ridgeview Limited
("Limited") operates primarily in the Republic of Ireland and the local
currency, the Irish punt, has been designated as its functional currency.
Limited's assets and liabilities are translated at the balance sheet date using
the current exchange rate for the Irish punt and U.S. dollar. Results of
operations are translated using the exchange rates for the Irish punt and U.S.
dollar prevailing throughout the period. The resulting foreign currency
translation adjustments are included as a separate component of shareholders'
equity.
RECENT ACCOUNTING PRONOUNCEMENTS. The Financial Accounting Standards Board
has recently issued SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and SFAS No. 123,
"Accounting for Stock-Based Compensation." SFAS No. 121 requires that long-lived
assets and certain identifiable intangibles be reported at the lower of the
carrying amount or their estimated recoverable amount. Adoption of this standard
by the Company did not have a significant impact on the consolidated financial
statements. SFAS No. 123 encourages the accounting for stock-based employee
compensation programs to be reported within the financial statements on a fair
value based method; however, it allows an entity to continue to measure
compensation cost under Accounting Principles Board Opinion ("APB") No. 25. If
electing to remain with the accounting under APB No. 25, then the standard
requires pro forma disclosure of net income and earnings per share as if the
fair value based method had been adopted. The Company intends to adopt the pro
forma disclosure requirements of SFAS No. 123. Both standards are effective for
fiscal years beginning after December 15, 1995.
EARNINGS PER SHARE. Earnings per share are calculated using the weighted
average number of shares outstanding of Common Stock and dilutive common stock
equivalents during each period presented, after giving retroactive effect to a
129 for 1 stock split (see Note 10). Additionally, earnings per share, after
giving retroactive effect to the reduction in debt through the use of proceeds
from the proposed public offering, for the year ended December 31, 1995 and the
six months ended June 30, 1996 would have been $0.30 and $0.15, respectively.
RECLASSIFICATIONS. Financial statements for 1993 and 1994 have been
reclassified, where applicable, to conform to financial statement presentation
used in 1995.
NOTE 2 -- ACQUISITIONS
On June 28, 1995, the Company acquired all of the issued and outstanding
shares of capital stock of Seneca and certain real property owned by Seneca or
certain of its shareholders for $3 million in cash and $4 million in notes
payable in a transaction accounted for as a purchase. The purchase price
exceeded the fair value of the net tangible assets acquired by $1.9 million,
which amount is being amortized over 15 years on the straight-line method. The
operating results of Seneca are included in the Company's consolidated results
of operations from the date of acquisition.
F-11
<PAGE> 74
RIDGEVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
The Company expects to acquire all of the outstanding shares of capital
stock of Interknit, Inc. ("Interknit"), a corporation affiliated through common
ownership (see Note 11), in exchange for 240,000 shares of Common Stock in a
transaction to be accounted for as a pooling of interests. The shares of Common
Stock are to be issued immediately prior to the completion of the Company's
proposed initial public offering of Common Stock (see Note 14).
The following unaudited pro forma summary presents information as if the
acquisition of Seneca had occurred at January 1, 1994. The pro forma
information, which is provided for information purposes only, is based on
historical information and does not necessarily reflect the actual results that
would have occurred, nor is it necessarily indicative of future results of
operations of the combined entities.
Pro forma information (unaudited):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1994 1995
------- -------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net sales.................................................... $54,305 $59,176
Net income................................................... $ 1,151 $ 160
Earnings per share........................................... $ 0.85 $ 0.12
</TABLE>
NOTE 3 -- INVENTORIES
A summary of inventories by major classification is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1994 1995 1996
------ ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Raw materials........................................ $1,520 $ 3,444 $ 3,309
Work-in-process...................................... 4,480 4,864 6,803
Finished goods....................................... 3,994 6,522 9,013
(LIFO reserve)....................................... -- (50) (50)
------ ------- -------
$9,994 $14,780 $ 19,075
====== ======= =======
</TABLE>
NOTE 4 -- PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1994 1995 1996
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Land................................................ $ 132 $ 313 $ 313
Buildings and improvements.......................... 4,722 6,220 6,268
Machinery and equipment............................. 9,906 12,756 12,959
Automobiles and trucks.............................. 85 102 102
Office furniture and equipment...................... 1,831 2,072 2,245
------- ------- -------
16,676 21,463 21,887
Less accumulated depreciation and amortization...... 10,344 11,114 11,645
------- ------- -------
Net property, plant and equipment................... $ 6,332 $10,349 $ 10,242
======= ======= =======
</TABLE>
F-12
<PAGE> 75
RIDGEVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
Depreciation expense for each of the three years in the period ended
December 31, 1995 was $874,000, $901,000 and $1,096,000, respectively, and was
$491,000 and $657,000 for the six months ended June 30, 1995 and 1996,
respectively.
NOTE 5 -- SHORT-TERM BORROWINGS
Short-term borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1994 1995 1996
------ ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Bank drafts issued, not yet presented for payment...... $1,156 $1,255 $1,869
====== ====== ======
</TABLE>
The Company has an agreement with a bank whereby funds are automatically
drawn on the Company's Revolving Credit Facility (see Note 6) and transferred to
the Company's bank account to cover bank drafts as they are presented for
payment. Included in short-term borrowings is the liability for bank drafts
issued, but not yet presented for payment.
F-13
<PAGE> 76
RIDGEVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
NOTE 6 -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1994 1995 1996
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Revolving Credit Facility (see discussion below)...... $ 4,869 $12,553 $ 16,191
Term loan payable to bank in monthly installments of
$42, plus interest at prime plus 1% (9.25% at June
30, 1996), beginning February 2, 1995, with a final
balloon payment November 2, 1996, collateralized by
substantially all assets of the Company............. 5,000 4,542 4,292
Note payable to bank in 32 monthly installments of
$12, plus interest at prime plus 1% (9.25% at June
30, 1996), beginning July 1996, with a final payment
due January 1999, collateralized by substantially
all assets of the Company........................... -- 1,000 1,000
Note payable to bank in annual installments of $160,
beginning in 1997, with a final payment due in 2001,
collateralized by the assets of Limited and a
guarantee by the Company............................ -- 800 800
Note payable to Seneca County IDA, due in monthly
payments of approximately $5 including interest at
5% through March 1996 at which time the interest
rate adjusts annually to 50% of prime but not less
than 5%, collateralized by certain equipment........ -- 354 330
Note payable to former principal shareholder of
Seneca, due September 1, 1997, with interest only
payable monthly at 7% per annum; unsecured.......... -- 500 500
Note payable, due December 1996, with interest only
payable monthly at 9% per annum; unsecured.......... -- 350 350
Various notes payable in installments through March
1998, including interest at rates ranging up to
13.2%; collateralized by a building and
communications equipment............................ 267 157 91
------- ------- -------
10,136 20,256 23,554
Less current portion............................. 644 5,632 6,038
------- ------- -------
Total long-term debt.................................. $ 9,492 $14,624 $ 17,516
======= ======= =======
</TABLE>
On January 10, 1995, the Company restructured its existing bank loan
agreements. The restructured agreements provide a Revolving Credit Facility and
a $5 million term loan. The term loan provides for monthly payments and a final
balloon payment due on November 2, 1996. In connection with the restructured
agreements, short-term borrowings of $4.3 million and long-term notes totaling
$5.6 million at December 31, 1994 were effectively canceled and replaced with
the restructured bank loans. Accordingly, the loan balances outstanding at
December 31, 1994 were classified as long-term.
In connection with the acquisition of Seneca (see Note 2), the Revolving
Credit Facility was amended to increase the Company's borrowing capability to
$15 million. The Revolving Credit Facility was amended again on August 28, 1996
(pursuant to a letter of commitment issued by the lender) to, among other
things,
F-14
<PAGE> 77
RIDGEVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
increase the borrowing capability to $20 million. The amended Revolving Credit
Facility expires in January 1999. Borrowings under the Revolving Credit Facility
bear interest at the lender's prime interest rate plus 1% and are collateralized
by substantially all assets of the Company.
The provisions of the restructured agreements relating to both the
Revolving Credit Facility and the term loan contain certain covenants which
require, among other things, the maintenance of minimum amounts of working
capital and tangible net worth, restrictions on capital expenditures,
restrictions on dividends and compliance with minimum financial ratios relating
to debt coverage and cash flows. At December 31, 1995 and June 30, 1996, the
Company was in violation of certain of these loan covenants. Pursuant to the
August 28, 1996 letter of commitment issued by the lender, these violations have
been waived and the lender has agreed to permanent modifications of the loan
covenants. Accordingly, the amounts outstanding at December 31, 1995 and June
30, 1996 have been classified as long-term.
Approximate maturities of long-term debt for the next five years are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31, (IN THOUSANDS)
-------------------------------------------------------
<S> <C>
1996................................................... $ 5,632
1997................................................... 390
1998................................................... 363
1999................................................... 13,411
2000................................................... 220
Thereafter............................................. 240
-----------
$ 20,256
===========
</TABLE>
NOTE 7 -- INCOME TAXES
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
---- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.............................................. $272 $550 $ 448
State................................................ 34 60 54
Foreign.............................................. 45 23 (20)
---- ---- -----
351 633 482
---- ---- -----
Deferred:
Federal.............................................. 4 (48) (229)
State................................................ -- (6) (28)
Foreign.............................................. (6) (6) 14
---- ---- -----
(2) (60) (243)
---- ---- -----
Provision for income taxes............................. $349 $573 $ 239
==== ==== =====
</TABLE>
F-15
<PAGE> 78
RIDGEVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
The actual income tax expense differs from the "expected" tax expense for
those years (computed by applying the applicable statutory U.S. corporate income
tax rate of 34% to income before income taxes) as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income before income taxes............................... $1,433 $1,587 $ 535
====== ====== ====
Computed "expected" tax expense.......................... 487 540 182
Increase (decrease) in taxes resulting from:
Foreign income with no U.S. income tax effect....... (183) (64) 20
State income taxes, net of federal income tax....... 23 36 17
Nondeductible expenses.............................. 5 14 27
Foreign tax......................................... 39 17 (6)
Other............................................... (22) 30 (1)
------ ------ ----
$ 349 $ 573 $ 239
====== ====== ====
</TABLE>
Net deferred tax assets and net deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
----- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Receivable and inventory reserves.......................... $ 69 $ 195
Accrued expenses........................................... -- 73
Deferred compensation liability............................ 374 578
----- -------
Total deferred tax assets............................. $ 443 $ 846
----- -------
Deferred tax liabilities:
Tax greater than book depreciation......................... $(359) $ (618)
LIFO reserve............................................... -- (849)
----- -------
Total deferred tax liabilities........................ (359) (1,467)
----- -------
Net deferred tax assets (liabilities)................. $ 84 $ (621)
===== =======
</TABLE>
The Company does not accrue income taxes on the undistributed earnings of
its foreign subsidiary, Limited, which are intended to be invested in Limited
indefinitely. At December 31, 1995, the amount of undistributed earnings for
which taxes have not been accrued was $1.7 million.
NOTE 8 -- CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMER
The Company sells its products principally through retailers in North
America and Europe (see Note 13). The Company performs ongoing credit
evaluations of its customers and generally does not require collateral for
outstanding accounts receivable. Allowances are maintained for potential credit
losses, and such losses during the periods covered by these financial statements
have not exceeded management's expectations.
For the years ended December 31, 1993, 1994 and 1995, sales to one
customer, Target, accounted for 11%, 18% and 13%, respectively, of the Company's
net sales. For the six months ended June 30, 1995 and 1996, sales to this same
customer accounted for 12% of net sales in both periods. Accounts receivable
from this same customer were 23%, 19% and 7%, respectively, of total accounts
receivable at December 31, 1994 and 1995 and June 30, 1996.
F-16
<PAGE> 79
RIDGEVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
NOTE 9 -- BENEFIT PLANS
The Company has an employee savings plan which covers participating
employees who have completed one year of employment and have attained age 21.
Under the terms of the plan, the Company contributes an amount equal to 25% of
participating employees' contributions which do not exceed 6% of each
participant's earnings. Total contributions to the plan by the Company amounted
to $86,000, $87,000 and $85,000 for the years ended December 31, 1993, 1994 and
1995, respectively, and $45,000 and $44,000 for the six months ended June 30,
1995 and 1996, respectively.
As specified by the collective bargaining agreement between Seneca and The
International Ladies' Garment Workers' Union, which in 1995 merged with the
Amalgamated Clothing and Textile Workers Union to form the Union of
Needletrades, Industrial and Textile Employees ("UNITE"), Seneca is required to
make contributions based on a percentage of the gross salary for all bargaining
unit employees, who are members of the union, to the following multi-employer
benefit plans:
1. Eastern Region, UNITE Health and Welfare Fund, a trust fund
established by collective agreement for the purpose of providing workers
with health, welfare and recreation benefits and services.
2. UNITE National Retirement Fund, a trust fund established by
collective agreement for the purpose of providing pensions or annuities on
retirement or death of workers.
3. UNITE Health Services Plan, a trust fund established by collective
agreement for the purpose of providing workers with drugs, medication and
other health services.
From the date of acquisition of Seneca, June 28, 1995, through December 31,
1995 and for the six months ended June 30, 1996, contribution expense under this
collective bargaining agreement amounted to approximately $243,000. The
Company's applicable portion of total plan benefits and net assets of the plans
are not separately identifiable.
NOTE 10 -- CAPITAL STOCK
In contemplation of a proposed initial public offering of the Company's
common stock (see Note 14), the Company's board of directors has authorized, and
the Company's shareholders have approved, amended and restated articles of
incorporation that increase the Company's authorized capital stock to 22,000,000
shares, to be divided into 20,000,000 shares of common stock and 2,000,000
shares of preferred stock. The board of directors has also declared a stock
dividend effective October 8, 1996 that resulted in the issuance of
approximately 129 additional shares of Common Stock for each share of Common
Stock then issued and outstanding. To reflect this split-up of the Company's
outstanding common stock into a greater number of shares, all share numbers and
per share amounts in these financial statements have been adjusted
retroactively.
Also in contemplation of the proposed initial public offering, the board of
directors and the shareholders have approved the Omnibus Plan, which permits the
issuance of options, stock appreciation rights ("SARS"), limited SARS,
restricted stock, performance awards and other stock-based awards to selected
employees and independent contractors of the Company. The Company has reserved
230,000 shares of common stock for issuance under the Omnibus Plan, which
provides that the term of each award shall be determined by a committee of the
board of directors charged with administering the Omnibus Plan, but no longer
than ten years after the date they are granted. Under the terms of the Omnibus
Plan, options granted may be either nonqualified or incentive stock options.
SARS and limited SARS granted in tandem with an option shall be exercisable only
to the extent the underlying option is exercisable. To date, no awards have been
granted under the Omnibus Plan.
F-17
<PAGE> 80
RIDGEVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
The directors have also authorized an employee stock purchase plan that,
after the initial public offering is completed and the plan activated, will
allow employees to purchase shares of common stock of the Company through
payroll deductions at 85% of the market value of the shares at the time of
purchase. The Company has reserved 75,000 shares for issuance under this plan.
In September 1996, the Company adopted an Outside Directors' Stock Option
Plan (the "Directors' Plan"), reserving 15,000 shares of common stock for
issuance thereunder. The Directors' Plan provides that each outside director, at
the time of initial election, shall automatically be granted an option to
purchase 500 shares of common stock at the fair market value on the date of
election. On each anniversary date of an outside director's election, option to
purchase 500 additional shares of common stock will automatically be granted,
provided that the director shall have continuously served and the number of
shares of common stock available under the Directors' Plan is sufficient.
Options granted under the Directors' Plan will be nonqualified stock options,
will vest in increments of 33 1/3% on each anniversary and will expire ten years
after the date they are granted. To date, no awards were made or granted under
the Directors' Plan.
NOTE 11 -- RELATED PARTY TRANSACTIONS
All of the Company's executive officers are shareholders of Interknit,
which manufactures greige goods and sells substantially all of its production to
the Company. The Company also sells raw materials to Interknit.
The Company's transactions with Interknit are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1993 1994 1995 1995 1996
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Purchases of greige goods........... $ -- $2,338 $3,162 $1,442 $2,363
Sales of raw materials.............. -- 266 289 288 25
Payables and receivables related to
the above transactions are as
follows:
Accounts payable.................... -- 135 136 206 300
Accounts receivable................. -- 1 1 32 6
</TABLE>
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
SELF INSURANCE PLAN. The Company is self insured for certain health
benefits up to $50,000 per occurrence per individual, with certain maximum
aggregate policy limits per claim year. The cost of such benefits is recognized
as an expense in the period the claim occurred. This cost amounted to $575,000,
$402,000 and $491,000 for the years ended December 31, 1993, 1994 and 1995,
respectively, and $275,000 and $412,000 for the six months ended June 30, 1995
and 1996, respectively.
LOAN GUARANTEE. On July 5, 1995, the Company acquired a 50% interest in a
limited liability corporation formed for the purpose of purchasing an airplane.
The limited liability company financed the purchase of the airplane with
proceeds of a bank loan. At December 31, 1995, this loan had an outstanding
balance of $1.2 million, of which $600,000 is guaranteed by the Company. The
Company's investment in the limited liability company, which is accounted for
under the equity method, is not material and is included in other assets.
DEFERRED COMPENSATION. The Company has various agreements with certain
executive officers that provide for specified levels of compensation upon
retirement, death or disability. The expense related to these agreements
amounted to $174,000, $175,000 and $176,000 for the years ended December 31,
F-18
<PAGE> 81
RIDGEVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
1993, 1994 and 1995, respectively, and $88,000 and $129,000 for the six months
ended June 30, 1995 and 1996, respectively.
In December 1995, the Company agreed to provide a senior level executive a
supplemental retirement benefit of $7,000 per month for a period of 84 months
commencing January 1996. As a result, the Company recorded a $500,000 pre-tax
charge to operating expenses.
DEFERRED CREDIT. The Republic of Ireland grants relating to property,
plant and equipment additions at Limited have been deferred and are amortized
over the life of the related assets. During the year ended December 31, 1995,
$445,000 in additional grants were received in connection with a major expansion
of Limited's manufacturing facility. No grants were received for the years ended
December 31, 1993 and 1994. Over a ten-year period, the grants are subject to
full or partial repayment to the Republic of Ireland if certain conditions
specified in the grant agreement are not met. In the opinion of management,
Limited was in compliance with those conditions at December 31, 1995, and the
Company intends to remain in compliance throughout the ten-year period.
RESERVED RETAINED EARNINGS. Pursuant to the grant agreements with the
Republic of Ireland, Limited is required to maintain a minimum amount of equity
(and equity equivalents, as defined) based upon the amount of government grants
received. At December 31, 1994 and 1995, $460,000 and $475,000 of retained
earnings, respectively, have been reserved for this purpose.
On March 27, 1996, in compliance with the above government grant agreement,
Limited reserved an additional $480,000 of retained earnings for an aggregate of
$955,000 at June 30, 1996. These reserved retained earnings are required to be
maintained for the duration of the grant agreement, which expires December 31,
1999.
LEASES. The Company has several noncancellable operating leases, primarily
for manufacturing, showroom, storage and office purposes, that expire over the
next four years. Total rental expense amounted to $85,000, $99,000 and $186,000
for the years ended December 31, 1993, 1994 and 1995, respectively, and $78,000
and $143,000 for the six months ended June 30, 1995 and 1996, respectively.
Future minimum lease payments under noncancellable operating leases are as
follows: 1996 -- $244,000; 1997 -- $136,000; 1998 -- $88,000; and
1999 -- $13,000.
LICENSE AGREEMENTS. In the normal course of its business, the Company
enters into license agreements for the use of trademarks owned by others on the
Company's products. Each of the license agreements provides for payment of
minimum royalties for each annual period during the term of the license
agreement.
Aggregate minimum guaranteed royalty payments under the license agreements
are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31, (IN THOUSANDS)
-----------------------------------------------------
<S> <C>
1996................................................. $400
1997................................................. 50
1998................................................. 50
--------
Total minimum royalty payments....................... $500
========
</TABLE>
On May 28, 1996, the Company signed an additional license agreement for the
Evan-Picone trademark, which calls for minimum guaranteed royalty payments of
$450,000, $500,000 and $600,000 for the period commencing July 1, 1996 through
December 31, 1997 and the years ending December 31, 1998 and 1999, respectively.
F-19
<PAGE> 82
RIDGEVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
Total royalty expense for license agreements amounted to $40,000, $169,000
and $270,000 for the years ended December 31, 1993, 1994 and 1995, respectively,
and $129,000 and $197,000 for the six months ended June 30, 1995 and 1996,
respectively.
NOTE 13 -- INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one principal industry segment, the manufacture and
sale of socks and women's hosiery products. The Company's products are sold
primarily through retailers.
Financial information by geographic region is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales to unaffiliated
customers:
United States.................. $31,379 $36,028 $49,684 $19,042 $27,633
Europe......................... 4,226 4,065 4,724 2,432 4,166
------- ------- ------- ------- -------
Total net sales................ $35,605 $40,093 $54,408 $21,474 $31,799
======= ======= ======= ======= =======
Transfers between geographic
areas (Eliminated in
consolidation):
United States.................. $ 175 $ 84 $ 144 $ 24 $ 340
Europe......................... -- -- -- -- 16
------- ------- ------- ------- -------
Total transfers................ $ 175 $ 84 $ 144 $ 24 $ 356
======= ======= ======= ======= =======
Operating income (loss):
United States.................. $ 1,464 $ 2,294 $ 2,134 $ 765 $ 1,133
Europe......................... 296 140 (118) 73 109
Eliminations................... -- (72) -- -- --
Other income (expense), net.... (327) (775) (1,481) (503) (1,035)
------- ------- ------- ------- -------
Income before income taxes..... $ 1,433 $ 1,587 $ 535 $ 335 $ 207
======= ======= ======= ======= =======
Identifiable assets:
United States.................. $18,703 $21,267 $32,525 $35,125 $38,834
Europe......................... 3,673 4,183 7,038 4,783 6,837
Eliminations................... (762) (963) (1,029) (813) (1,226)
------- ------- ------- ------- -------
Total assets................... $21,614 $24,487 $38,534 $39,095 $44,445
======= ======= ======= ======= =======
</TABLE>
The classification by geographic region of the Company's net sales to
unaffiliated customers in the table above is based on the geographic location of
the customers for the Company's products. Transfers between geographic regions
are recorded at amounts generally above cost and in accordance with the rules
and regulations of the respective governing tax authorities. Operating income
consists of total net sales less operating expenses, and does not include other
income (expense) net, or income taxes. Identifiable assets of geographic areas
are those assets used in the Company's operations in each area.
F-20
<PAGE> 83
RIDGEVIEW, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONCLUDED)
(INFORMATION FOR JUNE 30, 1995 AND 1996 IS UNAUDITED)
NOTE 14 -- PROPOSED PUBLIC OFFERING
The Company's board of directors has approved resolutions authorizing the
preparation and filing of a registration statement under the Securities Act with
the Commission pursuant to which the Company intends to register shares of its
Common Stock for sale to the public through a group of underwriters on a firm
commitment basis. Direct costs of $282,000 incurred in preparation of the
proposed initial public offering have been deferred and will be charged to
additional paid-in capital upon successful completion of the proposed public
offering or, if the public offering is not successfully completed, expensed
during the period in which the Company determines not to proceed with such
offering.
F-21
<PAGE> 84
INDEPENDENT AUDITORS' REPORT
Board of Directors
Seneca Knitting Mills Corporation
and Subsidiaries
We have audited the accompanying consolidated balance sheets of Seneca Knitting
Mills Corporation and Subsidiaries as of April 1, 1995 and April 2, 1994, and
the related consolidated statements of income and retained earnings and cash
flows for each of the three fiscal years in the period ended April 1, 1995.
These financial statements are the responsibility of the Companies' management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Seneca Knitting
Mills Corporation and Subsidiaries as of April 1, 1995 and April 2, 1994, and
the consolidated results of their operations and their consolidated cash flows
for each of the three fiscal years in the period ended April 1, 1995, in
conformity with generally accepted accounting principles.
As discussed in Note J, the Company changed its method of accounting for income
taxes in the year ended April 3, 1993.
/s/ Mengel, Metzger, Barr & Co. LLP
Rochester, New York
May 11, 1995
F-22
<PAGE> 85
SENECA KNITTING MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
APRIL 1, APRIL 2,
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................................... $ 239,926 $ 428,135
Note receivable from shareholder.......................................... 453,000 --
Accounts receivable, less allowance for doubtful accounts of $50,000 in
1995 and $18,000 in 1994................................................ 1,370,913 960,291
Inventories............................................................... 2,254,794 2,078,550
Prepaid income taxes...................................................... 90,585 --
Other prepaid expenses.................................................... 91,925 125,036
Deferred income taxes..................................................... 108,000 111,000
---------- ----------
TOTAL CURRENT ASSETS............................................... 4,609,143 3,703,012
PROPERTY, PLANT AND EQUIPMENT
Land...................................................................... 25,216 93,898
Buildings................................................................. 439,259 748,850
Leasehold improvements.................................................... 652,554 617,856
Machinery and equipment................................................... 1,901,405 1,264,795
Furniture and fixtures.................................................... 171,899 211,530
Vehicles.................................................................. 34,221 34,221
---------- ----------
3,224,554 2,971,150
Less accumulated depreciation and amortization............................ 1,875,024 1,787,536
---------- ----------
1,349,530 1,183,614
OTHER ASSETS
Cash value of life insurance.............................................. 293,413 270,883
Sundry.................................................................... 1,000 93,336
---------- ----------
294,413 364,219
---------- ----------
$6,253,086 $5,250,845
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt......................................... $ 107,929 $ 60,000
Accounts payable.......................................................... 1,189,663 624,890
Accrued payroll and related accruals...................................... 264,151 308,250
Accrued retirement and welfare contributions.............................. 358,106 330,334
Income taxes payable...................................................... 16,859 469,390
Other accrued liabilities................................................. 17,282 38,952
---------- ----------
TOTAL CURRENT LIABILITIES.......................................... 1,953,990 1,831,816
LONG-TERM DEBT.............................................................. 780,015 501,831
DEFERRED INCOME TAXES....................................................... 48,300 74,500
LEASE COMMITMENTS
SHAREHOLDERS' EQUITY
Common stock, Class A, voting, $10 par value:
Authorized, 50,000 shares
Issued and outstanding, 16,725 shares................................. 167,250 167,250
Common stock, Class B, non-voting, $10 par value:
Priority as to dividends and dissolution, Authorized, 50,000 shares
Issued and outstanding, 20,000 shares................................. 200,000 200,000
Retained earnings......................................................... 3,103,531 2,475,448
---------- ----------
3,470,781 2,842,698
---------- ----------
$6,253,086 $5,250,845
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-23
<PAGE> 86
SENECA KNITTING MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
APRIL 1, APRIL 2, APRIL 3,
1995 1994 1993
----------- ----------- ----------
<S> <C> <C> <C>
Net sales............................................ $14,211,680 $11,743,641 $8,312,529
Cost of sales........................................ 11,162,712 8,911,545 6,974,301
----------- ----------- ----------
GROSS PROFIT.................................... 3,048,968 2,832,096 1,338,228
Selling, general and administrative expenses......... 1,901,427 1,292,725 901,400
----------- ----------- ----------
INCOME FROM OPERATIONS.......................... 1,147,541 1,539,371 436,828
Other (expense) income:
Interest expense................................... (160,509) (155,707) (133,647)
Interest income.................................... 6,771 11,376 3,896
Gain on sale of property, equipment and sundry
assets.......................................... 27,104 9,723 (163)
Sundry............................................. 22,176 17,351 6,519
----------- ----------- ----------
(104,458) (117,257) (123,395)
----------- ----------- ----------
INCOME BEFORE INCOME TAXES...................... 1,043,083 1,422,114 313,433
Income taxes:
Current:
Federal......................................... 385,200 400,000 46,000
State........................................... 53,000 68,500 21,200
Deferred (benefit)................................. (23,200) 54,284 71,331
----------- ----------- ----------
415,000 522,784 138,531
----------- ----------- ----------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE........................................ 628,083 899,330 174,902
Cumulative effect of change in accounting for income
taxes.............................................. -- -- 112,765
----------- ----------- ----------
NET INCOME...................................... 628,083 899,330 287,667
Retained earnings at beginning of year............... 2,475,448 1,576,118 1,288,451
----------- ----------- ----------
RETAINED EARNINGS AT END OF YEAR................ $ 3,103,531 $ 2,475,448 $1,576,118
=========== =========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-24
<PAGE> 87
SENECA KNITTING MILLS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------
APRIL 1, APRIL 2, APRIL 3,
1995 1994 1993
--------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS -- OPERATING ACTIVITIES
Net income for the year.................................. $ 628,083 $ 899,330 $ 287,667
Adjustments to reconcile net income to net cash provided
from operating activities:
Depreciation and amortization......................... 271,572 184,428 156,159
Gain on sale of property, equipment and sundry
assets.............................................. (27,104) (9,723) 163
Bad debts............................................. 32,299 49,095 28,078
Deferred income taxes................................. (23,200) 54,284 (41,434)
Cash value of life insurance.......................... (3,756) (2,432) (3,448)
Changes in certain assets and liabilities affecting
operations:
Accounts receivable................................. (442,921) (213,436) (342,743)
Inventories......................................... (176,244) (665,048) (257,184)
Prepaid income taxes................................ (90,585) -- --
Other prepaid expenses.............................. 33,111 (46,764) 52,298
Sundry other assets................................. -- (1,000) --
Accounts payable.................................... 564,773 167,775 29,754
Accrued payroll and related accruals................ (44,099) 121,226 50,181
Accrued retirement and welfare contributions........ 27,772 255,933 (18,475)
Income taxes payable................................ (452,531) 399,767 63,439
Other accrued liabilities........................... (21,670) 23,246 8,278
--------- ---------- ----------
NET CASH PROVIDED FROM OPERATING ACTIVITIES...... 275,500 1,216,681 12,733
CASH FLOWS -- INVESTING ACTIVITIES
Purchase of property and equipment....................... (771,048) (321,444) (70,060)
Proceeds from the sale of equipment...................... -- 35,500 2,450
Cash value of life insurance............................. (18,774) (19,856) (19,856)
--------- ---------- ----------
NET CASH (USED FOR) INVESTING ACTIVITIES......... (789,822) (305,800) (87,466)
CASH FLOWS -- FINANCING ACTIVITIES
Note payable to bank..................................... -- (770,000) 253,000
Proceeds on long-term debt............................... 390,000 150,000 --
Payments on long-term debt............................... (63,887) (60,000) (65,000)
--------- ---------- ----------
NET CASH PROVIDED FROM (USED FOR) FINANCING
ACTIVITIES..................................... 326,113 (680,000) 188,000
--------- ---------- ----------
NET (DECREASE) INCREASE IN CASH.................. (188,209) 230,881 113,267
Cash at beginning of year................................ 428,135 197,254 83,987
--------- ---------- ----------
CASH AT END OF YEAR.............................. $ 239,926 $ 428,135 $ 197,254
========= ========== ==========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash payments during the fiscal year for:
Interest.............................................. $ 170,480 $ 142,917 $ 138,867
========= ========== ==========
Income taxes.......................................... $ 981,316 $ 68,733 $ 3,761
========= ========== ==========
NON-CASH INVESTING ACTIVITY
Sale of property, equipment and sundry assets financed
through a note receivable from shareholder............... $ 453,000 $ -- $ --
========= ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-25
<PAGE> 88
SENECA KNITTING MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
The Company is primarily engaged in the manufacturing and sale of yarn and
heavy weight sport hosiery. GPM Corporation is involved in real estate
activities. The Company grants credit to qualified customers, who are located
primarily in the United States and involved in retail sales.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the accounts of Seneca
Knitting Mills Corporation (the Company) and its wholly-owned subsidiaries,
Seneca Knitting Mills International Sales, Inc. (a Foreign Sales Corporation)
and GPM Corporation. All significant intercompany transactions and balances have
been eliminated.
FISCAL YEAR END
The Company has adopted a 52-53 week fiscal year ending on the Saturday
closest to March 31.
CASH
The Company maintains its cash balances in one financial institution
located in New York State. These balances are insured by the Federal Deposit
Insurance Corporation up to $100,000. At April 1, 1995, uninsured amounts held
at this financial institution total approximately $121,000.
INVENTORIES
Substantially all of the Company's inventories are stated at the lower of
cost or market with cost determined on the last-in, first-out (LIFO) basis.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost. Major
renewals and betterments are charged to the property accounts while
replacements, maintenance and repairs, which do not improve or extend the lives
of the respective assets, are expensed currently.
Depreciation is provided using both accelerated and straight-line methods
at rates sufficient to amortize the cost of the related asset over its estimated
useful life. Upon sale or retirement, the related cost and accumulated
depreciation are removed from the accounts and the related gain or loss is
reflected in operations.
INCOME TAXES
Deferred income tax assets and liabilities arise from temporary differences
associated with differences between the financial statement and tax basis of
assets and liabilities. Deferred tax assets and liabilities not related to an
asset or liability are classified as current or noncurrent depending on the
periods in which the temporary differences are expected to reverse. The
principal types of temporary differences between assets and liabilities for
financial statement and tax return purposes are accumulated depreciation,
inventories, accounts receivable, accrued payroll and accrued vacation.
F-26
<PAGE> 89
SENECA KNITTING MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B: NOTE RECEIVABLE FROM SHAREHOLDER
Note receivable from shareholder results from the sale of certain assets of
the Company to the shareholder as of March 31, 1995. Pursuant to the agreement
as discussed in Note J and as a condition thereto, the note receivable from
shareholder is to be paid when the sale is completed. Therefore, the Company has
classified the note receivable from shareholder as a current asset as of April
1, 1995.
NOTE C: INVENTORIES
The major categories of inventory are as follows:
<TABLE>
<CAPTION>
APRIL 1, APRIL 2,
1995 1994
---------- ----------
<S> <C> <C>
Raw materials................................................. $1,542,447 $1,137,666
Work in process............................................... 1,290,778 1,372,182
Finished goods................................................ 1,550,148 1,408,189
Supplies...................................................... 227,096 196,643
---------- ----------
4,610,469 4,114,680
Less LIFO reserve............................................. 2,355,675 2,036,130
---------- ----------
$2,254,794 $2,078,550
========== ==========
</TABLE>
NOTE D: NOTE PAYABLE TO BANK
The Company maintains a revolving line of credit of $3,750,000. Interest is
at prime for outstanding borrowings up to $1,875,000 and prime plus .5% for
amounts over that amount. The line of credit is secured by the Company's
accounts receivable, inventories and the personal guarantee of the Company's
majority shareholder. At April 1, 1995, there was no outstanding balance.
F-27
<PAGE> 90
SENECA KNITTING MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE E: LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
APRIL 1, APRIL 2,
1995 1994
-------- --------
<S> <C> <C>
Note payable to bank, due in monthly payments of $5,000 plus
interest at prime plus 1% (an effective rate of 10% at April
1, 1995) through December 1997. Collateralized by accounts
receivable, inventories and fixed assets and the personal
guarantee of the Company's majority shareholder............. $151,831 $211,831
Note payable to Seneca County IDA, due in monthly payments of
$5,500 including interest at 5% through March 1996 at which
time the interest rate adjusts annually to 50% of prime but
not less than 5%. Collateralized by certain equipment and
the personal guarantee of the Company's majority
shareholder................................................. 386,113 --
Note payable to related party, due June 1, 1996, with interest
only payable monthly at 10% per annum....................... 200,000 200,000
Note payable to related party, due September 8, 1996, with
interest only payable monthly at 8% per annum............... 150,000 150,000
-------- --------
887,944 561,831
Less current portion........................................... 107,929 60,000
-------- --------
$780,015 $501,831
======== ========
</TABLE>
Annual fiscal year maturities of long-term debt are estimated as follows:
<TABLE>
<S> <C>
1996............................................................ $107,929
1997............................................................ 460,382
1998............................................................ 84,790
1999............................................................ 55,669
2000............................................................ 58,517
Thereafter...................................................... 120,657
--------
$887,944
========
</TABLE>
NOTE F: INCOME TAXES
Deferred income tax assets and liabilities are determined based on the
differences between the financial statement and tax basis of assets and
liabilities as measured by the enacted rates which will be in effect when these
differences reverse.
F-28
<PAGE> 91
SENECA KNITTING MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes resulting from temporary differences are summarized
as follows:
<TABLE>
<CAPTION>
ASSETS/(LIABILITIES)
-----------------------
APRIL 1, APRIL 2,
1995 1994
-------- --------
<S> <C> <C>
Accumulated depreciation................................... $(48,300) $(74,500)
Inventories................................................ 38,400 44,000
Accounts receivable........................................ 20,000 7,200
Accrued payroll............................................ -- 28,000
Accrued vacation........................................... 49,600 31,800
-------- --------
$ 59,700 $ 36,500
======== ========
Classification of deferred taxes:
Current asset.............................................. $108,000 $111,000
Non-current liability...................................... (48,300) (74,500)
-------- --------
$ 59,700 $ 36,500
======== ========
</TABLE>
At April 1, 1995, the Company has unused investment tax credits (ITC) of
approximately $64,000 to reduce future state income taxes, which expire at
various dates through 2005. The future benefit of these New York State ITC
carryforwards is significantly limited because of the state income tax rules
and, accordingly, no related deferred tax asset has been recorded relating to
these credits.
NOTE G: BENEFIT PLANS
As specified by the collective agreement between the Company and The
International Ladies' Garment Workers' Union (ILGWU), the Company is required to
make contributions to the following multi-employer benefit plans:
1. Eastern Region, ILGWU Health and Welfare Fund, a trust fund
established by collective agreement for the purpose of providing workers
with health, welfare and recreation benefits and services.
2. ILGWU National Retirement Fund, a trust fund established by
collective agreement for the purpose of providing pensions or annuities on
retirement or death of workers.
3. ILGWU Health Services Plan, a trust fund established by collective
agreement for the purpose of providing workers with drugs, medication and
other health services.
Contributions are made as a percentage of the gross salary for all
bargaining unit employees (union) as follows:
<TABLE>
<CAPTION>
EFFECTIVE JANUARY 1,
-----------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
ILGWU Health and Welfare Fund........................... 4.50% 4.50% 4.50%
ILGWU National Retirement Fund.......................... 9.00% 9.00% 9.00%
ILGWU Health Services Plan.............................. 2.375% 2.375% 2.375%
</TABLE>
For the years ended April 1, 1995, April 2, 1994 and April 3, 1993,
contribution expense amounted to approximately $487,500, $430,400 and $300,200,
respectively. The Company's applicable portion of total plan benefits and net
assets of the plans are not separately identifiable.
NOTE H: OTHER
Sales to four major customers in 1995 were approximately $4,737,000, to
three major customers in 1994 approximately $3,024,000, and to two major
customers in 1993 approximately $2,130,000.
F-29
<PAGE> 92
SENECA KNITTING MILLS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I: LEASE COMMITMENTS
The Company leases warehouse space from a related party at a monthly amount
of $4,000 plus taxes and insurance through December 1997.
The Company leases retail store space in Ithaca, Camillus and Corning, New
York at a total monthly amount aggregating $4,250 expiring at different dates
through January 1997.
The Company leases certain equipment and vehicles. Lease payments aggregate
approximately $5,000 per month and expire at different dates through February
1998.
Total lease expense approximated $150,000, $92,000 and $21,000 for the
years ended April 1, 1995, April 2, 1994 and April 3, 1993, respectively.
NOTE J: CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted, effective March 29, 1992, Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under the
liability method specified by SFAS 109, deferred tax assets and liabilities are
determined based on the difference between the financial statements and tax
bases of assets and liabilities as measured by the enacted tax rates which are
expected to be in effect when these differences reverse. Deferred tax expense
(credit) is the result of changes in deferred tax assets and liabilities. The
principal types of differences between assets and liabilities for financial
statement and tax return purposes are further detailed in Note F.
The deferred method, used in years prior to 1993, required the Company to
provide for deferred tax expense based on certain items of income and expense
which were reported in different years in the financial statements and the tax
returns as measured by the tax rate in effect for the year the difference
occurred.
The change from the deferred method to the liability method of accounting
for income taxes decreased the Company's 1993 net income by approximately
$120,000 before the cumulative effect of the change in accounting. Also, net
income for 1993 increased by approximately $113,000 as a result of the
cumulative effect of the change in accounting related to years prior to 1993
which were not restated.
NOTE K: SUBSEQUENT EVENT
On April 27, 1995, the shareholders of the Company signed an agreement for
the sale of their common stock to Ridgeview, Inc., a North Carolina corporation.
Subject to several conditions of the contract, the shareholders of the Company
anticipate the sale of their common stock to be completed prior to July 1995.
F-30
<PAGE> 93
INDEPENDENT AUDITORS' REPORT
Board of Directors
Interknit, Inc.
Fort Payne, Alabama
We have audited the accompanying balance sheets of Interknit, Inc. as of
December 31, 1995 and 1994, and the related statements of income, retained
earnings (deficit), and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the statements referred to above present fairly in all
material respects, the financial position of Interknit, Inc. as of December 31,
1995 and 1994, and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
/s/ Whisnant & Company
February 26, 1996
F-31
<PAGE> 94
INTERKNIT, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------
1996 1995 1994
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................................. $ 22,053 $ 39,062 $ 44,447
Refundable income taxes.............................. 3,970 3,970 --
Accounts receivable -- trade......................... 722,794 293,528 363,749
Inventories.......................................... 105,575 181,303 33,888
Deferred income taxes................................ 1,868 1,624 13
---------- ---------- ----------
Total current assets......................... 856,260 519,487 442,097
---------- ---------- ----------
PROPERTY, PLANT AND EQUIPMENT
Machinery and equipment.............................. 1,611,732 1,596,456 1,051,827
Office furniture and fixtures........................ 1,654 10,794 8,774
Vehicles............................................. 17,063 17,063 17,063
Leasehold improvements............................... 48,536 36,464 3,709
---------- ---------- ----------
1,678,985 1,660,777 1,081,373
Less accumulated depreciation..................... 333,860 215,642 118,040
---------- ---------- ----------
Net property, plant and equipment............ 1,345,125 1,445,135 963,333
---------- ---------- ----------
OTHER ASSETS
Deferred income taxes................................ -- 4,672 --
Start-up costs, net of amortization.................. 19,678 23,614 31,485
Deposits............................................. 88,909 81,799 33,299
---------- ---------- ----------
Total other assets........................... 108,587 110,085 64,784
---------- ---------- ----------
Total........................................ $2,309,972 $2,074,707 $1,470,214
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings................................ $ 155,000 $ 155,000 $ --
Current portion of long-term debt.................... 218,943 210,635 129,309
Accounts payable -- trade............................ 392,687 298,699 338,612
Withheld and accrued payroll taxes................... 32,691 41,341 1,793
Accrued salaries..................................... -- 2,303 --
Accrued interest..................................... 4,000 4,500 --
Accrued income taxes................................. 45,125 -- 3,970
Accrued expenses..................................... -- -- 41
---------- ---------- ----------
Total current liabilities.................... 848,446 712,478 473,725
---------- ---------- ----------
LONG-TERM DEBT, less current portion................... 1,255,051 1,366,662 927,300
---------- ---------- ----------
DEFERRED INCOME TAXES.................................. 38,958 -- 18,073
---------- ---------- ----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock -- authorized 5,000 shares of $1 par
value; issued 500 shares.......................... 500 500 500
Additional paid-in capital........................... 24,500 24,500 24,500
Retained earnings (deficit).......................... 142,517 (29,433) 26,116
---------- ---------- ----------
Total stockholders' equity (deficit)......... 167,517 (4,433) 51,116
---------- ---------- ----------
Total........................................ $2,309,972 $2,074,707 $1,470,214
========== ========== ==========
</TABLE>
See notes to financial statements.
F-32
<PAGE> 95
INTERKNIT, INC.
STATEMENTS OF RETAINED EARNINGS (DEFICIT)
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
1996 1995 1994
-------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Retained earnings (deficit), beginning.................. $(29,433) $ 26,116 $ --
Net income (loss)....................................... 171,950 (55,549) 26,116
-------- -------- -------
RETAINED EARNINGS (DEFICIT), ENDING........... $142,517 $(29,433) $26,116
======== ======== =======
</TABLE>
See notes to financial statements.
F-33
<PAGE> 96
INTERKNIT, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- -------------------------
1996 1995 1995 1994
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET SALES................................. $3,300,002 $1,512,902 $3,876,758 $2,338,439
COST OF GOODS SOLD........................ 2,921,709 1,565,288 3,825,248 2,166,924
---------- ---------- ---------- ----------
Gross profit (loss)............. 378,293 (52,386) 51,510 171,515
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................ 51,222 8,279 66,005 65,305
---------- ---------- ---------- ----------
Income (loss) from operations... 327,071 (60,665) (14,495) 106,210
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Gain on disposal of equipment........... -- 6,013 15,530 --
Interest expense........................ (66,610) (39,751) (84,910) (58,064)
---------- ---------- ---------- ----------
(66,610) (33,738) (69,380) (58,064)
---------- ---------- ---------- ----------
Income (loss) before income
taxes......................... 260,461 (94,403) (83,875) 48,146
---------- ---------- ---------- ----------
PROVISION FOR INCOME TAXES
Current................................. 45,125 (3,970) (3,970) 3,970
Deferred................................ 43,386 (25,834) (24,356) 18,060
---------- ---------- ---------- ----------
88,511 (29,804) (28,326) 22,030
---------- ---------- ---------- ----------
NET INCOME (LOSS)............... $ 171,950 $ (64,599) $ (55,549) $ 26,116
========== ========== ========== ==========
</TABLE>
See notes to financial statements.
F-34
<PAGE> 97
INTERKNIT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------
1995 1994
SIX MONTHS ENDED ----------- -----------
JUNE 30,
--------------------------
1996 1995
----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers........... $ 2,870,736 $ 1,608,978 $ 3,946,979 $ 1,974,690
Cash paid to suppliers and employees... (2,692,015) (1,560,693) (3,865,761) (2,038,760)
Interest paid.......................... (67,110) (36,751) (80,410) (58,064)
Cash received (paid) for deposits...... (7,109) (9,000) (48,500) 5,250
Taxes paid............................. -- -- (3,970) --
----------- ----------- ----------- -----------
Net cash (used in) provided by
operating activities................ 104,502 2,534 (51,662) (116,884)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from disposal of equipment.... -- 35,000 135,000 --
Cash paid for purchases of property and
equipment........................... (18,208) (39,467) (764,411) (287,999)
----------- ----------- ----------- -----------
Net cash (used in) investing
activities.......................... (18,208) (4,467) (629,411) (287,999)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from short-term debt.......... -- 106,500 155,000 --
Proceeds from long-term debt........... -- -- 650,000 278,026
Principal payments on long-term debt... (103,303) (138,456) (129,312) (93,109)
----------- ----------- ----------- -----------
Net cash (used in) provided by
financing activities................ (103,303) (31,956) 675,688 184,917
----------- ----------- ----------- -----------
Net decrease in cash................... (17,009) (33,889) (5,385) (219,966)
CASH -- beginning of year................ 39,062 44,447 44,447 264,413
----------- ----------- ----------- -----------
CASH -- end of year...................... $ 22,053 $ 10,558 $ 39,062 $ 44,447
========== ========== ========== ==========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES
The company's capital expenditures were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------
1995 1994
-------- --------
<S> <C> <C>
Total value of additions..................................... $914,404 $287,999
Amounts provided by book value of assets traded.............. 149,993 --
-------- --------
Net cash expenditures.............................. $764,411 $287,999
======== ========
</TABLE>
See notes to financial statements.
F-35
<PAGE> 98
INTERKNIT, INC.
STATEMENTS OF CASH FLOWS -- (CONCLUDED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
--------------------- ----------------------
1996 1995 1995 1994
--------- -------- --------- ---------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH (USED
IN) PROVIDED BY OPERATING ACTIVITIES
Net income (loss)............................. $ 171,950 $(64,599) $ (55,549) $ 26,116
========= ======== ========= =========
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Depreciation and amortization.............. 122,153 79,909 171,010 125,911
Increase (decrease) in deferred income
taxes.................................... 43,386 (25,834) (24,356) 18,060
Gain on sale of equipment.................. -- (6,013) (15,530) --
(Increase) decrease in deposits............ (7,109) (9,000) (48,500) 5,250
Changes in assets and liabilities:
(Increase) decrease in:
Refundable income taxes.................. -- -- (3,970) --
Accounts receivable -- trade............. (429,266) 96,076 70,221 (363,749)
Inventories.............................. 75,728 (38,889) (147,415) (33,888)
Other.................................... -- (12,555) -- 1,000
Increase (decrease) in:
Accounts payable -- trade................ 93,988 (34,888) (39,913) 98,612
Withheld and accrued payroll taxes....... (8,650) 19,338 39,548 1,793
Accrued salaries......................... (2,303) -- 2,303 --
Accrued interest......................... (500) 3,000 4,500 --
Accrued income taxes..................... 45,125 (3,970) (3,970) 3,970
Accrued expenses......................... -- (41) (41) 41
--------- -------- --------- ---------
Total adjustments to net income
(loss).............................. (67,448) 67,133 3,887 (143,000)
--------- -------- --------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES.................................... $ 104,502 $ 2,534 $ (51,662) $(116,884)
========= ======== ========= =========
</TABLE>
See notes to financial statements.
F-36
<PAGE> 99
INTERKNIT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS. Interknit, Inc. operates a manufacturing facility in
Fort Payne, Alabama, for the knitting of hosiery products. The Company sells its
products primarily to one customer (See Note F -- Related Party Transactions).
FINANCIAL STATEMENT PRESENTATION. Financial statements for 1994 have been
reclassified, where applicable, to conform to financial statement presentation
used in 1995.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
ACCOUNTS RECEIVABLE. Historically, the Company has not written-off any
accounts receivable as uncollectible and, consequently, no allowance for
doubtful accounts has been provided at June 30, 1996 and December 31, 1995 and
1994.
INVENTORIES. Inventories are stated at the lower of cost (first-in,
first-out) or market (net realizable value).
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated at
cost. Expenditures for maintenance and repairs, which do not improve or extend
the life of an asset, are charged to expense as incurred. Expenditures for
renewals and improvements that significantly add to productive capacity or
extend the useful life of an asset are capitalized. Upon retirement or other
disposition of depreciable properties, the cost and related accumulated
depreciation are removed from the property accounts and any gain or loss is
reflected in income, except for gains on traded properties which are reflected
in the basis of the new asset.
Depreciation is provided over the estimated useful lives of the individual
assets by the straight-line method. The estimated useful lives used in the
computation of depreciation are as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements............................................ 8-35
Machinery and equipment............................................... 5-12
Automobiles and trucks................................................ 5
Office furniture and equipment........................................ 5-10
</TABLE>
ORGANIZATIONAL COSTS. The costs associated with the start-up of the
Company's manufacturing facility have been capitalized and are being amortized
on the straight-line method over five years.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Financial instruments of the Company
include long-term debt. Based upon the current borrowing rates available to the
Company, estimated fair values of these financial instruments approximate their
recorded carrying amounts.
INCOME TAXES. The provision for income taxes includes deferred taxes which
result from temporary differences in the recognition of income and expense for
tax and financial reporting purposes. These temporary differences are due,
principally, to different methods of providing for depreciation and tax loss
carryforwards.
F-37
<PAGE> 100
INTERKNIT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE B -- INVENTORIES
A summary of inventories, by major classification, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
1996 1995 1994
-------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials................................... $ 83,682 $113,090 $15,647
Work-in-process................................. 21,893 52,361 18,241
Finished goods.................................. -- 15,852 --
-------- -------- -------
$105,575 $181,303 $33,888
======== ======== =======
</TABLE>
NOTE C -- SHORT-TERM BORROWINGS
Short-term borrowings consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ----------------------
1996 1995 1994
-------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
$200,000 line of credit, interest payable
monthly at prime plus 1%; secured by accounts
receivable and inventory...................... $155,000 $155,000 $ --
======== ======== =======
</TABLE>
NOTE D -- LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------
1996 1995 1994
---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to finance company in monthly
installments of $12,098 through December 31,
2000, including interest at 6.9%, secured by
machinery and equipment...................... $ 551,339 $ 603,842 $ 703,583
Note payable to finance company in monthly
installments of $4,516 beginning January 23,
1995, through January 23, 2001, including
interest at 9.3%, secured by machinery and
equipment.................................... 232,589 248,455 278,026
Note payable to finance company in monthly
installments of $10,245 beginning January 14,
1996, through January 14, 2003, including
interest at 8.35%, secured by machinery and
equipment.................................... 615,066 650,000 --
Unsecured notes payable to shareholders dated
August 2, 1993, payable in full on August 1,
1998, with interest payable annually at 8%... 75,000 75,000 75,000
-------- -------- -------
Total long-term debt........................... 1,473,994 1,577,297 1,056,609
Less current portion......................... 218,943 210,635 129,309
-------- -------- -------
Total long-term debt, less current portion..... $1,255,051 $1,366,662 $ 927,300
======== ======== =======
</TABLE>
F-38
<PAGE> 101
INTERKNIT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Approximate maturities of long-term debt for the five years subsequent to
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
-----------------------------------------------------------------
<S> <C>
1996............................................................. $ 210,635
1997............................................................. 227,584
1998............................................................. 320,919
1999............................................................. 265,753
2000............................................................. 275,114
Thereafter....................................................... 277,292
----------
$1,577,297
==========
</TABLE>
NOTE E -- INCOME TAXES
The provision for income taxes for the years ended December 31, 1995 and
1994, is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Current:
Federal..................................................... $ (3,970) $ 3,970
State....................................................... -- --
-------- --------
Total............................................... (3,970) 3,970
-------- --------
Deferred:
Federal..................................................... 20,466 13,369
State....................................................... 6,822 4,691
Benefit of operating loss carryforward...................... (51,644) --
-------- --------
Total............................................... (24,356) 18,060
-------- --------
Total provision for income taxes.................... $(28,326) $22,030
======== ========
</TABLE>
Deferred income taxes have been provided for temporary differences between
the financial statement and tax basis of assets and liabilities, and for the
benefit of net operating loss carryforwards. Net deferred tax assets and net
deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
Current:
Deferred tax asset......................................... $ 1,624 $ 13
Deferred tax liability..................................... -- --
-------- --------
Net current deferred tax asset..................... $ 1,624 $ 13
======== ========
Noncurrent:
Deferred tax asset......................................... $ 51,644 $ 704
Deferred tax liability..................................... (46,972) (18,777)
-------- --------
Net noncurrent deferred tax asset (liability)...... $ 4,672 $(18,073)
======== ========
</TABLE>
The Company has federal and state net operating loss carryforwards for tax
purposes expiring as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31: FEDERAL STATE
------------------------------------------------------------- -------- --------
<S> <C> <C>
2009......................................................... $ 45,238 $ 45,238
2010......................................................... 212,982 212,982
</TABLE>
F-39
<PAGE> 102
INTERKNIT, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- RELATED PARTY TRANSACTIONS
All of the Company's shareholders are management employees of a company to
whom Interknit, Inc. sells the majority of its production. The Company also buys
some raw materials from the related company.
The Company's related party transactions as a result of the above
relationships are summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
------------------------- -------------------------
1996 1995 1995 1994
---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Sales of greige goods............. $2,363,026 $1,442,000 $3,162,211 $2,338,439
Purchases of raw materials........ $ 24,647 $ 287,825 $ 288,642 $ 265,759
</TABLE>
Receivables and payables related to the above transactions are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ---------------------
1996 1995 1994
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Accounts receivable -- trade....................... $464,692 $135,829 $363,749
Accounts payable -- trade.......................... $ 5,967 $ 1,081 $ 1,222
</TABLE>
NOTE G -- COMMITMENTS AND CONTINGENCIES
LEASES. The Company leases its manufacturing facility under an informal
agreement. Rental expense for the years ended December 31, 1995 and 1994 was
$24,000 and $12,000 for the six month periods ended June 30, 1996 and 1995.
STOCKHOLDERS' AGREEMENT. Pursuant to an agreement between the Company and
its stockholders, upon the death, total disability, voluntary retirement or
termination of employment with Ridgeview, Inc. of any stockholder, the Company
agrees to purchase all of the shares owned by such stockholder at a price to be
determined on a "multiple times earnings value" formula, as defined.
F-40
<PAGE> 103
RIDGEVIEW, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following unaudited pro forma condensed consolidated balance sheet as
of June 30, 1996 gives effect to the proposed acquisition of Interknit as if
such event had occurred on June 30, 1996. The unaudited pro forma statements of
income for the six months ended June 30, 1995 and the year ended December 31,
1995 give effect to the acquisition of Seneca and the proposed acquisition of
Interknit as if such events had occurred on January 1, 1995. See Note 2 to the
Company's consolidated financial statements. The unaudited pro forma statement
of income for the six months ended June 30, 1996 gives effect to the proposed
acquisition of Interknit as if such event had occurred on January 1, 1996. The
unaudited pro forma statement of income for the year ended December 31, 1994
gives effect to the proposed acquisition of Interknit as if such event had
occurred on January 1, 1994. Interknit had no operations in the year ended
December 31, 1993.
The pro forma condensed consolidated information has been prepared by the
Company's management and is based on the historical financial statements of the
Company, Seneca and Interknit. These pro forma condensed consolidated financial
statements may not be indicative of the results that actually would have
occurred if the combinations had been in effect on the dates indicated or which
may be obtained in the future.
F-41
<PAGE> 104
RIDGEVIEW, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
RIDGEVIEW INTERKNIT ADJUSTMENTS PRO FORMA
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS
Accounts receivable................... $11,630,003 $ 722,794 $(305,841)(B.1(a)) $12,046,956
Inventories........................... 19,074,777 105,575 (47,500)(B.1(b)) 19,132,852
Other current assets.................. 608,050 27,891 635,941
----------- ---------- ----------
Total current assets................ 31,312,830 856,260 31,815,749
Property, plant and equipment, net.... 10,242,418 1,345,125 11,587,543
Other assets.......................... 1,092,387 108,587 1,200,974
Excess of cost over fair value of net
assets acquired, less
amortization........................ 1,797,153 1,797,153
----------- ---------- --------- ----------
Total assets........................ $44,444,788 $2,309,972 $(353,341) $46,401,419
=========== ========== ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable...................... $ 6,439,336 $ 392,687 $(305,841)(B.1(a)) $ 6,526,182
Current portion of long-term debt..... 6,038,292 218,943 6,257,235
Other current liabilities............. 3,722,668 236,816 (17,100)(B.1(c)) 3,942,384
----------- ---------- ----------
Total current liabilities........... 16,200,296 848,446 16,724,801
Long-term debt, less current
portion............................. 17,516,384 1,255,051 18,771,435
Other liabilities..................... 2,621,874 38,958 2,660,832
----------- ---------- ----------
Total liabilities................... 36,338,554 2,142,455 38,158,068
Shareholders' equity.................. 8,106,234 167,517 (30,400)(B.1(c)) 8,243,351
----------- ---------- --------- ----------
Total liabilities and shareholders'
equity........................... $44,444,788 $2,309,972 $(353,341) $46,401,419
=========== ========== ========= ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-42
<PAGE> 105
RIDGEVIEW, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
RIDGEVIEW INTERKNIT ADJUSTMENTS PRO FORMA
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales............................ $31,799,404 $3,300,002 $(2,387,673)(B.2(a)) $32,711,733
Costs of goods sold.................. 25,656,306 2,921,709 2,340,173(B.2(a)) 26,237,842
----------- ---------- -----------
Gross profit......................... 6,143,098 378,293 6,473,891
Selling, general and administrative
expenses........................... 4,901,083 51,222 4,952,305
----------- ---------- -----------
Operating income..................... 1,242,015 327,071 1,521,586
Interest expense..................... 1,063,672 66,610 1,130,282
Other income, net.................... 28,938 28,938
Income taxes......................... 77,796 88,511 (17,100)(B.2(b)) 149,207
----------- ---------- ----------- -----------
Net income........................... $ 129,485 $ 171,950 $ (30,400) $ 271,035
=========== ========== =========== ===========
Net income per share................. $ 0.10 $ 0.17
=========== ===========
Weighted average shares
outstanding........................ 1,354,852 1,594,852
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-43
<PAGE> 106
RIDGEVIEW, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
PRO
RIDGEVIEW SENECA INTERKNIT ADJUSTMENTS FORMA
----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales................. $21,474,024 $4,768,572 $1,512,902 $(1,729,825)(B.3(a)) $26,025,673
Costs of goods sold....... 16,921,693 3,904,326 1,565,288 1,787,775(B.3(b)) 20,603,532
----------- ---------- ---------- -----------
Gross profit (loss)....... 4,552,331 864,246 (52,386) 5,422,141
Selling, general and
administrative
expenses................ 3,714,346 636,876 8,279 76,685(B.3(c)) 4,436,186
----------- ---------- ---------- -----------
Operating income (loss)... 837,985 227,370 (60,665) 985,955
Interest expense.......... 520,155 44,770 39,751 301,313(B.3(d)) 905,989
Other income, net......... 17,525 6,013 23,538
Income taxes.............. 97,804 73,040 (29,804) (74,165)(B.3(e)) 66,875
----------- ---------- ---------- ----------- -----------
Net income (loss)......... $ 237,551 $ 109,560 $ (64,599) $ (245,883) $ 36,629
=========== ========== ========== =========== ===========
Net income per share...... $ 0.18 $ 0.02
=========== ===========
Weighted average shares
outstanding............. 1,352,663 1,592,663
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-44
<PAGE> 107
RIDGEVIEW, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
RIDGEVIEW SENECA INTERKNIT ADJUSTMENTS PRO FORMA
----------- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net sales................. $54,407,813 $4,768,572 $3,876,758 $(3,450,853)(B.3(a)) $59,602,290
Costs of goods sold....... 43,723,004 3,904,326 3,825,248 3,508,803(B.3(b)) 47,943,775
----------- ---------- ---------- -----------
Gross profit.............. 10,684,809 864,246 51,510 11,658,515
Selling, general and
administrative
expenses................ 8,668,711 636,876 66,005 76,685(B.3(c)) 9,448,277
----------- ---------- ---------- -----------
Operating income (loss)... 2,016,098 227,370 (14,495) 2,210,238
Interest expense.......... 1,583,336 44,770 84,910 301,313(B.3(d)) 2,014,329
Other income, net......... 102,581 15,530 118,111
Income taxes.............. 238,808 73,040 (28,326) (74,165)(B.3(e)) 209,357
----------- ---------- ---------- ----------- -----------
Net income (loss)......... $ 296,535 $ 109,560 $ (55,549) $ (245,883) $ 104,663
=========== ========== ========== =========== ===========
Net income per share...... $ 0.22 $ 0.07
=========== ===========
Weighted average shares
outstanding............. 1,349,894 1,589,894
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-45
<PAGE> 108
RIDGEVIEW, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1994
(UNAUDITED)
<TABLE>
<CAPTION>
RIDGEVIEW INTERKNIT ADJUSTMENTS PRO FORMA
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales............................ $40,093,456 $2,338,439 $(2,604,198)(B.4(a)) $39,827,697
Cost of goods sold................... 30,963,362 2,166,924 2,556,698(B.4(a)) 30,573,588
----------- ---------- -----------
Gross profit......................... 9,130,094 171,515 9,254,109
Selling, general and administrative
expenses........................... 6,768,104 65,305 6,833,409
----------- ---------- -----------
Operating income..................... 2,361,990 106,210 2,420,700
Interest expense..................... 828,466 58,064 886,530
Other income, net.................... 53,781 53,781
Income taxes......................... 573,013 22,030 (17,100)(B.4(b)) 577,943
----------- ---------- ----------- -----------
Net income (loss).................... $ 1,014,292 $ 26,116 $ (30,400) $ 1,010,008
=========== ========== =========== ===========
Net income per share................. $ 0.75 $ 0.64
=========== ===========
Weighted average shares
outstanding........................ 1,350,152 1,590,152
=========== ===========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-46
<PAGE> 109
RIDGEVIEW, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
A. GENERAL
On June 28, 1995, the Company acquired all of the outstanding capital stock
of Seneca for $3.0 million in cash and $4.0 million in notes payable in a
transaction that was accounted for as a purchase. The purchase price exceeded
the fair value of the net assets acquired by $1.9 million, which is being
amortized over 15 years using the straight-line method.
Immediately prior to completion of this Offering, the Company will acquire
all of the outstanding stock of Interknit, a corporation affiliated with the
Company through common ownership of its shares by certain shareholders of the
Company. Interknit was established for the purpose of providing a consistent,
reliable supply of greige goods to the Company's sock finishing and shipping
facility in Ft. Payne, Alabama. Pursuant to an exchange agreement by and among
the Company and the shareholders of Interknit, the shareholders of Interknit
will, immediately prior to completion of this Offering, transfer all of the
outstanding capital stock of Interknit to the Company in exchange for an
aggregate of 240,000 shares of Common Stock. The acquisition of Interknit will
be accounted for as a pooling of interests. The aggregate number of shares of
Common Stock to be issued in the acquisition was determined by the Company in
part on the basis of a valuation of Interknit's business performed by
Interstate/Johnson Lane Corporation.
B. PRO FORMA ADJUSTMENTS
1. Balance sheet as of June 30, 1996.
(a) The adjustments to accounts receivable and accounts payable
eliminate the intercompany receivable and payable between the Company and
Interknit.
(b) The adjustment to inventories eliminates intercompany profits
included in the Company's ending inventory.
(c) The adjustments to other liabilities and shareholders' equity
reflect the tax effect of the elimination of intercompany profits included
in the Company's ending inventory.
2. Statement of income for the six months ended June 30, 1996.
(a) The adjustments to net sales and cost of goods sold reflect the
elimination of sales of greige goods by Interknit to the Company and sales
of raw materials by the Company to Interknit. The adjustment to cost of
goods sold also reflects the elimination of intercompany profits included
in the Company's ending inventory.
(b) The adjustment to income taxes reflects the net of tax effect of
the elimination of intercompany profits included in the Company's ending
inventory.
3. Statements of income for the year ended December 31, 1995 and the six
months ended June 30, 1995, which for Seneca reflect operations for the
period from January 1, 1995 to June 28, 1995.
(a) The adjustment to net sales reflects the elimination of sales of
greige goods by Interknit to the Company and sales of raw materials by the
Company to Interknit.
(b) The adjustment to cost of goods sold reflects the decrease in
depreciation expense arising from recording Seneca's property, plant and
equipment at its fair value in connection with the acquisition. The
adjustment also reflects the decrease in cost of goods sold by eliminating
sales between the Company and Interknit.
F-47
<PAGE> 110
RIDGEVIEW, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS -- (CONCLUDED)
(UNAUDITED)
(c) The adjustment to selling, general and administrative expenses
reflects the increase in amortization expense arising from the excess of
cost over book value of assets acquired (goodwill) and organizational costs
related to the Seneca Acquisition.
(d) This pro forma adjustment reflects the interest expense incurred
on the notes payable issued in connection with the Seneca Acquisition.
(e) This pro forma adjustment reflects the decrease in the income tax
provision arising from net deductible expenses for book purposes and an
increase in deferred tax expense arising from an increase in tax
depreciation over book related to the Seneca Acquisition.
4. Statements of income for the year ended December 31, 1994.
(a) The adjustment to net sales and cost of goods sold reflect the
elimination of sales of greige goods by Interknit to the Company and sales
of raw materials by the Company to Interknit. The adjustment to cost of
goods sold also reflects the elimination of intercompany profits included
in the Company's ending inventory.
(b) The adjustment to income taxes reflects the net of tax effect of
the elimination of intercompany profits included in the Company's ending
inventory.
F-48
<PAGE> 111
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 6
Use of Proceeds....................... 11
Dividend Policy....................... 12
Capitalization........................ 12
Dilution.............................. 13
Selected Consolidated Financial
Data................................ 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 16
Business.............................. 26
Management............................ 43
Certain Transactions.................. 47
Principal and Management
Shareholders........................ 50
Selling Shareholders.................. 51
Description of Capital Stock.......... 52
Shares Eligible for Future Sale....... 55
Underwriting.......................... 56
Legal Matters......................... 57
Experts............................... 58
Additional Information................ 58
Trademark Information................. 59
Financial Statements.................. F-1
</TABLE>
---------------------
Until , 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Common Stock, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus when acting as
Underwriters and with respect to their unsold allotments or subscriptions.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
1,600,000 SHARES
(LOGO) RIDGEVIEW(R)
COMMON STOCK
-----------------
PROSPECTUS
, 1996
-----------------
INTERSTATE/JOHNSON LANE
CORPORATION
SCOTT & STRINGFELLOW, INC.
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 112
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with this offering:
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee............................. $ 6,980
Nasdaq National Market listing fee........................................ 20,600
National Association of Securities Dealers filing fee..................... 3,490
Printing and shipping expenses............................................ 101,000
Legal fees and expenses................................................... 175,000
Accounting fees and expenses.............................................. 260,000
Blue Sky fees and expenses................................................ 10,000
Transfer agent's fees..................................................... 10,000
Miscellaneous expenses.................................................... 12,930
-------
Total................................................................... $600,000
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 55-2-02 of the North Carolina Business Corporation Act (the
"Business Corporation Act") enables a corporation in its articles of
incorporation to eliminate or limit, with certain exceptions, the personal
liability of a director for monetary damages for breach of duty as a director.
No such provision is effective to eliminate or limit a director's liability for
(i) acts or omissions that the director at the time of the breach knew or
believed to be clearly in conflict with the best interests of the corporation,
(ii) improper distributions described in Section 55-8-33 of the Business
Corporation Act, (iii) any transaction from which the director derived an
improper personal benefit, or (iv) acts or omissions occurring prior to the date
the exculpatory provision became effective. The Company's Articles of
Incorporation limit the personal liability of its directors to the fullest
extent permitted by the Business Corporation Act.
Sections 55-8-50 through 55-8-58 of the Business Corporation Act permit a
corporation to indemnify its directors and officers under either or both a
statutory or nonstatutory scheme of indemnification. Under the statutory scheme,
a corporation may, with certain exceptions, indemnify a director or officer of
the corporation who was, is, or is threatened to be made, a party to any
threatened, pending or completed legal action, suit or proceeding, whether
civil, criminal, administrative, or investigative, because of the fact that such
person was a director or officer of the corporation, or is or was serving at the
request of such corporation as a director, officer, agent or employee of another
corporation or enterprise. This indemnity may include the obligation to pay any
judgment, settlement, penalty, fine (including an excise tax assessed with
respect to an employee benefit plan) and reasonable expenses, including
attorneys' fees, incurred in connection with a proceeding; provided that no such
indemnification may be granted unless such director or officer (i) conducted
himself or herself in good faith, (ii) reasonably believed that (A) any action
taken in his or her official capacity with the corporation was in the best
interests of the corporation and (B) in all other cases, his or her conduct was
at least not opposed to the corporation's best interests, and (iii) in the case
of any criminal proceeding, had no reasonable cause to believe his or her
conduct was unlawful. In accordance with Section 55-8-55 of the Business
Corporation Act, the determination of whether a director has met the requisite
standard of conduct for the type of indemnification set forth above is made by
the board of directors, a committee of directors, special legal counsel or the
shareholders. A corporation may not indemnify a director under the statutory
scheme in connection with a proceeding by or in the right of the corporation in
which the director was adjudged liable to the corporation or in connection with
a proceeding in which a director was adjudged liable on the basis of having
received an improper personal benefit.
II-1
<PAGE> 113
In addition to, and notwithstanding the conditions of and limitations on
indemnification described above under the statutory scheme, Section 55-8-57 of
the Business Corporation Act permits a corporation in its articles of
incorporation or bylaws or by contract or resolution to indemnify or agree to
indemnify any of its directors or officers against liability and expenses,
including attorneys' fees, in any proceeding (including proceedings brought by
or on behalf of the corporation) arising out of their status as such or their
activities in such capacities, except for any liabilities or expenses incurred
on account of activities that were, at the time taken, known or believed by the
person to be clearly in conflict with the best interests of the corporation.
Pursuant to this nonstatutory scheme, the Company's Bylaws provide for
indemnification to the fullest extent permitted by law of any person who at any
time serves or has served as an officer, employee or a director of the Company,
or who, while serving as an officer, employee or a director of the Company,
serves or has served at the request of the Company as a director, officer,
partner, trustee, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or as a trustee or administrator under an
employee benefit plan; provided such persons have not engaged in activities
known or believed by the person who undertook them to be clearly in conflict
with the Company's best interests when they occurred.
Sections 55-8-52 and 55-8-56 of the Business Corporation Act require a
corporation, unless its articles of incorporation provide otherwise, to
indemnify a director or officer who has been wholly successful on the merits or
otherwise in the defense of any proceeding to which such director or officer
was, or was threatened to be made, a party. Unless prohibited by the articles of
incorporation, a director or officer also may make application and obtain
court-ordered indemnification if the court determines that such director or
officer is fairly and reasonably entitled to such indemnification in view of all
the relevant circumstances as provided in Sections 55-8-54 and 55-8-56 of the
Business Corporation Act.
In addition, Section 55-8-57 of the Business Corporation Act authorizes a
corporation to purchase and maintain insurance on behalf of an individual who is
or was a director or officer of the corporation against certain liabilities
incurred by such persons, whether or not the corporation is otherwise authorized
by the Business Corporation Act to indemnify such party. The Company intends to
purchase insurance to protect itself and its directors and officers against
expense or loss arising from any action, suit or proceeding brought by reason of
the fact that any person is a director or officer of the Company. The policy is
expected to provide for the payment on behalf of its directors and officers of
losses which arise from claims (including claims made under the Securities Act
of 1933, as amended, or the Securities Exchange Act of 1934, as amended) against
the directors and officers for a wrongful act while acting in that capacity. The
policy is also expected to provide for payment of losses which the Company may
be required or permitted to pay as indemnity due the directors or officers for
claims against them for wrongful acts.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S> <C>
1 -- Form of Underwriting Agreement.*
2.1 -- Share Exchange Agreement dated August 27, 1996 by and among
Ridgeview, Inc. and the shareholders of Interknit, Inc.*
3.1 -- Articles of Incorporation of Ridgeview, Inc., as amended and
restated.*
3.2 -- Bylaws of Ridgeview, Inc., as amended and restated.*
4 -- Form of stock certificate for Ridgeview, Inc. Common Stock.*
5 -- Opinion of Moore & Van Allen, PLLC.*
10.1 -- License Agreement dated as of January 1, 1994 by and between
Ellen Tracy, Inc. and Ridgeview, Inc.*
10.2 -- License Agreement dated May 28, 1996 between Jones Investment
Co., Inc. and Ridgeview, Inc.*
10.3 -- Loan and Security Agreement (Term Loan) dated as of January 10,
1995 between Ridgeview, Inc. and NationsBank, N.A. (Carolinas).*
</TABLE>
II-2
<PAGE> 114
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S> <C>
10.4 -- First Amendment to Loan and Security Agreement (Term Loan) dated as of June 28,
1995 between Ridgeview, Inc. and NationsBank of Georgia, N.A.*
10.5 -- Second Amendment to Loan and Security Agreement (Term Loan) dated October 1995
between Ridgeview, Inc. and NationsBank of Georgia, N.A.*
10.6 -- Third Amendment to Loan and Security Agreement (Term Loan) dated as of June 11,
1996 between Ridgeview, Inc. and NationsBank, N.A. (South).*
10.7 -- Loan and Security Agreement (Revolving Loans) dated as of January 10, 1995 between
Ridgeview, Inc. and NationsBank of Georgia, N.A.*
10.8 -- First Amendment to Loan and Security Agreement (Revolving Loans) dated as of June
28, 1995 by and between Ridgeview, Inc. and NationsBank of Georgia, N.A.*
10.9 -- Second Amendment to Loan and Security Agreement (Revolving Loans) dated October
1995 by and between Ridgeview, Inc. and NationsBank of Georgia, N.A.*
10.10 -- Third Amendment to Loan and Security Agreement (Revolving Loans) dated as of June
11, 1996 by and between Ridgeview, Inc. and NationsBank, N.A. (South).*
10.11 -- Form of Loan and Security Agreement for outstanding loans from Metlife Capital
Corporation to Interknit, Inc.*
10.12 -- Mortgage and Security Agreement dated June 28, 1995 between Ridgeview, Inc. and
NationsBank of Georgia, N.A.*
10.13 -- Deed of Trust and Security Agreement (Term Loans) dated as of January 10, 1995 by
and among Ridgeview, Inc., Christopher C. Kupec and NationsBank, N.A.
(Carolinas).*
10.14 -- Deed of Trust and Security Agreement (Revolving Loans) dated as of January 10,
1995, by and among Ridgeview, Inc., Christopher C. Kupec and NationsBank of
Georgia, N.A.*
10.15 -- First Amendment to Deed of Trust and Security Agreement (Revolving Loans) dated as
of June 11, 1996, by and among Ridgeview, Inc., Christopher C. Kupec and
NationsBank, National Association (South).*
10.16 -- Security Agreement dated as of June 28, 1995 by and between Seneca Knitting Mills
Corporation and NationsBank of Georgia, N.A.*
10.17 -- Corporate Guaranty Agreement dated June 28, 1996 issued by Ridgeview, Inc. to
Clara G. Souhan guaranteeing payment of a promissory note dated June 28, 1996 made
by Seneca Knitting Mills Corporation payable to the order of Clara G. Souhan.*
10.18 -- Agreement for Sale of Capital Stock dated April 27, 1995, between George G.
Souhan, Susan C. Souhan, Geb F. Souhan, Elizabeth M. Souhan and Timothy J.J.
Souhan and Ridgeview, Inc.*
10.19 -- Agreement for Sale of Capital Stock Amendment No. 1 dated June 28, 1995, between
George C. Souhan, Susan C. Souhan, Geb F. Souhan, Elizabeth M. Souhan and Timothy
J.J. Souhan and Ridgeview, Inc.*
10.20 -- Amended and Restated Promissory Note dated June 28, 1996 of Ridgeview, Inc.
payable to the order of George G. Souhan.*
10.21 -- Salary Continuation Agreement dated March 1, 1983 by and between Ridgeview Mills,
Inc. and Albert C. Gaither.*
10.22 -- Salary Continuation Agreement dated March 1, 1983 by and between Ridgeview Mills,
Inc. and Hugh R. Gaither.*
10.23 -- First Amendment to Salary Continuation Agreement by and between Ridgeview, Inc.
and Hugh R. Gaither dated June 8, 1992.*
10.24 -- Salary Continuation Agreement dated March 1, 1983 by and between Ridgeview Mills,
Inc. and William D. Durrant.*
10.25 -- First Amendment to Salary Continuation Agreement by and between Ridgeview, Inc.
and William D. Durrant dated June 8, 1992.*
10.26 -- Salary Continuation Agreement dated June 8, 1992 by and between Ridgeview, Inc.
and Susan Gaither Jones.*
</TABLE>
II-3
<PAGE> 115
<TABLE>
<CAPTION>
EXHIBIT
NO.
-------
<C> <S> <C>
10.27 -- Salary Continuation Agreement dated July 1, 1996 by and between Ridgeview, Inc.
and Walter L. Bost, Jr.*
10.28 -- Split Dollar Life Insurance Agreement dated January 1, 1992 between Ridgeview,
Inc. and Albert C. Gaither.*
10.29 -- Ridgeview, Inc. 1995 Omnibus Stock Option Plan as amended and restated.*
10.30 -- Commitment letter dated August 28, 1996 between Ridgeview, Inc. and NationsBank,
National Association (South).*
10.31 -- Promissory Note dated June 28, 1996 of Seneca Knitting Mills Corporation payable
to the order of Clara Souhan.*
10.32 -- Description of Incentive Bonus Arrangements for Named Executive Officers.*
10.33 -- Ridgeview, Inc. Stock Option Plan for Outside Directors.*
10.34 -- Fourth Amendment to Loan and Security Agreement (Term Loan) dated as of September
6, 1996 by and between Ridgeview, Inc. and NationsBank, N.A. (South).*
10.35 -- Fourth Amendment to Loan and Security Agreement (Revolving Loans) dated as of
September 6, 1996 by and between Ridgeview, Inc. and NationsBank, N.A. (South).*
10.36 -- Second Amendment to Deed of Trust and Security Agreement (Revolving Loans) dated
as of September 6, 1996 by and among Ridgeview, Inc., Christopher C. Kupec and
NationsBank, National Association (South).*
10.37 -- Letter, dated October 3, 1996, from NationsBank, N.A. (South) to Walter L. Bost,
Jr. regarding a conditional commitment to modify the terms of the Loan and
Security Agreement (Revolving Loans), dated as of January 10, 1995, as amended,
and Loan and Security Agreement (Term Loan), dated as of January 10, 1995, as
amended.*
16 -- Letter dated October 8, 1996 Regarding Change in Certifying Accountant.*
21 -- Subsidiaries of Ridgeview, Inc.*
23.1 -- Consent of BDO Seidman, LLP.*
23.2 -- Consent of KPMG.*
23.3 -- Consent of Mengel, Metzger, Barr & Co. LLP.*
23.4 -- Consent of Moore & Van Allen, PLLC (included in Exhibit 5).*
23.5 -- Consent of Whisnant & Company.*
24 -- Power of Attorney.*
27 -- Financial Data Schedule (for SEC use only).*
</TABLE>
(B) SCHEDULES
Report of Independent Certified Public Accountants.*
Schedule II -- Valuation and Qualifying Accounts.*
- ---------------
* Previously Filed
II-4
<PAGE> 116
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, on October 28, 1996.
RIDGEVIEW, INC.
By: /s/ WALTER L. BOST, JR.
------------------------------------
Walter L. Bost, Jr.
Executive Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
<C> <S> <C>
/s/ ALBERT C. GAITHER* Chairman and Director October 28, 1996
- ---------------------------------------------
Albert C. Gaither
/s/ HUGH R. GAITHER* President, Chief Executive October 28, 1996
- --------------------------------------------- Officer and Director
Hugh R. Gaither
/s/ WILLIAM D. DURRANT* Executive Vice October 28, 1996
- --------------------------------------------- President -- Sales and
William D. Durrant Marketing and Director
/s/ WALTER L. BOST, JR. Executive Vice President and October 28, 1996
- --------------------------------------------- Chief Financial Officer
Walter L. Bost, Jr.
/s/ SUSAN GAITHER JONES* Vice President and Director October 28, 1996
- ---------------------------------------------
Susan Gaither Jones
/s/ P. DOUGLAS YODER Chief Accounting Officer and October 28, 1996
- --------------------------------------------- Comptroller (Principal
P. Douglas Yoder Accounting Officer)
/s/ J. MICHAEL GAITHER* Secretary and Director October 28, 1996
- ---------------------------------------------
J. Michael Gaither
/s/ CLAUDE S. ABERNETHY, JR.* Director October 28, 1996
- ---------------------------------------------
Claude S. Abernethy, Jr.
</TABLE>
* By: /s/ WALTER L. BOST, JR.
----------------------------------------
Attorney-in-Fact
II-5
<PAGE> 117
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBITS
------- ----------------------------------------------------------------------------------
<C> <S> <C>
1 -- Form of Underwriting Agreement.*
2.1 -- Share Exchange Agreement dated August 27, 1996 by and among Ridgeview, Inc. and
the shareholders of Interknit, Inc.*
3.1 -- Articles of Incorporation of Ridgeview, Inc., as amended and restated.*
3.2 -- Bylaws of Ridgeview, Inc., as amended and restated.*
4 -- Form of stock certificate for Ridgeview, Inc. Common Stock.*
5 -- Opinion of Moore & Van Allen, PLLC.*
10.1 -- License Agreement dated as of January 1, 1994 by and between Ellen Tracy, Inc. and
Ridgeview, Inc.*
10.2 -- License Agreement dated May 28, 1996 between Jones Investment Co., Inc. and
Ridgeview, Inc.*
10.3 -- Loan and Security Agreement (Term Loan) dated as of January 10, 1995 between
Ridgeview, Inc. and NationsBank, N.A. (Carolinas).*
10.4 -- First Amendment to Loan and Security Agreement (Term Loan) dated as of June 28,
1995 between Ridgeview, Inc. and NationsBank of Georgia, N.A.*
10.5 -- Second Amendment to Loan and Security Agreement (Term Loan) dated October 1995
between Ridgeview, Inc. and NationsBank of Georgia, N.A.*
10.6 -- Third Amendment to Loan and Security Agreement (Term Loan) dated as of June 11,
1996 between Ridgeview, Inc. and NationsBank, N.A. (South).*
10.7 -- Loan and Security Agreement (Revolving Loans) dated as of January 10, 1995 between
Ridgeview, Inc. and NationsBank of Georgia, N.A.*
10.8 -- First Amendment to Loan and Security Agreement (Revolving Loans) dated as of June
28, 1995 by and between Ridgeview, Inc. and NationsBank of Georgia, N.A.*
10.9 -- Second Amendment to Loan and Security Agreement (Revolving Loans) dated October
1995 by and between Ridgeview, Inc. and NationsBank of Georgia, N.A.*
10.10 -- Third Amendment to Loan and Security Agreement (Revolving Loans) dated as of June
11, 1996 by and between Ridgeview, Inc. and NationsBank, N.A. (South).*
10.11 -- Form of Loan and Security Agreement for outstanding loans from Metlife Capital
Corporation to Interknit, Inc.*
10.12 -- Mortgage and Security Agreement dated June 28, 1995 between Ridgeview, Inc. and
NationsBank of Georgia, N.A.*
10.13 -- Deed of Trust and Security Agreement (Term Loans) dated as of January 10, 1995 by
and among Ridgeview, Inc., Christopher C. Kupec and NationsBank, N.A.
(Carolinas).*
10.14 -- Deed of Trust and Security Agreement (Revolving Loans) dated as of January 10,
1995, by and among Ridgeview, Inc., Christopher C. Kupec and NationsBank of
Georgia, N.A.*
10.15 -- First Amendment to Deed of Trust and Security Agreement (Revolving Loans) dated as
of June 11, 1996, by and among Ridgeview, Inc., Christopher C. Kupec and
NationsBank, National Association (South).*
10.16 -- Security Agreement dated as of June 28, 1995 by and between Seneca Knitting Mills
Corporation and NationsBank of Georgia, N.A.*
10.17 -- Corporate Guaranty Agreement dated June 28, 1996 issued by Ridgeview, Inc. to
Clara G. Souhan guaranteeing payment of a promissory note dated June 28, 1996 made
by Seneca Knitting Mills Corporation payable to the order of Clara G. Souhan.*
10.18 -- Agreement for Sale of Capital Stock dated April 27, 1995, between George G.
Souhan, Susan C. Souhan, Geb F. Souhan, Elizabeth M. Souhan and Timothy J.J.
Souhan and Ridgeview, Inc.*
10.19 -- Agreement for Sale of Capital Stock Amendment No. 1 dated June 28, 1995, between
George C. Souhan, Susan C. Souhan, Geb F. Souhan, Elizabeth M. Souhan and Timothy
J.J. Souhan and Ridgeview, Inc.*
10.20 -- Amended and Restated Promissory Note dated June 28, 1996 of Ridgeview, Inc.
payable to the order of George G. Souhan.*
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EXHIBIT
NO. DESCRIPTION OF EXHIBITS
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10.21 -- Salary Continuation Agreement dated March 1, 1983 by and between Ridgeview Mills,
Inc. and Albert C. Gaither.*
10.22 -- Salary Continuation Agreement dated March 1, 1983 by and between Ridgeview Mills,
Inc. and Hugh R. Gaither.*
10.23 -- First Amendment to Salary Continuation Agreement by and between Ridgeview, Inc.
and Hugh R. Gaither dated June 8, 1992.*
10.24 -- Salary Continuation Agreement dated March 1, 1983 by and between Ridgeview Mills,
Inc. and William D. Durrant.*
10.25 -- First Amendment to Salary Continuation Agreement by and between Ridgeview, Inc.
and William D. Durrant dated June 8, 1992.*
10.26 -- Salary Continuation Agreement dated June 8, 1992 by and between Ridgeview, Inc.
and Susan Gaither Jones.*
10.27 -- Salary Continuation Agreement dated July 1, 1996 by and between Ridgeview, Inc.
and Walter L. Bost, Jr.*
10.28 -- Split Dollar Life Insurance Agreement dated January 1, 1992 between Ridgeview,
Inc. and Albert C. Gaither.*
10.29 -- Ridgeview, Inc. 1995 Omnibus Stock Option Plan as amended and restated.*
10.30 -- Commitment letter dated August 28, 1996 between Ridgeview, Inc. and NationsBank,
National Association (South).*
10.31 -- Promissory Note dated June 28, 1996 of Seneca Knitting Mills Corporation payable
to the order of Clara Souhan.*
10.32 -- Description of Incentive Bonus Arrangements for Named Executive Officers.*
10.33 -- Ridgeview, Inc. Stock Option Plan for Outside Directors.*
10.34 -- Fourth Amendment to Loan and Security Agreement (Term Loan) dated as of September
6, 1996 by and between Ridgeview, Inc. and NationsBank, N.A. (South).*
10.35 -- Fourth Amendment to Loan and Security Agreement (Revolving Loans) dated as of
September 6, 1996 by and between Ridgeview, Inc. and NationsBank, N.A. (South).*
10.36 -- Second Amendment to Deed of Trust and Security Agreement (Revolving Loans) dated
as of September 6, 1996 by and among Ridgeview, Inc., Christopher C. Kupec and
NationsBank, National Association (South).*
10.37 -- Letter, dated October 3, 1996, from NationsBank, N.A. (South) to Walter L. Bost,
Jr. regarding a conditional commitment to modify the terms of the Loan and
Security Agreement (Revolving Loans), dated as of January 10, 1995, as amended,
and Loan and Security Agreement (Term Loan), dated as of January 10, 1995, as
amended.*
16 -- Letter dated October 8, 1996 Regarding Change in Certifying Accountant.*
21 -- Subsidiaries of Ridgeview, Inc.*
23.1 -- Consent of BDO Seidman, LLP.*
23.2 -- Consent of KPMG.*
23.3 -- Consent of Mengel, Metzger, Barr & Co. LLP.*
23.4 -- Consent of Moore & Van Allen, PLLC (included in Exhibit 5).*
23.5 -- Consent of Whisnant & Company.*
24 -- Power of Attorney.*
27 -- Financial Data Schedule (for SEC use only).*
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(B) SCHEDULES
Report of Independent Certified Public Accountants.*
Schedule II -- Valuation and Qualifying Accounts.*
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* Previously Filed
