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FORM 10-K
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, 1997
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)
(828) 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 [ ].
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The aggregate market value of the Common Stock (its only voting stock)
held by non-affiliates of the Company, as of March 23, 1998, was $15,438,852.
(Reference is made to the final paragraph of Part I herein for a statement of
the assumptions upon which the calculation is based.)
As of March 23, 1998, there were 3,000,000 shares of the Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
In Part II of this report, information is incorporated by reference
from the Company's Annual Report to Shareholders for the year ended December 31,
1997. In Part III of this report, information is incorporated by reference to
the proxy statement for the annual meeting of shareholders to be held May 26,
1998.
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Ridgeview, Inc.
Index to Form 10-K
For the Year Ended December 31, 1997
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Page
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PART I
Item 1 - Business 4
Item 2 - Properties 27
Item 3 - Legal Proceedings 27
Item 4 - Submission of Matters to a Vote of Security Holders 27
PART II
Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters 28
Item 6 - Selected Financial Data 28
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of
Operations 29
Item 8 - Financial Statements and Supplementary Data 29
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 29
PART III
Item 10 - Directors and Executive Officers of the Registrant 30
Item 11 - Executive Compensation 30
Item 12 - Security Ownership of Certain Beneficial Owners and Management 30
Item 13 - Certain Relationships and Related Transactions 30
PART IV
Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K 31
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PART I
ITEM 1 - BUSINESS
GENERAL
The Company designs, manufactures and markets a complete range of
sports, rugged outdoor and heavyweight casual socks as well as a wide variety of
women's hosiery products, including tights, trouser socks, pantyhose and
knee-highs. The Company believes it is one of the leading vendors of sports
socks to sporting goods and active apparel stores. The Company also sells its
products to department stores, discount stores and a variety of other retailers.
In addition, the Company produces sports socks for sale by others under such
widely-recognized brand names as adidas, ASICS, Bass, Brooks, Fila, Head
Sportswear, IZOD, New Balance, Reebok and WB Sports 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, Ellen Tracy, Evan-Picone, Picone
Studio, Rockport and Woolrich. The Company estimates that between one-half and
two-thirds of its net sales in the current fiscal year will be derived from
sales of socks with the balance derived from sales of women's hosiery products.
As of March 23, 1998, the Company had more than 3,500 customers in the United
States, Europe and other parts of the world.
The Company was founded in 1912 in Newton, North Carolina by a group of
individuals, including Joseph Albert Gaither, grandfather of the Company's
Chairman and great grandfather of the Company's President and Chief Executive
Officer, as a manufacturer of women's hosiery. In the mid-1970's the Company
began diversifying its product line to include sports socks, and during the past
ten years the Company has diversified geographically and modernized its
production capacity, increased its domestic customer base, expanded its contract
manufacturing business, acquired the rights to manufacture and sell socks and
women's hosiery under several widely-recognized brand names and increased its
marketing activities and sales in Europe and other foreign markets. In 1986 the
Company established a manufacturing facility in the Republic of Ireland to serve
European customers and in 1992 established a manufacturing facility in Ft.
Payne, Alabama to produce promotionally-priced, multi-pair pack sports socks. In
June 1995, the Company expanded its manufacturing capacity and customer base by
acquiring Seneca Knitting Mills Corporation ("Seneca"), which has been engaged
exclusively in designing, manufacturing and marketing rugged outdoor and
heavyweight casual socks since 1954. In 1995 the Company also completed a major
expansion of its manufacturing facility in the Republic of Ireland to
accommodate growth from a new sports sock manufacturing program for adidas.
INDUSTRY OVERVIEW
According to statistics compiled by the National Association of Hosiery
Manufacturers ("NAHM"), total retail dollar volume in the United States of total
hosiery, which includes all socks, women's sheer hosiery and tights, increased
by approximately 13% from $6.9 billion in
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1993 to $7.8 billion in 1997. During the same five-year period, total retail
dollar volume of (i) socks increased by 31% from $3.5 to $4.6 billion on a 28.6%
increase in retail unit volume, (ii) women's sheer hosiery decreased from $2.8
to $2.6 billion on a 15.2% decrease in retail unit volume and (iii) tights
increased 13.6% from $619 million to $703 million on an 26.3% increase in retail
unit volume. From 1993 to 1997, total retail dollar volume of men's and boy's
sport/athletic socks (a category that includes rugged outdoor and heavyweight
casual socks) increased by approximately 46% from $660 million to $963 million
on a 61.1% increase in retail unit volume.
According to preliminary statistics compiled by NAHM, in 1997 retail
unit volume of socks increased 6.0%, retail unit volume of sheer hosiery
declined 7.6% and retail unit volume of tights/opaques increased 7.4%.
Production of socks in the United States increased 26.6% overall in 1997 with
the production of boy's socks, including both sports/athletic and casual dress
socks, showing the greatest increase (50.8%) among the various categories of
socks. Reflecting the decline in retail unit volume, production of women's sheer
hosiery decreased 10.3% in 1997. Production of tights and opaque products
increased 124% overall with the largest increases being in the categories of
infants and women's tights/opaques.
As part of the current trend in the United States towards more casual
dress, socks are increasingly becoming a fashion statement for style-conscious
consumers. The Company believes that this trend has helped drive the growth in
recent years in sales of socks. Sales of promotionally-priced, multi-pair pack
sports socks have also increased significantly during the past five years and
captured an increasing share of the sports sock retail dollar volume. Influenced
by the same trend towards more casual dress, the market for women's hosiery is
changing from its emphasis on traditional sheer pantyhose to include more
durable, heavyweight products such as tights and trouser socks. Manufacturing of
women's hosiery products is also becoming increasingly concentrated with
approximately 30 manufacturers of sheer hosiery operating in the United States.
Of that number, the 10 largest manufacturers produce approximately 75% of the
women's hosiery sold in the United States.
Rapid technological change is also affecting all sock and women's
hosiery manufacturers. In the last ten years, manufacturers have been replacing
their existing mechanical knitting machines with a smaller number of higher
speed electronic machines capable of equal or greater production than the
machines they replaced. The newer electronic machines, which have fewer moving
parts and require less maintenance, also provide greater production flexibility
since they can be rapidly changed over to knit a different style or type of
product. Changing over older mechanical machines is a time-consuming, labor
intensive process. The increased production capacity of the latest generation of
knitting machinery has led to production overcapacity in some segments of the
industry, which has been exacerbated by the fact that many of the older machines
they replaced have been purchased by others and put back into production.
In recent years, the industry has also been, and will continue in the
future to be, affected by certain trends in the retailing industry, including a
trend towards consolidation of all categories of retailers into larger units
having greater purchasing power. The retail sporting goods industry, for
example, which was traditionally highly fragmented and comprised of
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relatively small sporting goods retailers, sports specific specialty shops, pro
shops and departments within chain and discount stores, is being transformed by
the rapid growth of large format sporting goods retailers. They include
customers of the Company such as The Sports Authority, which operates more than
190 stores under that name, Jumbo Sports, which operates approximately 60 stores
and Oshman's Sporting Goods, which operates, in addition to its 34 traditional
sporting goods stores, a chain of 36 large format stores under the name
"SuperSports USA." Similarly, smaller regional discount chains in many regions
of the United States are experiencing increasing pressure from the growth of the
larger national discount stores such as Wal-Mart Stores and Target. Department
stores are also affected by the industry trend towards consolidation of
retailers. In 1995, Federated Department Stores and Broadway Stores merged, and
May Department Stores Co. and J.C. Penney separately purchased most of Woodward
& Lothrop, Inc. Industry analysts expect the trend towards consolidation and
bankruptcy reorganizations among retailers to continue.
The large format sporting goods stores and national discount,
department and chain stores to which the Company and its competitors sell their
products are using sophisticated electronic inventory management systems to
achieve optimal in-stock levels of merchandise. These systems with electronic
order placement features require manufacturers to make greater investments in
working capital to maintain a more extensive inventory of finished products and
in information technology that will give them a quick response capability when
orders are placed, usually electronically, by these retailers. Increasingly, the
large format sporting goods stores, national discount stores and large
department store chains are also requiring manufacturers to play a greater role
in marketing and managing their retail sock and women's hosiery business. This
includes placing logistical demands on manufacturers that impose extra
distribution costs and penalizing them through "chargebacks" when they do not
conform to a retailer's rules for packaging, pre-pricing and shipping goods.
The logistical and other demands retailers are placing on manufacturers
and the rapid technological changes that have created overcapacity in some
segments of the industry have already led to some consolidation of women's
hosiery manufacturers (30 at December 31, 1997 as opposed to 66 at the same date
in 1990 and 86 in 1986). While, according to the NAHM, the number of
manufacturers of socks in the United States increased to approximately 325 at
December 31, 1997 compared with 279 at the same date in 1990, the Company
expects this number to decline in the next several years. Industry analysts
expect that the sock manufacturing industry will be increasingly characterized
by the presence of a small number of large manufacturers, relatively few
medium-sized manufacturers and a large number of small manufacturers primarily
selling greige goods and finished hosiery products to the larger manufacturers.
The trend towards consolidation of manufacturers of socks and women's
hosiery is expected to be reinforced by the trend among large retailers such as
the national discount chains and the large format sporting goods stores to do
business with a smaller group of vendors that are capable of providing a
significant share of their total sock and women's hosiery requirements. With the
exception of the very large manufacturers such as Sara Lee Hosiery and
Kayser-Roth, most manufacturers concentrate on making either socks or women's
hosiery products. The Company, which produces socks and women's sheer hosiery
and tights,
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is one of only a few companies its size that makes all three of these categories
of products. The Company believes that being a diversified manufacturer will
become increasingly important as larger retailers seek to reduce the total
number of vendors with which they do business. The Company also believes that
product diversity will make the Company less vulnerable to consumer trends and
trends in the retailing industry affecting only one segment of the sock and
women's hosiery industry.
GROWTH STRATEGY
During the past ten years, the Company has increased sales by
diversifying its product lines, adding to and geographically diversifying its
production capacity, expanding its domestic customer base, expanding its
contract manufacturing business, acquiring the rights to manufacture and sell
products under licensed brand names and increasing its marketing activities and
sales in Europe and other foreign markets. The Company intends to continue this
overall growth strategy by focusing on the following goals:
INCREASING SALES TO EXISTING CUSTOMERS. Many of the Company's
existing customers in the sporting goods industry, such as Just for
Feet, The Sports Authority, Jumbo Sports and Oshman's Sporting Goods,
are expanding the number of stores they operate, and the Company
expects that its sales to these customers will increase as a result of
their unit growth. The Company also believes that it will be able to
increase its sales to other existing customers such as Target, J.C.
Penney and Nordstrom. The Company also expects to be able to expand its
contract manufacturing of products sold under such widely-recognized
brand names as adidas, Reebok and Fila for major athletic footwear and
apparel companies, and for other companies, such as Liz Claiborne, that
design, contract for the manufacture of and market products under their
own trademarks.
ESTABLISHING SALES RELATIONSHIPS THROUGH CROSS-SELLING. The
Company is seeking to establish relationships with certain major
retailers with which the Company has not historically done business.
Management believes that the Company's expanded customer base of major
retailers resulting from the Seneca acquisition and the Evan-Picone
women's hosiery program creates opportunities for cross-selling the
Company's other products. The recent expansion of the Company's
manufacturing facility in Ft. Payne, Alabama that produces multi-pair
pack sports socks also positions the Company to compete effectively for
sales to new customers.
OBTAINING ADDITIONAL LICENSING ARRANGEMENTS. The Company is
seeking to license additional nationally and internationally recognized
brand names to complement the Coleman, Ellen Tracy, Evan-Picone, Picone
Studio, Rockport and Woolrich licensed brand names.
ADDING COMPLEMENTARY PRODUCT CATEGORIES THROUGH SELECTIVE
ACQUISITIONS. Women's casual socks and men's dress socks are
complementary product categories that could be added to the Company's
existing product lines through selective acquisitions of other
manufacturers or through internal product diversification.
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Future acquisitions could also be expected to expand production
capacity and add to the customer base.
INCREASING INTERNATIONAL SALES. The Company plans to build on
the existing customer base served by the Company's manufacturing
facility in the Republic of Ireland and on the Company's base of export
sales of domestically manufactured products. In 1995, the Company
completed an expansion of this facility that approximately doubled its
production capacity.
OPERATING STRATEGIES
In recent years, manufacturers of socks and women's hosiery have
experienced a period of rapid technological change and encountered a demanding
retail environment characterized by customers' expectations of immediate order
fulfillment and depth in all product categories. Through the following core
operating strategies, the Company is investing in new technology and
strengthening its ability to provide a significant share of major retailers'
total socks and women's hosiery requirements.
PRODUCING HOSIERY PRODUCTS FOR SALE UNDER BRAND NAMES. The
Company produces socks for sale under its own brand names and for sale
by athletic footwear companies and others under such widely-recognized
brand names as adidas, ASICS, Bass, Brooks, Fila, Head Sportswear,
IZOD, New Balance, Reebok and WB Sports. Under licensing arrangements,
the Company produces and sells women's hosiery products directly to
retailers under the Ellen Tracy, Evan-Picone and Picone Studio brand
names and socks under the Coleman, Rockport and Woolrich brand names.
The Company also manufactures women's hosiery products for Liz
Claiborne, Inc. under its brand names. The Company believes its
reputation as a producer of well-known branded products, including the
Company's own branded products in the sporting goods retail industry,
distinguishes the Company from many of its competitors that manufacture
socks and women's hosiery for sale only under retailers' private
labels.
INVESTING TO BECOME A LOWER-COST MANUFACTURER. In recent years
the Company has made significant capital investments in manufacturing
technology with the goal of becoming a lower-cost, higher-volume
producer of a broad range of products. Most of these investments have
been made to replace existing mechanical knitting machinery for socks
with higher speed, more flexible electronic knitting machines that
require less maintenance and result in significant productivity
increases. The Company has also invested in sophisticated machinery
that automates the finishing operations at certain of its facilities,
significantly reducing the labor inputs required. The Company will
continue making capital investments in manufacturing and distribution
technology when appropriate to remain competitive. As of March 23,
1998, the Company had commitments to purchase 52 electronic knitting
machines to expand production capacity at its sports sock operation in
Ft. Payne, Alabama, reflecting its commitment to becoming a lower-cost,
higher-volume producer.
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OUTSOURCING MANUFACTURING TO INCREASE OPERATING EFFICIENCIES.
To meet peak demand, the Company regularly outsources the manufacturing
of certain products. As a result, the Company has been able to operate
its own manufacturing facilities at more efficient production levels.
MANUFACTURING A BROAD RANGE OF PRODUCTS. For a number of years
the Company has manufactured a complete range of sports socks and
produced a wide variety of women's hosiery products, including tights,
trouser socks, pantyhose and knee-highs. With the Seneca acquisition,
the Company added rugged outdoor and heavyweight casual socks to its
product lines. The Company has also broadened its product lines beyond
traditional products to include complementary products such as thermal
underwear/leggings, glove liners and gators for skiers and other
outdoor sports enthusiasts.
MAINTAINING A LARGE AND DIVERSE CUSTOMER BASE. As of March 23,
1998, the Company had more than 3,500 customers in the United States,
Europe and other parts of the world. Only one of such customers,
Target, accounted for more than 10% of the Company's 1997 net sales and
is expected to account for more than 10% of the Company's 1998 net
sales. Management believes that maintaining a large and diverse
customer base puts the Company in a stronger position to recover
increased raw material and manufacturing costs through price increases
than many of the Company's competitors who are dependent on a small
number of major customers.
PROVIDING RAPID ORDER FULFILLMENT. The Company maintains
finished inventory of many of its products that allows the Company to
fill and deliver customer orders for those products generally within
three days of the date the order is placed. In recent years, the
Company has made capital investments in information technology to
develop and implement its Quick Response system, which coordinates its
manufacturing and order fulfillment systems with the sophisticated
electronic inventory management control systems employed by an
increasing number of the Company's larger customers.
FOCUSING ON CONSISTENT, HIGH QUALITY. The Company believes
that consistent product quality is as important to its customers as
rapid order fulfillment. The Company maintains a rigorous quality
assurance program for its manufacturing operations and enjoys a good
reputation among its customers for product quality.
The Company's initial public offering, which was completed in November
1996, contributed to the further implementation of the Company's core operating
strategies by reducing outstanding debt, improving cash flow and funding
additional capital expenditures intended to give the Company an advantage as a
lower-cost, higher-volume producer in an increasingly competitive marketplace.
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OPERATIONS
Sports Socks
The Company manufactures an extensive collection of sports specific,
active sport and sports promotional socks for men, women and children. The socks
are knitted from a variety of natural and synthetic fibers and are manufactured
in a wide array of styles, including tubes, crews, half-crews, quarters,
rolldowns, slouches and cuffs.
"Sports specific socks," which allow a team or individual athlete to
match their socks to their activity, contain extra cushioning and differ
according to where the protective cushioning is placed (ball, toes, instep,
heel, arch, shin), how thick the cushioning is and the materials used to
construct the socks. The Company produces most of its sports specific socks for
athletic footwear and apparel companies that design, contract for the
manufacture of and market sports socks under such widely-recognized brand names
as adidas, ASICS, Bass, Brooks, Fila, Head Sportswear, IZOD, New Balance, Reebok
and WB Sports. Through its vendor relationships with these athletic footwear and
apparel companies, the Company not only increases its sales but also gains
access to changes in styling trends in the sporting goods industry. The Company
also produces its own collection of sports specific socks, which are sold to
retailers under the Company's SportSox brand name (in packaging and on displays
that also bear the Ridgeview name and trademark). This collection includes socks
for seven different sports, including in-line skating, tennis, cross-training,
cycling and aerobics.
The Company's "team collection" of sports specific socks is designed for
sale to sporting goods dealers that outfit school and recreational athletic
teams. The collection includes basketball, baseball, soccer and football socks.
The baseball socks include the traditional nylon stirrup and sanitary socks worn
under the stirrups as well as several styles of one piece, knitted-in stirrup
socks. The soccer socks include acrylic soccer socks for recreational play and
heavier, more expensive nylon socks for the serious soccer player.
Under the brand name Kidsox, the Company manufactures several styles of
basic cushion socks specifically for children that are made with the same
quality features found in their adult-sized counterparts. The Kidsox line
includes a feature the Company calls "dirt defender," which is a grey color
blend on the bottom of the sock that helps keep that portion of the sock
color-fast despite rough use and repeated washings.
"Active sport socks" are specifically designed for the serious athlete
who participates in active sports such as basketball, tennis, running, cycling
and aerobics. They offer high performance features like special fibers and
triple layer construction to provide cushioning in high impact areas and
protection against abrasion and blisters. The Company's premium line of active
sport socks, which includes socks for eight different sports, is sold at premium
prices under the Company's LINEOne brand name in packaging and on displays that
also bear the Ridgeview name and trademark. The natural and synthetic fibers
used in these socks include mercerized cotton (cotton yarn processed in a
caustic solution to increase the fiber's strength and luster), wool, silk,
Duraspun (a Monsanto synthetic fiber that allows for maximum shock absorbency
and offers excellent wicking properties), CoolMax (a DuPont synthetic fiber that
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breathes, while wicking perspiration away from the skin) and Thermastat (a
DuPont cold-weather synthetic fiber that traps warmth while allowing moisture to
escape).
Under the brand name SportSox and under private labels of various
sporting goods and discount stores, the Company manufactures and sells in
multi-pair packs a variety of styles of lightweight basic cushion socks designed
to be sold at promotional prices. These socks, which include tubes, crews,
quarters, rolldowns, slouches and cuffs and offer many of the features that are
found in the Company's premium-line socks, are knitted from a cotton-rich blend
of yarns.
Rugged Outdoor and Heavyweight Casual Socks
The Company's collection of rugged outdoor and heavyweight casual
socks, which expanded significantly with the acquisition of Seneca, is designed
for hikers and other outdoor enthusiasts as well as consumers who appreciate the
value of heavyweight casual socks. The collection of rugged outdoor and
heavyweight casual socks, most of which are sold under private labels includes
14 styles of thermal insulated socks, 11 styles of hiking and trekking socks, 15
styles of general outdoor wear socks and 13 styles of heavyweight casual socks.
In June 1995, Seneca began manufacturing rugged outdoor and heavyweight
casual socks under the licensed brand name Woolrich. Under the three-year
license agreement with Woolrich, Inc., the Company has the right to manufacture
and sell rugged outdoor and heavyweight casual socks under the Woolrich name in
the United States. The Company must meet minimum annual sales thresholds that
increase during the license term and pay a royalty equal to the greater of 5% of
its net sales of Woolrich brand socks or the applicable minimum annual sales
amount. The Company has signed a new license agreement with Woolrich, Inc.,
extending the term of the original license agreement until December 31, 2001. An
additional three-year renewal option is available to the Company provided its
performance as licensee has been satisfactory.
The Company also manufactures and sells a collection of outdoor socks
specifically designed for downhill and cross-country skiers, which includes nine
styles of bright, colorful skiing socks and liners. These socks are sold under
the Ridgeview name or private labels to several large retailers with national
distribution as well as to smaller, resort-oriented ski merchandise shops. The
skier-oriented outdoor collection also includes several styles of thermal
underwear/leggings as well as glove liners and gators. The Company believes the
favorable market response to its thermal underwear/leggings products offers
continued opportunities for sales growth and additional complementary product
development.
The fibers used in manufacturing the rugged outdoor and heavyweight
casual and ski sock collections include wool, wool blend, cotton and silk. They
also include such synthetic fibers as polypropylene (which when blended with
wool or cotton provides a superior level of durability and serves to effectively
wick moisture away from the skin, keeping feet dry), turbo hi-bulk acrylic (a
premium grade of acrylic that provides high bulk, softness and loft), Thermax (a
hollow core fiber used in cold weather socks that traps warmth while wicking
moisture away from the skin) and CoolMax. The thermal underwear/leggings are
constructed
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from a blend of DuPont's newest cold weather fighting polyester fiber,
Thermostat, and spandex fiber, Lycra.
Women's Hosiery Products
The Company manufactures a complete line of women's private label
hosiery, including more than 600 styles of tights, trouser socks, pantyhose and
knee-highs available in all popular colors and textures. The Company's largest
customer for these private label products is Target. In 1994, the Company
entered the designer segment of the women's hosiery market through the
negotiation of the license to manufacture and sell women's hosiery under the
Ellen Tracy brand name in the United States and Canada. The licensor, Ellen
Tracy, Inc., is a designer and manufacturer of "upmarket" women's ready-to-wear
fashions. In return, the Company must meet certain quality standards, distribute
primarily to better department and specialty stores, sell only limited
quantities of Ellen Tracy hosiery at off-price and pay a royalty equal to 7% of
its net sales of Ellen Tracy products. In addition, the Company is required to
expend in each year the agreement is in effect an amount equal to 3% of the
annual sales targets on advertising and promotions of Ellen Tracy products.
Approximately one-half of that amount is required to be made in the form of a
contribution to the national advertising budget of the licensor. The Company has
recently broadened the Ellen Tracy product line beyond the original limited
product category of high-end tights and trouser socks to include dress pantyhose
and casual socks and improved the packaging of the entire line of Ellen Tracy
products. Ellen Tracy hosiery products are now available in tights, trouser
socks and pantyhose sold at premium retail prices.
The Company is required to make minimum guaranteed royalty payments in
increasing amounts each year under the Ellen Tracy license agreement. The
minimum guaranteed royalty payments are based on 7% of annual sales targets for
Ellen Tracy products of $1.5, $3.0 and $5.0 million in 1994, 1995 and 1996,
respectively, which were established by negotiation with no prior sales
experience by the Company or a prior licensee of this Ellen Tracy hosiery
program to serve as a guide. The Company's net sales of Ellen Tracy products
exceeded $1.5 million in 1994. The Company's net sales of Ellen Tracy products
in 1995 represented only 84% of the $3.0 million sales target for that year, and
the Company did not achieve its 1996 sales target of $5.0 million, selling only
$3.0 million of Ellen Tracy products. Nonetheless, in late 1996, the licensor
agreed to a one-year renewal term ending December 31, 1997 for the Ellen Tracy
license agreement with a minimum annual sales threshold of $5.0 million. The
Company exceeded the minimum sales level in 1997 with sales of $5.3 million. As
a result, Ellen Tracy, Inc. has informed the Company that a new three-year
license agreement will be awarded to the Company, however, as of March 23, 1998,
no formal agreement had been signed. The Company is continuing to manufacture
and sell products under the Ellen Tracy brand name.
On May 28, 1996, the Company negotiated a license to manufacture and
sell women's sheer hosiery and medium-weight tights under the Evan-Picone brand
name, a widely-recognized and established brand of women's hosiery. The initial
term of the license agreement ends December 31, 1999, but the license is
renewable at the Company's option for another three years, provided the Company
has satisfied the minimum annual sales threshold of
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$14.0 million for the twelve-month period ending June 30, 1999. The Company is
required to pay royalties equal to 5% of net sales of Evan-Picone products (3%
of net sales of excess inventory and close-out sales). In addition, the Company
must spend 2% of annual net sales of Evan-Picone products on advertising. The
Company is required to make minimum guaranteed royalty payments during the term
of the agreement in increasing amounts in each annual period of the license
term, which was $450,000 for the 18-month period commencing July 1, 1996 through
December 31, 1997, and will increase to $750,000 in the sixth annual period of
the license agreement. The license also requires the Company to use its best
efforts to sell and promote Evan-Picone women's hosiery and provides that the
Company shall be deemed to be not using its best efforts if the Company's net
sales fail to exceed certain specified amounts during each annual period of the
license term. The specified amount of net sales of Evan-Picone products that
must be achieved was $9.5 million for 18-month period commencing July 1, 1996
through December 31, 1997, and increases in each annual period thereafter with
net sales requirements of $14.0 and $20.0 million in the third and sixth annual
periods, respectively. The Company satisfactorily achieved the minimum sales
level for the first annual period. In the event the Company fails to meet the
specified amount of net sales in any annual period, the licensor has the right
to terminate the agreement. The licensor may also terminate the agreement in
certain other events, including a change of control of the Company, the
Company's failure to make payments due under the agreement, abandonment of the
trademark or the granting of a lien or encumbrance on Evan-Picone products.
SALES AND MARKETING
During 1995 the Company integrated the sales and marketing of its socks
and women's hosiery products, which have traditionally been segregated by
product category. This reorganization of the Company's direct sales force gives
one executive officer responsibility for sales of all of the Company's products
and allows each member of the direct sales force to offer the entire mix of the
Company's products to customers.
The following table provides an overview of the sales and marketing of
the Company's finished products by product category, pricing approach, selected
brand names, market segment, major customers and method of distribution.
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<PAGE> 14
<TABLE>
<CAPTION>
SELECTED PERCENTAGE
PRICING BRAND DISTRIBUTION MAJOR OF 1997
PRODUCT CATEGORY GENERAL DESCRIPTION APPROACH NAMES CHANNELS USED CUSTOMERS REVENUE
- ----------------- ------------------- -------- -------- ------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
SOCKS
Sports specific Functional, high Moderate adidas, Sporting goods The Sports 22.6%
quality socks with Reebok, Fila, stores, Authority, Jumbo
extra cushioning Converse, athletic Sports, Champs,
that allow an IZOD, Head, footwear Oshman's
individual to match ASICS, stores, SuperSports USA,
socks to a Ridgeview, Pro athletic J.C. Penney,
particular sport AM footwear and Reebok, Fila
activity apparel
manufacturers
Sports promotional Lightweight, basic Value SportSox, Sporting goods The Sports 21.5%
cushion socks for a GAMEsocks, WB stores, Authority, Jumbo
variety of uses Sports athletic Sports, Champs,
footwear Oshman's,
stores, mass SuperSports USA,
market and Wal-Mart
discount stores
Rugged outdoor and Heavyweight socks Moderate Woolrich, Mass market Kmart, J.C. 16.3%
heavyweight casual with true rib to Premium Oyster Bay, and discount Penney, The Gap,
construction made Winchester, stores, Lands' End,
with wool and Seneca outdoor Eddie Bauer, WIX
cotton blends for specialty Corporation,
hiking, skiing, stores, Wal-Mart
hunting and other department Stores, Target
active outdoor uses stores, mail
order
retailers,
sporting goods
stores
Active sport Cushion-engineered Premium LINEOne Sporting goods The Sports 2.3%
socks with fiber stores, Authority, Jumbo
and construction athletic Sports, Champs,
elements intended footwear Oshman's
to provide high stores, SuperSports USA,
performance athletic J.C. Penney
features for the footwear and
serious athlete apparel
manufacturers
WOMEN'S HOSIERY
Tights and trouser
socks Opaque, durable Moderate Ellen Tracy, Department Target, J.C. 20.4%
pantyhose and to Premium Liz Claiborne stores, mass Penney,
trouser socks made market and Mercantile,
with heavy-weight discount Dillard's,
nylon yarns and stores, Federated
with spandex in women's (Macy's,
either half or all fashions Rich's), Neiman
of the knitted specialty Marcus,
courses stores Parisian,
Nordstrom
Sheer pantyhose Basic ladies Value to Ellen Tracy, Mass market, Target, J.C. 15.6%
and knee-highs pantyhose and Premium Liz Claiborne, discount and Penney,
knee-highs made Evan-Picone, department Mercantile,
with lightweight Picone Studio stores Dillard's,
nylon yarns and Federated
nylon/spandex yarns (Macy's,
for everyday and Rich's), Neiman
special uses Marcus,
Parisian,
Nordstrom
</TABLE>
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<PAGE> 15
Sports, Rugged Outdoor and Heavyweight Casual Socks
The Company believes it is one of the leading vendors of sports socks
to sporting goods and active apparel stores. The Company also sells its own and
licensed brand name socks to athletic footwear stores, sporting goods dealers,
department stores and mass merchandisers throughout the United States and
Canada. Among the Company's leading customers for its own sports sock brands are
Just for Feet, The Sports Authority, Oshman's Sporting Goods and Jumbo Sports.
Among the Company's leading customers for its rugged outdoor and heavyweight
casual socks, most of which are sold under various retailers' private labels,
are Kmart, J.C. Penney and The Gap.
The Company also sells sports specific socks to many of the large
athletic footwear and apparel companies, including Adidas AG, Reebok
International, Ltd., New Balance, Inc. and Fila Holdings SpA, which design,
contract for the manufacture of and market sports socks under their
widely-recognized brand names. The Company is the primary manufacturer of sport
socks bearing the adidas brand name to fill orders from distributors of adidas
branded products located throughout Europe. To accommodate growth from the
adidas sports sock manufacturing program, the Company, in 1995, doubled the
capacity of its manufacturing facility in the Republic of Ireland.
In conjunction with its retailers, the Company employs a sophisticated
marketing program for its own footwear collection designed to increase sales by
educating consumers about the benefits of its active sports, sports specific and
rugged outdoor and heavyweight casual socks. For example, the Company's LINEOne
brand of active sports socks are packaged in bright, colorful, attention-getting
sleeves printed with extensive information about the benefits of the extra
cushioning in high impact areas, the unique qualities and benefits of the
natural and synthetic fibers used and other features of the LINEOne brand that
are designed to help consumers appreciate the value of these premium-priced
socks. The marketing program includes offering retailers a variety of
merchandising aids such as floor and counter unit displays equipped with signage
bearing the Ridgeview name as well as the Company's brand names. For the
Company's promotionally-priced socks, which are typically sold in packages of
three or six pairs each, the Company offers retailers free-standing,
wire-constructed package bins equipped with similar signage. For most of its
socks, the Company also offers a 'tier' unit sock display system equipped with
Ridgeview and brand name specific signage designed to fit into retailers'
existing pegboard or slat wall product display systems.
Approximately 50% of the Company's sock sales in 1997 were made by a
nationwide network of more than 55 independent sales representatives, most of
whom specialize in sporting goods and athletic apparel, who earn commissions on
sales of the Company's products. The Company has an internal sales force of
seven employees located at the Company's headquarters. Two of these sales
employees work exclusively with large athletic footwear and apparel companies
for which the Company serves as a manufacturing source and major private label
accounts. Sales of sports socks manufactured at the Company's facility in the
Republic of Ireland, which are sold primarily to Adidas AG and Reebok
International Ltd. for distribution by them to retail outlets in Europe, are
handled by a small group of employees located at that facility.
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<PAGE> 16
Since the Seneca acquisition in June 1995, the Company has been selling
rugged outdoor and heavyweight casual socks under the licensed brand name
Woolrich. Sales of Woolrich socks are made primarily by the 40-person direct
sales force employed by Woolrich, Inc., who earn commissions from the Company.
In both its branded and private label sock business, the Company
engages in cooperative advertising with major retail accounts, whereby the
Company pays a percentage of the cost of advertising and promotional expenses.
In most instances, the percentage of the Company's contribution to the
retailer's advertising budget is related to the volume of the Company's sales to
the retail account.
International Sales and Marketing of Socks
In 1997, approximately 14% of the Company's sock sales were
attributable to sales to customers located outside of the United States. Among
the principal countries to which the Company exports socks are the United
Kingdom, France, Japan, Singapore and Finland. All of the production at the
Company's manufacturing facility in the Republic of Ireland is sold in Europe.
To accommodate growth from the new adidas sports sock manufacturing program, the
Company completed a major expansion of this facility in 1995.
Women's Hosiery Products
The Company sells private label women's hosiery products to
approximately 150 department stores, specialty retailers, mass market and
discount stores throughout the United States in over 5,000 locations. Among the
Company's leading customers for its private label products are Target, J.C.
Penney, Nordstrom and Liz Claiborne, Inc., which designs, contracts for the
manufacture of and markets women's hosiery packaged under various trademarks,
including Liz Claiborne and Elisabeth, to better department and specialty
stores. The Company sells Ellen Tracy women's hosiery to more than 100
department and specialty stores in over 1,000 locations throughout the United
States and Canada. Principal customers for the Ellen Tracy line of hosiery
products include Saks Fifth Avenue, Neiman Marcus, Nordstrom, Macy's,
Bloomingdale's and Dillard's.
In July 1996, the Company began selling the line of Evan-Picone women's
hosiery products, which is distributed through more than 200 department and
specialty stores in over 1,500 locations throughout the United States and
Canada. Principal customers for the Evan-Picone product line include The TJX
Companies, Inc, which includes T.J. Maxx and Marshalls, May Department Stores
Co., Dillard's, J.C. Penney and Federated Department Stores. The Company began
selling Evan-Picone products through a nationwide network of sales
representatives, most of whom sold Evan-Picone products for the company that
previously held the license for the Evan-Picone women's hosiery program. On
January 1, 1997, this group of sales representatives became part of the
Company's internal sales force.
In 1997, the Company contracted with a marketing, advertising and
public relations firm to develop a series of marketing initiatives aimed at
positioning Evan-Picone as a
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<PAGE> 17
significant competitor in the sheer hosiery marketplace. The initiatives, which
include comprehensive consumer focus group studies, new point of sale materials,
design and creation of new Evan-Picone packaging and direct mail to consumers,
will continue into 1998, and will transform the current line of Evan-Picone
products into a newly, redesigned line.
With the addition of the sales representatives from the Evan-Picone
women's hosiery program, the Company's internal sales force for women's hosiery
products has grown to 11 employees. This reorganized sales force is now
responsible for the private label, Ellen Tracy and Evan-Picone hosiery business.
Senior management is actively involved in selling to major accounts and
participates during market weeks and at other times in presentations to
department stores and specialty retailing customers.
The Company works closely with retailers, placing special emphasis on
packaging and design, to develop attractive and economical private label hosiery
programs that will meet with consumer acceptance and generate increased sales
for the retailer as well as the Company. For example, in 1995 the Company made
significant changes in product construction and pricing for its private label
programs with Target and took steps to control product costs by making
additional investments in knitting and automated finishing and packaging
machinery to increase the efficiency of the Company's manufacturing operations.
In both its private label and branded business, the Company engages in
cooperative advertising with major retail accounts, whereby the Company pays a
percentage of the cost of advertising and promotional expenses. In most
instances, the percentage of the Company's contribution to the retailer's
advertising budget is related to the volume of the Company's sales to the retail
account. From time to time, the Company's major yarn suppliers also contribute
to the cost of such cooperative advertising and promotions. The Company is
required to devote 3% of its Ellen Tracy sales to advertising. In 1997,
approximately one-half of that amount was used for cooperative advertising with
retail accounts, and the remainder was paid to Ellen Tracy, Inc. to support
general advertising of the Ellen Tracy brand name in fashion magazines and other
national media.
The Company intends to expand its private label women's hosiery
business, sales of which have increased in each of the last three years, by
augmenting sales under private label programs with existing customers, improving
customer service and pursuing additional private label program business with
major retailers. With the completion of the installation of 84 new knitting
machines in 1997, together with the investments in technology recently made to
strengthen women's hosiery manufacturing and the ability to contract with other
manufacturers for finished product when necessary, the Company will have the
capability to expand sales of its private label business without making
significant additional capital expenditures. The Company intends to expand the
sales of Ellen Tracy and Evan-Picone women's hosiery by adding to the existing
styles offered, increasing its sales and marketing effort and continuing major
product development.
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<PAGE> 18
MANUFACTURING
The chart set forth below provides an overview of the Company's
manufacturing facilities by geographic location:
<TABLE>
<CAPTION>
Number of
Knitting
Number Machines Approximate
of Installed Output per
Knitting in Last Year Approximate Week in Approximate
Location Machines Three Operations Square Dozens of Number of
of Facility Years Commenced Footage Product Categories Pairs Employees
- ----------- ------- ---------- --------- ----------- ------------------ ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Newton, NC 90 90 1912 100,000 Tights, trouser 18,000 275
(women's hosiery) socks, pantyhose
and knee-highs
Newton, NC 58 58 1976 70,000 Complete range of 15,000 210
(sports socks) sports specific
socks
Tralee, Republic of 80 50 1986 45,000 Complete range of 15,000 115
Ireland sports specific
socks
Ft. Payne, AL 76 76 1992 72,000 Complete range of 35,000 185
sports promotional
socks
Seneca Falls, NY 141 32 1954 180,000 Complete range of 12,000 205
--- -- ------- rugged outdoor and ------ ---
heavyweight casual
socks
Total 445 306 467,000 95,000 990
=== === ======== ====== ===
</TABLE>
Sports, Rugged Outdoor and Heavyweight Casual Socks
The Company manufactures socks primarily for inventory requirements
based on estimated demand but also in response to customer orders on private
label business. The Company maintains finished inventory of its own and licensed
brand products under the Company's Quick Response inventory control system.
Products maintained in finished inventory are generally shipped within three
days of receipt of an order, which in the case of the Company's larger customers
is typically received and processed by the Company electronically. Orders for
socks not maintained in finished goods inventory are typically shipped within
ten to thirty days of receipt of the customer's order, depending upon the size
of the order.
The Company manufactures socks at all of its facilities. At its
facility located in Newton, North Carolina, the Company has 58 knitting
machines, all of which are electronic. In its facility located in Ft. Payne,
Alabama, where all of the Company's promotionally-priced, multi-pair pack
lightweight cushion socks are made, the Company has 76 electronic knitting
machines. At its facility located in the Republic of Ireland, where the Company
makes sports specific socks primarily for sale to major athletic footwear and
apparel companies, the Company has 80 knitting machines, 50 of which were
installed in the last three years. At its facility located in Seneca Falls, New
York where the Company produces all of its rugged outdoor and heavyweight casual
socks, the Company has 141 "double cylinder" knitting machines, most of which
are mechanical machines.
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<PAGE> 19
The Company's electronic, CAD/CAM-driven machines allow the Company to
vary its manufacturing runs to adjust quickly to changing patterns in demand
without traditional high change-over or retooling costs. They also allow the
Company to maintain a computer library of pattern and texture designs that can
be electronically transmitted to these knitting machines. When the appropriate
yarns have been installed to feed into them, the machines will automatically
adjust to knit socks conforming to the new pattern and texture design.
The Company generally operates its sock knitting machinery at each
facility five days a week, 24 hours a day, except in Newton where the Company
operates its sock knitting machinery seven days a week, 24 hours a day.
Finishing socks, which includes toe closing, bleaching, scouring and dyeing,
boarding, pairing and packaging, is generally accomplished at each facility by
one shift of labor working five days a week and overtime when necessary. To meet
peaks in demand for finished inventory that cannot be met from its own
production, the Company from time to time purchases greige goods from other
manufacturers.
Although the Company expects to continue making regular, and in some
years significant, investments in technology that will increase the productive
capacity, efficiency and competitive position of its sock manufacturing
operations, the Company believes that its sock manufacturing operations,
supplemented by the purchase of greige goods from others when necessary, will be
able to meet current and projected demand for the Company's products.
Women's Hosiery Products
The Company manufactures its women's hosiery products in response to
customer orders and for inventory requirements based on estimated demand. The
Company maintains finished inventory of certain private label and Ellen Tracy
hosiery under the Company's Quick Response inventory system. Products maintained
in finished inventory are generally shipped within three days of receipt of an
order from a retail account, which in the case of the Company's larger
customers, such as Target, is typically received and processed by the Company
electronically. Orders for women's hosiery not maintained in finished goods
inventory are typically shipped within ten to thirty days of receipt of the
customer's order.
The Company manufactures women's hosiery products at its facility in
Newton, North Carolina, where the Company has 90 new electronic knitting
machines, automated assembly equipment and static dyeing machines. Eleven of the
Company's machines are electronic, CAD/CAM-driven and allow the Company to vary
its manufacturing runs to adjust quickly to changing patterns in demand without
traditional high changeover or retooling costs. The Evan-Picone hosiery program
and certain other women's hosiery products are outsourced to other
manufacturers. In 1997, the Company completed the installation of 84 electronic
knitting machines for its women's hosiery division to replace the existing
mechanical machines currently in use. These new electronic knitting machines
produce hosiery at a faster rate and reduce change-over and retooling costs, as
well as provide higher efficiency levels, significantly improve product quality,
reduce "fallout" and enhance product development through product sophistication
and diversity. The Company generally operates its women's hosiery-knitting
machinery 24 hours a day, five days a week. The finishing of women's
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<PAGE> 20
hosiery which, includes toe closing, fabricating, boarding and packaging, is
generally accomplished by one shift of labor working five days a week. Overtime
work is scheduled when necessary to respond to increased product demand. The
Company recently purchased new assembly and packaging machinery, which by
automating several of the steps in the finishing process, has reduced the
Company's labor requirements for this traditionally labor intensive part of the
manufacturing process.
For its electronic CAD/CAM-driven knitting machinery, the Company is
able to maintain a computer library of hosiery patterns and texture designs that
can be electronically transmitted to the knitting machines. When the appropriate
yarns have been installed to feed into them, these machines will automatically
adjust to knit hosiery conforming to the new pattern and texture design. The
Company has a small in-house product development staff which includes two
experienced fashion designers that develop original designs on the Company's
CAD/CAM system.
The Company regularly contracts with other manufacturers for greige
goods as well as finished hosiery when orders for the Company's women's hosiery
products exceed its production capacity. Although the Company expects to make
continuing, significant investments in technology to increase the production
capacity and efficiency of its women's hosiery manufacturing operations, the
Company believes that, with the exception of the Evan-Picone program and a
limited number of other styles of women's hosiery products that will be
outsourced from time to time to other manufacturers, it will have sufficient
technologically advanced production capacity to meet current and projected
demand for its women's hosiery products for the next several years.
QUALITY ASSURANCE PROGRAM
The Company maintains a rigorous quality assurance program for its
manufacturing operations that begins with the purchase of only high-quality
yarns and a program of regular maintenance and constant monitoring, some of
which is done by computer, of the Company's knitting machinery. Greige goods
produced by the Company or purchased from others are carefully inspected prior
to finishing, and randomly selected samples of finished goods are inspected
prior to being packaged and shipped. The Company also emphasizes strong
interaction with its major customers on quality assurance issues and employee
education on the importance of quality assurance. During each of the past five
years, the Company has achieved high-quality standards with less than 1% of its
products in each of such years being returned as defective. Based on their
collective years of experience, management of the Company believes this record
compares favorably with those of others in the industry.
RAW MATERIALS
The Company's products are manufactured from yarns spun from either
synthetic (e.g., nylon and acrylic) or natural (e.g., cotton and wool) fibers,
or a blend of both. The principal yarns used in the manufacture of sports,
outdoor and casual socks are cotton, wool and a variety of synthetic fibers. The
principal yarns used in the manufacture of women's hosiery products are textured
nylon of varying weights and spandex, principally DuPont's Lycra. As
20
<PAGE> 21
the Company has achieved greater manufacturing efficiencies through investments
in modern knitting machinery and automated finishing and packaging equipment
that reduce labor inputs and as the prices of yarns spun from both natural and
synthetic fibers have increased, the cost of raw materials as a percentage of
the Company's cost of goods sold has increased.
The Company and other major users of cotton and wool yarns typically
enter into fixed-price contracts, having terms ranging from six to twelve
months, during the fall of the year when much of the cotton crop is being
harvested worldwide. By doing so, the Company and its competitors are able to
avoid making significant purchases of cotton and wool on the spot market and are
able to establish and maintain pricing for their products using large amounts of
these natural fibers throughout the year with only minor adjustments.
The Company purchases its requirements for textured nylon, polyester,
polypropylene and other yarns made from synthetic fibers from a variety of
suppliers at prevailing prices that are influenced both by changes in demand and
the producers' costs. Many synthetic fibers, such as polyester, are
petrochemical-based, and prices for them are influenced by changes in the price
of petroleum. The Company has reduced the adverse effect of price increases for
synthetic fiber yarns in recent years by negotiating rebates with its major
synthetic yarn suppliers based on the Company's volume of purchases.
The Company generally has been successful in recovering increased raw
material costs on its branded products, many of which include significant
amounts of wool and cotton yarn as well as yarns made from synthetic fibers.
Recovering higher costs for raw materials on the Company's private label women's
hosiery products is generally more difficult because of the highly competitive
nature of this business.
QUICK RESPONSE INVENTORY SYSTEM
The Company has developed its sophisticated Quick Response inventory
system to enable the Company to coordinate its manufacturing operations and
order fulfillment system with the electronic inventory control systems employed
by most of the Company's women's hosiery customers and an increasing number of
its major sport socks customers. The Quick Response inventory system, which
combines bar code technology with electronic data interchange ("EDI"), provides
a link between the customers' and the Company's computers, eliminates
inefficiencies by automating receipt and processing of customers' orders and
allows the Company to respond with "just-in-time" manufacturing techniques to
the tighter shipment schedules demanded by large retailers. Using EDI
technology, the Company receives from certain major customers, via electronic
interchange, weekly updates of sales and inventory levels from store locations
nationwide. For certain customers, such as Target and The Sports Authority, this
information automatically generates orders which the Company then fills.
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<PAGE> 22
For some time, the Company has been planning to construct a
distribution center at its manufacturing facility in Newton, North Carolina.
Management has postponed the construction of this new facility, however, until
the Company has successfully completed the implementation of its enterprise wide
management information system, which is currently underway. When completed, this
new system will incorporate sophisticated inventory control and order
fulfillment technology and become an integral component of the Company's Quick
Response inventory system. The construction of a distribution center, which
management expects to occur in the next two to four years, will become the focal
point of the Company's Quick Response inventory system. While the Company will
need to continue making significant capital investments in new information
technology to maintain and strengthen its Quick Response system in response to
major retailers' increasingly sophisticated EDI expectations, the Company
believes the system it is currently implementing will be adequate for its
current and future business needs.
MAJOR CUSTOMERS
In 1997, sales of women's hosiery products and socks to Target
accounted for approximately 13% of the Company's total net sales. During such
year, no other single customer accounted for more than 10% of the Company's
consolidated net sales. The Company's business relationship with Target began
more than 20 years ago when Target had less than 100 stores. As the number of
stores operated by Target has increased to over 700, the Company's sales to this
customer have increased commensurately. The Company's five largest women's
hosiery customers, including Target, accounted for greater than 75% of the
Company's total women's hosiery business in 1997. During the same year, the
Company's five largest sock customers accounted for approximately 30% of the
Company's sock business.
CREDIT AND COLLECTIONS
The Company's credit and collection functions are managed by the
Company's credit department at its corporate headquarters, except for credit and
collection on sales of socks manufactured at the Company's facilities located in
Seneca Falls, New York and in the Republic of Ireland, which are handled by
employees at those facilities. The credit of the Company's customers is
evaluated regularly by monitoring of accounts receivable and through reports
obtained from major business credit evaluation services. In the case of smaller
retail outlets for sports socks, the Company relies in part on credit evaluation
information available through a variety of credit information sources. The
Company believes its credit and collection management has been a significant
factor in minimizing the effect on the Company of bankruptcy filings of certain
customers. In each of the last five years, the Company's write-off of
uncollectible receivables has averaged less than 1% of net sales.
SEASONALITY
The Company's sales of rugged outdoor and heavyweight casual socks, ski
socks and thermal underwear/leggings are highly seasonal and generally occur
during the fall and winter selling seasons, which begin in August and end in
December. The Company's women's
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<PAGE> 23
hosiery business is also somewhat seasonal with hosiery sales, particularly
sales of tights (which sell for higher wholesale prices than women's sheer
hosiery) increasing in the fall and winter months. Historically, the majority of
the Company's sales have been generated, and most of the Company's profits have
been earned, in the third and fourth quarters of its fiscal year.
BACKLOG
As a result of the seasonality of certain products, the Company
accumulates a temporary backlog of orders primarily during the summer and early
fall months. At March 1, 1998, the Company's order book reflected unfilled
customer orders for approximately $9.0 million of products as compared to $7.2
million at the same date in the prior year. Order book data at any given date is
also materially affected by the timing of recording orders and of shipments, as
well as the status of major private label programs. Recently, certain large
customers who formerly placed firm orders with the Company began instead
providing projections of their demand for the Company's products and
transmitting smaller firm orders on a more frequent basis. Accordingly, order
book data should not be taken as indicative of eventual actual shipments or net
sales, or as providing meaningful period-to-period comparisons. Excluding those
products which are seasonal in nature and major private label programs, the
Company receives orders fairly evenly throughout the year and generally ships
within three to thirty days after receipt of a customer's order.
COMPETITION
The sock manufacturing segment of the hosiery industry is highly
fragmented and competitive. According to the NAHM, at December 31, 1997 there
were approximately 325 companies manufacturing socks in the United States. The
Company is subject to competition from a number of these companies that
manufacture and sell a complete range of sports socks or, in many cases,
specific categories of sports socks, such as active sports socks, that are
competitive with one or more of the Company's products. The Company believes
that it is one of the leading vendors of sports socks to sporting goods and
active apparel stores. The number of competitors in the manufacture and sale of
rugged outdoor and heavyweight casual socks is considerably smaller because the
number of "double cylinder" knitting machines required to make these socks is
limited.
The women's hosiery industry is highly competitive and is currently
experiencing excess capacity and flat demand for sheer hosiery products. The
women's hosiery industry is dominated by the industry leader, Sara Lee Hosiery,
and by Kayser-Roth. Sara Lee Hosiery not only sells private label and brand name
women's hosiery to department stores, specialty stores and mass merchandisers,
it also sells substantial quantities of its brand name products directly to
consumers through its outlet catalog. Sara Lee Hosiery and Kayser-Roth, as well
as several other large domestic manufacturers of women's hosiery, have
substantially greater market share and financial resources than the Company. The
Company is also subject to competition from a large number of smaller domestic
competitors, which compete primarily based on price for private label business.
Sara Lee Hosiery manufactures and sells women's hosiery in the designer segment
of the market under the licensed Donna Karan brand name in
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<PAGE> 24
competition with the Company's Ellen Tracy hosiery. Other women's hosiery
manufacturers sell similar designer name brand women's hosiery with equal or
greater consumer recognition, which is marketed to the same group of
fashion-conscious consumers to which the Company's Ellen Tracy hosiery is
marketed.
Competition among manufacturers of all categories of the Company's
products is primarily on the basis of customer service, product quality,
pricing, order fulfillment capability and relationships forged over time between
sales personnel and buyers for the large national retailers and other major
customers. The Company believes that the most important of these are order
fulfillment and product quality, which encompass the ability to service the
customer's needs by fulfilling and shipping orders for products that are of a
consistent quality on a timely basis. The Company believes its good reputation
for order fulfillment and consistent product quality gives it a competitive
advantage over many of its competitors, including some competitors whose prices
are lower than the Company's prices for similar products.
The Company believes that its increased size, which has occurred as the
result of internal sales growth and the Seneca acquisition, as well as its
diversified product lines, give the Company an increasing competitive advantage.
The Company believes a manufacturer's size will be particularly important during
a period of anticipated consolidation in the sock and women's hosiery industry
that is being driven in part by increased retail concentration. In this regard,
the Company expects to benefit from an industry trend for retailers to align
with a fewer number of major manufacturers who can provide a significant share
of a major retailer's total sock and women's hosiery requirements, have the
capability of assisting the retailer in managing its hosiery business and are
able to meet increased logistical demands imposed by major retailers.
REGULATION
The Company's business is subject to regulation by federal, state and
local governmental agencies dealing with various aspects of conducting a sock
and women's hosiery manufacturing business such as work place safety, protection
of the environment, wage and hour policies, product labeling, family and medical
leave policies and product flammability standards. Certain of these regulations,
particularly those relating to air quality, water quality and disposal of waste
products, are technical in nature, involve substantial penalties in the event of
breach and require extensive controls to assure compliance with their
provisions. While the Company believes that it has operated and intends to
operate in full compliance with these regulations, such compliance may result in
significant additional costs.
24
<PAGE> 25
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding the
executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Albert C. Gaither 66 Chairman and Director
Hugh R. Gaither 47 President, Chief Executive Officer
and Director
William D. Durrant 60 Executive Vice President and Director
Walter L. Bost, Jr. 43 Executive Vice President and Chief
Financial Officer
Barry F. Tartarkin 43 Executive Vice President - Sales and
Marketing
M. Ander Horne 46 Vice President - Sales and Marketing - Socks
Joseph G. Royall 37 Vice President - Operations
</TABLE>
Albert C. Gaither has been a director since 1958 and Chairman of the
Company since January 1992. From January 1980 through December 1991 he served as
the Company's President, and from January 1992 until September 1995 was the
Company's Chief Executive Officer. He received a B.A. from Davidson College in
1956 and has been employed with the Company since 1956. Mr. Gaither is Susan
Gaither Jones' father and a cousin of Hugh R. Gaither and J. Michael Gaither.
Hugh R. Gaither has been a director since 1977 and President of the
Company since January 1992. Since September 1995, he also has served as the
Company's Chief Executive Officer. Mr. Gaither served as Vice President of the
Company from January 1980 to January 1992. He joined the Company in 1975 after
having received a B.A. from Davidson College and a M.B.A. from the University of
North Carolina at Chapel Hill. During 1994 and 1995, Mr. Gaither served as
Chairman of the National Association of Hosiery Manufacturers. Mr. Gaither is J.
Michael Gaither's brother and a cousin of Albert C. Gaither and Susan Gaither
Jones.
William D. Durrant who was elected to his current position in September
1995, has been employed by the Company since 1976 and has been a director since
1979. From January 1992 until September 1995, Mr. Durrant served as Senior Vice
President (Sales and Marketing) for the Company's sports sock division. From
July 1976 until December 1992, he served as Vice President (Sales) for the
sports sock division.
25
<PAGE> 26
Walter L. Bost, Jr., who is a certified public accountant, was elected
to his current position in September 1995 and has been employed by the Company
since 1987, during which entire period he has served as the Company's Chief
Financial Officer. From 1982 until 1987 he was controller of a privately-owned
hosiery manufacturing company located in Hickory, North Carolina. Mr. Bost
received a B.A. in Accounting from the University of North Carolina at Chapel
Hill in 1977.
Barry Tartarkin, who was named to his current position in January 1997,
has been employed by the Company since March 1993, serving as Vice President of
Sales for the Company's women's hosiery division. From 1980 until 1993, Mr.
Tartarkin served as president of two different women's hosiery sales companies.
Mr. Tartarkin received a B.S. in Economics and Finance from the University of
Hartford in 1976.
M. Ander Horne, who was named to his current position in January 1997,
has been employed by the Company since April 1979, serving previously as Eastern
Regional Sales Manager from April 1979 until January 1995 and National Sales
Manager for the Company's sports sock manufacturing operations from January 1995
until January 1997. Mr. Horne received a B.A. in Journalism from the University
of Georgia in 1972.
Joseph G. Royall, who was named to his current position in January
1996, has been employed by the Company since 1989, serving as the Company's cost
accounting manager from October 1989 until June 1992 and as General Manager for
the Company's sports sock operation in Ft. Payne, Alabama from June 1992 until
January 1996. Mr. Royall received a B.S. in Accounting and Business Management
from Tennessee Wesleyan College in 1984.
EMPLOYEES
As of March 1, 1998, the Company employed approximately 990 persons,
177 of whom, employed at Seneca, were covered by a collective bargaining
agreement with the Union of Needletrades, Industrial and Textile Employees
("UNITE"). The employees at the Company's facility in the Republic of Ireland
are not covered by a collective bargaining agreement, but the Company does
recognize Services Industrial Professional Technical Union as their
representative. The Company's current collective bargaining agreement covering
wages and benefits for its employees at Seneca expires March 31, 1998, and the
Company is currently negotiating the terms of a new multi-year agreement. None
of the Company's employees represented by a union has engaged in any kind of
work stoppage in the last ten years. The Company considers its relationships
with its employees to be good.
At its manufacturing facility in Newton, North Carolina, the Company
operates a day care center for the benefit of its employees with space for 75
children. The operating costs of the center that are not covered by payments
made by employees using the center, grants received or funds from other sources
are paid by the Company. Approximately 75% of the Company's hourly employees at
this facility are female. For the past two years, Working Mother magazine has
named the Company to the magazine's annual list of "100 Best Companies for
Working Mothers," citing the availability of this day care center and the
Company's other family-friendly policies for its employees. Management believes
these
26
<PAGE> 27
policies foster employee morale and loyalty, help the Company attract and
retain talented people and contribute to a stable and productive work force.
ITEM 2 - PROPERTIES
The Company's corporate offices, all of its women's hosiery and a
significant portion of its sports sock manufacturing operations are located in
Newton, North Carolina in five Company-owned buildings containing approximately
170,000 square feet of space. The Company is currently examining the logistical
and physical requirements necessary for the construction of a distribution
facility on property the Company currently owns, which should be completed in
the next two to four years. As part of this process, the Company will give
consideration to either constructing a new facility or purchasing an existing
facility that meets the Company's distribution needs. The Company's facilities
in Newton also include a 4,000 square foot building housing a Company-sponsored
child care center.
The Company owns an approximately 60,000 square foot sock finishing and
shipping facility and leases on a month-to-month basis an approximately 24,000
square foot sock knitting and sewing facility in Ft. Payne, Alabama. The Company
also owns a manufacturing facility located in Tralee, Republic of Ireland. With
the assistance of a grant from the Irish Development Authority equal to
approximately one-third of the total capital investment required, the Company
expanded the size of this facility in 1995 to approximately 45,000 square feet.
The Company also owns an approximately 100,000 square foot, three-story building
at Seneca that houses the knitting, sewing and finishing operations for the
Company's production of rugged outdoor and heavyweight casual socks. The Company
owns a nearby 80,000 square foot building on 37 acres of land that serves as a
warehouse and distribution center for Seneca.
ITEM 3 - LEGAL PROCEEDINGS
None.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
* * * * * * *
For the purposes of calculating the aggregate market value of the
shares of Common Stock held by non-affiliates, as shown on the cover page of
this report, the Company has assumed that all outstanding shares are held by
non-affiliates except for shares outstanding that are beneficially owned by
directors or executive officers of the Company. However, this should not be
deemed to constitute an admission that all directors and executive officers of
the Company are, in fact, affiliates of the Company, or that there are not other
persons who may be deemed to be affiliates of the Company. Further information
concerning shareholdings of directors, executive officers and principal
shareholders is included in the Company's proxy statement for
27
<PAGE> 28
the annual meeting of shareholders to be held May 26, 1998. The Company will
file its proxy statement with the Securities and Exchange Commission not later
than April 30, 1998.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) Market Information
The Company's Common Stock is traded on The Nasdaq Stock Market
National Market System ("Nasdaq") under the symbol RIDG. The following
table sets forth for the period indicated the high and low sale prices
for the Company's Common Stock as reported by Nasdaq beginning with the
closing price on the first day of trading, November 1, 1996.
<TABLE>
<CAPTION>
Price Range
--------------------------------
High Low
---- ---
<S> <C> <C>
1996
----
Fourth Quarter $8.250 $7.125
(from November 1, 1996)
1997
----
First Quarter $8.000 $6.625
Second Quarter $7.875 $6.500
Third Quarter $8.375 $7.000
Fourth Quarter $8.000 $5.750
</TABLE>
(b) Holders
As of March 23, 1998, there were 114 holders of record of the
Company's Common Stock and 900 persons or entities holding in nominee
name.
(c) Dividends on the Company's Common Stock.
The Company ceased paying dividends on its Common Stock immediately
prior to the initial public offering in November 1996 and does not
intend to pay any cash dividends in the foreseeable future. In
connection with the initial public offering of its Common Stock, the
Company issued a stock dividend, effective October 8, 1996, of
approximately 129 additional shares of Common Stock for each
outstanding share of Common Stock.
ITEM 6 - SELECTED FINANCIAL DATA
The information required to be furnished in response to this item
appears in and is incorporated by reference from the Company's 1997 Annual
Report to Shareholders. Relevant portions of the Company's 1997 Annual Report to
Shareholders have been filed as Exhibit 13.1 to this report.
28
<PAGE> 29
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
The information required to be furnished in response to this item
appears in and is incorporated by reference from the Company's 1997 Annual
Report to Shareholders. Relevant portions of the Company's 1997 Annual Report to
Shareholders have been filed as Exhibit 13.1 to this report.
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 1997 Annual
Report to Shareholders. Relevant portions of the Company's 1997 Annual Report to
Shareholders have been filed as Exhibit 13.1 to this report.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OR ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
29
<PAGE> 30
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required to be furnished in response to this item with
respect to directors appears under the heading "Election of Directors" in the
Company's proxy statement for the annual meeting of shareholders to be held May
26, 1998, which information is incorporated by reference. The Company will file
its proxy statement with the Securities and Exchange Commission not later than
April 30, 1998. Information relating to the Company's executive officers is
contained in Part I of this report under the heading "Executive Officers of the
Registrant."
ITEM 11 - EXECUTIVE COMPENSATION
The information required to be furnished in response to this item
appears under the heading "Election of Directors" in the Company's proxy
statement for the annual meeting of shareholders to be held May 26, 1998, which
information is incorporated by reference. The Company will file its proxy
statement with the Securities and Exchange Commission not later than April 30,
1998.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be furnished in response to this item
appears under the heading "Security Ownership of Certain Beneficial Owners and
Management" in the Company's proxy statement for the annual meeting of
shareholders to be held May 26, 1998, which information is incorporated by
reference. The Company will file its proxy statement with the Securities and
Exchange Commission not later than April 30, 1998.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be furnished in response to this item
appears under the heading "Election of Directors" in the Company's proxy
statement for the annual meeting of shareholders to be held May 26, 1998, which
information is incorporated by reference. The Company will file its proxy
statement with the Securities and Exchange Commission not later than April 30,
1998.
30
<PAGE> 31
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, 1995,
1996 and 1997 are incorporated by reference from the Company's 1997 Annual
Report to Shareholders. Relevant portions of the Company's 1997 Annual
Report to Shareholders have been filed as Exhibit 13.1 to this report.
- - Consolidated Balance Sheets at December 31, 1996 and 1997 are incorporated
by reference from the Company's 1997 Annual Report to Shareholders.
Relevant portions of the Company's 1997 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, 1995, 1996 and 1997 are incorporated by reference from the
Company's 1997 Annual Report to Shareholders. Relevant portions of the
Company's 1997 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,
1995, 1996 and 1997 are incorporated by reference from the Company's 1997
Annual Report to Shareholders. Relevant portions of the Company's 1997
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, 1995, 1996 and 1997 are incorporated by reference from the
Company's 1997 Annual Report to Shareholders. Relevant portions of the
Company's 1997 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 certified public accountants on Supplemental
Schedule filed as Exhibit 23.1 to this report
- - Schedule II - Valuation and Qualifying Accounts
31
<PAGE> 32
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 Exhibit As
Exhibit Was Exhibit
No. Previously Filed No. Exhibit Description
- ------- --------------------------- -------- -------------------
<S> <C> <C> <C>
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) (2) 10.1(a) Form of letter dated October 22, 1996 from Ellen Tracy, Inc.
extending license agreement until December 31, 1997
10.1(b) Form of letter dated February 27, 1998 from Ellen Tracy, Inc.
extending license agreement through December 31, 2000.
10.2 (1) 10.2 License Agreement dated May 28, 1996 between Jones
Investment Co., Inc. and Ridgeview, Inc.
10.3 (2) 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 (2) 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>
32
<PAGE> 33
<TABLE>
<S> <C> <C> <C>
10.5 (2) 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 (3) Third Amendment to Amended and Restated Loan and Security
Agreement (Term Loan and Revolving Loan) dated July 31, 1997,
by and among Ridgeview, Inc., Seneca Knitting Mills Corporation
and NationsBank, N.A.
10.7 Fourth Amendment to Amended and Restated Loan and Security
Agreement (Term Loan and Revolving Loan) dated March 13, 1998,
by and among Ridgeview, Inc., Seneca Knitting Mills Corporation
and NationsBank, N.A.
10.8 (1) 10.11 Form of Loan and Security Agreement for outstanding loans
from MetLife Capital Corporation to Interknit, Inc.
10.9 (1) 10.12 Mortgage and Security Agreement dated June 28, 1995 between
Ridgeview, Inc. and NationsBank of Georgia, N.A.
10.10 (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.
10.11 (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.
10.12 (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).
10.13 (1) 10.16 Security Agreement dated as of June 28, 1995 by and between
Seneca Knitting Mills Corporation and NationsBank of
Georgia, N.A.
10.14 (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.
10.15 (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.
10.16 (1) 10.19 Salary Continuation Agreement dated March 1, 1983 by and
between Ridgeview Mills, Inc. and Albert C. Gaither.*
10.17 (1) 10.20 Salary Continuation Agreement dated March 1, 1983 by and
between Ridgeview, Mills, Inc. and Hugh R. Gaither.*
10.18 (1) 10.21 First Amendment to Salary Continuation Agreement by and
between Ridgeview, Inc. and Hugh R. Gaither dated June 8,
1992.*
</TABLE>
33
<PAGE> 34
<TABLE>
<S> <C> <C> <C>
10.19 (1) 10.22 Salary Continuation Agreement dated March 1, 1983 by and
between Ridgeview Mills, Inc. and William D. Durrant.*
10.20 (1) 10.23 First Amendment to Salary Continuation Agreement by and
between Ridgeview, Inc. and William D. Durrant dated June 8,
1992.*
10.21 (1) 10.24 Salary Continuation Agreement dated June 8, 1992 by and
between Ridgeview, Inc. and Susan Gaither Jones.*
10.22 (1) 10.25 Salary Continuation Agreement dated July 1, 1996 by and
between Ridgeview, Inc. and Walter L. Bost, Jr.*
10.23 (1) 10.26 Split Dollar Life Insurance Agreement dated January 1, 1992
between Ridgeview, Inc. and Albert C. Gaither.*
10.24 (1) 10.27 Ridgeview, Inc. 1995 Omnibus Stock Option Plan as amended
and restated.*
10.25 (1) 10.28 Description of Incentive Bonus Arrangement for Named
Executive Officers.*
10.26 (1) 10.29 Ridgeview, Inc. Stock Option Plan for Outside Directors.*
10.27 (2) 10.25 First Modification to Mortgage and Security Agreement dated
December 20, 1996 between Ridgeview, Inc. and NationsBank,
N.A. (South)
10.28 (2) 10.26 First Modification to Mortgage and Security Agreement dated
December 20, 1996 between GPM Corporation and NationsBank,
N.A. (South)
10.29 (2) 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)
10.30 (2) 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 Consent of BDO Seidman, LLP, independent certified public accountants.
27 Financial Data Schedule (included in the EDGAR filing only.)
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
34
<PAGE> 35
* 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.
(1) Registration Statement on Form S-1, file No. 333-11111 filed August 30,
1996.
(2) Annual Report on Form 10-K, file No. 0-21469 filed March 31, 1997.
(3) Quarterly Report on Form 10-Q, file No. 0-21469 filed November 13, 1997.
35
<PAGE> 36
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
RIDGEVIEW, INC.
By: /s/ Hugh R. Gaither
------------------------------------
Hugh R. Gaither, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
the following persons signed this report in the capacities indicated on the 27th
day of March, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- --------- -----
<S> <C>
/s/ Hugh R. Gaither President, Chief Executive
- ---------------------------------- Officer and Director
Hugh R. Gaither (Principal Executive Officer)
/s/ Albert C. Gaither Chairman and Director
- ----------------------------------
Albert C. Gaither
/s/ Walter L. Bost, Jr. Executive Vice President and
- ---------------------------------- Chief Financial Officer
Walter L. Bost, Jr.
/s/ P. Douglas Yoder Corporate Controller\
- ---------------------------------- (Principal Accounting Officer)
P. Douglas Yoder
/s/ William D. Durrant Executive Vice President and Director
- ----------------------------------
William D. Durrant
/s/ Susan Gaither Jones Vice President and Director
- ----------------------------------
Susan Gaither Jones
/s/ J. Michael Gaither Director
- ----------------------------------
J. Michael Gaither
/s/ Claude S. Abernethy, Jr. Director
- ----------------------------------
Claude S. Abernethy, Jr.
/s/ George Watts Carr, III Director
- ----------------------------------
George Watts Carr, III
/s/ Joseph D. Hicks Director
- ----------------------------------
Joseph D. Hicks
/s/ Charles M. Snipes Director
- ----------------------------------
Charles M. Snipes
</TABLE>
36
<PAGE> 1
EXHIBIT 10.1(b)
[ELLEN TRACY LETTERHEAD]
February 27th, 1998
Mr. Barry Tartarkin
Ridgeview Inc.
1489 West Palmetto Park Road
Suite 410
Boca Raton, Florida 33486
Dear Barry,
This letter confirms our intention to renew the Ellen Tracy license for the next
three years, through December 31st, 2000. At the present time a contract is
being drafted, and Ridgeview is authorized to sell Ellen Tracy women's legwear
under conditions of our previous agreement.
If there are any questions please contact me.
Sincerely,
/s/ Howard Rosenberger
Howard Rosenberger
Executive Vice President
<PAGE> 1
EXHIBIT 10.7
[EXECUTION COPY]
AMENDMENT NO. 4
to
Amended and Restated
Loan and Security Agreement
dated as of December 20, 1996
AMENDMENT NO. 4 entered into as of March 13, 1998 among RIDGEVIEW,
INC., a North Carolina corporation (for itself and as successor by merger to
InterKnit, Inc., an Alabama corporation), SENECA KNITTING MILLS CORPORATION, a
New York corporation (collectively, the "Borrowers"), and NATIONSBANK, N.A., a
national banking association (the "Lender").
Preliminary Statement
The Borrowers and the Lender are parties to that certain 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 and Amendment No. 3 dated as of July 31, 1997 (the "Loan Agreement,"
terms defined therein, unless otherwise defined herein, being used herein as
therein defined).
The Borrower has requested an extension of the maturity of the
Revolving Credit Facility, a reduction in the interests rates applicable to
Loans, and certain other modifications to the Loan Agreement, and the Lender has
agreed to such request, upon and subject to all of the terms, conditions and
provisions hereinafter set forth.
NOW, THEREFORE, in consideration of the Loan Agreement, the mutual
covenants set forth therein and herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto hereby agree as follows:
Section 1. Amendment to Loan Agreement. Subject to the provisions of
Section 2, the Loan Agreement is hereby amended:
(a) by amending the provisions of Section 1.1 Definitions as follows:
(i) by amending the definition "Applicable Margin" in its
entirety to read as follows:
"Applicable Margin" means (a) from and after March 1,
1998, as to Prime Rate Loans -0-% and (b) as to Eurodollar
Rate Loans made on or after March 1, 1998, the rate per annum
set forth below opposite the Funded Debt to EBITDA Ratio
reflected in the financial statements of the Borrowers
delivered to the Lender pursuant to Section 9.1(b) for the
then most recently ended period of four
<PAGE> 2
consecutive fiscal quarters (provided such financial
statements shall have been delivered to the Lender at least
five Business Days prior to the determination of the
Applicable Margin):
<TABLE>
<CAPTION>
Funded Debt to
EBITDA Ratio Applicable Margin
Prime Rate Eurodollar Rate
Loans Loans
----- -----
<S> <C> <C>
< 2.50 to 1 0% 1.75%
=>2.50 to 1 <2.75 to 1 0% 1.87%
=>2.75 to 1 <3.00 to 1 0% 2.00%
=>3.00 to 1 <3.25 to 1 0.12% 2.12%
=>3.25 to 1 <3.50 to 1 0.25% 2.25%
=>3.50 to 1 0.37% 2.37%
</TABLE>
"Funded Debt to EBITDA Ratio" means, as of the last day of any
fiscal quarter of the Borrowers, the ratio of Funded Debt as
of such last day to EBITDA for the period of four consecutive
fiscal quarters ended on such last day; "Funded Debt" means
the aggregate outstanding principal amount of all Indebtedness
for Money Borrowed of the Borrowers computed on a consolidated
basis; and "EBITDA" for any specified accounting period means
Net Income of the Borrowers on a consolidated basis for such
period, plus the sum of the amounts deducted in respect of
interest expense, income taxes, depreciation and amortization
in computing such Net Income. In the event that financial
statements of the Borrowers have not been timely delivered in
accordance with Section 9.1(b) and, therefore, the Funded Debt
to EBITDA Ratio cannot be determined, the Applicable Margin
shall be equal to the sum of the then effective Applicable
Margin and the Default Rate.
(ii) by amending the definition "Borrowing Base" in its
entirety to read as follows:
"Borrowing Base" means at any time an amount equal to the sum
of:
(a) 80% (or such lesser percentage as the Lender may
in its sole and absolute discretion determine from time to
time) of the face value of Eligible Receivables due and owing
at such time, plus
2
<PAGE> 3
(b) the lesser of
(i) subject to the proviso below, 50% (or
such lesser percentage as the Lender may in its sole
and absolute discretion determine from time to time)
of the lesser of cost (computed on a
first-in-first-out basis) and fair market value of
Eligible Inventory at such time, and
(ii) $12,500,000, minus
(c) the Letter of Credit Obligations and such other
reserves as the Lender may determine from time to time in the
exercise of its reasonable credit judgment;
provided, that the stated advance rate (subject to the
Lender's discretion) against Eligible Inventory may be 60% for
not more than 120 consecutive days during the period May 1
through September 30 of each calendar year and shall not be
greater than 40% during a period of at least 60 consecutive
days during the period October 1 of one calendar year through
February 28 (or 29) of the following calendar year. Each
period during which such stated advance rate may be 60% shall
commence on the date of delivery of a Borrowing Base
Certificate during the relevant period reflecting either an
advance rate against Eligible Inventory of 60% or a deficit in
Collateral Availability that would be cured by application of
a 60% advance rate; each period during which such stated
advance rate shall not exceed 40% shall commence on the date
of delivery of a Borrowing Base Certificate during the
relevant period reflecting a 40% advance rate against Eligible
Inventory, but in any event not later than January 1 of each
calendar year.
(iii) by amending the definition "CAPEX Lock-in Date" in its
entirety to read as follows:
"CAPEX Lock-in Date" means June 30, 1998.
(iv) by amending the definition "Revolving Credit Facility" by
deleting the figure "$18,000,000" appearing therein and substituting
therefor the figure "$28,000,000";
(v) by amending the definition "Termination Date" by deleting
the date "January 10, 1999" appearing therein and substituting therefor
the date "June 30, 2000";
(b) by further amending Section 1.1 Definitions by adding thereto in
appropriate alphabetical order the following additional definitions:
3
<PAGE> 4
"Collateral Availability" means the excess, if any, of the
Borrowing Base as in effect on the date of determination, over the
aggregate outstanding principal amount of Revolving Credit Loans on the
same date.
"Fiscal Year" means the calendar year and when followed or
preceded by a designated year, means such calendar year.
(c) by amending Section 2B.2 Repayment of Term Loan in its entirety to
read as follows;
Section 2B.2 Repayment of Term Loan. The Term Loan is due and
payable, and shall be repaid in full by the Borrowers in 43
installments as follows: the first 42 installments, payable on January
1, 1997 and on the first day of each calendar month thereafter, shall
be in the amount of $53,667 each and the final installment payable on
June 30, 2000 shall be in the amount of the then unpaid balance of the
Term Loan.
(d) by amending Section 2C.4 Repayment of CAPEX Loan in its entirety to
read as follows:
Section 2C.4 Repayment of CAPEX Loan. The CAPEX Loan is due
and payable, and shall be repaid in full by the Borrowers in 24
substantially equal consecutive monthly installments payable on the
first day of each month beginning July 1, 1998 through and including
June 1, 2000, each in an amount equal to 1/84th of the aggregate
principal balance of the CAPEX Loans outstanding on the CAPEX Lock-in
Date, and a 25th and final installment in the amount of the entire
remaining principal balance, payable on June 30, 2000.
(e) by amending Section 10.5 Capital Expenditures in its entirety to
read as follows:
Section 10.5 Capital Expenditures. Make or incur any Capital
Expenditures, except that Ridgeview and its Subsidiaries may make or
incur Capital Expenditures in Fiscal Year 1997 not exceeding
$4,100,000, in Fiscal Year 1998 not exceeding $4,000,000 and in any
Fiscal Year thereafter, not exceeding $1,000,000.
(f) by further amending the Loan Agreement by substituting one of the
Schedules attached hereto as a part of Annex 1 for the Schedule bearing the same
caption attached to the Loan Agreement on the Amendment Effective Date; and
(g) by amending Exhibit E (Form of Compliance Certificate) to the Loan
Agreement in its entirety to read in the form of Exhibit E attached hereto as
Annex 2.
Section 2. Effectiveness. The provisions of Section 1 shall become
effective as of the date hereof on the date (the "Amendment Effective Date") on
which the Lender shall have received each of the following, in form and
substance satisfactory to the Lender:
4
<PAGE> 5
(a) payment by the Borrowers of a $42,500 origination fee with respect
to the increase in the Revolving Credit Facility effected by this Amendment
(which amount the Borrowers hereby irrevocably authorize the Lender to charge to
any account of the Borrowers (or an individual Borrower)) maintained with the
Lender;
(b) counterparts of this Amendment duly executed by the Borrowers,
together with the Consent and Confirmation attached hereto duly executed by the
Guarantor;
(c) a Revolving Credit Note in the original principal amount of
$28,000,000, duly executed and delivered by each Borrower;
(d) a certificate of the chief operating officer or president of each
Borrower stating that, to the best of his knowledge and based on an examination
sufficient to enable him to make an informed statement:
(i) all of the representations and warranties made or deemed
to be made under the Loan Agreement are true and correct as of the
Amendment Effective Date, and
(ii) after giving effect to this Amendment, no Default or
Event of Default exists;
(e) a certificate of the chief financial officer of Ridgeview,
accompanied by supporting calculations of the Funded Debt to EBITDA Ratio (as
defined in the Loan Agreement as amended by this Amendment) in reasonable
detail, setting forth the Applicable Margins effective as of the Amendment
Effective Date, based on September 30, 1997 financial statements and EBITDA for
the four-quarter period ended on that date;
(f) a signed opinion of Isenhower, Wood & Cilley, P.A., counsel for the
Borrowers, and such local counsel as the Lender shall deem necessary and
desirable, opining as to such matters in connection with this Amendment as the
Lender or its counsel may reasonably request; and
(g) such other documents and instruments as the Lender may reasonably
request.
Section 3. Effect of Amendment. Upon and after the effectiveness of
this Amendment as provided in Section 2 hereof, all references to the Loan
Agreement in the Loan Agreement or in any other Loan Document shall mean the
Loan Agreement as amended by this Amendment. Except as expressly provided in
this Amendment, the execution and delivery of this Amendment does not, and will
not, amend, modify or supplement any provision of or constitute a consent to or
a waiver of any noncompliance with the provisions of the Loan Agreement and,
except as specifically provided in this Amendment, the Loan Agreement shall
remain in full force and effect.
5
<PAGE> 6
Section 4. Representations and Warranties. Each Borrower hereby makes
the following representations and warranties to the Lender, which
representations and warranties shall survive the delivery of this Amendment and
the making of Loans under the Loan Agreement as amended hereby:
(a) Organization; Power; Qualification. Each Borrower is a corporation,
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and authority to own
its properties and to carry on its business as now being and hereafter proposed
to be conducted and is duly qualified and authorized to do business in each
jurisdiction in which failure to be so qualified and authorized would have a
Materially Adverse Effect.
(b) Authorization of Agreements. Each Borrower has the right and power
and has taken all necessary action to authorize it to execute, deliver and
perform this Amendment and the other Loan Documents contemplated hereby in
accordance with its terms. This Amendment has been, and the other Loan Documents
contemplated hereby when executed and delivered by the Borrowers, will have
been, duly executed and delivered by the duly authorized officers of each
Borrower and is, or at such time will be, a legal, valid and binding obligation
of such Borrower, enforceable in accordance with its terms.
(c) Compliance of Agreements with Laws. The execution and delivery of
this Amendment and the other Loan Document contemplated hereby, and the
performance of the Loan Agreement as amended by this Amendment and of the other
Loan Documents in accordance with their respective terms, do not and will not,
by the passage of time, the giving of notice or otherwise,
(i) require any Governmental Approval or violate any
applicable law relating to such Borrower or any of its Affiliates,
(ii) conflict with, result in a breach of or constitute a
default under (1) the articles of incorporation or by-laws or any
shareholders' agreement of such Borrower, (2) any indenture, agreement
or other instrument to which such Borrower is a party or by which any
of its property may be bound or (3) any Governmental Approval relating
to such Borrower, or
(iii) result in or require the creation or imposition of any
Lien upon or with respect to any property now owned or hereafter
acquired by such Borrower other than the Security Interest.
Section 5. General Provisions.
(a) Expenses. (i) The Borrowers agree to pay or reimburse on demand all
costs and expenses incurred by the Lender, including, without limitation, the
reasonable fees and
6
<PAGE> 7
disbursements of counsel, in connection with (a) the negotiation, preparation,
execution, delivery, administration, enforcement and termination of this
Amendment, the Loan Agreement and each of the other Loan Documents, whenever the
same shall be executed and delivered, including, without limitation, the
out-of-pocket costs and expenses incurred in connection with the administration
and interpretation of this Amendment, the Loan Agreement and the other Loan
Documents, (b) sums paid or obligations incurred in connection with the payment
of any amount or taking any action required of a Borrower under this Amendment,
the Loan Agreement and the other Loan Documents that such Borrower fails to pay
or take, and (c) any other obligations or expenses of the Borrowers under
Section 12.2 of the Loan Agreement.
(ii) The foregoing shall not be construed to limit any other provisions
of the Loan Documents regarding costs and expenses to be paid by the Borrowers.
The Borrowers hereby irrevocably authorize the Lender to charge to any account
of the Borrowers (or any individual Borrower) maintained with the Lender in the
amount of any costs and expenses owed by the Borrowers , as set forth in this
Section or otherwise, when such costs and expenses are due to the Lender and to
deem such amounts (but not in duplication) a request for a borrowing under the
Revolving Credit Facility pursuant to the provisions of Section 2A.2(a)(iii) of
the Loan Agreement.
(b) Governing Law. This Amendment shall be construed in accordance with
and governed by the law of the State of Georgia.
(c) Counterpart Execution. This Amendment may be executed in any number
of counterparts and by different parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and shall be binding
upon all parties, their successors and assigns, and all of which taken together
shall constitute one and the same agreement.
7
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
RIDGEVIEW, INC.
[CORPORATE SEAL]
Attest: By: /s/ Hugh R. Gaither
----------------------------
Hugh R. Gaither
President
By: /s/ Doug Yoder
------------------------------
Name: Doug Yoder
Title: Assistant Secretary
SENECA KNITTING MILLS
CORPORATION
[CORPORATE SEAL]
Attest: By: /s/ Hugh R. Gaither
----------------------------
Hugh R. Gaither
President
By: /s/ Walter L. Bost Jr.
------------------------------
Name: Walter L. Bost Jr.
Title: Secretary
NATIONSBANK, N.A.
By: /s/ Scott K. Goldstein
----------------------------
Scott K. Goldstein
Vice President
8
<PAGE> 9
CONSENT AND CONFIRMATION
The undersigned, GPM Corporation, as the maker of the Subsidiary
Guaranty, hereby acknowledges receipt of the foregoing Amendment No. 4 and
confirms, for the benefit of the Borrowers and the Lender, that the Subsidiary
Guaranty remains in full force and effect, in accordance with its terms, as to
Secured Obligations of the Borrower under the Loan Agreement as amended by the
said Amendment No. 4 and is hereby in all respects ratified and confirmed.
Dated: As of March 16, 1998
GPM CORPORATION
By: /s/ Hugh R. Gaither
----------------------------
Hugh R. Gaither
President
9
<PAGE> 10
ANNEX 1
Revised Schedules to the Loan Agreement
NONE
10
<PAGE> 11
ANNEX 2
EXHIBIT E
FORM OF COMPLIANCE CERTIFICATE
The undersigned, ______________________,
__________________________ of each of RIDGEVIEW, INC., a North Carolina
corporation, and SENECA KNITTING MILLS CORPORATION, a New York corporation
(collectively, the "Borrowers"), hereby certifies to NATIONSBANK, N.A., f/k/a
NationsBank, N.A. (South) (the "Lender") under the Amended and Restated Loan and
Security Agreement dated as of December 20, 1996 (as amended and in effect on
the date hereof, the "Loan Agreement") between the Borrowers and the Lender, in
accordance with the provisions of Section 9.3 of the Loan Agreement, that:
1. As of __________________ ___, 199__/20__, [date of last day of
fiscal month/fiscal year], the Borrowers were/were not in compliance with the
covenants set forth in Sections 10.1, 10.2 and 10.5 of the Loan Agreement, as
detailed on the worksheet attached.
2. As of __________________ ___, 199__/20__, the Funded Debt to EBITDA
Ratio was ______ to 1; as a result, the Applicable Margin for Prime Rate Loans
is __% and for Eurodollar Rate Loans is __%.
3. Based on an examination sufficient to enable me to make an informed
statement, [no Default or Event of Default exists as of the date hereof] [The
following Defaults and Events of Default exist [describe nature of Default or
Event of Default, when it occurred, whether it is continuing and the steps the
applicable Borrower is taking with respect thereto]].
IN WITNESS WHEREOF, the undersigned in his aforesaid capacity
has executed and delivered this Certificate as of __________ ___, 199__.
-------------------------------------
Name:
Title:
11
<PAGE> 12
AMENDED AND RESTATED
REVOLVING CREDIT NOTE
$28,000,000.00 Atlanta, Georgia
March 13, 1998
FOR THE VALUE RECEIVED, the undersigned, RIDGEVIEW, INC., a North
Carolina corporation ("Ridgeview"), and SENECA KNITTING MILLS CORPORATION, a
New York corporation (collectively, the "Borrowers"), hereby jointly and
severally unconditionally promise to pay to the order of NATIONSBANK, N.A.
(f/k/a/ NationsBank, N.A. (South), the "Lender"), at the offices of the Lender
located at 600 Peachtree Street, N.E., Atlanta, Georgia, 30308, or at such
other place within the United States as shall be designated from time to time
by the Lender, on the Termination Date, the principal amount of TWENTY-EIGHT
MILLION AND NO/100 DOLLARS ($28,000,000.00), or such lesser principal amount as
may then constitute the aggregate unpaid balance of all Revolving Credit Loans
made by the Lender to the Borrowers pursuant to the Loan Agreement, in lawful
money of the United States of America in federal or other immediately available
funds.
The Borrowers also jointly and severally unconditionally promise to
pay interest on the unpaid principal amount of this Note outstanding from time
to time for each day from the date of disbursement until such principal amount
is paid in full at the rates per annum and on the dates specified in the Loan
Agreement applicable from time to time in accordance with the provisions
thereof. Nothing contained in this Note or in the Loan Agreement shall be
deemed to establish or require the payment of a rate of interest in excess of
the maximum rate permitted by any applicable law. In the event that any rate
of interest required to be paid hereunder exceeds the maximum rate permitted by
applicable law, the provisions of the Loan Agreement relating to the payment of
interest under such circumstances shall control.
This Note is the Revolving Credit Note referred to in that certain
Amended and Restated Loan and Security Agreement dated as of December 20, 1996
(as amended, modified, supplemented or restated from time to time, the "Loan
Agreement"; terms defined therein being used in this Note as therein defined)
between the Borrowers and the Lender, is subject to, and entitled to, all
provisions and benefits of the Loan Documents, is secured by the Collateral and
other property as provided in the Loan Documents, is subject to optional and
mandatory prepayment in whole or in part and is subject to acceleration prior
to maturity upon the occurrence of one or more Events of Default, all as
provided in the Loan Documents.
<PAGE> 13
Presentment for payment, demand, protest and notice of demand, notice
of dishonor, notice of non-payment and all other notices are hereby waived by
the Borrowers, except to the extent expressly provided in the Loan Agreement.
No failure to exercise, and no delay in exercising, any right hereunder on the
part of the holder hereof shall operate as a waiver of such rights.
This Amended and Restated Revolving Credit Note is delivered in
exchange and substitution for, but not in extinguishment of the indebtedness
outstanding under, that certain Revolving Credit Note dated December 20, 1996
in the original principal amount of $14,000,000 made by the Borrowers in favor
of the Lender, as increased to $18,000,000 pursuant to Amendment No. 3 dated as
of July 31, 1997.
The Borrowers hereby jointly and severally agree to pay on demand all
costs and expenses incurred in collecting the Secured Obligations hereunder or
in enforcing or attempting to enforce any of the Lender's rights hereunder,
including, but not limited to, reasonable attorneys' fees and expenses if
collected by or through an attorney, whether or not suit is filed.
THE PROVISIONS OF SECTION 12.5 OF THE LOAN AGREEMENT ARE HEREBY
EXPRESSLY INCORPORATED BY REFERENCE HEREIN.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF GEORGIA WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS
PRINCIPLES THEREOF.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
-2-
<PAGE> 14
IN WITNESS WHEREOF, the undersigned have executed this Note as of the
day and year first above written.
RIDGEVIEW, INC.
[CORPORATE SEAL]
Attest: By: /s/ Hugh R. Gaither
-----------------------------------
Name: Hugh R. Gaither
By: /s/ Doug Yoder ----------------------------
----------------------------------- Title: President & CEO
Name: Doug Yoder ----------------------------
----------------------------
Title: Assistant Secretary
----------------------------
SENECA KNITTING MILLS
CORPORATION
[CORPORATE SEAL]
Attest: By: /s/ Hugh R. Gaither
-----------------------------------
Name: Hugh R. Gaither
----------------------------
By: /s/ Walter C. Bost, Jr. Title: President & CEO
----------------------------------- ----------------------------
Name: Walter C. Bost, Jr.
----------------------------
Title: Secretary
----------------------------
-3-
<PAGE> 1
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, 1997, 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: 1993 1994 1995 (2) 1996 1997
- ------------------------------------- -------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales $ 35,605 $ 39,828 $ 54,833 $ 76,839 $ 91,471
Gross profit 7,792 9,302 10,695 15,473 18,916
Operating income 1,760 2,467 2,001 4,877 5,273
Interest expense (661) (887) (1,668) (2,235) (1,870)
Income before income taxes 1,433 1,634 451 2,750 3,506
Net income 1,084 1,039 241 1,758 2,238
Earnings per share 0.80 0.65 0.15 0.96 0.75
Cash dividends per share (3) 0.09 0.09 0.10 0.05 --
Weighted average common and common
equivalent shares outstanding 1,353 1,590 1,590 1,832 3,000
OTHER DATA:
Gross profit margin 21.9% 23.4% 19.5% 20.2% 20.7%
Operating income margin 5.0% 6.2% 3.6% 6.4% 5.8%
Operating income before depreciation
and amortization (1) $ 2,661 $ 3,510 $ 3,372 $ 6,621 $ 6,968
Depreciation and amortization 901 1,043 1,371 1,744 1,695
Capital expenditures 840 2,169 4,384 1,089 2,346
</TABLE>
Page 1
<PAGE> 2
<TABLE>
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 7,616 $ 11,664 $ 11,718 $ 23,350 $ 29,604
Total assets 21,614 25,578 40,465 48,785 54,679
Long-term debt (less current portion) 5,771 10,420 15,991 15,668 20,266
Total debt 10,918 12,349 23,244 18,111 23,030
Shareholders' equity 6,690 7,827 7,982 19,357 21,149
</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
<PAGE> 3
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. Management believes the company 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, Reebok and WB Sports 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, Ellen Tracy,
Evan-Picone, Picone Studio, Rockport and Woolrich.
The Company's net sales have increased over the past three years, from
$54.8 million in 1995 to $91.5 million in 1997, a compounded annual growth rate
of 29.2%. The majority of the Company's revenue growth over the past three years
has been attributable to increased sales in all major product categories. The
increased sales of promotional weight 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. Increased sales of sheer
pantyhose are the result of the licensed Evan-Picone women's hosiery program,
which the Company began selling in July 1996. Over the past three years, the
Company has invested a significant portion of its capital resources in
modernizing its sock and women's hosiery manufacturing operations, with capital
improvements during the period totaling $7.8 million. 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 years ended December 31, 1995 and 1996.
The following table 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 * 1995 1996 1997
- ------------------ ---- ---- -----
Amount % Amount % Amount %
------ - ------ - ------ -
<S> <C> <C> <C> <C> <C> <C>
SOCKS:
Sports specific $14,878 27.1% $ 19,226 25.1% $20,665 22.6%
Sports promotional 13,344 24.3 18,161 23.6 19,698 21.5
Active sport 1,846 3.4 1,869 2.4 2,049 2.3
Rugged outdoor and
heavyweight casual 9,178 16.7 13,049 17.0 14,893 16.3
Greige goods 425 0.8 984 1.3 1,221 1.3
----------------------------------------------------------------------------
Total socks $39,671 72.3% $ 53,289 69.4% $58,526 64.0%
----------------------------------------------------------------------------
WOMEN'S HOSIERY:
Sheer pantyhose and knee-highs $ 6,047 11.1% $ 9,366 12.2% $14,299 15.6%
Tights and trouser socks 9,115 16.6 14,184 18.4 18,646 20.4
----------------------------------------------------------------------------
Total women's hosiery $15,162 27.7% $ 23,550 30.6% $32,945 36.0%
----------------------------------------------------------------------------
Total net sales $54,833 100.0% $ 76,839 100.0% $91,471 100.0%
============================================================================
</TABLE>
* For a detailed description of each finished product category, see "Business
- Sales and Marketing."
As illustrated by the table, socks have accounted for approximately
two-thirds of 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, 17.0% for 1996 and 16.3% in 1997. Sales of
sports promotional and sports specific socks have grown at a faster rate than
sales of heavier weight active sport socks because of customer preferences.
Within the women's hosiery product categories, the percentage of net sales
attributable to tights and trouser socks increased from 16.6% in 1995 to 20.4%
in 1997 because of customer preferences, the success of the licensed 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 and 1997.
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.
The Company's success depends in part on its ability to anticipate and
respond
<PAGE> 5
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. Another
trend that has begun more recently is the increase in demand in the "brown shoe"
market, as opposed to athletic footwear. Customers choosing to wear shoes in
this product category would typically wear a sock such as the rugged outdoor and
heavyweight socks the Company manufactures at Seneca. Management attributes the
14.1% increase in net sales of socks in this category primarily to this trend.
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 trend toward more casual dress by shifting the emphasis from traditional
sheer products to more durable, heavyweight products such as tights and trouser
socks. This trend has increased the Company's sales of women's hosiery products
as well as its profitability, because heavier weight product lines generally
carry higher margins than sheer products. Selling, general and administrative
costs have increased as well, because of 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, Evan-Picone and Picone Studio in its women's hosiery product lines, along
with Coleman, Rockport and Woolrich in its sports sock and rugged outdoor and
heavyweight casual product lines. Because many of these licensing agreements
typically involve higher margin products, most of them 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
<PAGE> 6
to such retailers, the Company has modernized and expanded its production
facilities, developed outsourcing relationships with other manufacturers,
committed to invest approximately $2.0 million over the next 18-24 months 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. This trend also may lead to more volatility in revenues, because the
addition or loss of a single customer's business can have a material impact on
the Company's operating results for the affected period.
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 years ended December
31, 1995 and 1996. The acquisition of an affiliated sock manufacturer,
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, the
administrative expenses associated with the integration of Interknit into the
Company's operations were 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) during 1995 incurred as a result of the downtime
associated with personnel training and the installation of and break-in period
for the new knitting machinery. In October 1997, the Company completed the
installation of 84 new electronic knitting machines in its women's hosiery
knitting operation, replacing 100 existing mechanical knitting
<PAGE> 7
machines. By staggering the installation of these machines over a six-month
period, the Company was able to minimize the downtime and avoid the negative
manufacturing variance the Company experienced in 1994 as a result of knitting
machine replacements.
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 years ended December 31, 1995 and 1996. Because of 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
five of the Company's 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. For the years ended December 31, 1995, 1996 and 1997, the
percentage of Interknit's net sales sold to the Company was 89%, 86% and 83%,
respectively. 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. In June 1997, Interknit was merged into the
Company.
Evan-Picone Women's Hosiery Program
In July 1996, the Company negotiated a license to manufacture and sell
women's sheer hosiery under the Evan-Picone brand name. In mid-1997, it became
apparent that sales of women's hosiery products under the Evan-Picone brand name
for the year would be significantly lower than budgeted. The lower than expected
sales volume did not result, however, in a proportionate reduction of selling,
general and
<PAGE> 8
administrative expenses associated with this program. Advertising, mark-down
allowances and customer rebates and discounts are costs of the program that are
not affected by variations in sales volume. As a result, the overall performance
of this program was also below management's expectations.
Management believes that a combination of a declining sheer pantyhose
market and the lack of a cohesive marketing strategy for this mature brand when
the Company became the licensee in July 1996 led to the lower than expected
volume of sales for this program. To rebuild the sales volume, the Company
contracted in 1997 with a marketing, advertising and public relations firm to
develop a series of marketing initiatives aimed at re-establishing Evan-Picone
as a significant competitor in the sheer hosiery marketplace. Among the
coordinated marketing efforts that have been undertaken, or will be made in
1998, are comprehensive consumer focus group studies, new point of sale
materials, new photographs of Evan-Picone products, design and creation of new
Evan-Picone packaging, direct mail to consumers and consumer survey cards. All
of these efforts are designed to prepare the hosiery marketplace for the
introduction of a new Evan-Picone women's hosiery program, which will take place
in mid-1998.
As part of its initiative to reestablish the Evan-Picone brand in the
marketplace, the Company will authorize its customers to begin returning their
current stock of products, in exchange for the redesigned line of Evan-Picone
branded products. As the goods are returned, certain styles and colors, which
are to remain in the new product line, will be repackaged and sold back to the
customer. The remaining goods will be repackaged and sold to certain discount
retail distribution outlets, with which the Company currently does business. The
customer returns will take place over a period of three to six months, will
transform the current line of Evan-Picone products to the newly redesigned
line, and will be effected in a manner that should be invisible to the consumer.
As of March 23, 1998, the Company had spent approximately $200,000 on
the marketing initiatives mentioned above. Additionally, the Company expects to
spend approximately $300,000 in the current year to completely implement its
marketing strategy. The customer returns of their current stock of Evan-Picone
products and the repackaging and resale of the returned merchandise, will
significantly increase the costs of the Company's initiative to re-establish the
Evan-Picone brand in the marketplace. Uncertainties, such as the quantity of the
returns and their condition and quality, prevent management, at this time, from
being able to reasonably estimate the total costs of the return, repackaging and
resale of this merchandise. Such costs, however, when combined with the other
expenses of the marketing initiative, will have a material adverse impact on the
overall performance of the Evan-Picone program in the current fiscal year. It is
management's belief, however, that the marketing initiatives being implemented,
will improve the performance of this program in 1999. There can be no
assurances, however, that the Company's current marketing initiatives designed
to improve the performance of the Evan-Picone women's hosiery program can be
implemented successfully without incurring additional expenditures.
<PAGE> 9
Results of Operations as a Percentage of Net Sales
The following table presents the Company's results of operations as a
percentage of net sales for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 80.5 79.8 79.3
------- ------- -------
Gross profit 19.5 20.2 20.7
Selling, general and administrative expenses 15.9 13.8 14.9
------- ------- -------
Operating income 3.6 6.4 5.8
Interest expense (3.0) (2.9) (2.0)
Other income, net 0.2 0.1 0.0
------- ------- -------
Income before income taxes 0.8 3.6 3.8
Income tax expense 0.4 1.3 1.4
-------
======= =======
Net income 0.4% 2.3% 2.4%
======= ======= =======
</TABLE>
Comparison of 1997 to 1996
Net sales for 1997 were $91.5 million, compared to $76.8 million in
1996, an increase of $14.7 million, or 19.1%. Revenues increased in each of the
Company's operating divisions for the year ended December 31, 1997. Net sales of
women's hosiery products, which include sales of tights and trouser socks under
the Ellen Tracy brand name and sales of sheer pantyhose under the Evan-Picone
brand name, accounted for $9.4 million of the increase in revenues. The increase
in sales of women's hosiery products was less than anticipated due to lower than
expected sales of products in the Evan-Picone program. Revenues for the
Company's sports sock product categories increased approximately 8.4% in 1997,
while sales of rugged outdoor and heavyweight casual socks increased 14.1%.
Gross profit for 1997 increased to $18.9 million from $15.5 million in
1996, an increase of $3.4 million, or 21.9%. As a percentage of net sales, gross
profit increased to 20.7% in 1997, compared to 20.2% in 1996. Approximately 65%
of the $3.4 million increase in gross profit resulted from the increase in sales
volume of women's hosiery products, which includes tights, trouser socks and
sheer pantyhose. Selected price increases and improved operational efficiencies
in knitting for the Company's sports sock operation in Newton, North Carolina
also contributed to the increase in gross profit. Gross profit for each of the
Company's other operating divisions remained flat.
Selling, general and administrative expenses for 1997 were $13.6
million, compared to $10.6 million in 1996, an increase of $3.0 million, or
28.3%. Selling expenses associated with the Evan-Picone women's hosiery program,
including royalty payments, cooperative advertising and mark-down allowances
accounted for $2.0 million of the $3.0 million increase.
<PAGE> 10
Operating income for 1997 was $5.3 million, compared to $4.9 million in
1996. Increased profitability in the women's hosiery division, primarily
associated with the increase in sales of tights and trouser socks under the
licensed Ellen Tracy brand name, as well as the profitability associated with
the sales of sports specific and active sports socks contributed to the increase
in operating income for 1997.
Interest expense decreased from $2.2 million in 1996, to $1.9 million
in 1997. Although total debt at December 31, 1997 was $4.9 million higher than
the same period in 1996, interest expense decreased as a result of a reduction
in the interest rate charged by the Company's primary lender.
Other income for 1997 was $103,000, compared to $108,000 for 1996.
Grant income, or the amortization of deferred credits granted by the Republic of
Ireland, account for the majority of other income for both 1997 and 1996.
Income tax expense for 1997 was $1.3 million, compared to $992,000 in
1996. The effective tax rates for both 1997 and 1996 were approximately 36%.
Net income for 1997 was $2.2 million, compared to $1.8 million in 1996,
an increase of $400,000, or 22.2%. The increase in net income for 1997 is
primarily attributable to increases in sales volume for each of the Company's
operating divisions, selected price increases in the sports socks and rugged
outdoor and heavyweight casual socks and the reduction in the interest rate
charged by the Company's primary lender.
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
<PAGE> 11
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 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.
<PAGE> 12
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.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities for the years ended December 31,
1995, 1996 and 1997 were $2.2 million, $(3.3 million) and $(2.6 million),
respectively. The negative cash flows for 1997 resulted from increases of $2.6
million in accounts receivable and $3.0 million in inventories. 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. Pursuant to an amended
and restated agreement signed in March 1998, the Revolving Credit Facility
provides for borrowings up to $28.0 million through June 2000. As of March 23,
1998, $16.0 million was outstanding under the Revolving Credit Facility, and
there was $12.0 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 1.75% to LIBOR plus 2.37%, depending upon the Company's
ratio of Funded Debt to Earnings Before Interest, Taxes, Depreciation and
Amortization ("Funded Debt to EBITDA") (as defined) (7.8075% at March 23 1998).
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.
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,
<PAGE> 13
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 a term
loan outstanding with NationsBank. As of March 23, 1998, the term loan had an
outstanding principal balance of approximately $4.2 million, and bears interest
at the LIBOR-based rate applicable to the Revolving Credit Facility (7.8075% at
March 23, 1998). This loan is payable in monthly installments of $53,667, with a
balloon payment of approximately $2.7 million due in June 2000. The loan is
secured by the same collateral as the Revolving Credit Facility and imposes
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 $1.2 million at March 1, 1998, bears
interest at rates ranging from 6.9% to 9.8% and is payable in monthly
installments through 2003.
As of March 23, 1998, the Company had commitments of approximately $1.2
million to purchase 52 electronic knitting machines for its sports sock knitting
operation in Ft. Payne, Alabama, to expand the current production capacity of
that facility. The source of funding for these planned capital expenditures is
expected to be proceeds from an additional term loan.
The Company is also implementing a new enterprise-wide management
information system that will link each of the Company's facilities
electronically and provide operational improvements in manufacturing,
forecasting, planning, distribution and financial reporting. This project, which
will take place over the next 18-24 months, will involve a complete overhaul of
the Company's current management information system and address any issues
relating to the Year 2000 concerning date driven applications. The Company
anticipates the cost of this project will be approximately $2.1 million over the
next 18-24 months, with the majority of costs associated with the project to be
disbursed during 1998. Management expects to finance the cost of the project
through borrowings under the Company's Revolving Credit Facility, supplemented
by a leasing arrangement for certain hardware. As of March 23, 1998, the Company
had spent approximately $500,000 on this project and expects to spend
approximately $1.5 million by the end of 1998. The Company is also communicating
with customers, suppliers, financial institutions and others to coordinate the
Company's Year 2000 compliance with theirs. In the event that any of the
Company's significant customers or suppliers are unable to successfully and
timely achieve Year 2000 compliance, the Company's business or results of
operations could be adversely affected.
For some time, the Company has been planning to construct at an
estimated cost of approximately $1.5 million, a new distribution facility on
property the Company currently owns. This project, however, has been postponed
until the implementation of the Company's new enterprise-wide management
information system
<PAGE> 14
is complete. Management's decision to delay the construction of the distribution
center was based on the need for a comprehensive examination of the Company's
needs and requirements for a centralized distribution center. As part of the
implementation of the new information system, the Company will examine all
aspects of its business process, including its distribution requirements.
Management believes that the Company's improved capitalization,
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.
EFFECT OF INFLATION
Management believes that inflation has not had a material impact on
the Company's results of operations for the years ended December 31, 1996 and
1997.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," which establishes standards for the reporting and display
of comprehensive income, its components and accumulated balances. Comprehensive
income, as defined, includes all changes in equity, except those resulting from
investments by owners and distributions to owners. Among other disclosures, SFAS
No. 130 requires that all items which are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements.
SFAS No. 130 is effective for periods beginning after December 15,
1997, and requires comparative information for earlier years to be restated.
Management will implement SFAS No. 130 in 1998 and will report comprehensive
income when applicable.
Also in June 1997, the FASB 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
<PAGE> 15
evaluated regularly 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 additional disclosure
may 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 these standards.
<PAGE> 16
COMPANY'S STATEMENT ON FORWARD-LOOKING INFORMATION
The foregoing discussion and other sections of the Company's Annual
Report include forward-looking statements regarding various hosiery programs,
the Company's results of operations and financial position and potential
acquisitions. Such forward-looking statements, which are generally
characterized by the use of "expects," "anticipates," "believes" or
"estimates," are based on management's current expectations and necessarily
involve assumptions about risk and uncertainties that could cause actual results
to differ materially from any future performance implied or assumed by such
statements. Some important factors which could cause the Company's actual
results to differ materially include the following: changes in consumer demand
and fashion trends/consumer dress habits; increases in costs and expenses that
the Company cannot quickly recover through price increases; unexpected
challenges in successfully integrating and operating any acquired businesses;
and loss of a significant customer or brand. Persons holding an investment in,
or making an investment decision regarding Ridgeview's common stock, should
assess any forward-looking statements in light of the possibility of
unforeseeable events or conditions.
<PAGE> 17
RIDGEVIEW, INC.
AND SUBSIDIARIES
DECEMBER 31, 1995, 1996 AND 1997
<PAGE> 18
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Ridgeview, Inc.
Newton, North Carolina
We have audited the accompanying consolidated balance sheets of Ridgeview, Inc.
and subsidiaries as of December 31, 1996 and 1997, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended December 31, 1997. 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 $7,122,000 and $6,186,000
as of December 31, 1996 and 1997, respectively, and total revenues of
$4,724,000, $8,290,000 and $8,737,000 for each of the three years in the period
ended December 31, 1997, 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 $9,614,000 and $11,186,000
as of December 31, 1996 and 1997, and total revenues of $9,178,000 for the
period from date of acquisition (June 28, 1995) through December 31, 1995,
$13,049,000 and $14,893,000 for the years ended December 31, 1996 and 1997,
respectively. 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, 1996 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
Greensboro, North Carolina
March 13, 1998
<PAGE> 19
[KPMG 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 1997
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 issued by the
Auditing Practices Board of the Republic of Ireland, which do not vary
substantially from those of the United States. An audit includes an
examination, on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements. It also includes an assessment of the
significant estimates and judgements made by branch management in the
preparation of the financial statements, and of whether the accounting policies
are appropriate to the branch's circumstances, consistently applied and
adequately disclosed.
We planned and performed our audits so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion we also evaluated the overall
adequacy of the presentation of 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 1995, 31 December 1996 and 31 December 1997 and of
the profit for the branch for the years ended 31 December 1995, 31 December
1996 and 31 December 1997.
/s/ KPMG
Chartered Accountants
Registered Auditors Date: 4 March 1998
<PAGE> 20
[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 and Subsidiaries (a wholly-owned subsidiary of Ridgeview,
Inc.) as of December 31, 1997 and 1996, and the related consolidated statements
of operations and (accumulated deficit) retained earnings and cash flows for the
years then ended and for the six month period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We 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 and Subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their consolidated cash flows for
the years then ended and for the six month period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ Mengel Metzger Barr & Co. LLP
Rochester, New York
February 20, 1998
<PAGE> 21
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
December 31,
-----------------------------
1996 1997
-----------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 316 $ 482
Accounts receivable (less allowance for doubtful accounts of
$502 and $605) (Note 8) 13,272 15,720
Refundable income taxes (Note 7) - 165
Inventories (Note 3) 20,624 23,316
Prepaid expenses 128 350
---------------------------
Total current assets 34,340 40,033
PROPERTY, PLANT AND EQUIPMENT, less accumulated
depreciation and amortization (Note 4) 11,499 11,414
OTHER ASSETS 1,215 1,629
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS
ACQUIRED, less accumulated amortization of $210 and $338
(Note 2) 1,731 1,603
---------------------------
Total assets (Note 6) $ 48,785 $ 54,679
---------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 22
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1996 1997
-------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings (Note 5) $ 1,094 $ 1,464
Accounts payable 5,905 5,612
Accrued expenses and other liabilities 1,632 1,544
Income taxes payable (Note 7) 465 -
Deferred income taxes (Note 7) 444 297
Current portion of long-term debt (Note 6) 1,349 1,300
Current portion of deferred compensation (Note 11) 101 212
-------------------------------------
Total current liabilities 10,990 10,429
LONG-TERM DEBT, less current portion (Note 6) 15,668 20,266
DEFERRED COMPENSATION, less current portion (Note 11) 1,534 1,521
DEFERRED CREDIT (Note 11) 1,020 789
DEFERRED INCOME TAXES (Note 7) 216 525
-------------------------------------
Total liabilities 29,428 33,530
-------------------------------------
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 and outstanding 3,000,000 shares 30 30
Additional paid-in capital 10,650 10,650
Retained earnings, including amounts reserved of $1,003 and
$854 8,450 10,688
Foreign currency translation adjustments 227 (219)
-------------------------------------
Total shareholders' equity 19,357 21,149
-------------------------------------
Total liabilities and shareholders' equity $ 48,785 $ 54,679
=====================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 23
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------
1995 1996 1997
-------------------------------------------
<S> <C> <C> <C> <C>
NET SALES (Note 8) $ 54,833 $ 76,839 $ 91,471
COST OF SALES 44,138 61,366 72,555
----------------------------------------
GROSS PROFIT 10,695 15,473 18,916
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 8,194 10,596 13,643
SUPPLEMENTAL RETIREMENT BENEFIT (Note 11) 500 - -
----------------------------------------
OPERATING INCOME 2,001 4,877 5,273
----------------------------------------
OTHER INCOME (EXPENSE)
Interest expense (1,668) (2,235) (1,870)
Foreign currency exchange gains - 12 15
Grant income 75 92 85
Other, net 43 4 3
----------------------------------------
Total other income (expense) (1,550) (2,127) (1,767)
----------------------------------------
INCOME BEFORE INCOME TAXES 451 2,750 3,506
PROVISION FOR INCOME TAXES (Note 7) 210 992 1,268
----------------------------------------
NET INCOME $ 241 $ 1,758 $ 2,238
========================================
EARNINGS PER SHARE $ .15 $ .96 $ .75
========================================
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 1,590 1,832 3,000
========================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 24
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 1995, 1996 and 1997
(In Thousands, Except Share and Per Share Amounts)
<TABLE>
<CAPTION>
Foreign
Common Common Additional Currency
Stock Stock Paid-in Retained Translation
Shares Amount Capital Earnings Adjustments Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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
Net income 2,238 2,238
Foreign currency translation
adjustment (446) (446)
- ------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 3,000,000 $ 30 $ 10,650 10,688 (219) 21,149
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 25
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
--------------------------------------------
1995 1996 1997
--------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers $ 53,499 $ 73,423 $ 88,682
Cash paid to suppliers and employees (48,698) (73,849) (87,565)
Interest paid (1,483) (2,220) (1,723)
Income taxes paid, net of refunds (941) (476) (1,700)
Other cash receipts 16 62 --
Other cash disbursements (174) (228) (264)
-------------------------------------------
Net cash provided by (used in) operating activities 2,219 (3,288) (2,570)
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for organizational costs (133) - -
Payments for investments in subsidiaries (76) (161) (139)
Payments for purchase of 100% of Seneca capital
stock, net of cash acquired (2,097) - -
Proceeds from sale of property and equipment 309 49 38
Payments for purchase of property, plant and
equipment (4,384) (1,089) (2,346)
-------------------------------------------
Net cash used in investing activities (6,381) (1,201) (2,447)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net short-term borrowings (repayments) 254 (334) 593
Proceeds for long-term debt 63,205 73,697 94,508
Repayment of long-term debt (59,208) (78,590) (89,891)
Dividends paid (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 490 - -
-------------------------------------------
Net cash provided by financing activities 4,290 4,535 5,210
-------------------------------------------
EFFECT OF EXCHANGE RATE ON CASH 4 8 (27)
-------------------------------------------
Net increase in cash 132 54 166
CASH, beginning of period 130 262 316
-------------------------------------------
CASH, end of period $ 262 $ 316 $ 482
===========================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 26
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Continued)
(In Thousands)
<TABLE>
<CAPTION>
For the Year Ended December 31,
------------------------------------------
1995 1996 1997
------------------------------------------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET
CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES
Net income $ 241 $ 1,758 $ 2,238
----------------------------------------
Adjustments to reconcile net income to net cash
provided by (used in)
operating activities:
Depreciation and amortization 1,371 1,744 1,695
Provision for doubtful accounts receivable 125 177 123
Capital grants recognized (75) (92) (85)
Decrease in government grants (43) - -
(Gain) loss on sale of assets (28) 26 3
Increase in deferred compensation liability 557 57 98
Increase (decrease) in deferred income taxes (267) 44 168
Changes in operating assets and liabilities,
net of effect from
purchase of Seneca:
Increase in accounts receivable (1,277) (3,255) (2,586)
(Increase) decrease in inventories 798 (5,566) (2,993)
Increase in prepaid expenses
and other assets (70) (152) (349)
Increase (decrease) in accounts
payable 1,592 769 (153)
Increase (decrease) in income taxes
payable (463) 472 (624)
Increase (decrease) in accrued
expenses and other liabilities (242) 730 (105)
----------------------------------------
Total adjustments to net income 1,978 (5,046) (4,808)
----------------------------------------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES $ 2,219 $ (3,288) $ (2,570)
----------------------------------------
</TABLE>
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
Year Ended December 31, 1995
----------------------------
<S> <C>
Purchase price of 100% of Seneca common stock $ 7,000
Less: Short-term notes issued (4,000)
Less: Cash acquired (903)
---------------------------
Payment for purchase of Seneca common stock,
net of cash acquired $ 2,097
===========================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 27
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 heavyweight 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. In June 1997,
Interknit was merged into the Company. All significant intercompany accounts and
transactions are eliminated in consolidation.
REVENUE RECOGNITION. Sales and related costs are recorded by the
Company upon shipment of its products.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
INVENTORIES. All inventories except those at Seneca are stated at the
lower of cost (first-in, first-out) or market. Inventories for Seneca are stated
at the lower of cost (last-in, first-out) or market.
PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment are stated
at cost. Expenditures for maintenance and repairs, which do not improve or
extend the life of an asset, are charged to expense as incurred. Expenditures
for renewals and improvements that significantly add to productive capacity or
extend the useful life of an asset are capitalized.
Depreciation is provided over the estimated useful lives of the
individual assets by the straight-line method. The estimated useful lives used
in the computation of depreciation are as follows:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Buildings and improvements 8-39
Machinery and equipment 5-12
Automobiles and trucks 5
Office furniture and equipment 5-10
</TABLE>
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED. The excess of
cost over fair value of net assets acquired represents the excess of purchase
price over the fair value of net tangible assets of businesses acquired
(goodwill) and is amortized using the straight-line method over the estimated
useful life of 15 years.
<PAGE> 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
LONG-LIVED ASSETS. Long-lived assets, such as property, plant and
equipment and goodwill, are evaluated for impairment when events or changes in
circumstances indicate that the carrying amount of those assets may not be
recoverable through the estimated undiscounted future cash flows from the use of
these assets. When any such impairment exists, the related assets will be
written down to fair value. This policy is in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." There have
been no impairment losses through December 31, 1997.
FAIR VALUE OF FINANCIAL INSTRUMENTS. Financial instruments of the
Company include long-term debt. Based upon the current borrowing rates available
to the Company, estimated fair values of these financial instruments approximate
their recorded carrying amounts.
INCOME TAXES. The 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.
ADVERTISING COSTS. Advertising costs, included in selling, general and
administrative expenses, are expensed as incurred and were $852,000, $914,000
and $1,836,000 for the years ended December 31, 1995, 1996, and 1997,
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.
EARNINGS PER SHARE. In February 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share," which
established new standards for computing earnings per share. SFAS No. 128
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 (see
Note 10) at December 31, 1996 and 1997 have not been included in diluted
earnings per share due to their antidilutive nature. Earnings per share are
calculated 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.
<PAGE> 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
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.
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.
NOTE 3 - INVENTORIES
A summary of inventories by major classification, is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1996 1997
---------------------------
(In Thousands)
<S> <C> <C>
Raw materials $ 4,114 $ 4,217
Work-in-process 6,127 8,039
Finished goods 10,523 11,180
LIFO reserve (140) (120)
--------------------------
$ 20,624 $ 23,316
==========================
</TABLE>
<PAGE> 30
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,
-----------------------------------
1996 1997
-----------------------------------
(In Thousands)
<S> <C> <C>
Land $ 313 $ 311
Buildings and improvements 6,449 6,673
Machinery and equipment 15,013 14,789
Automobiles and trucks 140 112
Office furniture and equipment 2,343 2,541
-----------------------------------
24,258 24,426
Less accumulated depreciation and amortization 12,759 13,012
-----------------------------------
Net property, plant and equipment $ 11,499 $ 11,414
==================================
</TABLE>
Depreciation expense amounted to $1,260,000, $1,501,000 and $1,492,000,
for the years ended December 31, 1995, 1996 and 1997, respectively.
NOTE 5 - SHORT-TERM BORROWINGS
Short-term borrowings consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1996 1997
-----------------------------------
(In Thousands)
<S> <C> <C>
$200 line of credit, interest payable
monthly at prime plus 1%, secured
by certain assets of Interknit $ 155 $ -
Bank drafts issued, not yet presented
for payment 939 1,464
---------------- ---------------
$ 1,094 $ 1,464
==================================
</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.
<PAGE> 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1996 1997
-----------------------------------
(In Thousands)
<S> <C> <C>
Revolving line of credit (see discussion below) $ 8,574 $ 14,552
Term loan payable to bank (see discussion below) 4,042 -
Term loan payable to bank (see discussion below) 928 -
Term loan payable to bank in 42 monthly installments of $54, plus
interest payable monthly, beginning January 1,
1997, with a final payment due June 30, 2000 (see
discussion below) - 4,326
Note payable to bank in annual installments of $314, beginning in
1997, plus interest at fixed and variable rates
(approximating 8.75% at December 31, 1997) with a final
payment due in 2001, collateralized by the
assets of Limited and guaranteed by the Company 1,593 1,113
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 1,091 884
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 305 248
Various notes payable in installments through July 2003,
including interest at rates ranging up to 13.2%,
collateralized by a building and various equipment 484 443
----------------------------------
17,017 21,566
Less current portion 1,349 1,300
----------------------------------
Total long-term debt $ 15,668 $ 20,266
==================================
</TABLE>
<PAGE> 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
NOTE 6 - LONG-TERM DEBT (Continued)
On March 13, 1998, the Company amended its existing bank loan
agreement. The amended agreement provides a $28,000,000 revolving line of credit
due June 30, 2000 and extends the due date of the existing term loan to June 30,
2000.
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, which were also amended on March 13, 1998, vary based on
achievement of a ratio of Funded Debt to Earnings Before Interest, Taxes,
Depreciation and Amortization ("Funded Debt to EBITDA"), calculated quarterly,
and range from prime to prime plus .37%, or LIBOR plus 1.75% to LIBOR plus 2.37%
(8.09% at December 31, 1997 under the LIBOR option). These loans are
collateralized by substantially all assets of the Company.
The provisions of the amended agreement relating to the revolving
credit facility and the term loan contain certain covenants which require, among
other things, the maintenance of minimum amounts of working capital and tangible
net worth, restrictions on capital expenditures, restrictions on dividends and
compliance with minimum financial ratios relating to debt coverage and cash
flows.
Approximate maturities of long-term debt for the next five years are as
follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31:
------------------------
<S> <C>
1998 $ 1,300
1999 1,320
2000 18,281
2001 438
2002 176
Thereafter 51
-------------
$ 21,566
=============
</TABLE>
<PAGE> 33
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,
---------------------------------------------
1995 1996 1997
-------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Current:
Federal $ 444 $ 797 $ 918
State 53 125 144
Foreign (20) 26 37
-------------------------------------------
477 948 1,099
-------------------------------------------
Deferred:
Federal (247) 37 150
State (34) 5 13
Foreign 14 2 6
-------------------------------------------
(267) 44 169
-------------------------------------------
Provision for income taxes $ 210 $ 992 $ 1,268
===========================================
</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,
-------------------------------------------
1995 1996 1997
-------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Income before income taxes $ 451 $ 2,750 $ 3,506
===========================================
Computed "expected" tax expense $ 153 $ 935 $ 1,192
Increase (decrease) in taxes resulting from:
Foreign income with no U.S. income tax
effect 20 (85) (126)
State income taxes, net of federal income 21 85 97
tax
Nondeductible expenses 28 50 51
Foreign tax (6) 28 43
Other (6) (21) 11
-------------------------------------------
$ 210 $ 992 $ 1,268
===========================================
</TABLE>
<PAGE> 34
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,
-----------------------
1996 1997
-----------------------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Receivable and inventory reserves $ 302 $ 423
Deferred compensation liability 605 641
Other 173 99
-----------------------
Total deferred tax assets $ 1,080 $ 1,163
=======================
Deferred tax liabilities:
Accumulated depreciation $ (910) $ (1,025)
LIFO reserve (830) (824)
Other - (136)
-----------------------
Total deferred tax liabilities (1,740) (1,985)
-----------------------
Net deferred tax liabilities $ (660) $ (822)
=======================
</TABLE>
The Company does not accrue income taxes on the undistributed earnings
of its foreign subsidiary (Limited) that are intended to be invested
indefinitely. At December 31, 1997, the amount of undistributed earnings for
which taxes have not been accrued was $854,000.
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, 1995, 1996 and 1997, sales to one
customer, Target Stores, Inc., accounted for 13% of the Company's net sales.
Accounts receivable from this same customer were 17% and 15% of total accounts
receivable at December 31, 1996 and 1997, respectively.
<PAGE> 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
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 $85,000, $89,000 and $82,000 for the years ended December 31, 1995, 1996, and
1997, respectively.
As specified by the collective bargaining agreement between Seneca and
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 years ended December 31, 1996 and 1997, contribution
expense under this collective bargaining agreement amounted to approximately
$243,000, $471,000, and $507,000, 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.
<PAGE> 36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
NOTE 10 - CAPITAL STOCK (Continued)
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 Omnibus
Plan, but no longer than ten years after the date they are granted. Under the
terms of the Omnibus Plan, options granted may be either nonqualified or
incentive stock options. SARS and limited SARS granted in tandem with an option
shall be exercisable only to the extent the underlying option is exercisable.
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 are nonqualified stock options, vest
in increments of 33 1/3% on each anniversary and 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. Additional grants totaling 2,000 shares were granted
in May 1997 to the outside directors. All of such options are outstanding and
unexercised.
The FASB 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. It allows an entity, however, to continue to measure
compensation cost under Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees." If the entity elects to measure
compensation cost in accordance with APB 25, SFAS No. 123 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. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock, no compensation cost is recognized.
The Company estimated the fair value of each stock option at the grant
date by using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 1995, 1996 and 1997; dividend
yield of one percent; expected volatility of 65.1%; risk free rate of return of
6.57%; and an expected life of ten years.
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
NOTE 10 - CAPITAL STOCK (Continued)
Under the accounting provisions of SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------------------------
1995 1996 1997
-------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $ 241 $ 1,758 $ 2,238
Pro forma 241 1,758 2,044
Basic and Diluted Earnings per share
As reported $ .15 $ .96 .75
Pro forma .15 .96 .68
</TABLE>
A summary of the status of the Company's two stock option plans, as of
the balance sheet date and changes during the years ending on those dates, is
presented below:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
-----------------------------------------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year - $ - 1,500 $ 8.00
Granted 1,500 8.00 55,200 7.48
Forfeited - 600 7.50
---------- --------- -------- --------
Outstanding and exercisable
at end of year 1,500 $ 8.00 56,100 $ 7.49
========== ========= ======== ========
Weighted-average fair value
of options granted during the
year $ 6.06 $ 5.69
========== ========
</TABLE>
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
NOTE 10 - CAPITAL STOCK (Continued)
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Weighted Average
Exercise Prices Options Outstanding Remaining Contractual Life Options Exercisable
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 6.87 2,000 9.6 --
7.50 52,600 9.8 52,600
8.00 1,500 8.9 500
</TABLE>
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.
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 $491,000,
$654,000 and $950,000 for the years ended December 31, 1995, 1996 and 1997,
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, 1997, this loan had an outstanding balance of $ 2,561,000,
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 $176,000, $205,000 and $218,000 for the years ended December 31,
1995, 1996 and 1997, 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 in 1995.
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued)
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 of 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, 1996 and 1997. 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, 1997, and the
Company intends to remain in compliance throughout the ten-year period.
RESERVED RETAINED EARNINGS. Pursuant to the grant agreements with the
Republic of Ireland, Limited is required to maintain a minimum amount of equity
(and equity equivalents, as defined) based upon the amount of government grants
received. At December 31, 1995, 1996, and 1997, $475,000, $1,003,000, $ 854,000
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 $210,000, $338,000
and $591,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Future minimum lease payments under noncancellable operating leases are
as follows: 1998 - $666,000; 1999 - $499,000; 2000 - $415,000, 2001 - $399,000;
2002 - $231,000.
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.
Aggregate minimum guaranteed royalty payments under all license
agreements are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
-----------------------------
<S> <C>
1998 $ 767
1999 930
2000 125
2001 150
---------
Total minimum royalty payments $ 1,972
=========
</TABLE>
Total royalty expense for license agreements amounted to $270,000,
$598,000 and $931,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
NOTE 11 - COMMITMENTS AND CONTINGENCIES (Continued)
PURCHASE COMMITMENTS. The Company has commitments outstanding at
December 31, 1997 to purchase equipment used in manufacturing which aggregate
$1,173,000.
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.
Geographic financial information is as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------------------
1995 1996 1997
-------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Net Sales to Unaffiliated Customers
United States $ 50,109 $ 68,568 $ 82,734
Europe 4,724 8,271 8,737
-------------------------------------------
Total net sales $ 54,833 $ 76,839 $ 91,471
===========================================
Transfers Between Geographic Areas
(Elimination in consolidation):
United States $ 144 $ 394 $ -
Europe - 19 -
-------------------------------------------
Total transfers $ 144 $ 413 $ -
===========================================
Operating income (loss):
United States $ 2,119 $ 4,641 $ 4,863
Europe (118) 236 410
Eliminations - - -
Other income (expense), net (1,550) (2,127) (1,767)
-------------------------------------------
Income before income taxes $ 451 $ 2,750 $ 3,506
===========================================
Identifiable Assets:
United States $ 34,456 $ 42,531 $ 49,398
Europe 7,038 7,122 6,186
Eliminations (1,029) (868) (905)
-------------------------------------------
Total Assets $ 40,465 $ 48,785 $ 54,679
===========================================
</TABLE>
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Concluded)
NOTE 12 - INDUSTRY SEGMENT AND GEOGRAPHIC INFORMATION (Continued)
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 used in the Company's operations in each area.
NOTE 13 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income, its components and accumulated balances. Comprehensive
income, as defined, includes all changes in equity, except those resulting from
investments by owners and distributions to owners. Among other disclosures,
SFAS No. 130 requires that all items which are required to be recognized under
current accounting standards as components of comprehensive income be reported
in a financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 is effective for periods beginning after
December 15, 1997, and requires comparative information for earlier years to be
restated. Management will adopt SFAS No. 130 in 1998 and will report
comprehensive income when applicable. Results of operations and financial
position, however, will not be affected by the implementation of this standard.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which supersedes 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 evaluated regularly 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 additional disclosure may be required to disclose separately,
certain information about the profit and loss and the assets of the Company's
operating divisions. Results of operations and financial position, however, will
be unaffected by the implementation of this standard.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF RIDGEVIEW, INC.
Name Jurisdiction of Incorporation
Ridgeview Ltd. Cayman Island
Seneca Knitting Mills Corporation New York
GPM Corporation New York
Seneca Knitting Mills, International United States Virgin
Sales, Inc. Islands
A Child's View, Inc. North Carolina
Ridgeview Foundation, Inc. North Carolina
<PAGE> 1
EXHIBIT 23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
Ridgeview, Inc.
Newton, North Carolina
The audits referred to in our report dated March 13, 1998 relating to the
consolidated financial statements of Ridgeview, Inc. and Subsidiaries, which is
incorporated in Item 14 of Form 10-K by reference to the annual report to
stockholders for the year ended December 31, 1997, included the audit of the
financial statement schedule listed in the accompanying index. This financial
statement schedule is the responsibility of the company's management. Our
responsibility is to express an opinion on this financial statement schedule
based upon our audits.
In our opinion such financial statement schedule presents fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
Greensboro, North Carolina BDO Seidman, LLP
March 13, 1998
<PAGE> 2
EXHIBIT 23
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Ridgeview, Inc.
Newton, North Carolina
We hereby consent to the incorporation by reference in Registration Statement
No. 333-29109 on Form S-8 of our reports dated March 13, 1997, relating to the
consolidated financial statements and schedules of Ridgeview, Inc. appearing in
the Company's Annual Report on Form 10-K for the year ended December 31, 1997.
/s/ BDO Seidman, LLP
Greensboro, North Carolina BDO Seidman, LLP
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 482,000
<SECURITIES> 0
<RECEIVABLES> 16,325,000
<ALLOWANCES> 605,000
<INVENTORY> 23,316,000
<CURRENT-ASSETS> 40,033,000
<PP&E> 24,426,000
<DEPRECIATION> 13,012,000
<TOTAL-ASSETS> 54,679,000
<CURRENT-LIABILITIES> 10,429,000
<BONDS> 0
0
0
<COMMON> 30,000
<OTHER-SE> 21,119,000
<TOTAL-LIABILITY-AND-EQUITY> 54,679,000
<SALES> 91,471,000
<TOTAL-REVENUES> 91,471,000
<CGS> 72,555,000
<TOTAL-COSTS> 13,643,000
<OTHER-EXPENSES> 103,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,870,000
<INCOME-PRETAX> 3,506,000
<INCOME-TAX> 1,268,000
<INCOME-CONTINUING> 2,238,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,238,000
<EPS-PRIMARY> .75
<EPS-DILUTED> .75
</TABLE>
