<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 (IRS Employer Identification No.)
incorporation or organization)
2101 North Main Avenue
Newton, North Carolina 28658
(Address of principal executive offices) (Zip Code)
(828) 464-2972
(Registrant's telephone number, including area code)
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.
[x] Yes [ ] No
As of November 13, 1998, the registrant had 3,000,000 shares of common
stock, $.01 par value per share, outstanding.
1
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1: Financial Statements
RIDGEVIEW, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 222,033 $ 481,674
Accounts receivable (less allowance for doubtful
accounts of $1,066,059 and $605,289) 22,418,987 15,720,033
Inventories (Note 3) 29,412,528 23,315,890
Refundable income taxes 716,859 164,539
Deferred income taxes 396,857 --
Prepaid expenses 42,478 350,388
----------- -----------
Total current assets $53,209,742 $40,032,524
PROPERTY, PLANT AND EQUIPMENT, less
accumulated depreciation 14,039,153 11,414,153
OTHER ASSETS 2,476,582 1,628,626
EXCESS OF COST OVER FAIR VALUE OF NET
ASSETS ACQUIRED, less accumulated
amortization (Note 4) 4,281,562 1,603,465
----------- -----------
Total assets $74,007,039 $54,678,768
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 3
RIDGEVIEW, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
(Unaudited) (Audited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term borrowings $ 1,443,906 $ 1,464,333
Accounts payable 8,032,022 5,612,009
Accrued expenses and other liabilities 2,673,565 1,544,844
Deferred income taxes -- 296,668
Current portion of long-term debt (Note 5) 34,601,214 1,299,523
Current portion of deferred compensation 241,135 211,845
------------ ------------
Total current liabilities $ 46,991,842 $ 10,429,222
LONG-TERM DEBT, less current portion (Note 5) 3,478,488 20,265,823
DEFERRED COMPENSATION, less current portion 1,665,422 1,520,972
DEFERRED CREDIT 782,302 788,550
DEFERRED INCOME TAXES 799,211 525,411
------------ ------------
Total liabilities $ 53,717,265 $ 33,529,978
------------ ------------
SHAREHOLDERS' EQUITY (Note 6)
Common stock - authorized 20,000,000 shares of
$.01 par value; issued and outstanding
3,000,000 shares $ 30,000 $ 30,000
Additional paid-in capital 10,650,018 10,650,018
Retained earnings, including amounts reserved of
$910,246 and $854,367 9,623,908 10,688,318
Accumulated other comprehensive income (Note 7) (14,152) (219,546)
------------ ------------
Total shareholders' equity $ 20,289,774 $ 21,148,790
------------ ------------
Total liabilities and shareholders' equity $ 74,007,039 $ 54,678,768
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
RIDGEVIEW, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 32,028,738 $ 25,889,396 $ 73,620,089 $ 66,690,310
COST OF SALES 26,006,018 20,156,894 60,898,954 52,232,019
------------ ------------ ------------ ------------
GROSS PROFIT $ 6,022,720 $ 5,732,502 $ 12,721,135 $ 14,458,291
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES $ 4,623,051 $ 3,400,923 $ 12,567,019 $ 10,228,806
------------ ------------ ------------ ------------
OPERATING INCOME $ 1,399,669 $ 2,331,579 $ 154,116 $ 4,229,485
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense $ (786,248) $ (547,142) $ (1,814,211) $ 1,361,455)
Other, net (9,695) 28,481 (15,518) 67,832
------------ ------------ ------------ ------------
Total other income (expense) $ (795,943) $ (518,661) $ (1,829,729) $ (1,293,623)
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES $ 603,726 $ 1,812,918 $ (1,675,613) $ 2,935,862
PROVISION (BENEFIT)
FOR INCOME TAXES 274,449 668,253 (611,203) 1,038,911
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 329,277 $ 1,144,665 $ (1,064,410) $ 1,896,951
============ ============ ============ ============
EARNINGS PER SHARE (Note 2) $ .11 $ 0.38 $ (.35) $ 0.63
============ ============ ============ ============
WEIGHTED AVERAGE COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING 3,000,000 3,000,000 3,000,000 3,000,000
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
RIDGEVIEW, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 69,113,202 $ 59,249,535
Cash paid to suppliers and employees (72,144,783) (62,811,314)
Interest paid (1,863,228) (1,235,355)
Income taxes paid, net of refunds (389,749) (1,349,387)
Other cash disbursements (216,583) (201,291)
------------ ------------
Net cash used in operating activities $ (5,501,141) $ (6,347,812)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for investments in subsidiaries $ -- $ (104,372)
Payment for purchase of Tri-Star (3,500,000) --
Proceeds from sale of property and equipment 170,713 --
Payments for purchase of property, plant and
equipment (2,462,792) (1,986,894)
------------ ------------
Net cash used in investing activities $ (5,792,079) $ (2,091,266)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term borrowings (repayments) $ (3,269,103) $ 1,329,482
Proceeds from long-term debt 80,813,046 65,324,283
Repayments of long-term debt (66,511,930) (58,500,619)
------------ ------------
Net cash provided by financing activities $ 11,032,013 $ 8,153,146
------------ ------------
EFFECT OF EXCHANGE RATE ON CASH $ 1,566 $ (14,599)
------------ ------------
Net decrease in cash $ (259,641) $ (300,531)
CASH, beginning of period 481,674 315,559
------------ ------------
CASH, end of period $ 222,033 $ 15,028
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
RIDGEVIEW, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Continued)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
----------- -----------
<S> <C> <C>
RECONCILIATION OF NET INCOME (LOSS) TO
NET CASH USED IN OPERATING ACTIVITIES
Net income (loss) $(1,064,410) $ 1,896,951
----------- -----------
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization $ 1,541,914 $ 1,283,319
Provision for doubtful accounts receivable 458,193 192,066
Capital grants recognized (53,363) (56,224)
Increase in deferred compensation liability 173,740 86,814
Increase in deferred income taxes (446,000) (54,552)
Changes in operating assets and liabilities,
net of effect from purchase of Tri-Star:
Increase in accounts receivable (5,147,368) (7,354,885)
Increase in inventories (2,621,090) (3,943,775)
Increase (decrease) in prepaid
expenses and other assets 252,244 (156,467)
Increase in accounts payable 1,084,353 2,170,992
Decrease in income taxes payable (554,952) (255,925)
Increase (decrease) in accrued expenses
and other liabilities 875,598 (156,126)
----------- -----------
Total adjustments to net income (loss) $(4,436,731) $(8,244,763)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES $(5,501,141) $(6,347,812)
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information as of September 30, 1998 and 1997 is unaudited)
NOTE 1 - UNAUDITED FINANCIAL INFORMATION
In the opinion of the Company, the accompanying unaudited Condensed
Consolidated Financial Statements contain all adjustments consisting of normal
recurring accruals for the nine and three months ended September 30, 1998,
necessary to present fairly the financial position of the Company as of
September 30, 1998 and the results of operations for the nine and three months
ended September 30, 1998 and 1997. The financial statements are presented in
condensed form as permitted by the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accounting policies followed by the Company are set
forth in the Company's audited financial statements, which are included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997, filed
with the Securities and Exchange Commission (the "Form 10-K"). The results of
operations for the nine and three months ended September 30, 1998 are not
indicative of the results to be expected for the full year. The Company's net
sales and profitability generally experience stronger performance in the third
and fourth quarters. These unaudited condensed financial statements should be
read in conjunction with the Company's audited financial statements included in
the Form 10-K.
NOTE 2 - 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. The Company has adopted Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share," which requires the
presentation of: (1) "Basic Earnings per Share," computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding during the period and (2) "Diluted Earnings per Share," which gives
effect to all dilutive potential common shares that were outstanding during the
period, by increasing the denominator to include the number of additional common
shares that would have been outstanding if the dilutive potential common shares
had been issued. The options outstanding at September 30, 1998 and December 31,
1997 have not been included in diluted earnings per share due to their
anti-dilutive nature.
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of September 30, 1998 and 1997 is unaudited)
NOTE 3 - INVENTORIES
A summary of inventories by major classification is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Raw Materials $ 3,896,675 $ 4,217,281
Work-in-process 12,559,026 8,038,662
Finished goods 13,076,827 11,179,947
(LIFO Reserve) (120,000) (120,000)
------------ ------------
Total inventories $ 29,412,528 $ 23,315,890
============ ============
</TABLE>
NOTE 4 - ACQUISITION
On July 14, 1998, the Company acquired all of the issued and
outstanding shares of capital stock of Tri-Star Hosiery Mills, Inc.
("Tri-Star"), a sports sock manufacturer located in Mebane, North Carolina, for
$3.5 million in cash and $4.0 in assumed debt, in a transaction accounted for as
a purchase. The excess of cost over fair value of net assets acquired
(goodwill) of $2.8 million is being amortized over fifteen years.
NOTE 5 - LONG-TERM DEBT
On July 14, 1998, the Company amended its existing bank loan agreement
(the "Loan Agreement"). The amended agreement provides for a $34,000,000
revolving line of credit due June 30, 2000 (the "Revolving Credit Facility"). In
addition to the Company's existing term loan of $4.0 million ("Term Loan A"),
the amended agreement provides for two additional term loans of $500,000 ("Term
Loan B") and $615,000 ("Term Loan C") for the funding of the acquisition of
Tri-Star.
On September 8, 1998, the Company and its lender entered into a
forbearance agreement (the "Agreement"), which acknowledges that events of
default occurred as of June 30, 1998 and have continued under the Loan
Agreement. Specifically, the Company is in violation of minimum domestic
tangible net worth and fixed charge coverage ratios, as specified in the Loan
Agreement. As such, the Company has requested, and the lender has agreed,
subject to all of the terms, conditions and provisions of the Agreement, to
forbear for a specified period from exercising the various rights and remedies
available to the lender when an event of default has occurred and is continuing
under the Loan Agreement.
8
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of September 30, 1998 and 1997 is unaudited)
NOTE 5 - LONG-TERM DEBT (Continued)
During the forbearance period, defined as the period beginning on
September 8, 1998 and ending on the earlier of December 31, 1998 or the date on
which any forbearance condition fails or ceases to be satisfied, the terms of
the Agreement allow for the lender to continue to make revolving credit loans to
the Company in accordance with the provisions of the Loan Agreement, modified as
follows: (1) no minimum revolving credit availability, (2) interest on all loans
will be charged from and after September 1, 1998 at the prime rate plus 0.37%
and (3) the London InterBank Offered Rates ("LIBOR") based option will not be
available.
The Company's obligations under the Agreement include obtaining a
written proposal, on or before September 30, 1998, from a commercial lender
indicating the terms and conditions on which it proposes to make available to
the Company, credit facilities permitting the Company to repay the secured
obligations owed to its existing lender. On or before November 30, 1998, the
Company must secure a binding commitment letter detailing the credit facilities
to be extended to the Company. By December 31, 1998, the Company is obligated to
repay the secured obligations in full and deliver a binding general release to
its existing lender.
As a result of the events of default and the subsequent Agreement, the
Company has reclassified $32,650,556 of long-term debt to a current liability at
September 30, 1998. On September 18, 1998, the Company received a written
proposal from the lender management believed offered the terms and conditions
most favorable to the Company. Management authorized the proposed lender to
begin conducting its due diligence. Based on discussions with the proposed
lender regarding the results of its due diligence, management expects to receive
a firm commitment by November 30, 1998, for a $35.0 million revolving credit
facility and $6.0 million in term debt with funding to occur by the end of the
fiscal year.
Prior to the forbearance agreement, the rate of interest charged for
borrowings under the loan agreement was based on the lending bank's prime rate
or LIBOR (8.01450% at August 31, 1998, prior to the effective date of the
forbearance agreement). Funds borrowed under Term Loan B bear interest at the
same rates as the other term loans plus 0.75%. These loans are collateralized by
substantially all assets of the Company.
9
<PAGE> 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of September 30, 1998 and 1997 is unaudited)
NOTE 6 - CAPITAL STOCK
The Company has an Omnibus Stock 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. To date, incentive stock options totaling
52,600 shares have been granted to certain of the Company's salaried employees
at an exercise price of $7.50 per share. All of such options are outstanding and
unexercised.
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 percent of the market value of the shares at the time
of purchase. The Company has reserved 75,000 shares for issuance under this
plan.
The Company also has an Outside Directors' Stock Option Plan (the
"Directors' Plan"), which provides that each outside director, at the time of
initial election, shall automatically be granted an option to purchase 500
shares of common stock at the fair market value on the date of election. On each
anniversary date of an outside director's election, 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 to permit such grant.
Options granted under the Directors' Plan are nonqualified stock options, vest
in increments of 33 1/3% on each anniversary of the option grant and expire ten
years after the date they are granted. The Company has reserved 15,000 shares
for issuance under this plan. In November 1996, options to purchase 500 shares
each were granted to the Company's three new members of the board of directors
at an exercise price of $8.00 per share. Additional grants totaling 4,000 shares
have been granted to the outside directors. All of such options are outstanding
and unexercised.
10
<PAGE> 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
(Information as of September 30, 1998 and 1997 is unaudited)
NOTE 7 - COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income,"
which requires that all components of comprehensive income and total
comprehensive income be reported on one of the following: a statement of income
and comprehensive income, a statement of comprehensive income or a statement of
stockholders' equity. Comprehensive income is comprised of net income and all
changes to stockholders' equity, except those due to investments by owners
(changes in paid in capital) and distributions to owners (dividends). For
interim reporting purposes, SFAS No. 130 requires disclosure of total
comprehensive income.
Total comprehensive income is as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
1998 1997
----------- ----------
<S> <C> <C>
Net income (loss) $(1,064,410) $1,896,951
Other comprehensive income (loss), net of tax 205,394 (386,584)
----------- ----------
Comprehensive income (loss) $ (859,016) $1,510,367
=========== ==========
</TABLE>
Accumulated other comprehensive income consists solely of foreign
currency translation adjustments, and is presented below as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
1998 1997
--------- ---------
<S> <C> <C>
Beginning balance $(219,546) $ 227,104
Current period change, net of taxes of $115,534
and $217,453, respectively 205,394 (386,584)
--------- ---------
Ending balance $ (14,152) $(159,480)
========= =========
</TABLE>
11
<PAGE> 12
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis provides information regarding
the Company's consolidated financial condition as of September 30, 1998 and its
results of operations for the three and nine months then ended. This discussion
and analysis should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Form 10-K, and the
unaudited interim consolidated financial statements and notes thereto included
elsewhere in this report. The results of operations for the three and nine
months ended September 30, 1998 are not indicative of results expected for the
year ending December 31, 1998. See "Seasonality" in discussion below.
General
The following table presents the Company's net sales by product
category for the three-month and nine-month periods ended September 30, 1998 and
1997, expressed in thousands of dollars and as a percentage of total net sales.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Socks:
Sports specific $ 8,830 27.6% $ 5,303 20.5% $21,502 29.2% $15,472 23.2%
Sports promotional 7,927 24.7 5,482 21.2 19,500 26.5 15,871 23.8
Active sport 311 1.0 594 2.2 1,269 1.7 1,608 2.4
Rugged outdoor and
heavyweight casual 5,281 16.5 5,794 22.4 8,776 11.9 10,055 15.1
------- ------- ------- ------- ------- ------- ------- -------
Total socks $22,349 69.8% $17,173 66.3% $51,047 69.3% $43,006 64.5%
------- ------- ------- ------- ------- ------- ------- -------
Women's Hosiery:
Sheer pantyhose and knee-highs $ 4,228 13.2% $ 2,634 10.2% $ 9,705 13.2% $10,658 16.0%
Tights and trouser socks 5,452 17.0 6,082 23.5 12,868 17.5 13,026 19.5
------- ------- ------- ------- ------- ------- ------- -------
Total women's hosiery $ 9,680 30.2% $ 8,716 33.7% $22,573 30.7% $23,684 35.5%
------- ------- ------- ------- ------- ------- ------- -------
Total net sales $32,029 100.0% $25,889 100.0% $73,620 100.0% $66,690 100.0%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The net sales by product category for the three and nine months ended
September 30, 1998 are not indicative of the net sales by product category
expected for the year ending December 31, 1998, because sales of rugged outdoor
and heavyweight casual socks and tights and trouser socks typically are higher
during the third and fourth quarters.
12
<PAGE> 13
Results of Operations
The following table presents the Company's results of operations as a
percentage of net sales for the three and nine months ended September 30, 1998
and 1997.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 81.2 77.9 82.7 78.3
------- ------- ------- -------
Gross profit 18.8% 22.1% 17.3% 21.7%
Selling, general and
administrative expenses 14.4 13.1 17.1 15.3
------- ------- ------- -------
Operating income 4.4% 9.0% 0.2% 6.4%
Interest expense (2.5) (2.1) (2.5) (2.1)
Other income, net (0.0) 0.1 (0.0) 0.1
------- ------- ------- -------
Income (loss) before income taxes 1.9% 7.0% (2.3)% 4.4%
Income tax expense 0.9 2.6 (0.8) 1.6
------- ------- ------- -------
Net income (loss) 1.0% 4.4% (1.5)% 2.8%
======= ======= ======= =======
</TABLE>
Comparison of Three Months Ended September 30, 1998 to Three Months Ended
September 30, 1997
Net sales for the three months ended September 30, 1998 increased to
$32.0 million, compared to $25.9 million for the same period a year ago, an
increase of $6.1 million, or 23.6%. The increase in net sales is primarily
attributable to the acquisition of Tri-Star Hosiery Mills, Inc. ("Tri-Star"),
which the Company completed on July 14, 1998. Net sales for Tri-Star for the
three months ended September 30, 1998 were $4.4 million, which represented 72.1%
of the increase in net sales for the period. The Company's sock operation in
Newton, North Carolina experienced an increase in net sales of $1.7 million for
the quarter, compared to the same period a year ago, primarily as a result of
increased sales of socks in the sports specific product category. Sales of
products in the sports promotional category increased approximately 45% as a
result of the Tri-Star acquisition.
Gross profit for the quarter ended September 30, 1998 was $6.0 million,
compared to $5.7 million for the same period in 1997, an increase of $0.3
million, or 5.3%. As a percentage of net sales, gross profit decreased to 18.8%
for the three months ended September 30, 1998, compared to 22.1% during the same
period in 1997. The Company continues to face declining gross profit margins in
each of its product categories. Although the Company planned to accept certain
sales programs for 1998 at lower margins than historically had been achieved,
other unforeseen circumstances increased the decline in margins. The Company's
women's hosiery operation failed to manufacture at planned production levels
during the quarter, resulting in negative
13
<PAGE> 14
manufacturing variances and poor shipping execution. Management has taken
appropriate measures to improve the execution of its manufacturing plan and
minimize the negative variances incurred to date. However, the impact of the
deficiencies will continue to be felt through the end of the year. In addition,
the gross profit margin for the rugged outdoor and heavyweight casual sock
product category decreased from 22.6% in 1997 to 16.3% in 1998. The primary
reason for this reduction is due to changes in the mix of products produced by
this division dictated by market conditions. Moreover, the Company has completed
a re-engineering of a majority of the manufacturing departments for this product
category in an effort to reduce costs and improve margins. Management expects
the Company to begin realizing the benefits of these efforts in early 1999.
Selling, general and administrative expenses for the three months ended
September 30, 1998 and 1997 were $4.6 million and $3.4 million, respectively. As
a percentage of net sales, selling, general and administrative expenses
increased to 14.4% for the quarter ended September 30, 1998, compared to 13.1%
for the same period a year ago. Selling, general and administrative expenses
increase by $339,000 this quarter as a result of the Tri-Star acquisition.
Royalty expenses associated with licensed brands, ongoing advertising and
marketing expenses relating to the Evan-Picone women's hosiery program, as well
as an increase in freight charges resulting from the implementation of a private
label program with a large U.S. retailer, caused the balance of the increase in
selling, general and administrative expenses for the quarter.
Operating income for the three months ended September 30, 1998 was $1.4
million, compared to $2.3 million, a decrease of $0.9 million, or approximately
39%. The decrease in operating income is a result of the declining margins and
the increase in selling, general and administrative expenses.
Interest expense for the quarter ended September 30, 1998 increased
43.7% to $786,000 from $547,000 for the three months ended September 30, 1997.
This increase is attributable primarily to the acquisition of Tri-Star, which
added $7.5 million of new and assumed debt to the Company's total
interest-bearing liabilities.
Income tax expense for the three months ended September 30, 1998 and
1997 was $274,000 and $668,000, respectively.
Net income for the quarter ended September 30, 1998 was $329,000,
compared to $1.1 million for the same period a year ago. The decrease in net
income resulted from lower gross profit margins combined with higher selling,
general and administrative expenses and increased interest expense.
14
<PAGE> 15
Comparison of Nine Months Ended September 30, 1998 to Nine Months Ended
September 30, 1997
Net sales for the nine months ended September 30, 1998 were $73.6
million, compared to $66.7 million for the nine months ended September 30, 1997.
The Tri-Star acquisition provided additional revenues of $4.4 million for the
period, representing approximately 64% of the net sales increase. The increase
in net sales attributable to Tri-Star was offset by significant reductions in
net sales occurring in the Company's women's hosiery and rugged outdoor and
heavyweight casual sock product categories. Net sales for the nine months ended
September 30, 1998 also were adversely impacted by a one-time charge of
$900,000 recorded by the Company during the second quarter relating to the
re-launch of the Evan-Picone women's hosiery program.
Gross profit for the nine months ended September 30, 1998 was $12.7
million, compared to $14.5 million for the same period in 1997, a decrease of
$1.8 million, or 12.4%. As a percentage of net sales, gross profit decreased to
17.3% for the nine months ended September 30, 1998, compared to 21.7% during the
same period in 1997. Gross profit margins have declined in each of the Company's
product categories. These declines are primarily due to negative manufacturing
variances in the women's hosiery operation and a shift in the mix of rugged
outdoor and heavyweight casual sock products sold that included a higher
concentration of items with lower margins. Gross profit for the nine months
ended September 30, 1998 also was adversely affected by the charge taken during
the second quarter relating to the Evan-Picone re-launch.
For the nine months ended September 30, 1998 and 1997, selling, general
and administrative expenses were $12.6 million and $10.2 million, respectively.
As a percentage of net sales, selling, general and administrative expenses
increased from 15.3% for the first nine months of 1997, compared to 17.1% for
the same period the in 1998. Selling, general and administrative expenses
increased by $339,000 as a result of the Tri-Star acquisition. Selling, general
and administrative expenses also were negatively impacted by $700,000 of charges
taken by the Company during the second quarter relating to costs associated with
the management information systems implementation and increases in the Company's
allowance for doubtful accounts.
Income from operations for the nine months ended September 30, 1998 and
1997 was $0.2 million and $4.2 million respectively. With the exception of the
Company's subsidiary in the Republic of Ireland and Tri-Star, each of the
Company's operating divisions posted a decrease in operating income for the nine
months ended September 30, 1998. The decrease in income from operations is
attributable to the decline in gross profit amount and margin and the increase
in selling, general and administrative expenses. The $900,000 and $700,000
one-time charges taken by the Company during the second quarter also contributed
to the decrease in income from operations for the nine-month period ending
September 30, 1998.
15
<PAGE> 16
Interest expense for the nine months ended September 30, 1998 was $1.8
million, compared to $1.4 million for the same period the prior year, an
increase of 28.6%. The funding of the Tri-Star acquisition with new and assumed
debt in July 1998 and an increase in average borrowings for the nine-month
period ended September 30, 1998 account for the increase in interest expense.
Income tax (benefit) for the nine months ended September 30, 1998 was
$(611,000), compared to income tax expense of $1.0 million for the nine months
ended September 30, 1997. The income tax benefit for 1998 is the result of the
operating loss incurred to date.
Net loss for the nine months ended September 30, 1998 was
$(1.1) million, compared to net income of $1.9 million for the same period in
1997, a decrease in earnings of $3.0 million for the nine-month period. The
erosion of gross profit margins and the increase in selling, general and
administrative expenses and increased interest expense have all affected the
Company's profitability for the nine months ended September 30, 1998. The net
loss of $(1.1) million also included approximately $1.0 million of after-tax
charges taken by the Company during the second quarter.
Liquidity and Capital Resources
Cash flows used in operating activities during the nine months ended
September 30, 1998 and 1997 were $(5.5) million and $(6.3) million,
respectively. The negative cash flow from operating activities during the first
nine months of 1998 resulted from a $5.1 million increase in accounts receivable
since December 31, 1997. The Company generally experiences a higher level of
accounts receivable at the end of the third quarter as a result of its heavier
shipping season during the third quarter.
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 (the "Revolving Credit Facility"). The Revolving Credit Facility
provides for borrowings up to $34.0 million. As of November 12, 1998, $27.8
million was outstanding under the Revolving Credit Facility, and there was $6.2
million available for additional borrowings. Prior to September 1, 1998, funds
borrowed under the Revolving Credit Facility bore interest at a rate based on
LIBOR (8.01450% at August 31, 1998, prior to the effective date of the
forbearance agreement). 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.
16
<PAGE> 17
Based on the Company's results of operations for the quarter ended
June 30, 1998, the Company was in violation of certain financial covenants with
respect to the Revolving Credit Facility and term loans. As such, on September
8, 1998, the Company entered into a forbearance agreement with the lender,
acknowledging the existence of such defaults. Under the terms of the forbearance
agreement, for the period beginning September 8, 1998 and ending on December 31,
1998, or at an earlier date on which any forbearance condition fails or ceases
to be satisfied, the lender has agreed that it will not exercise any of its
rights or remedies available to it upon default. Further, the lender agreed to
continue making loans to the Company under the Revolving Credit Facility, at the
lender's discretion, in accordance with the provisions of the loan agreement.
The following modifications to the terms of the loan agreement apply during the
forbearance period: (i) there will be no minimum revolving credit availability,
(ii) beginning after September 1, 1998, interest on all loans will be charged at
the prime rate plus 0.37%, and (iii) the LIBOR based rate previously available
to the Company will no longer be available.
The Company's obligations under the forbearance agreement include
obtaining a written proposal, on or before September 30, 1998, from a commercial
lender indicating the terms and conditions on which it proposes to make
available to the Company, credit facilities permitting the Company to repay the
secured obligations owed to its existing lender. On or before November 30, 1998,
the Company must secure a binding commitment letter detailing the credit
facilities to be extended to the Company. By December 31, 1998, the Company is
obligated to repay the secured obligations to its existing lender.
The Company has solicited and received preliminary proposals from six
different commercial lenders to replace the Revolving Credit Facility and
existing term loans. On September 18, 1998, the Company received a written
proposal from the lender management believed offered the terms and conditions
most favorable to the Company. Management authorized the proposed lender to
begin conducting its due diligence. Based on discussions with the proposed
lender regarding the preliminary results of its due diligence, management
expects to receive a firm commitment by November 30, 1998, for a $35.0 million
revolving credit facility and $6.0 million in term debt with closing to occur by
the end of the fiscal year. Although management is working diligently to obtain
financing and expects to do so by December 31, 1998, no assurance can be given
that the Company will in fact be successful in meeting this condition of the
forbearance agreement.
For some time, the Company's Year 2000 Project team has been reviewing
and assessing the Company's management information system and its compliance
with the Year 2000. The project team, selected by executive management and
comprised of senior managers from relevant functional areas, has been managing
the implementation of the Company's new enterprise-wide management information
system. Once completed, the system will link each of the Company's facilities
electronically and provide operational improvements in manufacturing,
forecasting, planning, distribution and financial reporting. Additionally, the
new system will address the issues regarding Year 2000 compliance and date
driven applications. The Company's suppliers and customers are being informed of
the Company's Year 2000 compliance plan, and have been asked to provide the
Company with their Year 2000 compliance plans.
17
<PAGE> 18
Because the Company's Year 2000 compliance plan involves a complete
overhaul of its management information system, the expected total cost of the
project is $3.0 million. Approximately $1.9 million had been disbursed as of
November 13, 1998. An additional $1.1 is expected to be expended over the next
six months. As of November 13, 1998, the project was approximately 65% complete.
Management expects the Company's new management information system to become
operational just after the end of the first quarter of 1999. Financing of the
project has been provided by the Company's Revolving Credit Facility, a leasing
arrangement for certain hardware and additional term loans of approximately
$470,000.
In July 1998, the Company completed its acquisition of Tri-Star, a
sports sock manufacturer located in Mebane, North Carolina. The Company acquired
100% of the outstanding common stock of Tri-Star for $3.5 million in cash and
assumed debt in the amount of $4.0 million. Funding for the acquisition came
from the Company's Revolving Credit Facility and two additional term loans in
the amount of $1.1 million.
Seasonality
Although the Company generally experiences higher net sales and greater
profitability in the third and fourth quarters, management expects the trend of
lower than expected sales and reduced gross profit margins to continue through
the end of the year.
Impact of Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," which supercedes SFAS No. 14, "Financial Reporting for Segments of
a Business Enterprise." SFAS No. 131 establishes standards for the way that
public companies report information about operating segments in interim
financial statements issued to the public. It also establishes standards for
disclosures regarding products and services, geographic areas and major
customers. SFAS No. 131 defines operating segments as components of a company
about which separate financial information is available that is regularly
evaluated by the chief decision makers in deciding how to allocate resources and
in assessing performance.
SFAS No. 131 is effective for periods beginning after December 15, 1997,
and requires comparative information for earlier years to be restated.
Management will adopt this standard in 1998, and believes that additional
disclosure will be required to disclose separately, certain information about
the profit or loss and the assets of the Company's operating divisions. Results
of operations and financial position will be unaffected by the implementation of
this standard.
18
<PAGE> 19
PART II - OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
The Company is filing the following exhibits with this report:
(a) Exhibit 10.1 - Forbearance Agreement
(b) Exhibit 27 - Financial Data Schedule (for SEC use only)
No Current Reports on Form 8-K were filed by the Company during the quarter for
which this report is filed.
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RIDGEVIEW, INC.
Date: November 13, 1998 By: /s/ Walter L. Bost, Jr.
-----------------------
Walter L. Bost, Jr.
Executive Vice President
and Chief Financial Officer
20
<PAGE> 1
[EXECUTION COPY]
FORBEARANCE AGREEMENT
THIS FORBEARANCE AGREEMENT is made as of September 8, 1998 by and
among RIDGEVIEW, INC., a North Carolina corporation, SENECA KNITTING MILLS
CORPORATION, a New York corporation, and TRI-STAR HOSIERY MILLS, INC., a North
Carolina corporation (the "Borrowers"), and NATIONSBANK, N.A. (f/k/a
NationsBank, N.A. (South)) (the "Lender").
Preliminary Statement
The Borrowers and the Lender are parties to an Amended and Restated
Loan and Security Agreement dated as of December 20, 1996, as amended by
Amendment No. 1 dated as of January 31, 1997, Amendment No. 2 dated as of March
13, 1997, Amendment No. 3 dated as of July 31, 1997, Amendment No. 4 dated as of
March 13, 1998, and Amendment No. 5 dated as of July 14, 1998 (as so amended,
the "Loan Agreement"; terms defined therein and not otherwise defined herein
being used herein as therein defined).
Events of Default have occurred and are continuing under the Loan
Agreement. Specifically, Section 10.1 (b)(ii) of the Loan Agreement required as
of June 30, 1998 that the Tangible Net Worth of the Domestic Business of
Ridgeview and its U.S. Subsidiaries be $17,415,385; such Tangible Net Worth was
reported to the Lender as $15,517,086. Further, Section 10.1(b)(iii) of the Loan
Agreement required that the Fixed Charge Ratio of the Domestic Business of
Ridgeview and its U.S. Subsidiaries as of June 30, 1998 be greater than 1.25 to
1; such ratio was reported to the Lender as -0.87 to 1. This Agreement
constitutes written notice to the Borrowers of the foregoing Events of Default,
which Events of Default, and any continuation or repetition of such Events of
Default, are referred to hereinafter as the "Forbearance Defaults."
The Borrowers have requested, and the Lender has agreed, upon and
subject to all of the terms, conditions and provisions of this Agreement, to
forbear for a specified period from exercising the various rights and remedies
available to the Lender when an Event of Default has occurred and is continuing
under the Loan Agreement.
Accordingly, in consideration of the Loans, the mutual undertakings
hereinafter set forth and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
Section 1. Acknowledgments and Agreements by Borrowers. The Borrowers
acknowledge and agree that:
<PAGE> 2
(a) Events of Default have occurred and now exist under the Loan
Documents and are continuing;
(b) The Loan Documents executed and delivered by the Borrowers are
the legal, valid and binding obligations of the Borrowers, enforceable against
them in accordance with their respective terms;
(c) The Security Interest granted by the Borrowers to the Lender in
the Collateral is a duly perfected, first priority Lien, subject only to
Permitted Liens; and
(d) All of the Secured Obligations are absolutely due and owing by
the Borrowers to the Lender without any defense, deduction, offset or
counterclaim.
Section 2. Agreement to Forbear. The Lender agrees that during the
Forbearance Period (as hereinafter defined) it will not, solely by reason of the
Forbearance Defaults, exercise any right or remedy available to it upon default
by the Borrowers, other than as expressly set forth in this Agreement. Further,
during the Forbearance Period the Lender may continue in its discretion to make
Revolving Credit Loans to the Borrowers in accordance with the provisions of the
Loan Agreement, modified as follows:
(a) Notwithstanding Section 10.14 of the Loan Agreement to the
contrary, there shall be no minimum Revolving Credit Availability;
(b) Notwithstanding any contrary provision of the Loan Agreement or
any notice or other communication by the Lender to the Borrowers prior to the
date hereof, and without prejudice to the Lender's right to impose the Default
Margin, interest shall be payable from and after September 1, 1998 on all Loans
and, to the extent permitted by applicable law, on all other Secured
Obligations, at the Prime Rate, plus 0.37%, payable on demand or, if no demand
is made, monthly on the first day of each month; and
(c) The Eurodollar Rate shall not be available.
"Forbearance Period" means the period beginning on the date hereof and ending on
the earlier of December 31, 1998 and the date on which any Forbearance Condition
(as hereinafter defined) fails or ceases to be satisfied.
Section 3. Forbearance Conditions. The following conditions shall
constitute the "Forbearance Conditions":
(a) On or before September 15, 1998, the Lender shall have received a
signed legal opinion from Bond, Schoeneck & King, LLP, in connection with
Amendment No. 5 to the Loan Agreement, in the form previously submitted by the
Lender to said law firm;
2
<PAGE> 3
(b) The Borrowers shall timely perform all of their obligations under
this Agreement;
(c) No Default or Event of Default, other than the Forbearance
Defaults, shall occur or be continuing;
(d) The Borrowers shall pay to the Lender on the date hereof, in
consideration of the Lender's forbearance, a fee of $10,000 which shall be fully
earned when due and payable and not subject to rebate or refund;
(e) The Borrowers shall not permit EBITDA for the fiscal quarter of
the Borrowers ending September 30, 1998 to be less than $2,000,000;
(f) On or before September 30, 1998, the Borrowers shall have
furnished to the Lender a copy of a proposal letter from a commercial lender
indicating the terms and conditions on which it proposes to make available to
the Borrower(s) credit facilities that will permit the Borrowers to repay the
Secured Obligations;
(g) On or before November 30, 1998, the Borrowers shall have
furnished to the Lender a copy of a binding commitment from a commercial lender,
as to credit facilities to be extended to the Borrower(s) that will permit the
repayment in full of the Secured Obligations on or before December 31, 1998; and
(h) On or before December 31, 1998, the Borrowers shall have paid the
Secured Obligations in full and delivered to the Lender a binding general
release.
Section 4. Forbearance Terminated. If any one or more of the
Forbearance Conditions is not satisfied, the agreement of the Lender to forbear
as set forth in Section 2 shall, at the election of the Lender, terminate
without notice to the Borrowers, and the Lender shall thereupon have and may
exercise from time to time all of the remedies available to it under the Loan
Documents and applicable law by reason of the existence of continuing Events of
Default.
Section 5. Representations and Warranties of Borrowers. The Borrowers
hereby represent and warrant to the Lender that:
(a) The Borrowers have no knowledge of any Defaults or Events of
Default existing under the Loan Documents other than the Forbearance Defaults;
(b) Subject to such existing Events of Default, the representations
and warranties of the Borrowers set forth in the Loan Documents are true and
correct in all material respects on the date of this Agreement;
(c) The Borrowers have the power and authority and have taken all
necessary steps to authorize them to execute, deliver and perform its
obligations under this
3
<PAGE> 4
Agreement in accordance with its terms, this Agreement has been duly executed
and delivered by the Borrowers and is the legal, valid and binding obligation of
the Borrowers, enforceable against the Borrowers in accordance with its terms;
and
(d) The execution, delivery and performance by the Borrowers of this
Agreement does not require any Governmental Approval, violate any applicable
law, conflict with or result in a breach of the Borrowers' certificates of
incorporation or by-laws, or conflict with or result in a breach of or
constitute a default under any material provisions of any indenture, agreement
or other instrument to which any Borrower is a party or by which any Borrower or
any of its property may be bound or any Governmental Approval applicable to any
Borrower or its property.
Section 6. Application of Proceeds. The Borrowers hereby agree, any
provision of the Loan Agreement or any other Loan Document to the contrary
notwithstanding, that as between the Borrowers, on one hand, and the Lender on
the other, the Lender shall have the right to apply and reapply any and all
Collateral, proceeds thereof, other amounts received by the Lender for
application to the Secured Obligations and any property of the Borrowers at any
time in the possession of the Lender or any Affiliate of the Lender to the
payment of the Secured Obligations in any order that the Lender in its sole and
absolute discretion may determine from time to time.
Section 7. Governing Law; General Provisions. (a) This Agreement
shall be governed by and construed in accordance with the laws of the State of
Georgia (without reference to conflict of laws principles).
(b) This Agreement may be executed in any number of copies and by the
parties on separate copies, all of which taken together shall constitute a
single agreement.
(c) Captions of Sections, subsections, schedules or exhibits herein
or attached hereto are for convenience of reference only and shall not be
considered in interpreting or construing any provision of this Agreement and its
attachments.
(d) The parties to this Agreement do not intend to create, and no
provision hereof shall be deemed to have created, any rights in favor of any
Person not a party to this Agreement.
(e) This Agreement may not be amended or otherwise modified except in
writing, signed by the parties to this Agreement.
(f) This Agreement is not intended to be, and it shall not be
construed to be, a novation or accord and satisfaction and, except as expressly
modified hereby, the Loan Agreement and the other Loan Documents remain in full
force and effect and are hereby ratified and confirmed.
4
<PAGE> 5
Section 8. No Waiver. None of this Agreement, the forbearance by the
Lender hereunder, the Lender's continued Revolving Credit Loans to the Borrowers
in accordance with the terms of the Loan Agreement and this Agreement or the
Lender's review of, or discussions or negotiations with the Borrowers as to a
potential restructuring of the facilities available under the Loan Agreement are
intended to be, nor are they nor shall they be deemed to be a waiver of or
consent to the Events of Default referred to herein or any other Default or
Event of Default. The Borrowers agree that no Default or Event of Default has
been waived or released, or shall be considered to have been cured by reason of
the Lender entering into this Agreement or performing the terms hereof,
including, without being limited to, forbearing from the exercise of available
remedies and making further Revolving Credit Loans to the Borrowers.
Section 9. Release; Waiver of Jury Trial. (a) TO INDUCE THE LENDER TO
ENTER INTO THIS AGREEMENT, THE BORROWERS HEREBY RELEASE THE LENDER, ITS
RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AND ASSIGNS, FROM ANY AND ALL CLAIMS,
DEMANDS, ACTIONS, CAUSES OF ACTION AND OTHER LIABILITIES OF ANY KIND, WHETHER
MATURED OR UNMATURED OR CONTINGENT, LIQUIDATED OR UNLIQUIDATED, AT LAW OR IN
EQUITY, THAT THE BORROWERS HAVE OR HAVE HAD AGAINST THE LENDER.
(b) EACH OF THE PARTIES HERETO HEREBY WAIVES ANY RIGHT IT MAY HAVE TO
TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATED TO THIS
AGREEMENT.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their duly authorized officers all as of the day and year first
written above.
BORROWERS:
[Corporate Seal] RIDGEVIEW, INC.
Attest:
By: /s/ Doug Yoder By: /s/ Hugh R. Gaither
---------------------------------- -------------------------------
Name: Doug Yoder Hugh R. Gaither
--------------------------- President
Title: Assistant Secretary
---------------------------
[Corporate Seal] SENECA KNITTING MILLS CORPORATION
Attest:
By: /s/ Walter Bost By: /s/ Hugh R. Gaither
---------------------------------- -------------------------------
Name: Walter Bost Hugh R. Gaither
--------------------------- President
Title: Secretary
---------------------------
[Corporate Seal] TRI-STAR HOSIERY MILLS, INC.
Attest:
By: /s/ Doug Yoder By: /s/ Hugh R. Gaither
---------------------------------- -------------------------------
Name: Doug Yoder Hugh R. Gaither
--------------------------- President
Title: Secretary
---------------------------
LENDER:
NATIONSBANK, N.A.
By:
-------------------------------
Scott K. Goldstein
Vice President
6
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