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.
Year Ended December 31,
-----------------------
STATEMENT OF OPERATIONS DATA: 1993 1994 1995 (2) 1996 1997
- ------------------------------------- -------- -------- -------- -------- --------
(in thousands, except per share data)
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
Page 1
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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
(1) Operating income before depreciation and amortization is net sales minus
cost of goods sold, selling, general and administrative expenses plus
depreciation and amortization expense. The measure does not represent cash
generated from operating activities determined in accordance with
generally accepted accounting principles, is not necessarily indicative of
cash available to fund needs and should not be considered an alternative
to net income as an indicator of the Company's operating performance or as
an alternative to cash flow as a measure of liquidity.
(2) Reflects charges for the write-off of obsolete, unfinished women's hosiery
products in excess of normal reserves in the amount of $621,000 and the
recognition of a supplemental retirement obligation in the amount of
$500,000 to the Company's former chairman.
(3) The Company ceased paying dividends on its Common Stock prior to the
initial public offering in November 1996 and does not intend to pay
any cash dividends in the foreseeable future.
Page 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company derives its revenue from the manufacture and sale of
sports, rugged outdoor and heavyweight casual socks and women's hosiery
products. The Company's manufacturing facilities are located in Newton, North
Carolina; Ft. Payne, Alabama; Seneca Falls, New York; and Tralee, in the
Republic of Ireland. 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.
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Years Ended December 31,
------------------------
Product Category * 1995 1996 1997
- ------------------ ---- ---- -----
Amount % Amount % Amount %
------ - ------ - ------ -
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%
============================================================================
* 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
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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
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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
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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
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.
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.
Year Ended December 31,
-----------------------------------------------
1995 1996 1997
---- ---- ----
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%
======= ======= =======
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.
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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
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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.
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,
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
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
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.
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.
17
RIDGEVIEW, INC.
AND SUBSIDIARIES
DECEMBER 31, 1995, 1996 AND 1997
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
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
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
21
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
December 31,
-----------------------------
1996 1997
-----------------------------
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
---------------------------
See accompanying notes to consolidated financial statements.
22
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In Thousands)
December 31,
-------------------------------------
1996 1997
-------------------------------------
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
=====================================
See accompanying notes to consolidated financial statements.
23
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(In Thousands, Except Per Share Amounts)
For the Year Ended December 31,
-------------------------------------------
1995 1996 1997
-------------------------------------------
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
========================================
See accompanying notes to consolidated financial statements.
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)
Foreign
Common Common Additional Currency
Stock Stock Paid-in Retained Translation
Shares Amount Capital Earnings Adjustments Total
- ------------------------------------------------------------------------------------------------------------------
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
==================================================================================================================
See accompanying notes to consolidated financial statements.
25
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In Thousands)
For the Year Ended December 31,
--------------------------------------------
1995 1996 1997
--------------------------------------------
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
===========================================
See accompanying notes to consolidated financial statements.
26
RIDGEVIEW, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Continued)
(In Thousands)
For the Year Ended December 31,
------------------------------------------
1995 1996 1997
------------------------------------------
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)
----------------------------------------
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Year Ended December 31, 1995
----------------------------
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
===========================
See accompanying notes to consolidated financial statements.
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:
Years
-----
Buildings and improvements 8-39
Machinery and equipment 5-12
Automobiles and trucks 5
Office furniture and equipment 5-10
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED. The excess of
cost over fair value of net assets acquired represents the excess of purchase
price over the fair value of net tangible assets of businesses acquired
(goodwill) and is amortized using the straight-line method over the estimated
useful life of 15 years.
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.
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:
December 31,
---------------------------
1996 1997
---------------------------
(In Thousands)
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
==========================
30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
A summary of property, plant and equipment is as follows:
December 31,
-----------------------------------
1996 1997
-----------------------------------
(In Thousands)
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
==================================
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:
December 31,
-----------------------------------
1996 1997
-----------------------------------
(In Thousands)
$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
==================================
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.
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
NOTE 6 - LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
-----------------------------------
1996 1997
-----------------------------------
(In Thousands)
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
==================================
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):
Year Ending December 31:
------------------------
1998 $ 1,300
1999 1,320
2000 18,281
2001 438
2002 176
Thereafter 51
-------------
$ 21,566
=============
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
NOTE 7 - INCOME TAXES
The provision for income taxes is summarized as follows:
For the Year Ended December 31,
---------------------------------------------
1995 1996 1997
-------------------------------------------
(In Thousands)
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
===========================================
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:
For the Year Ended December 31,
-------------------------------------------
1995 1996 1997
-------------------------------------------
(In Thousands)
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
===========================================
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Continued)
NOTE 7 - INCOME TAXES (Continued)
Net deferred tax assets and net deferred tax liabilities are as
follows:
December 31,
-----------------------
1996 1997
-----------------------
(In Thousands)
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)
=======================
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.
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.
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.
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:
For the Year Ended December 31,
-------------------------------------------------------------
1995 1996 1997
-------------------------------------------------------------
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
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:
December 31, 1996 December 31, 1997
-----------------------------------------------------------------
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
-----------------------------------------------------------------
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
========== ========
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:
Weighted Average
Exercise Prices Options Outstanding Remaining Contractual Life Options Exercisable
--------------------------------------------------------------------------------------------------------------
$ 6.87 2,000 9.6 --
7.50 52,600 9.8 52,600
8.00 1,500 8.9 500
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.
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):
Year Ending December 31,
-----------------------------
1998 $ 767
1999 930
2000 125
2001 150
---------
Total minimum royalty payments $ 1,972
=========
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.
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:
For the Year Ended December 31,
-------------------------------------------
1995 1996 1997
-------------------------------------------
(In Thousands)
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
===========================================
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.