<PAGE> 1
FORM 10-K/A
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
Commission File Number: 0-21469
RIDGEVIEW, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
North Carolina 56-0377410
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
2101 North Main Avenue
Newton, North Carolina 28658
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(704) 464-2972
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X].
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ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required to be furnished in response to this item
appears in and is incorporated by reference from the Company's 1996 Annual
Report to Shareholders. Relevant portions of the Company's 1996 Annual Report to
Shareholders have been filed as Exhibit 13.1 to this report. Exhibit 13.1 has
been refiled with this Amendment in order to reflect the manual signature of
BDO Seidman LLP on its audit report.
2
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PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The Company has included the following Consolidated Financial Statements
with this 10-K Report:
- - Consolidated Statements of Income -- For the Years Ended December 31, 1994,
1995 and 1996 are incorporated by reference from the Company's 1996 Annual
Report to Shareholders. Relevant portions of the Company's 1996 Annual
Report to Shareholders have been filed as Exhibit 13.1 to this report.
- - Consolidated Balance Sheets at December 31, 1995 and 1996 are incorporated
by reference from the Company's 1996 Annual Report to Shareholders.
Relevant portions of the Company's 1996 Annual Report to Shareholders have
been filed as Exhibit 13.1 to this report.
- - Consolidated Statements of Shareholders' Equity -- For the Years Ended
December 31, 1994, 1995 and 1996 are incorporated by reference from the
Company's 1996 Annual Report to Shareholders. Relevant portions of the
Company's 1996 Annual Report to Shareholders have been filed as Exhibit
13.1 to this report.
- - Consolidated Statements of Cash Flows -- For the Years Ended December 31,
1994, 1995 and 1996 are incorporated by reference from the Company's 1996
Annual Report to Shareholders. Relevant portions of the Company's 1996
Annual Report to Shareholders have been filed as Exhibit 13.1 to this
report.
- - Notes to Consolidated Financial Statements -- For the Years Ended December
31, 1994, 1995 and 1996 are incorporated by reference from the Company's
1996 Annual Report to Shareholders. Relevant portions of the Company's 1996
Annual Report to Shareholders have been filed as Exhibit 13.1 to this
report.
(a)(2) The Company has included the following Consolidated Financial Statement
schedules with this 10-K Report:
- - Report of Independent Auditors on Supplemental Schedule (included in
Subsection (d) of this Item 14).
- - Schedule II - Valuation and Qualifying Accounts (included in
Subsection (d) of this Item 14).
3
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We have omitted all other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission
because they are either not required under the related instructions or are
inapplicable.
(b) Reports on Form 8-K
None.
(c) Exhibits
- --------------------------------------------------------------
Previously Filed and
Incorporated Herein by
Reference
- --------------------------------------------------------------
<TABLE>
<CAPTION>
Document With Which As
Exhibit Exhibit Was Exhibit
No. Previously Filed No. Exhibit Description
--- ---------------- --- -------------------
<C> <C> <C> <S>
3.1 (1) 3.1 Articles of Incorporation of Ridgeview, Inc., as
amended and restated.
3.2 (1) 3.2 Bylaws of Ridgeview, Inc., as amended and
restated.
4.1 (1) 4.1 Form of Common Stock Certificate.
10.1 (1) 10.1 License Agreement dated as of January 1, 1994 by
and between Ellen Tracy, Inc. and Company
10.1(a) Form of letter dated October 22, 1996 from Ellen
Tracy Inc. extending license agreement until
December 31, 1997
10.2 (1) 10.2 License Agreement dated May 28, 1996 between
Jones Investment Co., Inc. and Ridgeview, Inc.
10.3 Amended and Restated Loan and Security
Agreement (Term Loan and Revolving Loan)
dated as of December 20, 1996 by and among
Ridgeview, Inc. Seneca Knitting Mills
Corporation, Interknit, Inc. and NationsBank,
N.A. (South).
10.4 First Amendment to Amended and Restated Loan
and Security Agreement (Term Loan and
Revolving Loan) dated as of January 31, 1997 by
and among Ridgeview, Inc., Seneca Knitting Mills
Corporation, Interknit, Inc. and NationsBank,
N.A. (South)
</TABLE>
4
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<TABLE>
<C> <C> <C> <S>
10.5 Second Amendment to Amended and Restated
Loan and Security agreement (Term Loan and
Revolving Loan) dated March 13, 1997, by and
among Ridgeview, Inc., Seneca Knitting Mills
Corporation, Interknit, Inc. and NationsBank N.A.
(South)
10.6 (1) 10.11 Form of Loan and Security Agreement for
outstanding loans from MetLife Capital
Corporation to Interknit, Inc.
10.7 (1) 10.12 Mortgage and Security Agreement dated June 28,
1995 between Ridgeview, Inc. and NationsBank of
Georgia, N.A.
10.8 (1) 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 of Georgia, N.A.
10.9 (1) 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.
10.10 (1) 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, N.A. (South).
10.11 (1) 10.16 Security Agreement dated as of June 28, 1995 by
and between Seneca Knitting Mills Corporation
and NationsBank of Georgia, N.A.
10.12 (1) 10.17 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.
10.13 (1) 10.18 Agreement for Sale of Stock Amendment No. 1
dated June 28, 1995, between George G. Souhan,
Susan C. Souhan, Geb F. Souhan, Elizabeth M.
Souhan and Timothy J.J. Souhan and Ridgeview,
Inc.
10.14 (1) 10.19 Salary Continuation Agreement dated March 1,
1983 by and between Ridgeview Mills, Inc. and
Albert C. Gaither.*
10.15 (1) 10.20 Salary Continuation Agreement dated March 1,
1983 by and between Ridgeview, Mills, Inc. and
Hugh R. Gaither.*
10.16 (1) 10.21 First Amendment to Salary Continuation
Agreement by and between Ridgeview, Inc. and
Hugh R. Gaither dated June 8, 1992.*
10.17 (1) 10.22 Salary Continuation Agreement dated March 1,
</TABLE>
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<TABLE>
<C> <C> <C> <S>
1983 by and between Ridgeview Mills, Inc. and
William D. Durrant.*
10.18 (1) 10.23 First Amendment to Salary Continuation
Agreement by and between Ridgeview, Inc. and
William D. Durrant dated June 8, 1992.*
10.19 (1) 10.24 Salary Continuation Agreement dated June 8, 1992
by and between Ridgeview, Inc. and Susan Gaither
Jones.*
10.20 (1) 10.25 Salary Continuation Agreement dated July 1, 1996
by and between Ridgeview, Inc. and Walter L.
Bost, Jr.*
10.21 (1) 10.26 Split Dollar Life Insurance Agreement dated
January 1, 1992 between Ridgeview, Inc. and
Albert C. Gaither.*
10.22 (1) 10.27 Ridgeview, Inc. 1995 Omnibus Stock Option Plan
as amended and restated.*
10.23 (1) 10.28 Description of Incentive Bonus Arrangement for
Named Executive Officers.*
10.24 (1) 10.29 Ridgeview, Inc. Stock Option Plan for Outside
Directors.*
10.25 First Modification to Mortgage and Security
Agreement dated December 20, 1996 between
Ridgeview, Inc. and NationsBank, N.A. (South)
10.26 First Modification to Mortgage and Security
Agreement dated December 20, 1996 between
GPM Corporation and NationsBank, N.A. (South)
10.27 Amended, Restated and Consolidated First
Assignment of Lessee's Interest in Lease dated
December 20, 1996 by Ridgeview, Inc. and
NationsBank, N.A. (South)
10.28 Amended, Restated and Consolidated Deed of
Trust and Security Agreement dated December 20,
1996, by and among Ridgeview, Inc., John B.
Miller, Jr. And NationsBank, N.A. (South)
13.1 The portions of the Company's 1996 Annual
Report to Shareholders that have been incorporated
by reference into the Company's Annual Report on
Form 10-K.
21 Subsidiaries of Ridgeview, Inc.
23 (1) 23 Consent of BDO Seidman, LLP, independent
auditors.
27 Financial Data Schedule (included in the EDGAR
filing only.)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of Form 10-K.
6
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(1) Registration Statement on Form S-1, file No. 333-11111 filed August 30,
1996.
7
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(d) Schedules
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Ridgeview, Inc. and Subsidiaries
The audits referred to in our report dated February 24, 1997, except for Note 6
which is as of March 13, 1997, relating to the consolidated financial
statements of Ridgeview, Inc. and subsidiaries which is incorporated in Item 8
of the Form 10-K by reference to the annual report to shareholders for the year
ended December 31, 1996, included the audits of the financial statement
schedule listed in the accompanying index. The financial statement schedule is
the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement schedule based upon our audits.
In our opinion, such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO SEIDMAN, LLP
Greensboro, North Carolina
February 24, 1997
8
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RIDGEVIEW, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
<TABLE>
<CAPTION>
Balance at Charged Balance
Beginning of to Costs Other at End
Description Period and Expenses Changes Deductions of Period
- ----------- ------------ ------------ ------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1994:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $224 $ (29) $ -- $ -- $195
---- ----- ------ ------ ----
Inventory obsolescence reserve $313 $(128) $ -- $ -- $185
---- ----- ------ ------ ----
YEAR ENDED DECEMBER 31, 1995:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $195 $ (29) $ -- $ -- $371
---- ----- ------ ------ ----
Inventory obsolescence reserve $185 $ 85 (a) $ -- $ -- $270
---- ----- ------ ------ ----
YEAR ENDED DECEMBER 31, 1996:
Reserves and allowances deducted from
asset accounts:
Allowance for uncollectible accounts $371 $ 131 $ -- $ -- $502
---- ----- ------ ------ ----
Inventory obsolescence reserve $270 $ 200 $ -- $ -- $470
---- ----- ------ ------ ----
</TABLE>
- ------------
(a) Does not include an adjustment for the direct write-off of obsolete,
unfinished women's hosiery products in excess of normal reserves in the
amount of $621.
9
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Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Amendment to be
signed on its behalf by the undersigned, thereunto duly authorized.
RIDGEVIEW, INC.
By: /s/ Hugh R. Gaither
-------------------------------
Hugh R. Gaither, President and
Chief Executive Officer
10
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EXHIBIT 13.1
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data and other
operating information of the Company for each of the last five years ended
December 31, 1996, which are derived from the consolidated financial statements
of the Company. On June 28, 1995, the Company acquired Seneca Knitting Mills
Corporation ("Seneca") in a transaction accounted for as a purchase. The
accounts of Seneca are included from the date of acquisition. On November 5,
1996, the Company acquired Interknit, Inc. in a transaction accounted for as a
pooling-of-interests. Accordingly, the financial statements of the Company, and
the selected financial data presented below, were restated to include the
accounts and the results of operations of Interknit for all periods presented.
All information contained in the following table should be read in conjunction
with the consolidated financial statements and related notes of the Company
included herein.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
STATEMENT OF OPERATIONS DATA: 1992 1993 1994 1995 (2) 1996
- ------------------------------------- -------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 32,438 $ 35,605 $ 39,828 $ 54,833 $ 76,839
Gross profit 6,259 7,792 9,302 10,695 15,473
Operating income 944 1,760 2,467 2,001 4,877
Interest expense (630) (661) (887) (1,668) (2,235)
Income before income taxes 610 1,433 1,634 451 2,750
Net income 533 1,084 1,039 241 1,758
Earnings per share 0.40 0.80 0.65 0.15 0.96
Cash dividends per share (3) 0.09 0.09 0.09 0.10 0.05
Weighted average common and common
equivalent shares outstanding 1,359 1,353 1,590 1,590 1,832
OTHER DATA:
Gross profit margin 19.3% 21.9% 23.4% 19.5% 20.2%
Operating income margin 2.9% 5.0% 6.2% 3.6% 6.4%
Operating income before depreciation
and amortization (1) $ 1,768 $ 2,661 $ 3,510 $ 3,372 $ 6,621
Depreciation and amortization 824 901 1,043 1,371 1,744
Capital expenditures 1,512 840 2,169 4,384 1,089
</TABLE>
Page 1
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<TABLE>
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 6,885 $ 7,616 $ 11,664 $ 11,718 $ 23,350
Total assets 19,145 21,614 25,578 40,465 48,785
Long-term debt (less current portion) 5,859 5,771 10,420 15,991 15,668
Total debt 9,651 10,918 12,349 23,244 18,111
Shareholders' equity 6,119 6,690 7,827 7,982 19,357
</TABLE>
(1) Operating income before depreciation and amortization is net sales minus
cost of goods sold, selling, general and administrative expenses 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 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.
(2) Reflects charges for the write-off of obsolete, unfinished women's hosiery
products in excess of normal reserves in the amount of $621,000 and the
recognition of a supplemental retirement obligation in the amount of
$500,000 to the Company's former chairman.
(3) The Company ceased paying dividends on its Common Stock prior to the
initial public offering in November 1996 and does not intend to pay
any cash dividends in the foreseeable future.
Page 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 Coleman, Converse, Ellen Tracy, Evan-Picone and
Woolrich. The Company is currently negotiating to produce and sell socks under
the Rockport brand name beginning July 1, 1997.
The Company's net sales have increased over the past three years, from
$39.8 million in 1994 to $76.8 million in 1996, a compounded annual growth rate
of 24.5%. 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, sports specific socks, 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 socks resulted from the acquisition of Seneca Knitting Mills
Corporation ("Seneca") in June 1995. Over the past three years, the Company
invested a significant portion of its capital resources in modernizing its sock
manufacturing operations, with aggregate capital improvements during such years
totaling $7.6 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.
The table below presents the Company's net sales by product
category for the most recent three years, expressed in thousands of dollars and
as a percentage of total net sales.
<PAGE> 4
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
Product Category * 1994 1995 1996
- ------------------ ------------------------------------------------------------------------
Amount % Amount % Amount %
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SOCKS:
Sports specific $13,947 35.1% $14,878 27.1% $19,226 25.1%
Sports promotional 12,035 30.2 13,344 24.3 18,161 23.6
Active sport 1,879 4.7 1,846 3.4 1,869 2.4
Rugged outdoor and
heavyweight casual -- -- 9,178 16.7 13,049 17.0
Greige goods -- -- 425 0.8 984 1.3
------------------------------------------------------------------------
Total socks $27,861 70.0% $39,671 72.3% $53,289 69.4%
------------------------------------------------------------------------
WOMEN'S HOSIERY:
Sheer pantyhose and knee-highs $ 5,782 14.5% $ 6,047 11.1% $ 9,366 12.2%
Tights and trouser socks 6,185 15.5 9,115 16.6 14,184 18.4
------------------------------------------------------------------------
Total women's hosiery $11,967 30.0% $15,162 27.7% $23,550 30.6%
------------------------------------------------------------------------
Total net sales $39,828 100.0% $54,833 100.0% $76,839 100.0%
========================================================================
</TABLE>
* For a detailed description of each finished product category, see
"Business - Sales and Marketing."
As illustrated by the table, socks have accounted for greater than
two-thirds of the Company's total net sales during each year in the most recent
three-year period. Within the sock product categories, the percentage of total
net sales attributable to rugged outdoor and heavyweight casual socks, which
were not sold by the Company prior to the acquisition of Seneca in June 1995,
was 16.7% for six months in 1995 and 17.0% for 1996. Sales of sports promotional
and sports specific socks have grown at a faster rate than sales of heavier
weight active sport socks due primarily to customer preferences. Within the
women's hosiery product categories, the percentage of net sales attributable to
tights and trouser socks increased from 15.5% in 1994 to 18.4% in 1996 due to
customer preferences, the success of the Ellen Tracy program, which began in
1994, and the introduction of a number of private label tight programs with
Target, the Company's largest customer, and other customers. Sales under the
licensed Evan-Picone program, which began in July 1996, account for the growth
in the sheer pantyhose category for 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. 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.
<PAGE> 5
The Company's success depends in part on its ability to anticipate and
respond to changing customer demands and fashion trends. Recent fashion trends
toward more casual dress and active wear have had a favorable impact on the
Company. Socks typically are an integral part of a more casual, sports-oriented
wardrobe, and as a result, sales of the Company's socks have increased. While
existing retailers have modified their sales strategies to emphasize casual
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 "casualization of America" by shifting the emphasis from traditional sheer
products to more durable, heavier weight 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, because heavier weight product lines generally
carry higher margins than sheer products. Selling, general and 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 certain licensing agreements to use designer brand names such as Ellen
Tracy and Evan-Picone in its women's hosiery product lines, Coleman and Woolrich
in its rugged outdoor and heavyweight casual product lines and Converse in its
sports sock product lines. Beginning in July 1997, the Company expects to sell
sports socks and rugged outdoor and heavyweight casual socks under the licensed
Rockport brand name. 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 agreements 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. This trend has been
particularly prevalent among the sporting goods retailers and discount
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 chains also expect manufacturers to play a significant 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,
<PAGE> 6
developed outsourcing relationships with other manufacturers, invested more than
$500,000 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.
Management 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 manufacturers, such as the Company, 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 acquisition of Seneca, 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 costs
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 acquisition of Interknit, Inc.
("Interknit") in November 1996 was 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 were already closely coordinated, management expects that the
administrative expenses associated with the integration of Interknit into the
Company's operations will be minimal.
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 expected negative manufacturing variance (direct manufacturing
costs in excess of budget) incurred as a result of the downtime associated with
personnel training and the installation of and break-in period for the new
knitting machinery. The anticipated replacement over the next 12 months of more
than 100 mechanical knitting machines currently used by the Company to
manufacture women's hosiery products with 84 new electronic knitting machines
is expected to produce similar results in future periods. This replacement
program for the women's hosiery division will be effected over a
<PAGE> 7
period of several months in order to minimize the manufacturing disruptions
experienced in 1995 with the replacement program for the sock division.
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.
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 net sales in the last six months of 1995 by
$9.2 million and $12.9 million in 1996, expenses attributable to the acquisition
and integration efforts had an adverse effect on the Company's operating results
for the last six months in 1995 and the first six months of 1996. Due to
seasonal trends, Seneca's net sales and profitability generally experience
stronger performance in the third and fourth quarters.
The Interknit Acquisition
In connection with the Company's initial public offering in November
1996, the Company acquired 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 also are shareholders of the Company,
including the Company's five executive officers (four of whom are members of
the Company's Board of Directors). 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. From January to October 1996,
approximately 75% of Interknit's output of greige goods was sold to the
Company. The Interknit acquisition was accounted for as a "pooling of
interests," and accordingly, the Company's financial statements have been
restated to reflect the acquisition.
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.
<PAGE> 8
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 76.6 80.5 79.8
----- ----- -----
Gross profit 23.4 19.5 20.2
Selling, general and administrative expenses 17.2 15.9 13.8
----- ----- -----
Operating income 6.2 3.6 6.4
Interest expense (2.2) (3.0) (2.9)
Other income, net 0.1 0.2 0.1
----- ----- -----
Income before income taxes 4.1 0.8 3.6
Income tax expense 1.5 0.4 1.3
----- ----- -----
Net income 2.6% 0.4% 2.3%
===== ===== =====
</TABLE>
Comparison of 1996 to 1995
Net sales for 1996 were $76.8 million, compared to $54.8 million in
1995, an increase of $22.0 million, or 40.1%. Sales of rugged outdoor and
heavyweight casual socks, which the Company did not sell during the first six
months of 1995, accounted for $3.9 million of the net sales growth in 1996. The
Company's subsidiary in the Republic of Ireland experienced an increase in net
sales of 75.5% in 1996 primarily as the result of sales of sports socks bearing
the adidas brand name to European distributors of adidas products. Prior to
1996, the Company did not sell adidas products. Domestically, the Company's two
sports sock operations combined for a 20.2% increase in net sales while sales of
women's hosiery products increased by 56.2% over the prior year. Contributing to
the increase in sock sales was internal sales growth and continued growth of the
Company's customer base among large sporting goods retailers. The introduction
of numerous private label tight programs to many of the Company's customers,
including Target, the Company's largest customer, fueled the sales growth in the
women's hosiery product categories. Also contributing to this growth were net
sales of women's sheer hosiery under the licensed Evan-Picone brand name, which
began in July 1996.
Gross profit for 1996 was $15.5 million compared to $10.7 million for
1995, an increase of $4.8 million, or 44.9%. As a percentage of net sales, gross
profit increased to 20.2% in 1996 from 19.5% in 1995. Included in cost of goods
sold in 1995 is a charge of $621,000 that was 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 for 1995, as a percentage of net sales, by 1.1%. Although the Company
experienced substantial growth in net sales in 1996 compared to 1995, the growth
came from products that generally carried gross profit margins lower than the
gross profit margins of products sold in the prior year. Moreover, the pricing
of a significant private label program for Target in the women's hosiery
division was reduced early in 1996 to increase sales volume. The Company's
subsidiary in the Republic of Ireland began a program to manufacture sport socks
bearing the adidas brand name in late 1995. These products carried gross profit
<PAGE> 9
margins of less than 10% during the introductory phase of the program. Price
increases during the latter half of 1996 improved the margins realized on the
products in this program. 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.
Selling, general and administrative expenses for 1996 were $10.6
million, compared to $8.7 million for 1995, an increase of $1.9 million, or
21.8%. This increase was primarily attributable to the integration of Seneca's
operations and additional selling costs associated with the introduction of the
licensed Evan-Picone women's hosiery program. As a percentage of net sales,
selling, general and administrative expenses decreased from 15.9% in 1995, to
13.8% in 1996. This reduction is due to net sales increasing at a faster rate
than selling, general and administrative expenses.
Operating income increased from $2.0 million in 1995 to $4.9 million in
1996. Operating income in 1995, however, reflects the recognition of a
supplemental retirement obligation in the amount of $500,000 to the Company's
former chairman. As a percentage of net sales, operating income was 6.4% in
1996, compared to 3.6% in 1995. Increased profitability resulting from net sales
growth and relatively lower selling, general and administrative expenses are the
primary reasons for the increase in operating income.
Interest expense increased from $1.7 million in 1995 to $2.2 million in
1996, an increase of 29.4%. Debt incurred to finance the Seneca acquisition in
June 1995 and additional interest expense associated with a temporary increase
in the Company's revolving credit facility earlier in 1996 contributed to this
increase.
Other income for 1996 was $108,000, compared to $118,000 in 1995. Net
gains on the sale or disposal of equipment and foreign currency transactions
typically comprise other income.
Income tax expense for 1996 was $992,000 compared to $210,000 in 1995.
The effective tax rate for 1996 was 36.1%, compared to 46.6% in 1995. The
decrease in the effective tax rate from 1995 to 1996 is the result of an
increase in the percentage of the Company's total income attributable to
operations in the Republic of Ireland, which is not subject to United States
income tax.
Net income increased from $241,000 in 1995, to $1.8 million in 1996.
Net income in the prior year was negatively impacted, however, by the one-time
charges incurred for the write-off of obsolete inventory in excess of normal
reserves and the recognition of the Company's future obligation to pay a
supplemental retirement benefit to its former chairman.
<PAGE> 10
Comparison of 1995 to 1994
Net sales for 1995 were $54.8 million, compared to $39.8 million in
1994, an increase of $15.0 million, or 37.7%. 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 19.5% of net sales, as
compared to $9.3 million, or 23.4% 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%.
Selling, general and administrative expenses increased $1.9 million in
1995 to $8.7 million, 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. As
a percentage of net sales, selling, general and administrative expenses
nonetheless decreased in 1995 to 15.9% compared to 17.2% 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 $2.5 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 24.0% increase in operating income over the prior year.
Interest expense in 1995 was $1.7 million compared to $887,000 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 91.7%
increase in interest expense.
Other income for 1995 was $118,000, compared to $54,000 for 1994. The
lower amount of other income in 1994 was primarily due to losses incurred on the
sale
<PAGE> 11
or disposal of equipment 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 $385,000 from 1994. The effective
tax rate in 1995 was 46.6% compared to 36.4% 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 attributable to the Company's operations in the
Republic of Ireland, which is not subject to United States income tax.
Net income for 1995 was $241,000 compared to $1.0 million in 1994. The
decrease was primarily the result 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 obligation to pay a supplemental retirement
benefit to a former executive officer. Without these charges, income before
income taxes for 1995 would have been $1.6 million and net income would have
been $840,000. The Company's net income for 1995 was also adversely impacted by
the 91.7% increase in interest expense over the prior year described above.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities for the years ended December 31,
1994, 1995 and 1996 were $880,000, $2.2 million and $(3.3 million),
respectively. The negative cash flows for 1996 resulted from increases of $3.3
million in accounts receivable and $5.6 million in inventories for the year
ended December 31, 1996. The increase in accounts receivable and inventories
reflect the levels of such assets necessary to support higher levels of sales in
each of the Company's operating 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") (the "Revolving
Credit Facility"). Borrowings under the Revolving Credit Facility also were used
to partially fund the Seneca acquisition in June 1995. The Revolving Credit
Facility provides for borrowings up to $14.0 million through January 1999. As of
March 1, 1997, $9.7 million was outstanding under the Revolving Credit Facility,
and there was $4.3 million available for additional borrowings. Funds borrowed
under the Revolving Credit Facility bear interest at a rate based on London
Interbank Offered Rates ("LIBOR"). The LIBOR-based rate available to the Company
ranges from LIBOR plus 2% to LIBOR plus 33%, depending upon the Company's
leverage ratio (as defined) (7.4375% at March 1, 1997). The Revolving Credit
Facility is secured by the Company's accounts receivable, inventory, equipment
and certain real property. Amounts borrowed under the Revolving Credit Facility
may not exceed the sum of specified percentages of the Company's accounts
receivable and inventory.
<PAGE> 12
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 retained earnings of the
Company's Irish subsidiary are subject to certain restrictions based upon the
amount of government grants received to date.
In addition to the Revolving Credit Facility, the Company has two term
loans outstanding with NationsBank. As of March 1, 1997, the term loans had an
aggregate principal balance of approximately $4.9 million. The first loan, which
was entered into as a source of permanent financing for the Company's capital
equipment modernization program, had an outstanding principal balance of $4.0
million at March 1, 1997, and bears interest at the LIBOR-based rate applicable
to the Revolving Credit Facility (7.4375% at March 1, 1997). This loan is
payable in monthly installments of $41,667 with a balloon payment of
approximately $3.9 million due March 31, 1997. The second term loan with
NationsBank, which at March 1, 1997 had an outstanding principal balance of
$904,000, was obtained in connection with the Seneca acquisition in June 1995.
This loan also bears the same LIBOR-based rate as the Company's other
obligations with NationsBank. This loan is payable in monthly installments of
$12,000 each, with a balloon payment of approximately $640,000 due in January
1999. On March 13, 1997, NationsBank amended the loan agreement, combining
both term loans outstanding with NationsBank into one loan. The new loan, which
at March 31, 1997, is expected to have an outstanding principal balance of $4.8
million, will be payable in 22 monthly installments of $53,667 each, with a
final balloon payment due in January 1999. The new loan bears interest at the
LIBOR-based rates previously mentioned, will be secured by the same collateral
as the Revolving Credit Facility and will impose similar restrictive covenants
on the Company.
As a result of the Interknit acquisition, the Company's total debt
increased by approximately $1.7 million during the fourth quarter of 1996. The
outstanding balance of this debt was $1.6 million at March 1, 1997, bears
interest at rates ranging from 6.9% to 9.8% and is payable in monthly
installments through 2003.
The proceeds of the Company's initial public offering, which was
completed in November 1996, reduced borrowings under the Revolving Credit
Facility by $8.7 million. The Company used an additional $850,000 of the net
proceeds to pay indebtedness incurred in connection with the Seneca acquisition.
As of March 1, 1997, the Company had commitments of approximately
$2.0 million to purchase 84 electronic knitting machines for its women's hosiery
division (to replace 100 existing mechanical machines), 20 additional
electronic knitting machines for its sports sock knitting operation in Ft.
Payne, Alabama and 10 additional electronic knitting machines at
<PAGE> 13
Seneca. These expenditures represent the final phase of the Company's knitting
equipment modernization program, which began in 1994. The source of funding for
these planned capital expenditures is expected to be the proceeds of the
Company's recently completed initial public offering and an additional term loan
from NationsBank, bearing the same LIBOR-based interest rate under which the
Company currently is borrowing from NationsBank.
During the next 18 to 24 months, the Company also plans to construct,
on property the Company currently owns, a distribution facility at an estimated
cost of approximately $1.5 million. As of March 1, 1997, the Company had just
begun to examine the logistical and physical requirements necessary for planning
this project, and had no firm commitments regarding this planned capital
expenditure. The Company has no other plans or material commitments to make any
other material capital expenditures for the next 24 months.
Management believes that the Company's improved capitalization
following its initial public offering, combined with the Revolving Credit
Facility, other financing arrangements described herein and anticipated cash
flows from operations, will be adequate to fund the Company's working capital
requirements and planned capital expenditures for a period of at least 24
months. 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 generally
has higher net sales and greater profitability in the third and fourth quarters.
<PAGE> 14
RIDGEVIEW, INC.
AND SUBSIDIARIES
December 31, 1994, 1995 and 1996
<PAGE> 15
RIDGEVIEW, INC. AND SUBSIDIARIES
Index To Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of BDO Seidman, LLP 2
Report of KPMG 3-4
Report of Mengel, Metzger, Barr & Co. LLP 5
Consolidated Financial Statements:
Consolidated balance sheets as of December 31, 1995
and 1996 6
Consolidated statements of income for the years ended
December 31, 1994, 1995 and 1996 7
Consolidated statements of shareholders' equity for the
years ended December 31, 1994, 1995 and 1996 8
Consolidated statements of cash flows for the years ended
December 31, 1994, 1995 and 1996 9-10
Notes to consolidated financial statements 11-22
</TABLE>
1
<PAGE> 16
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, 1995 and 1996, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1996. 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 $7,038,000 and $7,122,000
as of December 31, 1995 and 1996, respectively, and total revenues of
$4,065,000, $4,724,000 and $8,290,000 for each of the three years in the period
ended December 31, 1996, 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 and $9,614,000
as of December 31, 1995 and 1996, and total revenues of $9,178,000 for the
period from date of acquisition (June 28, 1995) through December 31, 1995 and
$13,049,000 for the year ended December 31, 1996. 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, 1995 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
Greensboro, North Carolina
February 24, 1997, except for Note 6
which is as of March 13, 1997
2
<PAGE> 17
[KPMG Chartered Accountants (Ireland) Letterhead]
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 1996
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.
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 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,
<PAGE> 18
whether caused by fraud or other irregularity or error. In forming our opinion
we also evaluated the overall adequacy of the presentation of the 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 1994, 31 December 1995 and 31 December 1996 and of
the profit for the branch for the years ended 31 December 1994, 31 December
1995 and 31 December 1996.
/s/ KPMG
Chartered Accountants
Registered Auditors
Date: 5 March 1997
<PAGE> 19
[Mengel, Metzger, Barr & Co. LLP Letterhead]
INDEPENDENT AUDITORS' REPORT
Board of Directors
Seneca Knitting Mills Corporation
We have audited the accompanying consolidated balance sheets of Seneca Knitting
Mills Corporation (a wholly-owned subsidiary of Ridgeview, Inc.) as of December
31, 1996 and 1995, and the related consolidated statements of operations and
(accumulated deficit) retained earnings and cash flows for year ended December
31, 1996 and the six months 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 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Seneca Knitting
Mills Corporation as of December 31, 1996 and 1995, and the consolidated
results of its operations and its consolidated cash flows for the year ended
December 31, 1996 and the six months ended December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ Mengel, Metzger, Barr & Co. LLP
Rochester, New York
February 18, 1997
<PAGE> 20
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1996
------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 262 $ 316
Accounts receivable (less allowance for doubtful
accounts of $371 and $502) (Note 8) 10,153 13,272
Inventories (Note 3) 14,961 20,624
Prepaid expenses 301 128
------- -------
Total current assets 25,677 34,340
PROPERTY, PLANT AND EQUIPMENT, less accumulated
depreciation and amortization (Note 4) 11,794 11,499
OTHER ASSETS 1,133 1,215
EXCESS OF COST OVER FAIR VALUE OF NET
ASSETS ACQUIRED, less accumulated amortization
of $80 and $210 (Note 2) 1,861 1,731
------- -------
Total assets (Note 6) $40,465 $48,785
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 21
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
------- -------
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings (Note 5) $ 1,410 $ 1,094
Accounts payable 5,084 5,905
Accrued expenses and other liabilities 899 1,632
Income taxes payable (Note 7) -- 465
Deferred income taxes (Note 7) 579 444
Current portion of long-term debt (Note 6) 5,843 1,349
Current portion of deferred compensation (Note 11) 144 101
------- -------
Total current liabilities 13,959 10,990
LONG-TERM DEBT, less current portion (Note 6) 15,991 15,668
DEFERRED COMPENSATION, less current portion
(Note 11) 1,433 1,534
DEFERRED CREDIT (Note 11) 1,064 1,020
DEFERRED INCOME TAXES (Note 7) 36 216
------- -------
Total liabilities 32,483 29,428
------- -------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 11)
SHAREHOLDERS' EQUITY (Notes 10 and 11)
Common stock - authorized 20,000,000 shares of
$.01 par value; issued 1,589,698 shares and 3,000,000
shares, respectively 16 30
Additional paid-in capital 1,100 10,650
Retained earnings, including amounts reserved of $475
and $1,003 6,777 8,450
Foreign currency translation adjustments 89 227
------- -------
Total shareholders' equity 7,982 19,357
------- -------
Total liabilities and shareholders' equity $40,465 $48,785
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 22
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
NET SALES (Note 8) $ 39,828 $ 54,833 $ 76,839
COST OF SALES 30,526 44,138 61,366
-------- -------- --------
GROSS PROFIT 9,302 10,695 15,473
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,835 8,194 10,596
SUPPLEMENTAL RETIREMENT
BENEFIT (Note 11) -- 500 --
-------- -------- --------
OPERATING INCOME 2,467 2,001 4,877
-------- -------- --------
OTHER INCOME (EXPENSE)
Interest expense (887) (1,668) (2,235)
Foreign currency exchange gains -- -- 12
Grant income 117 75 92
Other, net (63) 43 4
-------- -------- --------
Total other income (expense) (833) (1,550) (2,127)
-------- -------- --------
INCOME BEFORE INCOME TAXES 1,634 451 2,750
PROVISION FOR INCOME TAXES
(Note 7) 595 210 992
-------- -------- --------
NET INCOME $ 1,039 $ 241 $ 1,758
======== ======== ========
EARNINGS PER SHARE $ .65 $ .15 $ .96
======== ======== ========
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 1,590 1,590 1,832
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 23
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1994, 1995 and 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, 1993 1,590,216 $ 16 $ 1,101 $ 5,810 $ (212) $ 6,715
Net income 1,039 1,039
Cash dividends ($.09 per share) (145) (145)
Redemption of common stock (129)
Foreign currency
translation adjustment 218 218
--------- --------- --------- ---------- --------- ---------
Balance at December 31, 1994 1,590,087 16 1,101 6,704 6 7,827
Net income 241 241
Cash dividends ($.10 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 1,589,698 16 1,100 6,777 89 7,982
Net income 1,758 1,758
Cash dividends ($.05 per share) (85) (85)
Issuance of common stock, net
of offering costs of $1,666 1,410,302 14 9,550 9,564
Foreign currency
translation adjustment 138 138
--------- --------- --------- ---------- --------- ---------
Balance at December 31, 1996 3,000,000 $ 30 $ 10,650 $ 8,450 $ 227 $ 19,357
========= ========= ========= ========== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 24
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-----------------------------------------
1994 1995 1996
-----------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Cash received from customers $ 38,500 $ 53,499 $ 73,423
Cash paid to suppliers and employees (36,340) (48,698) (73,849)
Interest paid (789) (1,483) (2,220)
Income taxes paid, net of refunds (373) (941) (476)
Other cash receipts 17 16 62
Other cash disbursements (135) (174) (228)
-------- -------- --------
Net cash provided by (used in)
operating activities 880 2,219 (3,288)
-------- -------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES
Payments for organizational costs -- (133) --
Payments for investments in subsidiaries (13) (76) (161)
Payments for purchase of 100% of
Seneca capital stock, net
of cash acquired -- (2,097) --
Proceeds from sale of property and
equipment 435 309 49
Payments for purchase of property,
plant and equipment (2,169) (4,384) (1,089)
-------- -------- --------
Net cash used in investing activities (1,747) (6,381) (1,201)
-------- -------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net short-term borrowings 1,057 254 (334)
Proceeds from long-term debt 334 63,205 73,697
Repayment of long-term debt (854) (59,208) (78,590)
Dividends paid (146) (168) (84)
Proceeds from issuance of common stock -- 15 11,230
Payments for stock issuance costs -- (282) (1,384)
Payments for stock redemption -- (16) --
Proceeds from government grants 56 490 --
-------- -------- --------
Net cash provided by financing
activities 447 4,290 4,535
-------- -------- --------
EFFECT OF EXCHANGE RATE ON
CASH 20 4 8
-------- -------- --------
Net increase (decrease) in cash (400) 132 54
CASH, beginning of period 530 130 262
-------- -------- --------
CASH, end of period $ 130 $ 262 $ 316
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE> 25
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Continued)
(In Thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------
1994 1995 1996
-------------------------------------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME
TO NET CASH PROVIDED BY
(USED IN) OPERATING ACTIVITIES
Net income $ 1,039 $ 241 $ 1,758
------- ------- -------
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization 1,043 1,371 1,744
Provision for doubtful accounts
receivable 163 125 177
Capital grants recognized (117) (75) (92)
Decrease in government grants -- (43) --
(Gain) loss on sale of assets 66 (28) 26
Increase in deferred compensation
liability 139 557 57
Decrease in deferred income taxes (41) (267) 44
Changes in operating assets and
liabilities, net of effects from
purchase of Seneca:
(Increase) decrease in accounts
receivable (1,329) (1,277) (3,255)
(Increase) decrease in inventories (918) 798 (5,566)
(Increase) decrease in prepaid expenses
and other assets (135) (70) (152)
Increase (decrease) in accounts
payable 549 1,592 769
Increase (decrease) in income taxes
payable 264 (463) 472
Increase (decrease) in accrued expenses
and other liabilities 157 (242) 730
------- ------- -------
Total adjustments to net income (159) 1,978 (5,046)
------- ------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 880 $ 2,219 $(3,288)
======= ======= =======
</TABLE>
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
Year ended
December 31, 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.
10
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS. Ridgeview, Inc. (the "Company") and its
subsidiaries design, manufacture and market a complete range of sports and
rugged outdoor and heavy weight casual socks as well as a wide variety of
woman's hosiery products, including, tights, trouser socks, pantyhose and
knee-highs. The Company sells its products in both domestic and international
retail markets. Ridgeview, Ltd., a wholly-owned subsidiary of the Company,
operates a manufacturing facility in Tralee, Co. Kerry, Republic of Ireland and
sells its products in European markets.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of Ridgeview, Inc. and its wholly-owned subsidiaries,
Seneca Knitting Mills Corporation and subsidiaries ("Seneca"), Ridgeview, Ltd.
("Limited"), a Cayman Islands corporation and Interknit, Inc. All significant
intercompany accounts and transactions are eliminated in consolidation.
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. The Company has adopted
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Assets to be Disposed of," in
assessing the carrying value of property, plant and equipment. Adoption of this
new standard did not have a material effect on the Company.
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:
Years
-----
Buildings and improvements 8-39
Machinery and equipment 5-12
Automobiles and trucks 5
Office furniture and equipment 5-10
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.
11
<PAGE> 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES. The Company calculates income taxes using the asset and
liability method specified by SFAS No. 109, "Accounting 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 laws and rates that apply to the periods in which they are
expected to affect taxable income.
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 $629,000, $852,000
and $914,000 for the years ended December 31, 1994, 1995, and 1996,
respectively.
FOREIGN CURRENCY TRANSLATION. 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.
STOCK-BASED COMPENSATION. The Financial Accounting Standards Board
recently issued SFAS No. 123, "Accounting for Stock-Based Compensation". 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 statement requires pro forma disclosure of
net income and earnings per share as if the fair-value based method had been
adopted. The Company has adopted the pro forma disclosure requirements of SFAS
No. 123. Although the Company granted options to purchase 1,500 shares of common
stock to three outside members of its board of directors, such grants are not
material and there were no other options or stock awards in 1996. Accordingly,
the pro forma disclosure has not been made.
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) and the exchange of 240,000
shares for all of the issued and outstanding shares of Interknit (see Note 2).
Additionally, earnings per share, after giving retroactive effect to the
reduction in debt through the use of proceeds from the Company's initial public
offering as if such public offering had occurred at the beginning of 1996, would
have been $.77.
RECLASSIFICATIONS. Financial statements for 1994 and 1995 have been
reclassified, where applicable, to conform to financial statement presentation
used in 1996.
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 $1,917,000 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.
12
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 2 - ACQUISITIONS (Continued)
In November 1996, the Company acquired all of the issued and
outstanding shares of capital stock of Interknit, Inc. ("Interknit"), a
corporation affiliated through common ownership, in exchange for 240,000 shares
of the Company's common stock in a transaction accounted for as a pooling of
interests. The consolidated financial statements have been restated to include
the accounts of Interknit with those of the Company for all periods presented
prior to the combination.
Net sales and net income (loss) of the separate companies for the periods
preceding the combination were as follows:
<TABLE>
<CAPTION>
For the Nine
For the Year Ended Month Period
December 31, Ended
------------------- September 30,
(In thousands, except per share amounts) 1994 1995 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales
Ridgeview, Inc. $ 40,094 $ 54,408 $ 54,554
Interknit, Inc. 2,338 3,876 5,182
Eliminations (2,604) (3,451) (3,790)
- -----------------------------------------------------------------------------------------
Combined $ 39,828 $ 54,833 $ 55,946
=========================================================================================
Net income (loss)
Ridgeview, Inc. $ 1,014 $ 296 $ 729
Interknit, Inc. 25 (55) 376
Eliminations -- -- (58)
- -----------------------------------------------------------------------------------------
Combined $ 1,039 $ 241 $ 1,047
=========================================================================================
</TABLE>
NOTE 3 - INVENTORIES
A summary of inventories by major classification, is as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1996
-----------------------------
(In Thousands)
<S> <C> <C>
Raw materials $ 3,557 $ 4,114
Work-in-process 4,916 6,127
Finished goods 6,538 10,523
(LIFO allowance) (50) (140)
-------- --------
$ 14,961 $ 20,624
======== ========
</TABLE>
13
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1996
--------------------------
(In Thousands)
<S> <C> <C>
Land $ 313 $ 313
Buildings and improvements 6,257 6,449
Machinery and equipment 14,352 15,013
Automobiles and trucks 119 140
Office furniture and equipment 2,083 2,343
------- -------
23,124 24,258
Less accumulated depreciation and amortization 11,330 12,759
------- -------
Net property, plant and equipment $11,794 $11,499
======= =======
</TABLE>
Depreciation expense amounted to $1,019,000, $1,260,000 and $1,501,000,
for the years ended December 31, 1994, 1995 and 1996, respectively.
NOTE 5 - SHORT-TERM BORROWINGS
Short-term borrowings consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1996
-----------------------
(In Thousands)
<S> <C> <C>
$200 line of credit, interest payable
monthly at prime plus 1%; secured by
certain assets of Interknit $ 155 $ 155
Bank drafts issued, not yet presented
for payment 1,255 939
------ ------
$1,410 $1,094
====== ======
</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.
14
<PAGE> 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1995 1996
---------------------
(In Thousands)
<S> <C> <C>
Revolving line of credit (see discussion below) $12,553 $ 8,574
Term loan payable to bank (see discussion below) 4,542 4,042
Term loan payable to bank in 32 monthly installments of $12, plus
interest at prime plus 1% through November 5, 1996 and subsequently
amended, due January 1999 (see discussion below) 1,000 928
Note payable to bank in annual installments of $351, beginning in
1997, plus interest at fixed and variable rates (approximating
8.5% at December 31, 1996) with a final payment due in 2001,
collateralized by the assets of Limited and guaranteed by the
Company 800 1,593
Notes payable to finance companies in monthly installments
aggregating $22 including interest at 6.9% and 8.35%,
collateralized by equipment, due variously through
December 2002 1,254 1,091
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 and
guaranteed by the Company 354 305
Note payable to former principal shareholder of Seneca, with
interest only payable monthly at 7% per annum;
paid November, 1996 500 --
Note payable, with interest payable monthly at 9% per
annum; paid November, 1996 350 --
Various notes payable in installments through July, 2003, including
interest at rates ranging up to 13.2%;
collateralized by a building and various equipment 481 484
------- -------
21,834 17,017
Less current portion 5,843 1,349
------- -------
Total long-term debt $15,991 $15,668
======= =======
</TABLE>
15
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 6 - LONG-TERM DEBT (Continued)
On December 20, 1996 the Company restructured its existing bank loan
agreements. The restructured agreement provides a $14,000,000 revolving line of
credit due January 10, 1999 and temporarily extends the due date on the
$5,000,000 term loan ($4,204,000 outstanding at December 31, 1996) until
March 31, 1997, and consolidates the second term loan payable to bank ($928,000
outstanding at December 31, 1996) under one agreement. On March 13, 1997 the
bank amended the loan agreement, combining the term loans into one loan and
extending the due date to January 10, 1999. Accordingly, the term loan is
classified as long-term as of December 31, 1996. At the option of the Company,
borrowings under these loans bear interest based on the bank's prime rate or
the London InterBank Offered Rates ("LIBOR"). The rates vary based on
achievement of certain ratios of total liabilities to tangible net assets,
calculated monthly, and range from prime to prime plus 1%, or LIBOR plus 2% to
LIBOR plus 3.25% (7.35% at December 31, 1996 under the LIBOR option). These
loans are collateralized by substantially all assets of the Company.
The provisions of the restructured agreement relating to the revolving
credit facility and the combined 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, 1996, the Company was in
violation of certain of these loan covenants, which the lender has subsequently
waived.
Approximate maturities of long-term debt for the next five years are as
follows:
<TABLE>
<CAPTION>
Year Ending December 31:
------------------------
<S> <C> <C>
1997 $ 1,349,000
1998 893,000
1999 13,447,000
2000 709,000
2001 438,000
Thereafter 181,000
-----------
$17,017,000
===========
</TABLE>
16
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7 - INCOME TAXES
The provision for income taxes is summarized as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1994 1995 1996
-------------------------------
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $554 $ 444 $797
State 60 53 125
Foreign 23 (20) 26
---- ----- ----
637 477 948
---- ----- ----
Deferred:
Federal (35) (247) 37
State (1) (34) 5
Foreign (6) 14 2
---- ----- ----
(42) (267) 44
---- ----- ----
Provision for income taxes $595 $ 210 $992
==== ===== ====
</TABLE>
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>
For the Year Ended December 31,
--------------------------------
1994 1995 1996
--------------------------------
(In Thousands)
<S> <C> <C> <C>
Income before income taxes $1,634 $451 $2,750
====== ==== ======
Computed "expected" tax expense 556 153 935
Increase (decrease) in taxes
resulting from:
Foreign income with no U.S.
income tax effect (64) 20 (85)
State income taxes, net of
federal income tax 39 21 85
Nondeductible expenses 14 28 50
Foreign tax 17 (6) 28
Other 33 (6) (21)
------ ---- ------
$ 595 $210 $ 992
====== ==== ======
</TABLE>
17
<PAGE> 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 7 - INCOME TAXES (Continued)
Net deferred tax assets and net deferred tax liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1995 1996
-----------------------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Receivable and inventory reserves $ 196 $ 302
Operating loss carryover 52 --
Accrued expenses 73 84
Alternative minimum tax credit -- 89
Deferred compensation liability 578 605
------- -------
Total deferred tax assets $ 899 $ 1,080
======= =======
Deferred tax liabilities:
Accumulated depreciation $ (666) $ (910)
LIFO reserve (848) (830)
------- -------
Total deferred tax liabilities (1,514) (1,740)
------- -------
Net deferred tax liabilities $ (615) $ (660)
======= =======
</TABLE>
The Company does not accrue income taxes on the undistributed earnings
of its foreign subsidiary Limited that are intended to be invested in Limited
indefinitely. At December 31, 1996, the amount of undistributed earnings for
which taxes have not been accrued was $1,941,000.
NOTE 8 - CONCENTRATIONS OF CREDIT RISK AND MAJOR CUSTOMER
The Company sells products to retail customers in both the United
States and Europe. The Company performs ongoing credit evaluations of 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, 1994, 1995 and 1996, sales to one
customer, Target Stores, Inc., accounted for 18%, 13%, and 13%, respectively, of
the Company's net sales. Accounts receivable from this same customer were 19%
and 17% of total accounts receivable at December 31, 1995 and 1996.
NOTE 9 - BENEFIT PLANS
The Company has an employee savings plan which covers participating
employees who have completed one year of employment and 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 $87,000, $85,000 and $89,000 for the years ended December 31, 1994, 1995 and
1996, respectively.
18
<PAGE> 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 9 - BENEFIT PLANS (Continued)
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 (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 year ended December 31, 1996, contribution expense under
this collective bargaining agreement amounted to approximately $243,000 and
$471,000, respectively. The Company's applicable portion of total plan benefits
and net assets of the plans are not separately identifiable.
NOTE 10 - CAPITAL STOCK
On November 5, 1996, the Company completed an initial public offering
of the Company's common stock. In preparation for the public offering, the
Company's board of directors and shareholders approved amended and restated
Articles of Incorporation that increased 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. Effective October 8, 1996, the board of
directors declared a stock dividend 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 initial public offering, the board of
directors and the shareholders approved an omnibus stock award and incentive
plan (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 Plan, but no longer than ten years after the date they are
granted. Under the terms of the 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.
The board has also authorized an employee stock purchase plan that 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 the employee
stock purchase plan. The board of directors has not yet activated the employee
stock purchase plan.
19
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 10 - CAPITAL STOCK (continued)
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 Directors' election, an 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 10 years
after the date they are granted. In November 1996, options to purchase 500
shares each were granted to three new members of the Company's board of
directors at an exercise price of $8.00 per share. All of such options are
outstanding and unexercised.
NOTE 11 - 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 $402,000,
$491,000 and $654,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
LOAN GUARANTEE. The Company holds a 25% 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, 1996, this loan had an outstanding balance of $2,764,000,
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 $175,000, $176,000 and $205,000 for the years ended December 31,
1994, 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, 1994 and 1996. 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, 1996, and the
Company intends to remain in compliance throughout the ten-year period.
20
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued)
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, 1995 and 1996, $475,000 and $1,003,000 of retained
earnings, respectively, have been reserved for this purpose. 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 five years. Total rental expense amounted to $123,000, $210,000
and $338,000 for the years ended December 31, 1994, 1995 and 1996, respectively.
Future minimum lease payments under noncancellable operating leases are
as follows: 1997 - $297,000; 1998 - $185,000; 1999 - $110,000, 2000 - $104,000;
2001 - $88,000.
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 license agreement provides for payment of minimum
royalties for each annual period during the term of the license agreement. On
May 28, 1996, the Company signed a license agreement for the Evan-Picone
trademark, which calls for minimum guaranteed royalty payments of $450,000
($75,000 paid in 1996), $500,000 and $600,000 for the 18-month period commencing
July 1, 1996 through December 31, 1997 and the years ending December 31, 1998
and 1999, respectively.
Aggregate minimum guaranteed royalty payments under all license
agreements are as follows:
<TABLE>
<S> <C>
Year Ending:
1997 $ 970,000
1998 769,500
1999 765,000
----------
Total minimum royalty payments $2,504,500
==========
</TABLE>
Total royalty expense for license agreements amounted to $169,000,
$270,000 and $598,000 for the years ended December 31, 1994, 1995 and 1996,
respectively.
PURCHASE COMMITMENTS. The Company has commitments outstanding at
December 31, 1996 to purchase equipment used in manufacturing which aggregate
$1,707,000.
NOTE 12 - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one principal industry segment, the manufacture
and sale of hosiery products and accessories. The Company's products are sold
primarily to the retail markets.
21
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 12 - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION (Continued)
Geographic financial information is as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------
1994 1995 1996
--------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net Sales To Unaffiliated Customers:
United States $ 35,763 $ 50,109 $ 68,568
Europe 4,065 4,724 8,271
-------- -------- --------
Total net sales $ 39,828 $ 54,833 $ 76,839
======== ======== ========
Transfers Between Geographic Areas
(Elimination in consolidation):
United States $ 84 $ 144 $ 394
Europe -- -- 19
-------- -------- --------
Total transfers $ 84 $ 144 $ 413
======== ======== ========
Operating income (loss):
United States $ 2,399 $ 2,119 $ 4,641
Europe 140 (118) 236
Eliminations (72) -- --
Other income (expense), net (833) (1,550) (2,127)
-------- -------- --------
Income before income taxes $ 1,634 $ 451 $ 2,750
======== ======== ========
Identifiable Assets:
United States $ 22,330 $ 34,456 $ 42,531
Europe 4,211 7,038 7,122
Eliminations (963) (1,029) (868)
-------- -------- --------
Total assets $ 25,578 $ 40,465 $ 48,785
======== ======== ========
</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.
22
