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REGISTRATION NO. 333-23555
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ITHACA INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
<S> <C> <C>
DELAWARE 2322, 2341 & 2351 56-1385842
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code No.) Identification No.)
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HIGHWAY 268 WEST
P.O. BOX 620
WILKESBORO, NORTH CAROLINA 28697
(910) 667-5231
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
ERIC N. HOYLE
Senior Vice President-Finance and Administration
Highway 268 West
P.O. Box 620
Wilkesboro, North Carolina 28697
(910) 667-5231
(Name, address, including zip code, and telephone number, including area
code, of registrant's agent for service of process)
---------------
COPIES TO:
CARL L. REISNER, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
(212) 373-3000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
From time to time after the effective date of the
Registration Statement.
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If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box: |X|
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ITHACA INDUSTRIES, INC.
CROSS REFERENCE SHEET PURSUANT TO RULE 404(A) AND ITEM 501(B)
OF REGULATION S-K, SHOWING LOCATION IN PROSPECTUS OF
INFORMATION REQUIRED BY ITEMS OF FORM S-1
Form S-1 Item Number and Caption Location or Caption in Prospectus
-------------------------------- ---------------------------------
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1. Forepart of Registration Statement and Outside Front
Cover Page of Prospectus.............................. Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................ Inside Front and Outside Back Cover Pages of Prospec
tus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges............................. Prospectus Summary; Risk Factors; Selected Financial
Data;
4. Use of Proceeds....................................... Prospectus Summary; Use of Proceeds
5. Determination of Offering Price....................... Plan of Distribution
6. Dilution.............................................. *
7. Selling Security Holders.............................. Selling Stockholders
8. Plan of Distribution.................................. Outside Front and Inside Front Cover Pages of Prospec
tus; Plan of Distribution
9. Description of Securities to be Registered............ Outside Front Cover Page of Prospectus; Description of
Capital Stock
10. Interests of Named Experts and Counsel................ Legal Matters; Experts
11. Information with Respect to the Registrant............ Outside Front and Inside Front Cover Pages of Pro
spectus; Prospectus Summary; Risk Factors; the
Company; Selected Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Directors and Manage
ment; Compensation and Stock Option Committee
Interlocks and Insider Participation in Compensation
Decisions; Financial Statements
12. Disclosure of Commission Position on Indemnification Indemnification of Directors and Officers
for Securities Act Liabilities........................
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* Item inapplicable
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED APRIL 3, 1997
PROSPECTUS
10,109,290 Shares
Ithaca Industries, Inc.
Common Stock
-----------------------------
This Prospectus relates to the offering from time to time of up to
10,109,290 shares ("Shares") of Common Stock, par value $.01 per share (the
"Common Stock"), issued by Ithaca Industries, Inc. (the "Company" or "Ithaca
Industries" or "Ithaca"), a Delaware corporation, to certain creditors of the
Company pursuant to the Company's Plan of Reorganization dated as of August 29,
1996, ("Plan of Reorganization") under Section 1121(a) of the United States
Bankruptcy Code (the "Bankruptcy Code") and pursuant to a certain Management
Agreement entered into with Alvarez & Marsal, Inc. dated December 17, 1996 (the
"Management Agreement"). The Plan of Reorganization became effective on December
16, 1996 (the "Effective Date of the Plan of Reorganization"). Pursuant to the
Plan of Reorganization, 10,000,000 shares of Common Stock were issued following
the Effective Date of the Plan of Reorganization and, as of April 3, 1997,
constituted all of the shares of Common Stock outstanding. Pursuant to the
Management Agreement, an Option to purchase 109,290 shares was granted to
Alvarez & Marsal, Inc., the Company's financial and business advisor, as of
January 31, 1997. As of the date of this Prospectus, Alvarez & Marsal, Inc. has
not exercised its option.
The Shares may be sold to the public from time to time by certain
holders thereof (the "Selling Stockholders") in the amount and the manner
described herein or as may be set forth in a Prospectus Supplement accompanying
this Prospectus. The Company will receive no proceeds from the sale of any of
the Shares by any of the Selling Stockholders. See "Plan of Distribution."
-----------------------------
SEE "RISK FACTORS" ON PAGE 7 FOR INFORMATION CONCERNING CERTAIN RISKS
ASSOCIATED WITH AN INVESTMENT IN ANY OF THE SHARES.
-----------------------------
Through the date hereof, there has been no established public trading
market for the Securities. Application will be made to list the Common Stock on
the NASDAQ National Market. There can be no assurance that any active trading
market will develop or will be sustained for the Common Stock or as to the price
at which the Common Stock may trade or that the market for the Common Stock will
not be subject to disruptions that will make it difficult or impossible for the
holders of the Common Stock to sell shares in a timely manner, if at all, or to
recoup their investment in the Common Stock. See "Risk Factors--Liquidity;
Absence of Market for Common Stock."
-----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------------
The date of this Prospectus is April 3, 1997.
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The Selling Stockholders directly, through agents designated from time
to time, or through dealers or underwriters also to be designated, may sell the
Common Stock from time to time on terms to be determined at the time of sale. To
the extent required, the Common Stock to be sold, the names of the Selling
Stockholders, the respective purchase prices of public offering prices,
historical trading information for the Common Stock, the names of any such
agent, dealer or underwriter, and any applicable commissions or discounts with
respect to a particular offer will be set forth in an accompanying Prospectus
Supplement. See "Plan of Distribution." If the Company is advised that an
underwriter has been engaged with respect to the sale of any Shares offered
hereby, or in the event of any other material change in the plan of
distribution, the Company will cause an appropriate amendment to the
Registration Statement of which this Prospectus forms a part to be filed with
the Securities and Exchange Commission (the "Commission") reflecting such
engagement or other change. See "Additional Information."
The Company will not receive any proceeds from this offering, but agreed
to pay substantially all of the expenses of this offering other than applicable
transfer taxes, seller's counsel fees, commissions, fees and discounts payable
to dealers, agents or underwriters. The Selling Stockholders and any broker
dealers, agents or underwriters that participate with the Selling Stockholders
in the distribution of the Shares may be deemed to be "underwriters" within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"), and
any commissions received by them and any profit on the resale of the Shares
purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. See "Description of Capital Stock--Registration Rights
Agreement" and "Plan of Distribution" for a description of certain
indemnification arrangements.
Until 90 days subsequent to the effective date of this filing, all
dealers effecting transactions in the registered securities whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
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ADDITIONAL INFORMATION
When the Registration Statement of which this Prospectus forms a part
was declared effective by the Commission, the Company became subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith became obligated to file
reports and other information with the Commission. Reports and other information
concerning the Company may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the Commission located at
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661 and at Suite 1300,
7 World Trade Center, New York, New York 10048. Copies of such material can also
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 upon payment of the fees prescribed by the
Commission. Reports, proxy, information statements and other information
regarding the Company filed electronically with the Commission are available on
the Commission's web site (http://www.sec.gov).
The Company has filed with the Commission a Registration Statement
(which term shall encompass any amendments and exhibits thereto) under the
Securities Act with respect of the Shares offered hereby. This Prospectus, which
forms a part of such Registration Statement, does not contain all the
information set forth in such Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission.
Statements made in this Prospectus as to the contents of any contract, agreement
or other document referred to are not necessarily complete; with respect to each
such contract, agreement or other document filed as an exhibit to such
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. Any interested parties may inspect
such Registration Statement, without charge, at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and may obtain copies of all or any part of it from the Commission upon payment
of the fees prescribed by the Commission. Neither the delivery of this
Prospectus or any Prospectus Supplement nor any sales made hereunder or
thereunder shall under any circumstances create any implication that the
information contained herein or therein is correct as of any time subsequent to
the date hereof or thereof or that there has been no change in the affairs of
the Company since the date hereof or thereof.
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING
ELSEWHERE IN THIS PROSPECTUS. FOR PURPOSES OF PRESENTING FINANCIAL INFORMATION
IN THIS PROSPECTUS (OTHER THAN THE FINANCIAL STATEMENTS), THE COMPANY'S FISCAL
YEARS ARE INDICATED AS ENDING ON JANUARY 31, ALTHOUGH BEFORE DECEMBER OF 1996
SUCH PERIODS ACTUALLY ENDED ON THE FRIDAY NEAREST SUCH DATE AND AFTER NOVEMBER
OF 1996 SUCH PERIODS ACTUALLY END ON THE SATURDAY NEAREST SUCH DATE.
THE COMPANY
The Company believes it is the largest manufacturer of private label
underwear and women's hosiery products in the United States, operating
distribution and manufacturing facilities in the Southeastern United States and
off-shore manufacturing facilities in Central America. The Company has three
principal product lines: (i) men's and boys' underwear and outerwear T-shirts
(ii) women's and girls' underwear and (iii) women's hosiery. In marketing its
products, the Company utilizes the private label names or trade names of its
customers as well as licensed brand names. The Company's products are sold
through a wide range of retail distribution channels and are offered to the
public through more than 10,000 customer outlets, including discount stores,
department stores, specialty stores, drug stores and supermarkets. The key
elements of the Company's strategy are supplying a wide variety of product
offerings at a number of price points, maintaining a strong presence in multiple
channels of distribution, maintaining close customer relationships by developing
products and programs that suit individual customer needs, and maintaining a low
cost and flexible manufacturing capability.
The Company was founded in 1948 in Ithaca, New York as a manufacturer of
women's underwear. Since that time, Ithaca has evolved from a specialized
producer of women's underwear for J.C. Penney to become a leading diversified
producer and marketer of undergarments to major retailers throughout the United
States. Over the years, Ithaca expanded its product lines and manufacturing
capacity, adding women's hosiery in 1968, men's and boys' underwear in 1972, and
T-shirts in 1983. In 1983, Ithaca's founder sold the business to an investor
group led by Merrill Lynch Capital Partners Inc. ("MLCP"), a private investment
firm affiliated with Merrill Lynch & Co., Butler Capital Corporation ("Butler")
and senior management. The Company was recapitalized in 1988. In December 1992,
the Company completed a public offering of $125,000,000 of 11.125% Senior
Subordinated Notes due 2002 ("Notes"). In connection with the completion of the
offering, the Company and its stockholders completed a reorganization whereby
the Company became a wholly-owned subsidiary of Ithaca Holdings, Inc., a
Delaware corporation ("Holdings").
During fiscal 1996, the Company incurred covenant defaults under its
bank credit agreement, originally dated as of December 10, 1992 and amended and
restated as of December 16, 1996 (the "Credit Agreement"). Under the terms of a
series of waivers between the Company and the parties to the Credit Agreement,
the Company was unable to pay the interest due on the Notes. In the third and
fourth quarters of fiscal 1996 the Company undertook an extensive review of its
manufacturing capacity, overhead structure, product lines and customer base.
These efforts resulted in the promulgation of a three-year business plan, which
was revised in May, 1996 (as revised, the "Business Plan"), to enhance
performance and reduce overhead expenses. The Company consolidated its
distribution centers and production capacity to increase efficiencies,
consolidated the operations of certain plants to off-shore facilities and
accelerated the process of moving sewing operations off-shore. See "Management
Discussion and Analysis of Financial Condition and Results of Operations."
In furtherance of its restructuring efforts, on October 8, 1996 the
Company filed a voluntary petition for reorganization under Chapter 11 ("Chapter
11") of the Bankruptcy Code with the Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). On December 16, 1996, the Company emerged
from bankruptcy pursuant to the Plan of Reorganization. Pursuant to the Plan of
Reorganization, among other things, 10,000,000 shares of Common Stock were
distributed to the holders of the Notes, the Notes were retired, the Company
ceased to be a subsidiary of Holdings, and the Credit Agreement was amended and
restated.
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The Company is organized under the laws of the State of Delaware and its
principal executive offices are located at Highway 268 West, P.O. Box 620,
Wilkesboro, North Carolina 28697, telephone number (910) 667- 5231.
RISK FACTORS
See "Risk Factors" for information concerning certain risks associated
with an investment in the Shares.
SUMMARY FINANCIAL INFORMATION
The summary financial information set forth below is qualified by and
should be read in conjunction with the Financial Statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. The Company's
Results of Operations for the 42-week period ended November 22, 1996 reflect the
consummation of the Plan of Reorganization and the transactions contemplated
thereby and the application of Fresh Start Reporting rules and procedures.
Accordingly, the future Results of Operations of the Company will generally not
be comparable to the periods discussed below due to the effects of the Plan of
Reorganization, the transactions completed thereby and related financing. See
"Consolidated Financial Data." Income per share for periods prior to the
Effective Date of the Plan of Reorganization is not meaningful because during
such periods the Company was a wholly owned subsidiary of a holding company.
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Preconfirmation
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42-Week
Period Ended Fiscal Year Ended
November 22, January 31,
------------- -------------------------------------------------------
1996 1996 1995 1994 1993 1992
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(Dollars in thousands)
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STATEMENT OF INCOME DATA:
Net sales $297,604 $398,819 $414,800 $414,671 $440,357 $402,670
Gross profit 42,061 44,882 72,859 68,072 79,137 79,703
Selling, general and
administrative expenses 27,670 43,486 37,075 39,711(1) 33,996 30,122
(Recovery of) provision for
asset write-downs and
restructuring (2,964) 51,591(2)
Operating income (loss) 17,355 (50,195) 35,784 28,361 45,141 50,664
Interest expense - net(3) 17,489 26,905 23,147 23,455 24,027 29,938
Reorganization items (1,176)(4)
Income (loss) before income
taxes
and extraordinary items 1,666 (76,802) 13,166 4,968 21,647 20,971
Income tax expense (benefit) 4,218 (27,157) 5,653 2,086 8,415 11,190
(Loss) income before
extraordinary items (2,552) (49,644) 7,513 2,882 13,232 9,781
Extraordinary items(5) 67,924 -- -- -- (5,939) --
Net income (loss) $ 65,372 $(49,644) $ 7,513 $ 2,882 $ 7,293 $ 9,781
======== ========= ======== ======== ======= ========
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BALANCE SHEET DATA (AT END
OF PERIOD): Post-Confirmation
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Working capital (deficit) $ 75,591 ($145,909) $113,028 $123,222 $122,230 $ 79,334
Total assets 155,993 208,642 224,471 235,997 236,588 186,351
Long-term debt exclusive of
current maturities 77,255 n/a(6) 221,819 242,785 250,720 216,519
Total stockholders' equity 22,116 (93,558) (43,914) (51,427) (54,309) (69,254)
(deficit)
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(1) Includes a bad debt provision of $4 million to cover the bankruptcy of a
major T-shirt customer during the second quarter of fiscal 1994.
(2) In fiscal 1996 the Company initiated a restructuring plan to improve
operating performance and reduce costs. In connection with this plan, the
Company recorded charges totaling $51,591,000 ($33,379,000 after related
income tax benefits). Such charges related to (i) the closing and
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consolidation of certain manufacturing and distribution facilities,
(ii) the write-down of certain equipment associated with closed facilities,
(iii) the write-off and establishment of reserves for inventory and
accounts receivable associated with customers, product lines, and specific
products that the Company elected to discontinue manufacturing and
distributing, (iv) severance and other costs associated with plant closures
and overhead reductions, and (v) the write-off of certain impaired
intangible assets.
(3) Principally includes interest expense on long-term debt and amortization of
deferred debt expense, offset by interest income from the short-term
investment of excess cash. During the period from August 29, 1996 through
November 22, 1996, the Company did not accrue interest on the Senior
Subordinated Notes due 2002 which were cancelled in connection with the
Plan of Reorganization.
(4) Reorganization items for the 42-week period ended November 22, 1996 include
$3,765,000 million of adjustments to record assets and liabilities at fair
value in connection with the application of Fresh Start Reporting.
(5) Loss on early extinguishment of debt (net of income tax benefit of
$3,763,000) on December 10, 1992 and gain on debt discharge (net of income
tax expense of $23,056,000) pursuant to confirmation of Plan of
Reorganization at November 22, 1996.
(6) Due to continuing covenant violations, temporary waivers granted and events
of default, as further discussed in "Management's Discussion and Analysis,"
all of the Company's outstanding debt was classified as current at February
2, 1996.
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RISK FACTORS
PRIOR TO MAKING AN INVESTMENT DECISION, PROSPECTIVE INVESTORS IN THE
COMMON STOCK SHOULD CONSIDER THE SPECIFIC FACTORS SET FORTH BELOW AS WELL AS THE
OTHER INFORMATION SET FORTH IN THIS PROSPECTUS.
RECENT EMERGENCE FROM REORGANIZATION PROCEEDING
On December 16, 1996, the Company emerged from bankruptcy pursuant to
the Plan of Reorganization. The Plan of Reorganization left all the Company's
creditor's claims unimpaired except for parties to the Credit Agreement, which
was restructured, and the holders of the Notes (the "Noteholders"), who received
10,000,000 shares of Common Stock in exchange for all of their Notes, which were
then retired. While trade creditors were paid in full, it is possible that the
fact of the bankruptcy will adversely impact the Company's future relationship
with customers and suppliers and its future access to capital. The Company can
not predict what, if any, impact this will have.
SUBSTANTIAL LEVERAGE
Although, in connection with the Plan of Reorganization, $125 million of
indebtedness was converted to equity, the Company remains significantly
leveraged. As of November 22, 1996, the Company had borrowings of $77,185,000.
As of March 31, 1997, there were $62,500,000 of borrowings outstanding under the
Credit Agreement (exclusive of $7,557,000 of outstanding letters of credit) and
the Company had additional borrowing capacity under the Credit Agreement of up
to $41,571,000.
The degree to which the Company is leveraged could have important
consequences for holders of the Common Stock, including: (i) the Company's
ability to obtain additional financing in the future for working capital,
capital expenditures, product development, acquisitions, general corporate
purposes or other purposes may be impaired; (ii) a substantial portion of the
Company's cash flow from operations must be dedicated to the payment of the
principal and interest on its indebtedness; (iii) terms of the Company's debt
instruments restrict the Company's ability to pay dividends and impose other
operating and financial restrictions; and (iv) the Company's degree of leverage
may make it vulnerable to economic downturns and may limit its ability to
withstand competitive pressures. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
The Company believes that, based on current levels of operations and
expected efficiency gains, its cash flow from operations will be adequate to
make scheduled payments of principal and interest on its indebtedness prior to
final maturity, to permit anticipated capital expenditures and to fund working
capital requirements. However, the Company's ability to make required payments
of principal at maturity will be dependent on its ability to refinance its
indebtedness at maturity, and the ability of the Company to meet its debt
service obligations generally will be dependent upon the future performance of
the Company, which, in turn, will be subject to general economic conditions,
financial, competitive, business factors and other factors, including factors
beyond the Company's control. The Company's obligations under the Credit
Agreement mature on August 31, 1999 (the "Maturity Date"). The Company
contemplates that its outstanding obligations under the Credit Agreement will be
satisfied on or before the Maturity Date, in whole or in part, through a
refinancing. The form of refinancing will be based upon economic conditions at
the time of refinancing.
The Credit Agreement contains a number of significant covenants that,
among other things, restrict the ability of the Company to dispose of assets,
incur additional indebtedness, make capital expenditures, pay dividends, create
liens on assets, enter into leases, investments or acquisitions, engage in
mergers or consolidations, or engage in certain transactions with affiliates and
otherwise restrict corporate activities (including change of control and asset
sale transactions). In addition, under the Credit Agreement, the Company is
required to maintain specified financial ratios, and comply with tests,
including minimum EBITDA levels, minimum interest coverage ratios, and minimum
fixed charge coverage ratios, some of which become more restrictive over time.
Any significant deterioration in the Company's future operating or financial
performance could result in a breach of these provisions. The Company's
obligations under the Credit Agreement are secured by substantially
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all the assets of the Company. The breach of any of these covenants or
restrictions could result in a default under the Credit Agreement, which could
permit the lenders party to the Credit Agreement to declare all amounts borrowed
thereunder to be due and payable together with accrued and unpaid interest, to
terminate their commitments to make further loans and issue letters of credit
and to proceed against the collateral securing the obligations owing to them.
Any such default could have a significant adverse effect on the market value and
the marketability of the Common Stock.
RISKS INHERENT IN BUSINESS PLAN
In the third and fourth quarters of fiscal 1996 the Company undertook an
extensive review of its manufacturing capacity, overhead structure, product
lines and customer base. These efforts resulted in the promulgation of the
Business Plan to enhance performance and reduce overhead expenses. The Company
consolidated its distribution centers and production capacity to increase
efficiencies, consolidated the operations of certain plants to off-shore
facilities and accelerated the process of moving sewing operations off-shore.
Beginning in fiscal 1998, the Company has been unable to obtain the level of
sales revenue anticipated by the Business Plan and therefore may not be able to
achieve the Operating Results set forth in the Business Plan. The Company
believes this resulted from customers' reluctance to place new or additional
programs with the Company while it was implementing its financial restructuring
as well as increased pressure from the Company's competitors to place programs
with both existing and potential new customers. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Business Plan."
The Business Plan is dependent upon, among other things, the Company's
ability to increase its foreign sourcing capabilities and to otherwise
manufacture its products at a competitive cost. A key element of the Business
Plan is to develop foreign contracting sources, particularly for women's and
girls' underwear. The Company is also engaged in ongoing efforts to consolidate
its women's hosiery operations and to consolidate other operations in offshore
facilities. The success of the Company's foreign sourcing efforts is dependent,
among other things, upon the absence of political or economic disruptions,
quotas, labor disruptions, embargoes or currency fluctuations that might
adversely affect the Company, particularly in Honduras and other foreign nations
where the Company currently or in the future sources its products.
The Business Plan is also dependent upon the efficient operation of new
centralized distribution centers, the success of the Company's efforts to
streamline its stock keeping units ("SKU's"), to eliminate unprofitable and
low-profit lines and products, to reduce its selling, general and administrative
expenses and to efficiently manage its inventory levels.
FRESH START REPORTING
The Plan of Reorganization was confirmed on November 22, 1996. The
Company emerged from bankruptcy on December 16, 1996, the Effective Date of the
Plan of Reorganization. Accordingly, the Company's Consolidated Balance Sheets
as of November 22, 1996, the date on which Fresh Start Reporting was adopted,
and its Consolidated Statements of Operations and Consolidated Statement of
Stockholders' Equity (Deficit) for the periods thereafter will not be comparable
to the Consolidated Financial Statements for prior periods included elsewhere
herein.
IMPORTANCE OF MAJOR CUSTOMERS
For the 42-week period ended November 22, 1996, J.C. Penney accounted
for approximately 47% of the total net sales of the Company. No other customers
accounted for 10% or more of total net sales for the 42-week period ended
November 22, 1996. The loss of a material amount of sales to J.C. Penney, or a
decline in J.C. Penney's business, or the loss of one of the Company's other
major customers would have a material adverse effect on Ithaca's Results of
Operations. See "Business--Importance of Major Customers."
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COMPETITION
The underwear and women's hosiery businesses are highly competitive. A
substantial portion of the Company's operations remain located in the United
States while a number of the Company's competitors have moved to foreign
sourcing to a significantly greater degree. A key element of the Business Plan
is to develop foreign sourcing, particularly for women's and girls' underwear.
The Company's failure to develop such sourcing capabilities could materially
adversely affect the Company.
The Company believes that suppliers in the underwear and women's hosiery
businesses compete primarily on the basis of price, quality and customer
service. The Company competes with other private label manufacturers as well as
manufacturers of branded products. Several of the Company's competitors have
significantly greater financial resources and market recognition than the
Company. Many of the Company's customers purchase a portion of their private
label program's requirements from competitors as well as from Ithaca. See
"Business--Competition."
FOREIGN SOURCING
The Company currently relies and anticipates increasing reliance on
foreign sourcing of its products. The Company's ability to utilize foreign
sourcing is dependent on the absence of political or economic disruptions,
quotas, labor disruptions, embargoes or currency fluctuations in the countries
in which the Company sources its products.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the continued services of certain senior
executives, including: Jim D. Waller, Chief Executive Officer, President and
Chairman of the Board, Eric N. Hoyle, Chief Financial Officer, Senior Vice
President-Finance and Administration and Secretary, R. Dean Riggs, Executive
Vice President-Operations and David H. Jones, Executive Vice President-Sales.
The Company believes the loss of the services of one or more of these senior
executives could have a material adverse effect on the Company.
LIQUIDITY; ABSENCE OF MARKET FOR COMMON STOCK
There is no currently existing formal trading market for the Common
Stock. Pursuant to the Plan of Reorganization and the Management Agreement, the
Shares were issued to a limited number of holders. Application will be made to
list the Common Stock on NASDAQ National Market. There can be no assurance that
any active trading market will develop or will be sustained for the Common Stock
or as to the price at which the Common Stock may trade or that the market for
the Common Stock will not be subject to disruptions that will make it difficult
or impossible for the holders of the Common Stock to sell shares in a timely
manner, if at all. In addition, if such markets develop, the trading markets for
the Ithaca Common Stock may be unstable and illiquid for an indeterminate period
of time. In addition, holders of the Common Stock who are deemed to be
"underwriters" as defined in subsection 1145(b) of the Bankruptcy Code, or who
are otherwise deemed to be "affiliates" or "control persons" of the Company
within the meaning of the Securities Act, will be unable to freely transfer or
sell their respective securities (which securities will be "restricted
securities" within the meaning of the Securities Act), except pursuant to an
available exemption from registration under the Securities Act and under
equivalent state securities or "blue sky" laws. However, as described below,
certain holders of Common Stock have certain registration rights.
EFFECT OF FUTURE SALES OF COMMON STOCK; REGISTRATION RIGHTS
No prediction can be made as to the effect, if any, that future sales of
Common Stock or the availability of Common Stock for future sale will have on
the market price of the Common Stock, prevailing from time to time. Sales of
substantial amounts of Common Stock or the perception that such sales may occur,
could adversely affect prevailing market prices for the Common Stock.
9
<PAGE>
An aggregate of 10,000,000 shares of Common Stock were issued pursuant
to the Plan of Reorganization. Pursuant to Section 1145 of the Bankruptcy Code,
all of such shares of Common Stock are freely tradeable without registration
under the Securities Act, except for shares that were issued to an "underwriter"
(as defined in Section 1145(b) of the Bankruptcy Code) or that are acquired by
an "affiliate" of the Company. With respect to all of the shares of Common Stock
issued to the Noteholders pursuant to the Plan of Reorganization (together with
any securities issued or issuable in respect thereof by way of a dividend, stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization or otherwise, the "Registrable
Securities") the Company has entered into a registration rights agreement with
certain stockholders (the "Registration Rights Agreement") which requires Ithaca
to use its reasonable best efforts to file, cause to be declared effective and
keep effective for three years or until all registerable securities are sold, a
"shelf" registration statement (the "Shelf Registration"). The Registration
Statement of which this Prospectus is a part is the Shelf Registration referred
to in the Registration Rights Agreement. See "Description of Capital
Stock-Registration Rights Agreement."
DIVIDENDS
The Company presently intends to retain earnings for working capital and
to fund capital expenditures. Accordingly, there is no present intention to pay
cash dividends on any shares of the Common Stock. In addition, the Credit
Agreement prohibits the payment of cash dividends on the Company's equity
securities.
CERTAIN CORPORATE GOVERNANCE MATTERS
The Company's Amended and Restated Certificate of Incorporation filed
with the Secretary of State of Delaware on December 16, 1996 (the "Certificate")
provides that the terms of the seven members of the Board of Directors of the
Company, one of whom is Jim D. Waller, Chief Executive Officer of the Company,
will expire at the annual meeting of the stockholders of the Company next
following the Company's fiscal year ending January 31, 1998. It is possible that
such provisions, as well as certain other provisions of the Company's
Certificate and certain provisions of the General Corporation Law of Delaware,
may make it more difficult to accomplish transactions which stockholders may
otherwise deem to be in their best interests. Such provisions may be deemed to
have an anti-takeover effect and may delay, defer or prevent a tender offer or
takeover attempt that might result in the receipt of a premium over the market
price for the securities held by stockholders. See "Description of Capital
Stock."
FORWARD LOOKING STATEMENTS
Certain statements in the Registration Statement of which this
Prospectus forms a part including information set forth under "Risk
Factors--Risks Inherent in Business Plan" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," constitute
"Forward-Looking Statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 (the "Reform Act"). Ithaca desires to take
advantage of certain "safe harbor" provisions of the Reform Act and is including
this special note to enable the Company to do so. Forward-looking statements
including the Registration Statement of which this Prospectus forms a part,
involve known and unknown risks, uncertainties, and other factors which could
cause the Company's actual results, performance (financial or operating) or
achievements to differ materially from the future results, performance
(financial or operating) or achievements expressed or implied by such
forward-looking statements. The Company believes a change in the following
important factors could cause such a material difference to occur: (1) the level
of sales to the Company's major customers, in particular J.C. Penney which
accounted for approximately 47% of the Company's total net sales for the 42-week
period ended November 22, 1996; (2) the Company's ability to source or
manufacture its products at a competitively favorable cost; (3) the general
strength of retailing, in particular in the apparel categories in which the
Company operates and at the retail outlets which are major customers of the
Company; (4) the continued services of certain of the Company's senior
executives; (5) the comparative strength of the Company's principal competitors,
particularly, the impact of foreign sourcing in certain of the Company's product
categories; (6) the absence of political or economic disruptions, quotas, labor
disruptions, embargoes or currency fluctuations that might adversely affect the
Company, particularly in Honduras and other foreign nations where the Company
currently or in the future
10
<PAGE>
sources its products; (7) the success of the Company's recent Business Plan and
reorganization, particularly the success of the Company's ongoing efforts to
consolidate its women's hosiery operations and to consolidate certain other
operations in offshore facilities and to increase its foreign sourcing
capabilities (especially in women's and girls' underwear categories), the level
of efficiency of operation of the Company's new centralized distribution
centers, the success of the Company's efforts to streamline its SKU's and
eliminate unprofitable and low-profit lines and products, the success of the
Company's efforts to reduce its selling, general and administrative expenses,
and the success of the Company's efforts to efficiently manage its inventory
levels; (8) the impact of price fluctuations of the Company's raw materials,
particularly cotton and spandex, and the Company's ability to pass on to
retailers and consumers any possible price increases; (9) the continued
improvement of the Company's information systems; or (10) the ability of the
Company to have access to adequate capital to meet its working capital needs and
to fund necessary capital expenditures.
Many of the foregoing factors have been discussed in the Company's prior
Commission filings and other publicly available documents. Had the Reform Act
been effective at an earlier time, this special note would have been included in
earlier Commission filings. The foregoing review of significant factors should
not be construed as exhaustive or as an admission regarding the adequacy of
disclosures previously made by the Company prior to the effective date of the
Reform Act.
USE OF PROCEEDS
The Company will receive none of the proceeds from the sale of the
Common Stock by the Selling Stockholders. A total of 10,000,000 shares of Common
Stock were initially issued to Noteholders of the Company in accordance with the
Plan of Reorganization under which the Company emerged from a Chapter 11
bankruptcy proceeding. An option to purchase 109,290 shares of the Company's
Common Stock was issued to Alvarez & Marsal, Inc. pursuant to the Management
Agreement as a portion of compensation for the turnaround-management and
financial restructuring advisory services rendered the Company.
DIVIDEND POLICY
The Company has no present intention of paying any dividends on the
Common Stock. The declaration and payment of future dividends to holders of
Common Stock will be at the discretion of the Company's Board of Directors and
will depend upon many factors, including the Company's financial condition,
earnings, the capital requirements of its operating subsidiaries, legal
requirements and such other factors as the Board of Directors deems relevant. In
addition, the Credit Agreement prohibits the payment of cash dividends on the
capital stock of the Company.
Under the Delaware General Corporations Law ("DGCL"), the Company may
only declare and pay dividends out of surplus (as defined in the DGCL), or, if
there is no surplus and subject to certain conditions, out of net profits for
the fiscal year in which the dividend is declared and/or the preceding fiscal
year.
MARKET FOR THE COMMON STOCK
Through the date hereof there has been no established public trading
market for the Common Stock. See "Risk Factors--Liquidity; Absence of Market for
Common Stock." Pursuant to the Plan of Reorganization, 10,000,000 shares of
Common Stock were issued following the Effective Date of the Plan of
Reorganization and, as of April 3, 1997, constituted all of the outstanding
shares of Common Stock. In reliance on the exemption provided by Section 1145 of
the Bankruptcy Code, none of the shares of Common Stock issued pursuant to the
Plan of Reorganization was registered under the Securities Act in connection
with its issuance pursuant to the Plan
11
<PAGE>
of Reorganization; however, those shares are being registered hereby for resale
by the Selling Stockholders pursuant to certain registration rights. Shares
issued pursuant to the Plan of Reorganization are freely tradeable without
registration under the Securities Act, except for any shares that were issued to
an "underwriter" (as defined in Section 1145(b) of the Bankruptcy Code) or that
are subsequently acquired by an "affiliate" of the Company, all of which shares
will be "restricted securities" within the meaning of Rule 144 under the
Securities Act ("Rule 144"). Shares of Common Stock which are "restricted
securities" within the meaning of Rule 144 may not be resold in the absence of
registration under the Securities Act other than in accordance with Rule 144 or
another exemption from registration. See "Description of Capital
Stock--Registration Rights Agreement" for a discussion of the rights of certain
stockholders of the Company to request registration of sales of their shares of
Common Stock. A total of 109,290 shares of Common Stock are being registered
hereby in connection with the Company's grant to Alvarez & Marsal, Inc. of an
option to purchase such shares. As of April 3, 1997, there were approximately 10
holders of record of Common Stock and there were no outstanding options or
warrants to purchase, or securities convertible into, Common Stock or Preferred
Stock other than options to purchase 899,514 shares of Common Stock, including
the options granted to Alvarez & Marsal, Inc., issuable under the Company's 1996
Long Term Stock Incentive Plan ("LTIP"), of which options to purchase 240,994
shares are currently exercisable.
12
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the Company at
November 22, 1996 and as adjusted to give effect to the revised capital
structure of the Company as a result of the Plan of Reorganization. This table
should be read in conjunction with the Company's Consolidated Financial
Statements, including the notes thereto, found elsewhere in this Prospectus.
<TABLE>
<CAPTION>
November 22, 1996
----------------------------------
(in thousands)
Post
Historical Confirmation(2)
---------- ---------------
<S> <C> <C>
Current Installments of Long Term Debt $202,016(1) $ -
Long Term Debt
Credit Facility: - 77,185
Other - 70
Total 202,016 77,255
------- --------
Stockholders' (deficit) equity:
Preferred Stock, par value $.01 per share; 2,500,000 - -
Shares authorized; none issued
Preconfirmation Common Stock (par value $.01, 1,000 - -
authorized, issued and outstanding)
Common Stock (par value $.01 per share, 27,500,000 - 100
authorized, 10,000,000 issued and outstanding)
Additional Paid-In Capital 9,000 22,016
Retained Earnings (Deficit) (101,156) -
Total Stockholders' (Deficit) Equity (92,156) 22,116
---------- -------
Total Capitalization $109,860 $99,371
========== =======
</TABLE>
- ----------
(1) Reflects classification of all outstanding debt as current due to Company's
defaults under the Credit Agreement and the Notes.
(2) Reflects application of Fresh Start Reporting provisions and the effects of
the Plan of Reorganization, including: (i) forgiveness of the Notes and
accrued interest and (ii) other fair value adjustments.
13
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following Unaudited Pro Forma Consolidated Statement of
Operations for the 42-week period ended November 22, 1996, has been prepared to
reflect the consummation of the Company's Plan of Reorganization and certain
Fresh Start Reporting Adjustments. The Unaudited Pro Forma Consolidated
Statement of Operations has been prepared as if such consummation occurred on
February 1, 1996. The Unaudited Pro Forma Consolidated Statement of Operations
is not necessarily indicative of the results that would have actually occurred
if the Plan of Reorganization had actually been consummated on such date and
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the Company's Audited
Consolidated Financial Statements and the notes thereto included elsewhere in
this Prospectus.
Unaudited Pro Forma Consolidated Statement of Operations
42-Week Period ended November 22, 1996
(Dollars in thousands, except per share information)
<TABLE>
<CAPTION>
Fresh Start
Reporting and
Reorganization
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Net sales $297,604 $297,604
Cost of sales 255,543 $(1,934)a 253,609
---------- ----------- ---------
Gross profit 42,061 1,934 43,995
Selling general and administrative 27,670 (385)a 27,285
expenses
(Recovery of) asset write-downs (2,964) - (2,964)
and restructuring
---------- ----------- ---------
Operating income 17,355 2,319 19,674
Other income (deductions):
Interest and amortization of (2,597) 1,377b (1,220)
deferred debt expense-related
parties
Interest and amortization of (14,892) 7,871b (7,021)
deferred debt expense-
other
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C> <C>
Reorganization Items:
Adjustments to fair value
Professional fees and (2,589) 2,589c -
other 3,765 (3,765)d -
Other, net 625 - 625
---------- ----------- ---------
Income before taxes 1,666 10,391 12,058
Income tax expense 4,218 605e 4,823
---------- ----------- ---------
Net (loss) income before extraordinary
item $(2,552) $9,786 $7,235
========== =========== =========
Extraordinary gain on 67,924 (67,924)f -
debt forgiveness, net of tax
Net income $ 65,372 $ (58,138) 7 ,235
========== =========== =========
(Loss) income per share(g)
(Loss) income before extraordinary
item (0.25) - 0.72
Extraordinary item 6.79 - -
---------- ---------
Net income $ 6.54 - $ 0.72
========== =========
</TABLE>
a To adjust depreciation expense for fixed asset writedowns of $13,500
recorded in conjunction with Fresh Start Reporting adjustments as follows:
Cost of Sales $ 1,934
Selling, general & administrative 385
---------
Total $ 2,319
=========
b To reflect interest expense of the debt structure of the Company after
confirmation of the Plan of Reorganization. The interest rate under the
Credit Agreement was assumed to be 9.75%. The adjustment to interest expense
is summarized as follows:
Related party:
Note interest $ 1,604
Other interest (227)
---------
Net $ 1,377
=========
Non-Related party:
Note interest 6,414
Other interest 1,457
---------
Net $ 7,871
=========
c To eliminate reorganization items.
d To eliminate net fair value adjustments recorded in conjunction with fresh
start reporting.
e Income tax expense is assumed at an effective rate of 40%.
f To reverse extraordinary gain on debt discharge and related income tax
expense.
g Pro forma earnings per share are based upon 10 million Shares outstanding.
15
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial information with respect
to the Company for the 42-week period ended November 22, 1996 and the five
fiscal years ended January 31, 1996 and is derived from and should be read in
conjunction with the Company's audited Consolidated Financial Statements and
related notes included elsewhere in this Prospectus. Income per share for
periods prior to the Effective Date of the Plan of Reorganization is not
meaningful because during such periods the Company was a wholly owned subsidiary
of Holdings.
The selected financial information set forth below is qualified by and
should be read in conjunction with the Financial Statements and the notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Prospectus. The Company's
Results of Operations for the 42-week period ended November 22, 1996 reflect the
consummation of the Plan of Reorganization and the transactions contemplated
thereby and the application of Fresh Start Reporting rules and procedures. The
future Results of Operations of the Company will generally not be comparable to
the periods discussed below due to the effects of the Plan of Reorganization.
See "Consolidated Financial Data."
The fiscal period beginning February 2, 1996 and ended November 22, 1996
reflects the effects of the Plan of Reorganization.
<TABLE>
<CAPTION>
Preconfirmation
----------------------------------------------------------------------
42-Week
Period Ended Fiscal Year Ended
November 22, January 31,
-------------- ------------------------------------------------------
1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales $297,604 $398,819 $414,800 $414,671 $440,357 $402,670
Gross profit 42,061 44,882 72,859 68,072 79,137 79,703
Selling, general and
administrative expenses 27,670 43,486 37,075 39,711(1) 33,996 30,122
(Recovery of) provision for
asset write-downs and
restructuring (2,964) 51,591(2)
Operating income (loss) 17,355 (50,195) 35,784 28,361 45,141 50,664
Interest expense - net(3) 17,489 26,905 23,147 23,455 24,027 29,938
Reorganization items (1,176)(4) -- -- -- -- --
Income before income taxes
and extraordinary items 1,666 (76,802) 13,166 4,968 21,647 20,971
Income tax expense (benefit) 4,218 (27,157) 5,653 2,086 8,415 11,190
(Loss) income before
extraordinary items (2,552) (49,644) 7,513 2,882 13,232 9,781
Extraordinary items(5) 67,924 -- -- -- (5,939) --
Net income (loss) $ 65,372 $(49,644) $ 7,513 $ 2,882 $ 7,293 $ 9,781
======== ========= ======== ======== ======== ========
<CAPTION>
BALANCE SHEET DATA (AT END
OF PERIOD): Post-Confirmation
-----------------
<S> <C> <C> <C> <C> <C> <C>
Working capital (deficit) $ 75,591 ($145,909) $113,028 $123,222 $122,230 $ 79,334
Total assets 155,993 208,642 224,471 235,997 236,588 186,351
Long-term debt exclusive of
current maturities 77,255 n/a(6) 221,819 242,785 250,720 216,519
Total stockholders' equity 22,116 (93,558) (43,914) (51,427) (54,309) (69,254)
(deficit)
- -----------------------------
</TABLE>
(1) Includes a bad debt provision of $4 million to cover the bankruptcy of a
major T-shirt customer during the second quarter of fiscal 1994.
(2) In fiscal 1996 the Company initiated a restructuring plan to improve
operating performance and reduce costs. In connection with this plan, the
Company recorded charges totaling $51,591,000 ($33,379,000 after related
income tax benefits). Such charges related to (i) the closing and
consolidation of certain manufacturing and distribution facilities, (ii)
the write-down of certain equipment associated with closed
16
<PAGE>
facilities, (iii) the write-off and establishment of reserves for
inventory and accounts receivable associated with customers, product lines,
and specific products that the Company elected to discontinue manufacturing
and distributing, (iv) severance and other costs associated with plant
closures and overhead reductions, and (v) the write-off of certain impaired
intangible assets.
(3) Principally includes interest expense on long-term debt and amortization of
deferred debt expense, offset by interest income from the short-term
investment of excess cash. During the period from August 29, 1996 through
November 22, 1996, the Company did not accrue interest on the Senior
Subordinated Notes due 2002 which were cancelled in connection with the
Plan of Reorganization.
(4) Reorganization items for the 42-week period ended November 22, 1996 include
$3,765,000 of adjustments to record assets and liabilities at fair value in
connection with the application of Fresh Start Reporting.
(5) Loss on early extinguishment of debt (net of income tax benefit of
$3,763,000) on December 10, 1992 and gain on debt discharge (net of income
tax expense of $23,056,000) pursuant to confirmation of Plan of
Reorganization at November 22, 1996.
(6) Due to continuing covenant violations, temporary waivers granted and events
of default, as further discussed in "Management's Discussion and Analysis,"
all of the Company's outstanding debt was classified as current at February
2, 1996.
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the
Consolidated Financial Statements and the related notes included elsewhere in
this Prospectus.
The following table sets forth the percentage relationship to total net
sales of certain items included in the Company's Statements of Operations:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
-----------------------------
42-WEEK PERIOD
ENDED NOVEMBER 22, 1996 1996 1995 1994
----------------------- ----- ----- -----
<S> <C> <C> <C> <C>
Net sales:
Men's & boys'
underwear 40.9% 35.7% 34.8% 28.0%
Women's and girls' 18.9
underwear 17.2 18.7 20.6
T-shirts 15.5 16.3 14.8 19.4
Women's hosiery 24.5 27.3 27.8 31.6
Other 1.9 2.0 2.0 2.1
---------- ---------- ---------- ----------
Total 100.0% 100.0% 100.0% 100.0%
---------- ---------- ---------- ----------
Cost of sales 85.9% 88.7% 82.4% 83.6%
---------- ---------- ---------- ----------
Gross profit 14.1 11.3 17.6 16.4
Selling, general and
administrative expenses 9.3 10.9 8.9 9.6
(Recovery of) provisions for
asset write-downs and
restructuring (1.0)% 12.9%
---------- ---------- ---------- ----------
Operating income (loss) 5.8 (12.6) 8.7 6.8
Interest expense-net 5.9 6.7 5.6 5.6
Other (net) (0.2) - (0.1) -
(0.4)%
---------- ---------- ---------- ----------
Reorganization items
Income (loss) before 1.2
income taxes and
extraordinary items 0.5 (19.2) 3.2
Income tax expense 0.5
(benefit) 9.2 (6.8) 1.4
Extraordinary item-gain
on debt discharge 30.6
Net income (loss) 21.9% (12.4)% 1.8% .7%
========== ========== ========== ==========
</TABLE>
RECENT RESULTS
The Company has not yet completed the preparation of its audited
financial statements for fiscal 1997. The Company estimates that its net sales
for fiscal 1997 were approximately $340 million and its operating income for
fiscal 1997 was approximately $16 million. These results for fiscal 1997
included approximately $46 million of sales resulting from the wind-down of
discontinued products which will not recur in future periods. These sales of
discontinued products were not included in the Business Plan which reflected
only sales of products that the Company intends to continue selling.
18
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF 42-WEEK PERIOD ENDED NOVEMBER 22, 1996 ("YTD FISCAL 1997") TO
43-WEEK PERIOD ENDED NOVEMBER 24, 1995 ("YTD FISCAL 1996").
Net sales declined 11.2% to $297.6 million in YTD fiscal 1997 from
$335.1 million in YTD fiscal 1996. Men's and boys' underwear sales were up 1.2%;
women's and girls' underwear sales were down 19.5% and women's hosiery sales
were down 18.8%. Outerwear T-shirts sales decreased 16.6%. Unit volume was down
12.9% with men's and boys' underwear down 3.3%, women's and girls' underwear
down 18.6% and women's hosiery down 17.3%, and outerwear T-shirt volume down
18.7%. The average selling price per dozen in YTD fiscal 1997 increased to
$20.57 from $20.18, primarily reflecting a mix change among product lines. There
were no significant pricing changes to the Company's customers during YTD fiscal
1997.
The sales declines reflected the implementation of the Company's
Business Plan which was designed, among other objectives, to eliminate
unprofitable products. Net sales in YTD fiscal 1997 included $39.9 million of
sales resulting from the wind-down of discontinued products, which will not
recur in future periods. These sales of discontinued products were not included
in the Business Plan which reflected only sales of products that the Company
intends to continue selling.
Gross profit declined $3.0 million or 6.6% during YTD fiscal 1997
compared to YTD fiscal 1996; however, gross margin improved to 14.1% of sales
from 13.4% in the prior period, as product costs fell proportionately faster
than the sales decline. The improved gross margin was attributable to lower
costs from offshore sourcing of men's and boys' underwear and women's and girls'
underwear. In YTD fiscal 1997, the Company reduced its excess domestic
manufacturing capacity in the men's and boys' underwear, women's and girls'
underwear and outerwear T-Shirt divisions by closing plants. Approximately 1,500
manufacturing and overhead jobs were eliminated by these closings in YTD fiscal
1997. Women's hosiery was favorably impacted by improved production efficiency
and progress in eliminating unprofitable products.
The Company recorded a reversal in YTD fiscal 1997 of $3.0 million of
asset writedowns taken during Fiscal 1996 (related to recovery of receivables
previously identified as impaired assets) compared to provisions for workforce
reductions and assets writedown of $14.2 million in the YTD fiscal 1996 period.
Selling, general and administrative expenses decreased by $6.3 million
(18.5%) in YTD fiscal 1997 to $27.7 million from $34.0 million in YTD fiscal
1996, which represented a decrease from 10.9% as a percentage of sales in YTD
fiscal 1996 to 9.3% as a percentage of sales in YTD fiscal 1997. The primary
component of this decrease was lower employee related costs, resulting from
headcount reductions early in the fiscal 1997 period. Shipping expense was $2.0
million lower in the current period reflecting operation of the consolidated
distribution centers in the current period compared with the transition to these
distribution centers in the prior period and lower sales levels in YTD fiscal
1997 as compared to YTD fiscal 1996.
Interest expense, net of interest income, decreased to $17.5 million for
YTD fiscal 1997 compared to $22.0 million in fiscal 1996. The decrease in YTD
fiscal 1997 was due to nonaccrual of bondholder interest after August 29, 1996
($3.2 million lower than YTD fiscal 1996) and lower average borrowings in 1997,
partially offset by higher interest rates during the period.
Income tax expense in YTD fiscal year 1997 was 253.3% of income before
income taxes, compared to 35.3% in full year fiscal 1996. The increase is due
primarily to the provision for deferred tax liabilities resulting from tax bases
reductions in connection with the gain from the debt discharge associated with
the confirmation of the Plan of Reorganization and to the non-deductibility of
certain restructuring charges.
19
<PAGE>
COMPARISON OF FISCAL 1996 TO FISCAL 1995
Net sales declined 3.9% ($398.9 million) in fiscal 1996 from fiscal 1995
($414.8 million). Men's and boys' underwear sales were down 1.7%, women's and
girls' underwear sales were down 12.6%, and women's hosiery sales were down 5.4%
reflecting in part the increase in casual workplace attire and longer lasting
products. Outerwear T-shirt sales increased 6.2%. Unit volume was down 7.0%,
with men's and boys' underwear down 4.3%, women's and girls' underwear down
8.8%, and women's hosiery down 11.3%, partially offset by a 9.1% increase in
outerwear T-shirt volume. The average selling price per dozen in fiscal 1996
increased to $20.09 from $19.04, reflecting a mix change among product lines.
There were no significant pricing changes to the Company's customers during
fiscal 1996.
Gross profit decreased significantly ($28.0 million or 38%) during
fiscal 1996 compared to fiscal 1995. All product categories had decreased gross
profit during fiscal 1996, due to erratic demand, lower production volume and
manufacturing cost increases which were not offset by price increases. In
particular, lower sales, increased SKU's, and higher overhead costs resulted in
an operating loss in the branded women's hosiery line. Anticipating that the
weakness in the U.S. retail environment would persist, with severe pricing
pressures likely to continue or escalate with resulting adverse effect on the
Company's profitability, the Company undertook an extensive review of its
manufacturing capacities, overhead structure, product lines and customer base in
the third and fourth quarters of fiscal 1996 and the first and second quarters
of fiscal 1997.
As a result of the implementation of objectives formulated during this
review, the Company recorded provisions for workforce reduction and asset
write-downs of $51.6 million in fiscal 1996. Approximately $24.2 million of this
provision was related to cost of goods, including costs associated with a major
program sourced in the Far East. In fiscal 1996 the Company reduced its excess
domestic manufacturing capacity in the men's and boys' underwear, women's and
girls' underwear and outerwear T-shirt divisions by closing plants.
Approximately 1,100 manufacturing and overhead jobs were eliminated by these
closings in the 1996 fiscal year.
Selling, general and administrative expenses, excluding provisions for
workforce reductions and asset write-downs, increased by $6.4 million (17.3%) in
fiscal 1996 to $43.5 million from fiscal 1995. The primary component of this
increase was shipping expense, which increased by $2.5 million (27.1%), due to
non-recurring costs incurred in the relocation of both the men's and boys'
underwear and women's and girls' underwear distribution activities to new
facilities in fiscal 1996, while operating from inefficient temporary facilities
during much of the year. Professional and legal fees were approximately $3.1
million higher in fiscal 1996 compared to the prior year, related primarily to
costs associated with a proposed bank debt refinancing in the second and third
fiscal quarters of 1996 and the subsequent financial restructuring activities.
Interest expense, net of interest income, increased to $26.9 million for
fiscal 1996 compared to $23.1 million in fiscal 1995. The increase in fiscal
1996 was due to higher average borrowings in 1996 and higher interest rates
during the period.
The loss before income taxes generated an income tax benefit of $27.2
million in fiscal 1996, an effective rate of 35.3% compared to an effective rate
of 43% in fiscal 1995. The change in effective tax rate was primarily due to the
write-off in fiscal 1996 of certain intangibles which did not create any tax
benefit.
COMPARISON OF FISCAL 1995 TO FISCAL 1994
Net sales were essentially unchanged ($414.8 million) in fiscal 1995
from the previous fiscal year ($414.7 million). Men's and boys' underwear sales
increased (24.6%) and women's and girls' underwear (10.1%) sales increased in
fiscal 1995. However, these increases were offset by decreases in sales of
women's hosiery (12.2%) and outerwear T-shirts (23.7%). Overall dozens increased
by (1.8%) with increases in men's and women's underwear being largely offset by
decreases in women's hosiery and outerwear T-shirts. The largest decrease in
unit volume occurred in the outerwear T-shirt division (29%) and
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<PAGE>
was caused primarily by a decrease in unit sales to two major customers. The
average selling price per dozen decreased in fiscal 1995 to $19.04 from $19.33,
due to mix change among product lines.
Gross profit increased from $68.1 million in fiscal 1994 to $72.9
million in fiscal 1995 (7.0%). The increase was attributable to increases in
men's and boys' underwear and women's and girls' underwear and was a result of
higher dozens shipped in the current fiscal year as well as the reduction of
excess capacity. The reduction in capacity was accomplished during fiscal 1995
when the men's and boys' underwear product group began consolidating its
domestic cutting and distribution into a single facility and when management
reduced women's hosiery capacity by closing one of the Company's plants. No
material exit or post employment benefit costs were incurred as a result of
those plant closings. The Company also continued to expand its offshore
production and sourcing capabilities in fiscal 1995.
Selling, general and administrative expenses decreased to $37.1 million
in fiscal 1995 from $39.7 million in the prior fiscal year (6.6%). This decrease
was a result of a $4.0 million bad debt write-off in fiscal 1994 which was
partially offset by higher marketing expenses in the 1995 fiscal year. There
were no significant bad debt write-offs in fiscal 1995.
Interest expense, net of interest income, was $23.1 million for fiscal
1995 compared to $23.5 million in fiscal 1994. The decrease in fiscal 1995 was
due to lower average debt levels, net of the effect of increased interest rates
during the period.
Income tax expense was 42.9% of income before income taxes in fiscal
1995 compared with 42% in fiscal 1994. In fiscal 1995 the Company settled its
outstanding disputes with the Internal Revenue Service with a tax payment of
$1.6 million, all of which was accrued in prior years.
LIQUIDITY AND CAPITAL RESOURCES
The Company's existing Credit Agreement was amended and restated on
December 16, 1996. As of that date, the Credit Agreement provides for a term
loan facility ("Term Loan") of $55.0 million and a revolving loan facility of
$77.2 million. The revolving loan facility includes a sub-limit of $25.0 million
for the issuance of letters of credit. For thirty-day periods beginning in
December and May of each year, commitments under the revolving loan facility are
reduced to $63.0 million and $68.0 million, respectively, (the "Clean-Down
Periods"). As of March 31, 1997, the Company had $53.0 million of Term Loans
outstanding, $9.5 million of borrowings under its revolving loan facility, and
$7.6 million of outstanding letters of credit. The Company at March 31, 1997 had
$41.6 million of additional borrowing capacity under its revolving loan
facility.
At November 22, 1996 the Company's working capital was $75.6 million and
the current ratio was 2.7:1. The Company reported a working capital deficit at
the end of fiscal 1996 because of the presentation of substantially all
outstanding debt as currently payable. The calculation of a current ratio under
such circumstance would not be meaningful. Working capital of $113.0 million as
of January 31, 1995 decreased by $10.2 million (8.3%) from $123.2 million as of
January 31, 1994. The current ratio was 3.9:1 as of January 31, 1995, compared
to 4.2:1 as of January 31, 1994.
Capital additions of $3.2 million during YTD fiscal 1997 were primarily
related to purchases of machinery and equipment and were substantially below
capital additions of $13.9 million during the full fiscal year 1996. Capital
additions of $13.9 million in fiscal year 1996 related principally to the
Company's new centralized distribution facilities and were significantly above
the additions of $8.5 million in fiscal 1995 and $8.9 million in fiscal 1994.
The Company's cash on hand as of November 22, 1996 was $1.3 million
compared with $10.4 million at January 31, 1996. This decrease in cash was used
to reduce outstanding bank borrowings during YTD fiscal 1997.
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Inflation has had only a minimal impact on the Company in the past. The
Company has minimized the impact of inflation on costs and expenses through cost
controls and increased manufacturing efficiency. The Company has at times
experienced some increase in the cost of labor, supplies, raw materials and
administrative expenses. The Company is not always able to promptly pass on cost
increases to its customers, principally due to timing of raw materials purchases
and customer orders as well as competitive pressures.
FINANCIAL CONDITION
On October 8, 1996 the company filed a voluntary petition for
reorganization under Chapter 11 with the Bankruptcy Court. The filing of the
voluntary petition resulted from a sequence of events stemming from the
Company's default under the Credit Agreement.
On December 16, 1996, the Company emerged from bankruptcy. Pursuant to
the Plan of Reorganization, the Company has repaid or will repay substantially
all of its secured and unsecured claims and indebtedness as follows: General
unsecured claims were or will be satisfied in the ordinary course of business.
Noteholder Claimants received the right to a pro rata share of 10,000,000 shares
of Ithaca Common Stock (representing, in the aggregate, all of the outstanding
shares of Ithaca Common Stock except for Common Stock issued pursuant to the
LTIP). Prior equity interests in the Company were cancelled, annulled and
extinguished. Administrative claims were or will be paid in full, in cash, in
the ordinary course of business. Tax claims were or will be paid in full.
Priority claims were or will be paid in full. The Credit Agreement was amended
and restated. General secured claims were or will be paid in full. Each holder
of an allowed general secured claim was either paid in full on the Effective
Date of the Plan of Reorganization (or the date upon which there is a final
order allowing such claim as an allowed secured claim), or was otherwise to be
rendered unimpaired.
BUSINESS PLAN
In the third and fourth quarters of fiscal 1996 the Company undertook an
extensive review of its manufacturing capacity, overhead structure, product
lines and customer base. The Company analyzed its strategic plans in connection
with the utilization of its plants located in Honduras, as well as obtaining
products from other foreign sources. These efforts resulted in the promulgation
of the Business Plan which the Company is in the process of implementing. In
general, to enhance its performance and reduce overhead expenses, the Company
consolidated its distribution centers and production capacity to increase
efficiencies, consolidated certain plants to off-shore facilities and
accelerated the process of moving more sewing operations off-shore. As part of
the implementation of the Business Plan, the Company has terminated certain real
property leases and unprofitable license agreements, and made certain payments
in connection therewith. In addition, the Company reduced the number of styles
and products it had been producing, eliminated certain unprofitable customers
and product lines, began the process of establishing Far East outsourcing
capability, and closed selected plants. Beginning in fiscal 1998, the Company
has been unable to obtain the level of sales revenue anticipated by the Business
Plan and therefore may not be able to achieve the Operating Results set forth in
the Business Plan. The Company believes this resulted from customers' reluctance
to place new or additional programs with the Company while it was implementing
its financial restructuring as well as increased pressure from the Company's
competitors to place programs with both existing and potential new customers.
The Company has previously made its Business Plan, which contained
projections regarding the Company's future net sales and operating income,
publicly available. Projections contained in the Business Plan were not prepared
with a view to complying with published guidelines of the Commission nor with
the accounting profession's principles regarding projections. In addition, such
information was based on a number of assumptions and was subject to significant
uncertainties and contingencies, many of which are beyond the Company's control.
Further, the Business Plan did not reflect any tax expense or credits during the
projection period, and utilized asset and liability valuations from the
Company's Historical Financial Statements, modified for the impact of the
exchange of the Notes for equity and the resultant elimination of
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bondholder interest during the projection period. Such information does not
reflect the impact of "Fresh Start" accounting rules, does not conform to
generally accepted accounting principles, and constitutes Forward Looking
Statements under the Reform Act as discussed in "Risk Factors--Forward Looking
Statements" and in the "Special Note Regarding Forward-Looking Statements"
included prior to Part I of the Company's 1996 10-K.
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BUSINESS
GENERAL
Ithaca is a leading designer, marketer and manufacturer of private label
men's and boys' underwear and outerwear T-shirt products, women's and girls'
underwear and women's hosiery. The Company believes it is the largest
manufacturer of private label underwear and women's hosiery products in the
United States, operating distribution and manufacturing facilities in the
Southeastern United States and off-shore manufacturing facilities in Central
America. The key elements of the Company's strategy are suppling a wide variety
of product offerings at a number of price points, maintaining a strong presence
in multiple channels of distribution, maintaining close customer relationships
by developing products and programs that suit individual customer needs, and
maintaining a low cost and flexible manufacturing capability.
PRODUCTS AND SALES
The Company's three principal product lines are (1) men's and boys'
underwear and outerwear T-shirts, (2) women's and girls' underwear and (3)
women's hosiery. The Company offers a large selection of products in a wide
range of styles, sizes and colors. Ithaca has worked closely with its customers
over the years to develop a wide variety of products in each of its product
lines to meet the needs of retailers in varied distribution channels. The
Company's offerings within each product line range from lower priced goods sold
by supermarkets and discount stores to higher quality, higher priced styles sold
by department stores. Management believes that this product breadth gives it a
competitive advantage over other U.S. private label manufacturers who do not
offer such a wide selection, and over foreign manufacturers who generally are
not as capable of providing prompt delivery on a broad range of products.
Ithaca's products are sold through a wide range of retail distribution channels
and are offered to the public through more than 10,000 customer outlets,
including discount stores, department stores, specialty stores, drug stores and
supermarkets
MEN'S AND BOYS' UNDERWEAR AND OUTERWEAR T-SHIRTS
Ithaca designs and manufactures over 160 styles of crew-neck T-shirts,
V-neck T-shirts, briefs, athletic shirts and fashion underwear for its line of
men's and boys' underwear. Ithaca also designs and manufactures over 30 styles
of tank top shirts, mock turtleneck shirts, white and colored pocket T-shirts
and white and colored T-shirt blanks for screen printing for its T-shirt product
line. Products are made of 100% cotton, cotton and polyester blends and, for
fashion underwear, nylon.
Men's and boys' underwear accounted for approximately 41% of the
Company's net sales in the 42- week period ended November 22, 1996, 36% in
fiscal 1996, 35% in fiscal 1995 and 28% in fiscal 1994.
Outerwear T-shirt sales accounted for approximately 16% of the Company's net
sales in the 42-week period ended November 22, 1996, 16% in fiscal 1996, 15% in
fiscal 1995 and 19% in fiscal 1994.
WOMEN'S AND GIRLS' UNDERWEAR
Ithaca designs and manufactures over 100 styles of briefs, hip huggers
and bikini panties for its line of women's and girls' underwear.
Women's and girls' underwear sales accounted for approximately 17% of
the Company's net sales in the 42-week period ended November 22, 1996, 19% in
fiscal 1996, 21% in fiscal 1995 and 19% in fiscal 1994.
WOMEN'S HOSIERY
Ithaca designs and manufactures over 130 styles of regular sheer
pantyhose, control top and support pantyhose, knee-highs and stockings for its
line of women's hosiery for women. Women's hosiery sales
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accounted for approximately 24.5% of the Company's net sales in the 42-week
period ended November 22, 1996, 27% in fiscal 1996, 28% in fiscal 1995 and 32%
in fiscal 1994.
RAW MATERIALS
The principal materials used in the Company's production of goods are
cotton, polyester, nylon and spandex yarns as well as tricot and powernet
fabrics. The Company does not produce its own yarns and believes that purchasing
yarns from the wide range of available sources in the United States is
cost-effective. Ithaca also purchases dyestuffs and packaging materials. The
Company is not always able to promptly pass on to its customers price increases
in raw materials principally due to the timing of raw material purchases and
customer orders as well as competitive conditions.
Management believes its sources of raw materials are adequate and does
not currently anticipate difficulty in obtaining raw materials to meet needs.
The Company has not experienced any significant shortages of raw materials
during the past 30 years.
MANUFACTURING AND SOURCING
Ithaca manufactures its products at 16 plants in the southeastern United
States and Central America, and sources a portion of its products from
contractors located in other countries throughout the world. Goods typically are
produced in anticipation of customer demand and the Company maintains a general
inventory which turned over 3.6 times in the 42-week period ending November 22,
1996. In both its women's hosiery and fabric production facilities, Ithaca has
the flexibility to shift its manufacturing processes easily among many styles,
colors and sizes in response to changes in demand. Approximately half of the
Company's men's and boys' products are assembled off-shore from components that
are cut in the United States. Less than one-fifth of women's and girls'
underwear are produced off-shore and the Company is vigorously exploring
opportunities to increase its off-shore sourcing for these products. Essentially
all of the Company's women's hosiery products are produced domestically.
Management is continually evaluating opportunities to reduce costs by performing
more of its production processes offshore and the Company may increase the
amount of foreign production in the future, if advantageous.
TRADEMARKS, LICENSES AND PATENTS
Ithaca's products are predominantly sold under the private label names
or trade names of its customers. The Company usually seeks to obtain trademark
registration protection for those private label names developed by the Company,
although such protection generally is not as critical as with branded products.
The Company has registered over 46 trademarks in the United States, and has 3
trademark applications pending as of December 3, 1996.
Ithaca has license agreements permitting it to manufacture and sell
specific underwear products using the trademarks of others. The Company has the
exclusive U.S. license from Hang Ten International to use the Hang Ten trademark
on men's and boys' underwear through January 31, 1999. The Company has the
exclusive U.S. license from John Weitz Inc. to use the John Weitz trademark on
specified underwear products for men and boys through September 30, 1997. Ithaca
has a license agreement with International Licensing Corporation to use the
Lightning Bolt trademark on specified underwear products for men through January
31, 1999. The Company has exclusive U.S. licenses from Salant Corporation to use
the Lady Manhattan trademark on specified women's underwear products through
December 31, 1999. Ithaca holds a patent for an Automatic Labelling Machine &
Method which expires on February 3, 2001.
The Company does not believe that the loss of any trademark or license
with respect to any product or products or the expiration or invalidation of any
patent would have a material adverse effect on the overall business of the
Company.
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DELIVERY REQUIREMENTS
All purchase orders are taken for current delivery and the Company has
no long-term sales contracts with any customer, or any contract entitling Ithaca
to be the exclusive supplier of merchandise to any retailer. The Company's
standard payment terms are net 30 days and are shipped F.O.B.--distribution
center.
SEASONALITY
The Company does not regard its overall business as highly seasonal.
IMPORTANCE OF MAJOR CUSTOMERS
For the 42-week period ended November 22, 1996, J.C. Penney accounted
for approximately 47% of the total net sales of the Company, compared to nearly
42% in fiscal 1996, 44% in fiscal 1995 and 41% in fiscal 1994. Wal-Mart
accounted for approximately 9% of total net sales for the 42-week period ended
November 22, 1996, compared to approximately 11% in fiscal 1996, 13% in fiscal
1995, and 12% in fiscal 1994. No other customers accounted for 10% or more of
net sales in the 42-weeks ending November 22, 1996 or in fiscal 1996, 1995 or
1994. Although the Company's reliance on its major customers has generally
decreased over the last ten years, the loss of a material amount of sales to
J.C. Penney, or a decline in J.C. Penney's business, or the loss of one of the
Company's other major customers would have a material adverse effect on Ithaca's
Results of Operations.
BACKLOG
The dollar amount of backlog of orders believed to be firm as of
November 22, 1996 and as of the end of fiscal 1996 is not material for an
understanding of the business of the Company.
COMPETITION
The women's hosiery and underwear markets in the United States are
highly competitive. The Company's products compete with products manufactured by
other private label suppliers as well as with products manufactured under
recognized name brands.
Ithaca believes it is the largest manufacturer of private label
merchandise in each of its three principal product lines, offering a broad
selection of styles, sizes and colors. The private label underwear and women's
hosiery products business is generally comprised of small scale, privately owned
companies with limited product lines. However, management is aware of several
large private label manufacturers with substantial resources. Ithaca's principal
private label competitors include: Beltex, Springford, Nantucket, Oneita, Tultex
and Delta Woodside in men's and boys' underwear or outerwear T-shirts;
Fitzgerald and Wundies Industries Inc. in women's and girls' underwear; and
Americal Corp., Glendale Hosiery Company, Inc. and Acme-McCrary Corp. in women's
hosiery.
The supply of branded underwear and women's hosiery products is
dominated by a few large manufacturers, some of which have substantially greater
financial resources and market recognition than Ithaca. Many of these
manufacturers also produce some private label underwear and women's hosiery
products. The Company's largest competitors among branded product manufacturers
are: Jockey International Inc. ("Jockey" and "Jockey for Her" brands), Sara Lee
Corp. ("Hanes" and "Hanes Her Way" brands) and Fruit of the Loom, Inc. ("Fruit
of the Loom" and "BVD" brands) in underwear; and Sara Lee Corp. ("Hanes" and
"L'eggs" brands), Kayser-Roth Corp. ("No Nonsense" brand) and Pennaco Hosiery
Inc.
("Round the Clock" brand) in women's hosiery.
Competition in the underwear and women's hosiery products market is
generally based on price, quality and service. The Company believes that it has
an advantage over other private label suppliers because it offers marketing
services to retailers implementing private label programs.
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IMPORTS
Ithaca's products compete with goods produced worldwide. Trade
association data available to the Company suggests that imported goods,
including offshore assembly of domestically cut garments, represented
approximately 36.5% of the total retail sales of men's and boys' underwear in
calendar 1996, up from 26.4% in calendar 1995, represented 51.7% of women's and
girls' panties compared with 45.4% in the prior year, and represented 13.1% of
sheer hosiery and tights versus 8.4% in calendar 1995. Reliable data on sales of
imported T-shirts is not believed to be available; however, retail sales of
men's and boys' knit sport shirts was reported to be 52.8% imports in calendar
1996 versus 49.3% in the prior year. The Company believes that it is important
to have the capability of sourcing a portion of its products from outside the
United States. The Company has consolidated certain plants to off-shore
facilities and has accelerated the process of moving more sewing operations
off-shore. The Company has established four Honduran subsidiaries which operate
three sewing plants in that country, primarily for men's and boys' underwear and
outerwear T-shirts. With respect to women's and girls' underwear, Ithaca has
begun the process of establishing Far East sourcing capability. The Company's
ability to utilize foreign sourcing is dependent on the absence of political or
economic disruptions, quotas, labor disruptions, embargoes or currency
fluctuations in the countries in which the Company sources its products.
ENVIRONMENTAL MATTERS
The Company believes that its facilities and operations are
substantially in compliance with current federal, state and local regulations
regarding safety, health and environmental pollution. Ithaca generally has
experienced no difficulty in complying with these regulations and such
compliance has not had a material adverse effect on the Company's capital
expenditures, earnings or competitive position.
EMPLOYEES
The Company employed approximately 7,900 people as of February 1, 1997,
of which approximately 7,400 were engaged in manufacturing and approximately 500
were engaged in managerial, administrative or sales and marketing functions.
None of the Company's employees are covered by a collective bargaining
agreement. The Company considers its relations with employees to be satisfactory
and has never experienced any interruption of operations due to labor disputes.
PROPERTIES
The Company owns its corporate headquarters in Wilkesboro, North
Carolina. The Company leases sales offices in New York City and Dallas, Texas.
The Company manufactures and distributes much of its women's and girls'
underwear at its owned Cairo, Georgia facility, and maintains three additional
owned sewing facilities in the Southeastern United States. Cutting and
distribution for men's and boys' underwear and T-shirt products takes place at
an owned centralized distribution and cutting facility in Vidalia, Georgia.
Men's and boys' underwear and outerwear T-shirts are sewn in four owned plants
in the Southeastern United States and at 3 facilities leased by the Company in
Honduras. The Company manufactures and distributes its women's hosiery products
at two owned facilities in North Carolina. Fabric for use in the Company's
underwear and T-shirt products is knit and finished at the Company's owned
facility in Gastonia, North Carolina and narrow fabrics, such as waistbands, are
manufactured at an owned facility in Graham, North Carolina. The Company also
utilizes leased storage facilities at several plant locations. All of the
Company's facilities are kept in good repair and have well-maintained equipment.
LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings relating
to claims arising out of its operations in the normal course of business. The
Company believes that there are no material legal proceedings pending or
threatened against the Company or any of its properties.
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DIRECTORS AND MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Present Position With the Company
---- --- ---------------------------------
<S> <C> <C>
Walter J. Branson 35 Director
Peter C. Cheston 38 Acting Chief Operating Officer
Marvin B. Crow 65 Director
Francis Goldwyn 43 Director
Morton Handel 62 Director
Eric N. Hoyle 49 Senior Vice President-Finance and Administration,
Secretary, Chief Financial Officer
David H. Jones 54 Executive Vice President-Sales
R. Dean Riggs 45 Executive Vice President-Operations
Jim D. Waller 56 Chairman of the Board, Chief Executive Officer,
President, Director
David N. Weinstein 38 Director
James A. Williams 54 Director
</TABLE>
Walter J. Branson was elected as a member of the post-reorganization
Board of Directors. Mr. Branson is currently Senior Vice President of
Development of the Big Party Corp. He joined the retailing firm as Vice
President of Development in 1996. From 1993 to 1996, Mr. Branson was the Chief
Financial Officer for CWT Specialty Stores. From 1989 to 1992, Mr. Branson was
employed by Executive Life Insurance as an Investment Manager.
Peter C. Cheston joined the Company in November 1995, temporarily, as
Acting Chief Operating Officer. Mr. Cheston is a Managing Director at Alvarez &
Marsal, Inc. a turnaround management firm, with whom he has been employed since
1985. It is anticipated that he will resign from this position at such time as
determined by the Board of Directors.
Marvin Crow was elected as a member of the post-reorganization Board of
Directors. At present, Mr. Crow serves on the Board of Directors of Dyersberg
Corporation, National Spinning Company, The Bibb Company and Ameritex Yarn
Corporation and works as a consultant for National Spinning Company, Texfi
Industries, Inc., Fortsmann & Company, Inc. and Charles Craft. Mr. Crow is also
actively involved with KBO Enterprises, Inc. Established by his family in 1989,
KBO Enterprises is involved in video rental, fitness, and TCBY Yogurt stores in
the Carolinas.
Francis Goldwyn was elected as a member of the post-reorganization Board
of Directors. Since 1993 Mr. Goldwyn has been a principal of Chapman Management
Inc., a provider of strategic operating and financial consulting services. From
1991 to 1992, Mr. Goldwyn served as an Executive Vice President with the Gitano
Group, Inc.
Morton Handel was elected as a member of the post-reorganization Board
of Directors. Presently, Mr. Handel is a director of CompUSA and Concurrent
Computer Corporation and President of S&H Consulting Ltd. Mr. Handel has served
as a director of Concurrent Computer Corporation since 1991. S&H Consulting Ltd.
provides strategic operating and financial consulting services. Mr. Handel
served as a member of the Management Committee of Remington Products Company, a
consumer products manufacturer, from 1992 to 1996.
Eric N. Hoyle joined the Company in January 1994 as Senior Vice
President--Finance and Administration and Chief Financial Officer. Mr. Hoyle was
previously employed by Bali Company, a
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manufacturer and marketer of Intimate Apparel from 1980 to 1994, most recently
as Chief Financial Officer and Vice President Finance and Administration. Mr.
Hoyle is a Certified Public Accountant.
David H. Jones joined the Company in January 1997 as Executive Vice
President-Sales. Prior to joining Ithaca, Mr. Jones was with Gerber
Childrenswear, Inc. where he served as President and CEO from 1994 to 1996 and
as Vice President-Sales from 1991 to 1994. Mr. Jones has over 25 years
experience in the apparel business.
R. Dean Riggs joined the Company in August, 1996 as Executive Vice
President-Manufacturing. Mr. Riggs was previously employed by Sara Lee Knit
Products from 1974 to 1996. His most recent assignments included Vice
President-Operations Planning and Vice President-Manufacturing & Operations in
the Casual Wear Division.
Jim D. Waller has served as Chief Executive Officer since April 1991.
Mr. Waller joined Anderson Hosiery as Vice President--Marketing in 1968 and
became Vice President--Marketing of Ithaca upon its acquisition of Anderson
Hosiery from Collins and Aikman in 1982. Mr. Waller was elected a director in
January 1985, President in June 1987 and Chairman of the Board in March 1995.
Mr. Waller has served as President and a director of Holdings between January
1992 and the Effective Date of the Plan of Reorganization and as Chairman
between March 1995 and the Effective Day of the Plan of Reorganization.
David N. Weinstein was elected as a member of the post-reorganization
Board of Directors. Mr. Weinstein is a Managing Director in the High Yield
Department at BancBoston Securities, Inc. Mr. Weinstein was Head of the High
Yield Capital Market Group at Chase Securities, Inc. and a Managing Director of
the firm from 1993 to 1996. From 1990 through 1993, Mr. Weinstein served in
various roles at Lehman Brothers/Smith Barney Shearson including as Head of the
Capital Markets Group in the High Yield Department at Lehman Brothers and as
Director of the High Yield/Private Finance Group at Smith Barney Shearson.
James A. Williams was elected as a member of the post-reorganization
Board of Directors. Mr. Williams is the President and Chief Executive Officer of
Great American Knitting Mills and has served in that capacity since 1991. Mr.
Williams joined Great American Mills as Senior Vice President of Sales and
Marketing in 1985. From 1970 through 1985, Mr. Williams was employed by
Adams-Mill Hosiery Company, first as a Sales Manager and later as Senior Vice
President-Sales & Marketing.
Pursuant to the Plan of Reorganization, the Board of Directors of the
Company consists of seven (7) directors, one of whom is Jim D. Waller. The term
of office of each director will expire at the first annual meeting of
stockholders of the Company next following the Company's fiscal year ending
January 31, 1998. Directors of the Company hold office until their successors
are elected and qualified, or until their earlier resignation or removal. Each
executive officer is appointed by the Board of Directors for a term specified by
the Board, or until his or her earlier resignation or removal.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has established an Audit Committee
and a Compensation and Stock Option Committee.
The Audit Committee is responsible for meeting with representatives of
the Company's independent certified public accountants and financial management
to review accounting, internal control, auditing and financial reporting
matters, and is also responsible, among other things, for maintaining liaison
with and exercising such supervision of the actions of said accountants in
whatever manner and to whatever extent shall be deemed, at its discretion,
necessary, proper and in the best interest of the Company and its stockholders.
The Audit Committee consists of Messrs. Crow, Goldwyn and Handel, three
Directors who are not and never have been employees of the Company.
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The Compensation and Stock Option Committee is responsible for reviewing
and approving officer and executive salaries and for reviewing and recommending
for approval by the Board of Directors executive and key employee compensation
plans, including incentive compensation and other benefits, and consists of
Messrs. Branson, Weinstein and Williams, all of whom are not and never have been
employees of the Company.
DIRECTOR COMPENSATION
Other than $21,909 paid to F. Richard Redden, a director of the Company
until the Effective Date of the Plan of Reorganization, non-employee Directors
received no remuneration for serving on the Board of Directors during fiscal
1997. Currently, non-employee Directors of the Company (Messrs. Branson, Crow,
Goldwyn, Handel, Weinstein and Williams) are paid retainer fees of $20,000 per
year. Each non-employee Director also receives a fee of $1,500 for each day of
board or committee meetings attended. The Company and its subsidiaries do not
pay fees to Directors who are employees of any of the Company and its
subsidiaries.
EXECUTIVE COMPENSATION
The following table sets forth a summary of compensation for services
rendered in all capacities for the three fiscal years ended January 31, 1997 for
the Chief Executive Officer, the three other most highly compensated executive
officers of the Company and two executives for whom disclosure would be required
but for the fact that they were not employed by the Company at the end of the
last completed fiscal year.
SUMMARY COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
------------------- -----------------------------
Number of
Securities
Underlying All Other
Options Compensation
Name and Position Year Salary Bonus (2) (3) (4)
----------------- ---- ------ --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
J.D. Waller 1997 $490,988 $ -0- 273,224 $1,219
Chairman, President and Chief 1996 $490,984 -0- -0- 1,219
Executive Officer 1995 480,413 316,130 -0- 1,079
N.J. Wehrmann(5) 1997 206,583 -0- -0- 1,219
Executive Vice President - 1996 206,583 -0- -0- 1,219
Manufacturing 1995 202,194 88,060 -0- 1,092
G.P. Felten(6) 1997 123,384 -0- -0- 660
Senior Vice President - 1996 217,000 -0- -0- 1,219
Sales & Marketing 1995 214,000 88,514 -0- 1,651
E.N. Hoyle 1997 190,500 -0- 65,000 1,219
Senior Vice President - 1996 190,000 -0- -0- 1,544
Finance and Administration, 1995 180,847 82,032 -0- 64
Chief Financial Officer
</TABLE>
- --------------------
(1) As the Company had only three executive officers (other than the Chief
Executive Officer), only such three executive officers are included in this
table and the other tables in "Executive Compensation." Mr. Peter C.
Cheston, Acting Chief Operating Office of the Company, receives no salary
directly from the Company. Mr. Cheston receives remuneration from Alvarez &
Marsal, Inc., with whom he is employed. See "Consulting Arrangements."
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<PAGE>
(2) The Company anticipates awarding bonuses for fiscal 1997 on or before April
15, 1997.
(3) Represents options to purchase shares of common stock of the Company
pursuant to the Company's LTIP.
(4) The amounts reported in this column represent the Company's matching
contributions for the account of the named executive officers pursuant to
the Company's Employee Retirement Savings Plan (the "401(k) Plan").
(5) Mr. Wehrmann's employment with the Company terminated in August, 1996. He
has since been replaced by R. Dean Riggs.
(6) Mr. Felten's employment with the Company terminated in August, 1996. He has
since been replaced by David H. Jones.
31
<PAGE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR/1/
<TABLE>
<CAPTION>
% of Total
Number of Options/SARs Potential Realizable Value at Assumed
Securities Granted to Exercise or Annual Rates of Stock Price Appreciation
Underlying Employees in Base Price Expiration for Option Term
Name Options Granted Fiscal Year ($/Sh) Date (5%) ($) (10%) ($)
- ---------------------- ---------------- ---------------- -------------- ------------ ------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
J.D. Waller 273,224 34.58% $6.00 1/23/07 $1,030,874 $2,612,692
E.N. Hoyle 65,000 8.23% $6.00 1/23/07 $245,245 $621,560
All Employees as a 790,224 100.00% $6.00 1/23/07 $2,981,515 $7,556,481
group
</TABLE>
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company entered into an employment agreement with Jim D. Waller in
February, 1997 (the "Employment Agreement"). The Employment Agreement, which
expires on December 31, 1999, calls for Mr. Waller to serve as the Company's
Chief Executive Officer, at an annual base salary of $490,000. Mr. Waller is
eligible to participate in the Company's Cash Bonus Plan and the Company's LTIP.
If Mr. Waller's employment is terminated during the term of the
Employment Agreement, he will be entitled to receive his base salary until
termination. If such termination is without cause (defined as gross negligence
that is materially detrimental to the Company; wilful, material, continued and
bad faith failure to perform and discharge his duties and responsibilities or
conviction of a felony involving personal dishonesty) or if Mr. Waller resigns
for good reason (defined as either a failure to re-elect him as Chief Executive
Officer, an assignment of duties significantly different from Chief Executive
Officer, a material limitation of the powers of Chief Executive Officer, a
reduction in base salary, relocation from Wilkesboro, North Carolina or a
failure to obtain the assumption of the Employment Agreement by a successor),
until the expiration of the Employment Agreement, Mr. Waller will be entitled to
receive 65% of his base salary if his employment terminates during the fiscal
year ending in the third year prior to the expiration date, 80% of his base
salary if his employment terminates during the fiscal year ending in the second
year prior to the expiration date and 100% of his base salary if his employment
is terminated thereafter. In the case of Mr. Waller's death during the term of
the Employment Agreement, his designee, estate, personal or legal
representative, as the case may be, shall be entitled to receive his then
current base salary until the earlier of one year or the date of expiration of
the Employment Agreement. If Mr. Waller is mentally or physically incapacitated
during the term of the
- --------
/1/ All options granted in fiscal 1997 are exercisable at a strike price of
$6.00 which the Company's Board of Directors determined to be approximately
equal to the fair market value of the Common Stock at the time of grant.
Approximately 16.67% of the options awarded will vest at the end of each of
fiscal 1997, fiscal 1998 and fiscal 1999. Up to an additional 16.67% of the
options will vest approximately 45 days after the end of each of fiscal
1997, fiscal 1998 and fiscal 1999, with the number of options vesting
linked to the achievement of certain performance goals related to EBITDA,
subject to the discretion of the Compensation and Stock Option Committee in
accordance to the terms of the LTIP. See "Employment and Consulting
Agreements." Assuming the officers' continued employment with the Company,
the options will expire on the tenth anniversary of the date of grant.
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<PAGE>
Employment Agreement and is unable to perform his duties, he will be entitled to
receive 50% of his base salary until the earlier of one year after his
replacement or the expiration of the agreement.
The Employment Agreement contains restrictions on disclosure by Mr.
Waller of confidential information and restricts Mr. Waller's right to compete
with the Company anywhere the Company does business during the term of his
employment and for 24 months thereafter. As described above, the Employment
Agreement is terminable upon the death of Mr. Waller, by the Company for cause,
upon disability or by Mr. Waller under certain circumstances. In addition,
unless Mr. Waller's employment is terminated for cause by the Company, or Mr.
Waller terminates his employment other than for good reason, (as previously
defined) Mr. Waller is entitled to continue to participate in all group health,
medical and employee benefits plans and programs to which he was previously
entitled for the remaining term of the Employment Agreement.
The Company has also entered into a one-year Management Agreement with
Alvarez & Marsal, Inc. pursuant to which Mr. Peter Cheston will serve as the
Company's Acting Chief Operating Officer at a monthly fee of $35,000 (subject to
downward adjustment upon the mutual agreement of Mr. Cheston and Ithaca if Mr.
Cheston devotes less than ninety percent of his time to the management of
Ithaca). In addition, pursuant to the Management Agreement, Alvarez & Marsal,
Inc. received an option to purchase 109,290 shares of the Company's capital
stock as of January 24, 1997 and is eligible to participate in the Cash Bonus
Plan (as defined below). The Management Agreement is terminable by Ithaca upon
30 days notice. The Management Agreement also provides for certain customary
indemnifications by the Company of Alvarez and Marsal, Inc. and its directors,
officers, agents and affiliates for actions arising out of Alvarez and Marsal,
Inc.'s performance under the Management Agreement.
CASH BONUS PLAN
Approximately 150 employees, as recommended by management, are eligible
to participate in the Cash Bonus Plan. In fiscal 1997, up to $1.5 million, may
be distributed under the Cash Bonus Plan if certain Business Plan targets are
achieved. The Board of Directors has the discretion to increase the amount
available under the Cash Bonus Plan. Under the provisions of the Cash Bonus
Plan, 85% of the amount available for cash bonuses will be paid out if 85% of
the target performance level is achieved and will be increased pro rata as
actual performance meets or equals up to 115% of the Business Plan targets.
LONG-TERM STOCK INCENTIVE PLAN
Ithaca has implemented the Ithaca Industries, Inc. 1996 Long-Term Stock
Incentive Plan (previously defined as the "LTIP"), to be administered by the
Compensation and Stock Option Committee comprised of two or more members of the
Board each of whom is intended to be a "Director" (within the meaning of Rule
16b-3 promulgated under the Securities and Exchange Act of 1934) and an "outside
director" (within the meaning of the Internal Revenue Code of 1986, as amended
(the "Code") Section 162 (m)) although, the mere fact that the Compensation and
Stock Option Committee does not consist of non-employee Directors and outside
directors will not invalidate any awards made by it. Any officer, other key
employee or consultant to the Company or any of its subsidiaries who is not a
member of the Compensation and Stock Option Committee is eligible to participate
in the LTIP. The Compensation and Stock Option Committee has the sole and
complete authority to determine the participants to whom awards shall be granted
("Participant" or "Participants").
The LTIP authorizes the grant of awards to participants with respect to
a maximum of 928,962 shares of the Company's Common Stock, which awards may be
made in the form of (a) nonqualified stock options, (b) stock options intended
to qualify as incentive stock options under Section 422 of the Code, (c) stock
appreciation rights, (d) restricted stock and/or restricted stock units, (e)
performance awards, and (f) other stock based awards. In any calendar year, a
Participant may not receive stock options or stock appreciation rights for more
than 273,224 of the Company's shares. No more than 109,290 shares of Common
Stock or the equivalent cash value thereof, may be paid to a Participant in
connection with the settlement of any award(s) designated as a Performance
Compensation Award (as defined below) in respect of a single performance period.
Any Performance Compensation Award that is deferred shall not (between the date
that the award is deferred and the
33
<PAGE>
payment date), increase (i) with respect to an award payable in cash, by a
measuring factor for each fiscal year greater than a reasonable rate of interest
set by the Compensation and Stock Option Committee or (ii) with respect to an
award payable in shares of the Company, by an amount greater than the
appreciation of a share of the Common Stock from the date such award is deferred
to the payment date. If any award granted under the LTIP is forfeited, or if an
award has expired, terminated or been cancelled for any reason whatsoever (other
than by reason of exercise or vesting), then the shares of Common Stock covered
by such award may be granted to another Participant pursuant to the terms of the
LTIP, to the maximum extent permitted under Section 162(m) of the Code.
Stock options intended to qualify as incentive stock options will be
subject to terms, conditions and such rules as may be prescribed by Section 422
of the Code. Additionally, non-qualified and incentive stock options granted
under the LTIP shall be subject to such terms, including exercise price and
conditions and timing of exercise, as may be determined by the Compensation and
Stock Option Committee and specified in the applicable award agreement. Payment
in respect of the exercise of an option granted under the LTIP may be made (a)
in cash, (b) its equivalent, or if and to the extent permitted by the
Compensation and Stock Option Committee and subject to such rules as may be
established by the Compensation and Stock Option Committee, (c) by exchanging
Common Stock owned by the optionee (which are not the subject of any pledge or
other security interest and which have been owned by such optionee for at least
6 months), (d) through the delivery of irrevocable instructions to a broker to
sell the Common Stock being acquired upon exercise of the option and to deliver
promptly to the Company an amount equal to the aggregate exercise price or (e)
by a combination of the foregoing, provided that the combined value of all cash,
cash equivalents and the fair market value of shares of Common Stock so tendered
to the Company (as of the date of such tender) is at least equal to the
aggregate exercise price of the option.
Stock appreciation rights granted under the LTIP may not be exercisable
earlier than six months after the date of grant but shall otherwise be subject
to such terms, including grant price and conditions and limitations applicable
to exercise as may be determined by the Compensation and Stock Option Committee
and specified in the applicable award agreement. Stock appreciation rights may
be granted in tandem with another award, in addition to another award, or
freestanding and unrelated to another award. A stock appreciation right shall
entitle the Participant to receive an amount equal to the excess of the fair
market value of a share of Common Stock over the grant price on the date of
exercise thereof. The Compensation and Stock Option Committee shall determine
whether a stock appreciation right shall be settled in cash, Common Stock or a
combination of cash and Common Stock.
Restricted stock and restricted stock units granted under the LTIP shall
be subject to such terms and conditions as may be determined by the Compensation
and Stock Option Committee in its sole discretion, including, without
limitation, the duration of the period during which, and the conditions, if any,
under which, the restricted stock and restricted stock units may be forfeited to
the Company. Each restricted stock unit shall have a value equal to the fair
market value of a share of Common Stock. Upon the lapse of the restrictions
applicable thereto, or otherwise in accordance with the applicable award
agreement, restricted stock units shall be paid in cash, shares of Common Stock,
other securities or other property, as determined in the sole discretion of the
Compensation and Stock Option Committee. Dividends paid on any shares of
restricted stock may be paid directly to the participant, withheld by the
Company subject to vesting of the restricted shares, or may be reinvested in
additional shares of restricted stock or in additional restricted stock units,
as determined by the Compensation and Stock Option Committee in its sole
discretion.
Performance awards granted under the LTIP shall consist of a right
denominated in cash or shares of Common Stock, payable at such time and in such
form as the Compensation and Stock Option Committee shall determine, payable in
amounts determined by the Compensation and Stock Option Committee, based upon
the achievement of such performance goals during such performance periods as the
Compensation and Stock Option Committee shall establish. Subject to the terms of
the LTIP and any applicable award agreement, the Compensation and Stock Option
Committee shall determine the performance goals to be achieved during any
performance period, the length of any performance period, the amount of any
performance award and the amount and kind of any payment or transfer to be made
pursuant to any performance award. Performance awards may
34
<PAGE>
be paid in a lump sum or in installments following the close of the performance
period or, in accordance with procedures established by the Compensation and
Stock Option Committee, on a deferred basis.
In addition to the foregoing types of awards, the Compensation and Stock
Option Committee shall have the authority to grant to Participants an "Other
Stock-Based Award", which shall consist of any right which is (a) not a stock
option, stock appreciation right, restricted stock or restricted unit award or
performance award, and (b) an award of shares of Common Stock or an award
denominated or payable in, valued in whole or in part by reference to, or
otherwise based on or related to, shares of Common Stock (including, without
limitation, securities convertible into shares of Common Stock), as deemed by
the Compensation and Stock Option Committee to be consistent with the purposes
of the LTIP; provided that any such rights must comply, to the extent deemed
desirable by the Compensation and Stock Option Committee, with Rule 16b-3 and
applicable law. Subject to the terms of the LTIP and any applicable award
agreement, the Incentive Plan Committee shall determine the terms and conditions
of any such other stock-based award, including the price, if any, at which
securities may be purchased pursuant to any other stock-based award granted
under the LTIP. In the sole and complete discretion of the Compensation and
Stock Option Committee, an award, whether made as any other stock-based award or
as any other type of award issuable under the LTIP, may provide the participant
with dividends or dividend equivalents, payable in cash, shares of Common Stock,
other securities or other property on a current or deferred basis.
The Compensation and Stock Option Committee shall also have the
discretion to designate any award as a "Performance Compensation Award." While
awards in the form of stock options and stock appreciation rights are intended
to qualify as "Performance-Based Compensation" under Section 162(m) of the Code,
provided that the exercise price or the grant price, as the case may be, is
established by the Compensation and Stock Option Committee to be equal to the
fair market value per share of Common Stock as of the date of grant, this form
of award enables the Compensation and Stock Option Committee to treat certain
other awards under the LTIP as Performance Based Compensation and thus preserve
deductibility by the Company for federal income tax purposes of such awards
which are made to participants in the LTIP.
Each Performance Compensation Award shall be payable only upon
achievement over a specified performance period of a duration of at least one
year of a pre-established objective performance goal established by the
Compensation and Stock Option Committee for such period. The Compensation and
Stock Option Committee may designate one or more performance criteria for
purposes of establishing a performance goal with respect to Performance
Compensation Awards made pursuant to the LTIP. The performance criteria that
will be used to establish such performance goals shall be based on the
attainment of specific levels of performance of the Company (or subsidiary,
affiliate, division or operational unit of the Company) and shall be limited to
the following: return on net assets, return on shareholders' equity, return on
assets, return on capital, shareholder returns, profit margin, EBITDA, earnings
per share, net earnings, operating earnings, price per share and sales or market
share.
With regard to a particular performance period, the Compensation and
Stock Option Committee shall have the discretion, subject to the terms of the
LTIP, to select the length of the performance period, the type(s) of Performance
Compensation Award(s) to be issued, the performance goals that will be used to
measure performance for the period and the performance formula that will be used
to determine what portion, if any, of the Performance Compensation Award has
been earned for the period. Such discretion shall be exercised by the
Compensation and Stock Option Committee in writing no later than 90 days after
the commencement of the period. Performance for the period shall be measured and
certified by the Compensation and Stock Option Committee upon the period's
close. In determining entitlement to payment in respect of a Performance
Compensation Award, the Compensation and Stock Option Committee may through use
of negative discretion reduce or eliminate such award, provided such discretion
is permitted under Section 162(m) of the Code. The Compensation and Stock Option
Committee may not use negative discretion with respect to any option or stock
appreciation right other than an option or stock appreciation right that is
intended to be a Performance Compensation Award.
35
<PAGE>
In the event that the Compensation and Stock Option Committee determines
that any corporate transaction or event affects the shares of Common Stock
awarded pursuant to the LTIP, such that an adjustment is appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits intended
to be made available under the LTIP, then the Compensation and Stock Option
Committee shall, in such manner as it may deem equitable, adjust any or all of
(a) the number of Shares or other securities of the Company (or number and kind
of other securities or property) with respect to which awards may be granted,
(b) the number of shares of Common Stock or other securities of the Company (or
number and kind of other securities or property) subject to outstanding awards,
and (c) the grant or exercise price with respect to any award or (d) if deemed
appropriate, make provision for a cash payment to the holder of an outstanding
award in consideration for the cancellation of such award; provided, in each
case that no such adjustment shall be authorized to the extent such authority
would cause an award designated by the Compensation and Stock Option Committee
as a Performance Compensation Award or an option or stock appreciation right
with an exercise price or grant price (as applicable) equal to the fair market
value of a share of Common Stock to fail to qualify as Performance Based
Compensation.
In the event of a Change of Control of the Company (as defined in the
LTIP), any outstanding awards which are unexerciseable or otherwise unvested
shall automatically be deemed exercisable or otherwise vested as of immediately
prior to the Change of Control.
Each award, and each right under any award, shall be exercisable only by
the Participant during the Participant's lifetime, or, if permissible under
applicable law, by the Participant's guardian or legal representative. No award
may be assigned, alienated, pledged, attached, sold or otherwise transferred or
encumbered by a Participant other than by will or by the laws of descent and
distribution and any such purported assignment, alienation, pledge, attachment,
sale, transfer or encumbrance shall be void and unenforceable against the
Company or any affiliate; provided that the designation of a beneficiary shall
not constitute an assignment, alienation, pledge, attachment, sale, transfer or
encumbrance.
The Board of Directors may amend, alter, suspend, discontinue, or
terminate the LTIP or any portion thereof at any time; provided that no such
amendment, alteration, suspension, discontinuation or termination shall be made
without shareholder approval if such approval is necessary to comply with any
tax or regulatory requirement, including for these purposes any approval
requirement which is a prerequisite for exemptive relief from Section 16(b) of
the Exchange Act or Code Section 162(m) (provided that the Company is subject to
the requirements of Section 16 of the Exchange Act or Code Section 162(m), as
the case may be, as of the date of such action).
As of January 31, 1997, options representing 899,514 shares were awarded
to 40 individuals and Alvarez & Marsal, Inc. Options representing 504,402 shares
were awarded as nonqualified stock options, of which 240,994 vested as of
January 31, 1997. Options representing 395,112 shares were awarded as
Performance Compensation Awards as of January 31, 1997, of which, up to 131,704
are expected to vest on April 15, 1997.
In addition, the Company presently (i) maintains a medical and dental
benefits plan (the "Medical Plan") which covers substantially all employees and
(ii) sponsors a qualified defined contribution retirement plan for its employees
under section 401(k) of the Internal Revenue Code of 1986 (the "Retirement
Plan"). The Medical Plan is funded currently by contributions from the Company
and employees based on anticipated claim costs. Company contributions to the
Retirement Plan are based upon a percentage of the employees' contributions.
COMPENSATION AND STOCK OPTION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
During the Company's last fiscal year there were no Compensation and
Stock Option Committee Interlocks.
36
<PAGE>
CONSULTING ARRANGEMENTS
In connection with consulting services provided by Mr. Redden, a former
Director of the Company who resigned on the Effective Date of the Plan of
Reorganization, Osnos and Company, of which Mr. Redden was President, billed the
Company $8,313 for services rendered in fiscal year 1996 and $21,258 for
services rendered subsequently through November 22, 1996. The Company does not
anticipate working with Osnos and Company in the future.
Alvarez and Marsal, Inc., of which Mr. Cheston is a managing director,
is providing turnaround management and financial restructuring advisory services
to the Company. The Company was billed $337,847 in fiscal 1996 and $1,179,752
for the 42-week period ended November 22, 1996. In addition, an Option to
purchase 109,290 shares at $6.00 per share was granted to Alvarez & Marsal,
Inc., the Company's financial and business advisor, as of January 31, 1997. As
of the date of this Prospectus, Alvarez & Marsal, Inc. has not exercised any
portion of its option.
37
<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The Company's authorized capital stock consists of 30,000,000 shares
including 2,500,000 shares of Preferred Stock, par value $.01 per share and
27,500,000 shares of Common Stock, par value of $.01 per share. American Stock
Transfer & Trust Company is the transfer agent and registrar for the Common
Stock. As of April 3, 1997, 10,000,000 shares of Common Stock were issued and
outstanding. Pursuant to the LTIP, options representing a maximum of 928,962
shares of Common Stock may be awarded. As of January 31,1997, Alvarez & Marsal,
Inc. were granted an option to purchase 109,290 shares of Common Stock. See
"Employment and Consulting Agreements" for a description of the terms and
conditions of Common Stock distributed pursuant to the LTIP. Alvarez & Marsal
may exercise its option until January 31, 2007. As of April 3, 1997, Alvarez &
Marsal, Inc. has not exercised any portion of its option.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue up to 2,500,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidation preferences and the number of shares constituting any
series or the designation of such series. The issuance of Preferred Stock could
adversely affect the voting power of holders of Common Stock and could have the
effect of delaying, deferring or preventing a change in control of the Company.
The Company has no present plan to issue any shares of preferred stock.
COMMON STOCK
The holders of the Common Stock are entitled to one vote for each share
held of record and shall vote as a single class on all matters as to which
stockholders are entitled to vote. There are no cumulative voting rights in the
election of directors. The quorum required at any stockholders' meeting for
consideration of any matter is a majority of all outstanding shares entitled to
vote, represented in person or by proxy. All matters will be decided by a
majority of the votes cast at stockholder meetings by holders of shares present
in person or by proxy who are entitled to vote.
Holders of the Common Stock are entitled to receive dividends when, as
and if declared by the Board of Directors out of funds legally available for
dividends. See "Risk Factors- Dividends" and "Dividend Policy." In the event of
any liquidation, dissolution or winding up of the Company, the holders of the
Common Stock are entitled to receive pro rata any assets distributable to
stockholders in respect of shares held by them, after payment of all obligations
of the Company. The holders of Common Stock are not entitled to pre-emptive
rights to any securities issued by the Company.
The Shares of the Common Stock, offered hereby, are duly authorized,
validly issued, fully paid and nonassessable.
The Company is authorized to issue additional shares of capital stock
from time to time There are no specific restrictions upon such issuances, except
that the Company's Certificate prohibits the issuance of non-voting equity
securities if, and only to the extent that and so long as, Section 1123 of the
Bankruptcy Code is applicable and would prohibit such issuance.
CERTAIN PROVISIONS OF THE COMPANY'S CERTIFICATE AND AMENDED AND RESTATED BY-LAWS
Certain provisions of the Certificate and the Amended and Restated
By-laws ("By-laws") of the Company summarized below may be deemed to have an
anti-takeover effect and may delay, defer or prevent a tender offer or takeover
attempt that a stockholder might consider in its best interest, including an
attempt that might result in a premium over the market price for shares held by
stockholders.
38
<PAGE>
The Certificate or By-laws provide (i) that no director may be removed
from office during his term except for cause, (ii) that vacancies on the Board
of Directors may be filled only by the remaining directors and not by the
stockholders, (iii) that any action required or permitted to be taken by the
stockholders may only be taken at an annual or special meeting of the
stockholders and stockholder action by written consent in lieu of a meeting is
prohibited, (iv) that special meetings of stockholders may be called only by a
majority of the Board of Directors, by the Chairman of the Board of Directors or
the President of the Company, (v) that stockholders are not permitted to call a
special meeting or require that the Board of Directors call a special meeting of
stockholders, (vi) that the nomination of candidates for election as directors,
other than by or at the direction of the Board of Directors, requires advance
notice and (vii) that the consideration of stockholder proposals at annual
meetings of stockholders requires advance notice. In general, notice of intent
to nominate a director or raise business at such meetings must be received by
the Company not less than 60 or more than 90 days prior to the anniversary of
the previous year's annual meeting and must contain certain information
concerning the person to be nominated or the matters to be brought before the
meeting and concerning the stockholder submitting the proposal.
The foregoing summary is qualified in its entirely by the provisions of
the Company's Certificate and Bylaws, copies of which have been filed as
exhibits to the Registration Statement of which this Prospectus is a part.
The By-laws provide that the Board of Directors will consist of seven
(7) members. The terms of the directors, one of whom pursuant to the Plan of
Reorganization is Jim D. Waller, Chief Executive Officer of the Company, will
expire at the annual meeting of the stockholders of the Company next following
the Company's fiscal year ending January 31, 1998. For the relevant period, it
is possible that such provisions may make it more difficult to accomplish
transactions which stockholders may otherwise deem to be in their best interest.
Such provisions may be deemed to have a taker-over effect and may delay, defer
or prevent a tender-offer or takeover attempt that might result in the receipt
of a premium over the market price for the securities held by stockholders.
CERTAIN PROVISIONS OF DELAWARE LAW
Section 203 of the DGCL ("Section 203") prohibits, subject to certain
exceptions specified therein, certain transactions between a Delaware
corporation and an Interested Stockholder (as defined below) of a Delaware
corporation. An Interested Stockholder may not engage in any business
combination, including mergers, consolidations or acquisitions of additional
shares of the corporation having an aggregate value in excess of 10% of the
consolidated assets of the corporation, and certain transactions that would
increase the Interested Stockholder's proportionate share ownership in the
corporation, for a three-year period following the date on which such
stockholder becomes an Interested Stockholder unless (i) prior to such date, the
Board of Directors of the corporation approved either the business combination
or the transaction which resulted in the stockholder becoming an Interested
Stockholder, (ii) upon consummation of the transaction which resulted in the
stockholder becoming an Interested Stockholder, the Interested Stockholder owned
at least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding certain shares), or (iii) on or subsequent to
such date, the business combination is approved by the Board of Directors of the
corporation and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least 66-2/3% of the outstanding voting stock which
is not owned by the Interested Stockholder. Except as otherwise specified in
Section 203, an "Interested Stockholder" is defined to include (x) any person
that is the owner of 15% or more of the outstanding voting stock of the
corporation, or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within three years immediately prior to the relevant date and (y) the
affiliates and associates of any such person.
Under certain circumstances, Section 203 makes it more difficult for a
person who would be an Interested Stockholder to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. The Certificate does not exclude the Company from the restrictions
imposed under Section 203. The provisions of Section 203 may encourage companies
interested in acquiring the Company to negotiate in advance with the Board of
Directors because the stockholder approval requirement would be avoided if a
majority of the directors then in office
39
<PAGE>
approve the business combination of the transaction which results in the
stockholder becoming an interested stockholder. Such provisions also may have
the effect of preventing changes in the management of the Company. It is
possible that such provisions could make it more difficult to accomplish
transactions which stockholders may otherwise deem to be in their best
interests.
REGISTRATION RIGHTS AGREEMENT
The Company has entered into a Registration Rights Agreement, dated as
of the Effective Date of the Plan of Reorganization, with certain holders of
Common Stock pursuant to which the Company agreed to use its reasonable best
efforts to file within 90 days after the consummation of the Plan of
Reorganization a Registration Statement, use its reasonable best efforts to
cause the Shelf Registration to be declared effective and to keep such Shelf
Registration continuously effective until the earlier of the disposition of all
Registrable Securities and three (3) years after the initial date of the Shelf
Registration; provided, however, that Ithaca will be permitted to suspend the
availability of the Self Registration for up to ninety (90) days during any
twelve-month period and, during any period in which Ithaca is not eligible to
use Form S-3 for the Shelf Registration, for such additional reasonable periods
as are necessary to cause any post-effective amendments to the Shelf
Registration to become effective. The Shelf Registration may not be used to
effect any underwritten offering unless such an offering relates to a Demand
Registration (as defined below). Ithaca will pay certain expenses in connection
with registrations made under the Shelf Registration (which expenses will not
include, unless such registration is a Demand Registration, any fees or expenses
of counsel for any holder of Registerable Securities ("Holder" or "Holders").
Ithaca will also effect up to three (3) registrations (the "Demand
Registrations") at the request of the Designated Holders (as defined in the
Registration Rights Agreement) in the event the Shelf Registration is
unavailable or, in the case of an underwritten offering, at the request of the
Approved Underwriter (as defined below); provided, however, that no such Demand
Registration is required to be effected earlier than one-hundred eighty (180)
days after the effective date of any Registration Statement (other than the
Shelf Registration or a Registration Statement on Form S-4 or From S-8 (or any
successor form thereto)) of Ithaca, under the Securities Act, covering
securities of the same class as any Registrable Securities. The Registration
Rights Agreement provides that, subject to certain conditions, Butler and The
Northwestern Mutual Life Insurance Company ("Northwestern") will each have the
right to request one (1) Demand Registration. Designated Holders owning at least
20% of the Registrable Securities held by all of the Designated Holders will
have the right to request the remaining one (1) Demand Registration; provided,
however, that Northwestern and the Butler Noteholders shall not be included as a
requesting Holder in determining whether Holders holding at least 20% of the
Registrable Securities have requested such Demand Registration unless such
Holder shall have previously exercised or forfeited prior to exercise its right
to request its Demand Registration described in the preceding sentence; and,
provided, further, however, that for each Demand Registration described in the
preceding sentence that shall have been forfeited prior to exercise, the number
of Demand Registrations permitted to be made as described in this sentence shall
be increased by one. The Butler Noteholders sold their Notes prior to the
execution of the Registration Rights Agreement and, accordingly, the Company
believes that they are deemed to have forfeited their right to request a Demand
Registration.
Pursuant to the Registration Rights Agreement, Ithaca is required to use
its best efforts to file a Demand Registration within sixty (60) days after the
period within which requests for registration may be given to Ithaca. Ithaca has
the right, in the case of a Demand Registration, to postpone the filing or
effectiveness of, or to withdraw, any Registration Statement if in the good
faith judgment of its Board of Directors, such registration would materially
interfere with any material financing, acquisition, corporate reorganization or
merger or other transaction involving Ithaca or any subsidiary thereof;
provided, however, that such postponement or withdrawal will last only for so
long as such material interference would exist, but in no event for more than
one-hundred eighty (180) days.
The Holders initiating a Demand Registration (the "Initiating Holders")
owning a majority of the Registrable Securities owned by the Initiating Holders
to be included in the registration may elect to cause a Demand Registration to
be underwritten, in which case, the lead or managing underwriter (the "Approved
40
<PAGE>
Underwriter") made pursuant to a Demand Registration will be selected by Ithaca
and must be reasonably acceptable to the Initiating Holders owning a majority of
the Registrable Securities owned by the Initiating Holders to be included in the
registration. Other Holders will, and Ithaca and other persons holding
registration rights in certain circumstances may, be permitted to participate in
a Demand Registration. Notwithstanding the foregoing sentence, if the Approved
Underwriter determines that the aggregate amount of securities requested to be
included in such offering is sufficiently large to have an adverse effect on the
success of such offering, then Ithaca will include in such registration only the
aggregate amount of Registrable Securities that in the opinion of the Approved
Underwriter may be sold without any such effect on the success of such offering
(the "Approved Underwriter Amount"), and (i) if the number of Registrable
Securities to be included in such registration is greater than the Approved
Underwriting Amount, then each Holder will be entitled to have included in such
registration Registrable Securities equal to its pro rata portion of the
Approved Underwriter Amount, as based on the amounts of Registrable Securities
and Ithaca and any Person who is not a Holder will not be permitted to include
any securities therein, and (ii) to the extent that the number of Registrable
Securities to be included by the Holders is less than the Approved Underwriter
Amount, securities that Ithaca and any Person who is not a Holder proposes to
register may also be included. Ithaca will pay substantially all expenses in
connection with the Demand Registration (including certain fees and expenses of
a single counsel for all Holders participating in such registration).
If Ithaca proposes to file or files a Registration Statement under the
Securities Act with respect to an offering by Ithaca for its own account of any
class of security (other than a Registration Statement on Form S-4 or S-8 (or
any successor form thereto)) under the Securities Act, then Ithaca will offer
the Holders the opportunity to register the number of Registrable Securities as
each such Holder may request. Subject to certain conditions, Ithaca will use its
best efforts to permit the Holders to include such Registrable Securities in
such offering on the same terms and conditions as the securities of Ithaca
included therein. Notwithstanding the foregoing, if such registration involves
an underwritten offering and the managing underwriter or underwriters (the
"Company Underwriter") determines that the total amount of securities requested
to be included in such offering (the "Total Securities") is sufficiently large
so as to have an adverse effect on the success of the distribution of the Total
Securities, then, Ithaca will include in such registration, to the extent of the
number of Registrable Securities which Ithaca is so advised can be sold in (or
during the time of) such offering without having such adverse effect, first, all
Ithaca Common Stock or securities convertible into, or exchangeable or
exercisable for Ithaca Common Stock that Ithaca proposed to register for its own
account, second, all securities proposed to be registered by the Holders, pro
rata among such Holders, and third, all other securities proposed to be
registered. Ithaca will pay certain expenses attributable to the Holders in
connection with such registrations (which expenses will not include any fees or
expenses of counsel for any Holder).
Ithaca will indemnify and hold harmless each Holder, its directors,
officers, partners, employees, advisors and agents, and each Person who controls
(within the meaning of the Securities Act or the Exchange Act) such Holder, to
the extent permitted by law, from and against any and all losses, claims,
damages, expenses (including, without limitation, reasonable costs of
investigation and fees, disbursements and other charges of counsel) or other
liabilities resulting from or arising out of or based upon any untrue, or
alleged untrue, statement of a material fact contained in any Registration
Statement, Prospectus, preliminary Prospectus, notification or offering circular
(as amended or supplemented if Ithaca has furnished any amendments or
supplements thereto) or other disclosure document, or arising out of or based
upon any omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, except insofar
as the same are caused by or contained in any information furnished in writing
to Ithaca by or on behalf of such Holder expressly for use therein. Ithaca will
also indemnify any underwriters of the Registrable Securities, their officers,
directors and employees, and each Person who controls any such underwriter
(within the meaning of the Securities Act and the Exchange Act) to the same
extent as provided above with respect to the indemnification of the Holders of
Registrable Securities.
Each Holder agrees to indemnify and hold harmless Ithaca, any
underwriter retained by Ithaca and their respective directors, officers,
employees, advisors, agents and each Person who controls (within the meaning of
the Securities Act and the Exchange Act) Ithaca or such underwriter to the same
extent as the foregoing indemnity
41
<PAGE>
from Ithaca to the Holders (subject to the proviso to this sentence and
applicable law), but only with respect to 2 any information furnished in writing
by or on behalf of such Holder expressly for use therein; provided, however,
that the liability of any Holder will be limited to the amount of the net
proceeds received by such Holder in the offering giving rise to such liability.
SELLING STOCKHOLDERS
The following tables provide certain information with respect to the
Common Stock held by each Selling Stockholder, which information has been
furnished to the Company by the Selling Stockholders and other sources and which
the Company has not verified. Because the Selling Stockholders may sell all or
some part of the Common Stock which they hold pursuant to this Prospectus and
the fact that this offering is not being underwritten on a firm commitment
basis, no estimate can be given as to the amount of Common Stock that will be
held by the Selling Stockholders upon termination of this Offering. See "Plan of
Distribution." The Common Stock offered by this Prospectus may be offered from
time to time in whole or in part by the persons named below or by their
transferees, as to whom applicable information will, to the extent required, be
set forth in a Prospectus Supplement.
<TABLE>
<CAPTION>
Amount to be
Amount of Stock offered for
owned prior to Stockholder's
Name Offering Account
- ---- -------- -------
<S> <C> <C>
The Northwestern Mutual Life Insurance Company 2,400,000 /1//2/ 2,400,000 /1//2/
Northwestern Mutual Series Fund, Inc. 136,000 /3/ 136,000 /3/
Merrill Lynch, Pierce Fenner & Smith Incorporated 1,252,080 1,252,080
</TABLE>
- ------------------------------
/1/ Includes 120,000 shares of Common Stock held in The Northwestern Mutual
Life Insurance Company Group Annuity Separate Account.
/2/ See the Selling Stockholder listed immediately following for additional
shares of Common Stock which The Northwestern Mutual Life Insurance Company
indirectly beneficially owns as the parent of Northwestern Mutual Series
Fund, Inc.
/3/ Held in its High Yield Bond Portfolio.
42
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the number of shares of Common Stock of
the Company beneficially owned, as of April 3, 1997, by certain executive
officers and by each person known by the Company to beneficially own more than
5% of the Company's Common Stock.
<TABLE>
<CAPTION>
Name and Number
Address of Owners of Shares Percentage
- ----------------- --------- ----------
<S> <C> <C>
Northwestern Mutual Life Insurance Company 2,536,000 /1/ 25.4%
720 East Wisconsin Avenue
Milwaukee, Wisconsin 53202
Merrill Lynch, Pierce, Fenner & Smith Incorporated 1,252,080 12.5%
250 Vesey Street
New York, NY 10281
Jim D. Waller/2/ 91,075 *
Ithaca Industries, Inc.
Highway 268 West
P.O. Box 620
Wilkesboro, North Carolina 28697
Eric N. Hoyle/2/ 21,667 *
Ithaca Industries, Inc.
Highway 268 West
P.O. Box 620
Wilkesboro, North Carolina 28697
All Executive Officers as a group/2/ 283,408 2.6%
</TABLE>
- -------------
* Less than 1%.
/1/ Of The Northwestern Mutual Life Insurance Company's holdings of 2,536,000
shares of Common Stock, 120,000 shares are held pursuant to shared voting
and investment power with The Northwestern Mutual Life Insurance Company
Group Annuity Separate Account, an affiliate, and 136,000 shares are held
pursuant to shared voting and investment power with Northwestern Mutual
Series Fund, Inc., a wholly-owned subsidiary.
/2/ The named executive officers have been awarded options to purchase the
shares indicated as of January 31, 1997, pursuant to the LTIP. Options
awarded under the LTIP that are not vested or that do not vest within 60
days from the date of this Prospectus are not included. In each case, the
options to purchase half of the number of the shares indicated vested as of
January 31, 1997. The Company anticipates that the option to purchase the
remaining half of the number of shares indicated will vest as of April 15,
1997 subject to Performance Goals. See "Directors and Management-Executive
Compensation" for a description of the LTIP.
43
<PAGE>
PLAN OF DISTRIBUTION
Of the Shares included in this Prospectus, 10,000,000 were distributed
on a pro rata basis to holders of the Notes, which were retired pursuant to the
Plan of Reorganization, under which the Company emerged from bankruptcy on
December 16, 1996. An option to purchase 109,290 of the Shares was issued to
Alvarez & Marsal, Inc. pursuant to the Management Agreement as a portion of the
compensation for the turnaround-management and financial restructuring advisory
services rendered the Company.
The Company will receive no proceeds from this offering. The Common
Stock may be sold from time to time to purchasers directly by any of the Selling
Stockholders. Alternatively, any of the Selling Stockholders may from time to
time, offer the Common Stock through underwriters, dealers or agents, who may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Selling Stockholders and/or the purchasers of Common Stock
for whom they may act as agent. The Selling Stockholders and any underwriters,
dealers or agents that participate in the distribution of Common Stock may be
deemed to be underwriters, and any profit on the sale of Common Stock by them
and any discounts, commissions or concessions received by any such underwriters,
dealers or agents might be deemed to be underwriting discounts and commissions
under the Securities Act. If the Company is advised that an underwriter has been
engaged with respect to the sale of any Common Stock offered hereby, or in the
event of any other material change in the plan of distribution, the Company will
cause appropriate amendments to the Registration Statement of which this
Prospectus forms a part to be filed with the Commission reflecting such
engagement or other change. See "Additional Information."
At the time a particular offer of Common Stock is made, to the extent
required, a Prospectus Supplement will be provided by the Company and
distributed by the relevant Selling Stockholder which will set forth the
aggregate amount of Common Stock being offered and the terms of the offering,
including the name or names of any underwriters, dealers or agents, any
discounts, commissions and other items constituting compensation from the
Selling Stockholders and any discount, commissions or concessions allowed or
reallowed or paid to dealers.
The Common Stock may be sold from time to time in one or more
transactions at a fixed offering price, which may be changed, or at varying
prices determined at the time of sale or at negotiated prices. Such prices will
be determined by the Selling Stockholders or by agreement between the Selling
Stockholders and underwriters or dealers.
Through the date hereof, there has been no established public trading
market for the Common Stock. The Shares were issued to the holders of the Notes
pursuant to the Plan of Reorganization and the Management Agreement. Application
will be made to list the Common Stock on NASDAQ National Market. There can be no
assurance that any active trading market will develop or will be sustained for
the Common Stock or as to the price at which the Common Stock may trade or that
the market for the Common Stock will not be subject to disruptions that will
make it difficult or impossible for the holders of Common Stock to sell Common
Stock in a timely manner, if at all, or to recoup their investment in the Common
Stock. See "Risk Factors--Liquidity; Absence of Market for Common Stock" and
"Risk Factors--Effect of Future Sales of Common Stock; Registration Rights."
Under applicable rules and regulations under the Exchange Act any person
engaged in a distribution of Common Stock may not simultaneously engage in
market-making activities with respect to such Common Stock for a period of nine
business days prior to the commencement of such distribution and ending upon the
completion of such distribution. In addition to and without limiting the
foregoing, each Selling Stockholder will be subject to applicable provisions of
the Exchange Act and the rules and regulations thereunder, including without
limitation Regulation M, which provisions may limit the timing of purchases and
sales of any of the Common Stock by the Selling Stockholders. All of the
foregoing may affect the marketability of the Common Stock and the ability of
any person or entity to engage in market-making activities with respect to the
Common Stock.
44
<PAGE>
Pursuant to the Registration Rights Agreement, the Company is obligated
to pay substantially all of the expenses incident to the registration, offering
and sale of the Common Stock of the Selling Stockholders to the public other
than commissions and discounts of underwriters, dealers or agents. The Selling
Stockholders, and any underwriter they may utilize, and their respective
controlling persons are entitled to be indemnified by the Company against
certain liabilities, including liabilities under the Securities Act. See
"Description of Capital Stock--Registration Rights Agreement."
LEGAL MATTERS
Certain legal matters regarding the Shares were passed upon for the
Company by Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York.
EXPERTS
The consolidated financial statements and schedule of the Company as of
November 22, 1996, February 2, 1996 and January 27, 1995 and for the 42-week
period ended November 22, 1996 and for each of the years in the two-year period
ended February 2, 1996, have been included herein and in the Registration
Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and in the
Registration Statement upon the authority of said firm as experts in accounting
and auditing.
The reports of KPMG Peat Marwick LLP covering the November 22, 1996
consolidated financial statements contains an explanatory paragraph that states
the Company emerged from bankruptcy and as of November 22, 1996 adopted
fresh-start reporting in accordance with American Institute of Certified Public
Accountants Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code."
45
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Index to Financial Statements
Page
----
Independent Auditors' Report .............................................. F-2
Consolidated Balance Sheets as of November 22, 1996, February 2,
1996, and January 27, 1995............................................. F-3
Consolidated Statements of Operations for the 42-Week Period ended
November 22, 1996 and for the Years ended February 2, 1996
and January 27, 1995................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) for the
42-Week Period ended November 22, 1996 and for the Years
ended February 2, 1996 and January 27, 1995............................ F-6
Consolidated Statements of Cash Flows for the 42-Week Period ended
November 22, 1996 and for the Years ended February 2, 1996
and January 27, 1995................................................... F-7
Notes to Consolidated Financial Statements ................................ F-9
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ithaca Industries, Inc.:
We have audited the accompanying consolidated balance sheets of Ithaca
Industries, Inc. and subsidiaries as of November 22, 1996, February 2, 1996, and
January 27, 1995, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the 42-week period ended
November 22, 1996 and each of the years in the two-year period ended February 2,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ithaca Industries,
Inc. and subsidiaries as of November 22, 1996, February 2, 1996, and January 27,
1995, and the results of their operations and their cash flows for the 42-week
period ended November 22, 1996 and each of the years in the two-year period
ended February 2, 1996, in conformity with generally accepted accounting
principles.
On December 16, 1996, the Company emerged from bankruptcy. As described in note
1 to the consolidated financial statements, the Company accounted for the
reorganization as of November 22, 1996 and adopted fresh-start reporting in
accordance with the American Institute of Certified Public Accountants Statement
of Position 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE
BANKRUPTCY CODE. As a result, the consolidated balance sheet as of November 22,
1996 presents the financial position of the reorganized entity and is,
therefore, not comparable to the consolidated balance sheets for periods prior
to the Company's emergence from bankruptcy.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
January 31, 1997
F-2
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
November 22, 1996, February 2, 1996, and January 27, 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
Post-Confirmation Preconfirmation
November 22, February 2, January 27,
Assets (Note 6) 1996 1996 1995
--------------- ---- ---- ----
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 1,329 10,369 7,531
Trade accounts receivable, net of allowance for
doubtful accounts of $1,508 at November 22, 1996,
and $1,215 at February 2, 1996 and
January 27, 1995, respectively (note 9) 45,342 29,958 40,304
Due from Parent (note 8) -- 604 926
Inventories (note 3) 68,706 56,079 97,117
Deferred taxes (note 7) -- 20,212 4,936
Prepaid expenses and other current assets 508 1,567 1,366
Refundable income taxes (note 7) -- 13,159 --
Assets held for disposition, net of estimated
reserves (notes 3, 4, and 13) 2,973 17,139 --
-------- -------- --------
Total current assets 118,858 149,087 152,180
-------- -------- --------
Net property, plant, and equipment (note 4) 35,647 54,295 55,389
Other assets:
Intangible assets, net of accumulated amortization
of $-0-, $22,570, and $19,016 at November 22,
1996, February 2, 1996, and January 27, 1995,
respectively (note 5) 453 905 4,459
Deferred debt expense, net of accumulated amortization
of $-0-, $7,868, and $3,799 at November 22, 1996,
February 2, 1996, and January 27, 1995, respec-
tively (note 13) -- 3,651 7,720
Cost in excess of fair value of net assets acquired,
net of accumulated amortization of $1,097 at
January 27, 1995 (note 13) -- -- 2,768
Other, including cash surrender value of officers' life
insurance 1,035 704 1,955
-------- -------- --------
Total other assets 1,488 5,260 16,902
-------- -------- --------
$155,993 208,642 224,471
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
Post-Confirmation Preconfirmation
November 22, February 2, January 27,
Liabilities and Stockholders' Equity (Deficit) 1996 1996 1995
---------------------------------------------- ---- ---- ----
<S> <C> <C> <C>
Current liabilities:
Current installments of long-term debt, due to related
parties (notes 6 and 10) $ -- 33,757 --
Current installments of long-term debt (notes 6
and 10) 135 206,301 639
Accounts payable 12,486 16,414 17,139
Accrued payroll and related expenses 14,743 10,335 11,276
Accrued restructuring costs (note 13) 2,468 12,204 --
Income taxes payable (note 7) 2,718 -- 3,154
Deferred income taxes (note 7) 5,215 -- --
Other accrued expenses 5,502 15,985 6,944
-------- ------- -------
Total current liabilities 43,267 294,996 39,152
-------- ------- -------
Long-term debt, excluding current installments, due to
related parties (notes 6 and 10) 11,344 -- 35,223
Long-term debt, excluding current installments (notes 6 and 10) 65,911 -- 186,596
Deferred income taxes (note 7) 13,355 7,204 7,414
Preconfirmation redeemable cumulative preferred stock of $.01
par value. Authorized but unissued 500,000 shares at
February 2, 1996 and January 27, 1995 -- -- --
Stockholders' equity (deficit):
Preferred stock, $.01 par value; authorized 2,500,000 shares;
none outstanding -- -- --
Common stock of $.01 par value; authorized 27,500,000
shares; issued and outstanding 10,000,000 shares at
November 22, 1996 100 -- --
Preconfirmation common stock, par value $.01; authorized and
issued 1,000 shares at February 2, 1996 and January 27, 1995 -- -- --
Additional paid-in capital 22,016 9,000 9,000
Accumulated deficit -- (102,558) (52,914)
-------- ------- -------
Total stockholders' equity (deficit) 22,116 (93,558) (43,914)
Commitments and contingencies (notes 6, 9, 11, 12, and 13)
-------- ------- -------
$155,993 208,642 224,471
======== ======= =======
</TABLE>
F-4
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
42-Week Period ended November 22, 1996 and Years ended
February 2, 1996 and January 27, 1995
(In thousands)
<TABLE>
<CAPTION>
42-Week
Period ended Years ended
November 22, February 2, January 27,
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales (note 9) $ 297,603 398,819 414,800
Cost of sales (note 3) 255,543 353,937 341,941
--------- --------- ---------
Gross profit 42,060 44,882 72,859
Selling, general, and administrative expenses
(notes 8, 11, and 12) 27,670 43,486 37,075
(Recovery of) provision for asset write-downs and
restructuring (note 13) (2,964) 51,591 --
--------- --------- ---------
Operating income (loss) 17,354 (50,195) 35,784
--------- --------- ---------
Other income (deductions):
Interest and amortization of deferred debt
expense - related parties (contractual interest
of $3,252 at November 22, 1996) (2,597) (3,918) (3,566)
Interest and amortization of deferred debt
expense - other, net of interest income of
$164, $237, and $895 at November 22,
1996, February 2, 1996, and January 27,
1995, respectively (contractual interest of
$17,512 at November 22, 1996) (14,892) (22,987) (19,581)
Other, net 625 299 529
(16,864) (26,606) (22,618)
Income (loss) before reorganization items,
income taxes, and extraordinary item 490 (76,801) 13,166
Reorganization items:
Adjustments to fair value 3,765 -- --
Professional fees and other (2,589) -- --
--------- --------- ---------
Income (loss) before income taxes
and extraordinary item 1,666 (76,801) 13,166
Income tax (expense) benefit (note 7) (4,218) 27,157 (5,653)
--------- --------- ---------
(Loss) income before extraordinary item (2,552) (49,644) 7,513
Extraordinary item - gain on debt discharge of $90,980
before income taxes of $23,056 (notes 1 and 7) 67,924 -- --
--------- --------- ---------
Net income (loss) $ 65,372 (49,644) 7,513
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholder's Equity (Deficit)
42-Week Period ended November 22, 1996 and Years ended
February 2, 1996 and January 27, 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
Total
Shares Additional Retained stockholders'
------------------------ Common paid-in earnings equity
Preconfirmation New stock capital (deficit) (deficit)
--------------- --- ----- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 28, 1994 1,000 -- $ -- 9,000 (60,427) (51,427)
Net income -- -- -- -- 7,513 7,513
---------- ---------- ---------- ---------- ---------- ----------
Balance at January 27, 1995 1,000 -- -- 9,000 (52,914) (43,914)
Net loss -- -- -- -- (49,644) (49,644)
---------- ---------- ---------- ---------- ---------- ----------
Balance at February 2, 1996 1,000 -- -- 9,000 (102,558) (93,558)
Net income for 42-week period ended November 22,
1996 (Preconfirmation) -- -- -- 65,372 65,372
Effect of reorganization:
Elimination of accumulated deficit -- -- -- 37,186 37,186
Cancellation of predecessor shares (1,000) -- -- (9,000) -- (9,000)
Issuance of new shares -- 10,000,000 100 22,016 -- 22,116
---------- ---------- ---------- ---------- ---------- ----------
Balance at November 22, 1996 (Post-Confirmation) -- 10,000,000 $ 100 22,016 -- 22,116
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
42-Week Period ended November 22, 1996 and Years ended
February 2, 1996 and January 27, 1995
(In thousands)
<TABLE>
<CAPTION>
42-Week
Period ended Years ended
November 22, February 2, January 27,
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash provided by operating activities:
Net income (loss) $ 65,372 (49,644) 7,513
Adjustments to reconcile net income (loss) to net
cash provided by operations:
(Recovery of) provision for asset write-downs
and restructuring (2,964) 40,623 --
Gain on debt discharge (90,980) -- --
Depreciation and amortization of property,
plant, and equipment 6,936 8,713 8,652
Provision for (recovery of) doubtful accounts 293 -- (582)
Amortization of intangible assets, goodwill,
and deferred debt expense 1,516 5,459 2,635
Amortization of discount on subordinated notes 52 62 62
Write-off of deferred debt expense 2,589 - --
Provision for deferred taxes 31,578 (15,486) (765)
(Gain) loss on sale of property, plant, and
equipment (292) 22 (238)
Net adjustments in accounts for fair value (3,765) -- --
Changes in operating assets and liabilities before
the effects of restructuring reclassifications:
Trade accounts receivable and due from Parent (13,011) 4,668 (841)
Inventories (646) 12,071 (22,455)
Prepaid expenses and other assets 14,204 (13,495) 1,514
Assets held for disposition 18,523 -- --
Accounts payable (3,928) (725) 78
Accrued payroll and related expenses 4,408 (941) 2,695
Other accrued expenses 1,469 6,390 4,645
Due to Parent -- -- (2,030)
Accruals relating to IRS examination -- -- (4,354)
-------- -------- --------
Net cash provided by (used in)
operating activities 31,354 (2,283) (3,471)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of property, plant, and equipment 949 219 563
Additions to property, plant, and equipment (3,248) (13,887) (8,478)
Decrease (increase) in other assets -- 1,251 (711)
-------- -------- --------
Net cash used in investing activities (2,299) (12,417) (8,626)
-------- -------- --------
</TABLE>
(Continued)
F-7
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In thousands)
<TABLE>
<CAPTION>
42-Week
Period ended Years ended
November 22, February 2, January 27,
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from financing activities:
Repayment of long-term debt $(38,095) (19,462) (20,971)
Proceeds from long-term debt -- 37,000 --
-------- -------- --------
Net cash (used in) provided by
financing activities (38,095) 17,538 (20,971)
-------- -------- --------
Net (decrease) increase in cash and
cash equivalents (9,040) 2,838 (33,068)
Cash and cash equivalents at beginning of year 10,369 7,531 40,599
-------- -------- --------
Cash and cash equivalents at end of year $ 1,329 10,369 7,531
======== ======== ========
Supplemental disclosures - cash paid (received)
during the year for:
Income taxes $(16,835) 1,224 7,149
======== ======== ========
Interest paid to related parties $ 379 2,654 3,314
======== ======== ========
Interest paid to others $ 7,632 16,309 17,046
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
(Continued)
F-8
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
November 22, 1996, February 2, 1996, and January 27, 1995
(In thousands, except share data)
(1) Reorganization and Emergence from Chapter 11
--------------------------------------------
On December 16, 1996 (the "Effective Date"), Ithaca Industries, Inc. (the
"Company") emerged from Chapter 11 of the United States Bankruptcy Code
("Chapter 11") pursuant to the Prepackaged Chapter 11 Plan of
Reorganization (the "Plan"), which was confirmed by The Bankruptcy Court
on November 22, 1996 (the "Confirmation Date"). The Plan implemented a
financial restructuring whereby approximately $125,000 ($124,625, net of
original issue discount) of previously outstanding Senior Subordinated
Notes (the "Notes") and related accrued interest, which were subject to
settlement under the Plan were exchanged for approximately 10,000,000
shares of new common stock (the "Common Stock") issued by the Company in
connection with the reorganization. Additionally, the Company's Credit
Agreement was amended and restructured. The restructured long-term debt
outstanding after consummation of the Plan is secured by substantially
all of the assets of the Company. All previously outstanding common stock
was canceled, annulled, and extinguished.
Pursuant to the Plan, the Company's certificate of incorporation and
bylaws were amended and restated in their entirety by the Amended and
Restated Certificate of Incorporation (the "Certificate") and the Amended
and Restated Bylaws (the "Bylaws") to provide, among other things, for
the restructuring of the Company's equity capitalization under the Plan.
As of the Effective Date of the Plan, the Company was authorized to issue
27,500,000 of the Company's $.01 par value, common stock of which an
aggregate of 10,000,000 shares was issued and distributed pursuant to the
Plan. An aggregate of 928,962 shares of common stock was reserved for
issuance pursuant to the 1996 Long-Term Stock Incentive Plan (the "Stock
Plan").
The Company's Certificate authorized 2,500,000 shares of preferred stock
with $.01 par value. The Board of Directors is authorized, upon
two-thirds affirmative vote, to issue preferred stock subject to
restrictions contained in the Amended and Restated Credit Agreement
("Amended Agreement" ), in one or more series, for any purpose permitted
by law, and is authorized to fix the designations, power, rights, and
preferences of the preferred stock. The Certificate provides that the
Company will not issue any nonvoting equity securities to the extent
prohibited by The Bankruptcy Code. The Certificate may be amended in
accordance with applicable law to remove the prohibition.
During fiscal 1996, the Company incurred covenant defaults under the
Credit Agreement. In addition, the Company did not make the December 15,
1995 and June 15, 1996 scheduled interest payments due on the Notes or
scheduled quarterly principal payments due under the Credit Agreement on
January 31, April 30, and July 31, 1996. Gross profits decreased
significantly during fiscal 1996 compared to fiscal 1995 due to lower
sales volume and manufacturing cost increases which were not offset by
price increases. As a result of these factors, on October 8, 1996 (the
"Petition Date"), the Company filed a voluntary petition for relief under
Chapter 11 in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). The Company filed the Plan to
consummate a financial restructuring that had been negotiated by the
Company, its Noteholders and parties to the Credit Agreement, and the
sole shareholder of the Company's outstanding stock. The Company was
operated as a debtor-in-possession subject to the supervision of the
Bankruptcy Court until December 16, 1996.
(Continued)
F-9
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data)
The Company continued to pay its trade creditors and other debt
obligations in the ordinary course of business.
Fresh-Start Reporting
---------------------
For financial reporting purposes, the effective date of the Company's
emergence from Chapter 11 was assumed to be November 22, 1996. In
accordance with AICPA Statement of Position 90-7, FINANCIAL REPORTING BY
ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE ("SOP 90-7"), the
Company adopted "fresh-start reporting," including the terms of the
Amended Agreement and reflected the effects of such adoption in the
financial statements as of November 22, 1996. The Post-Confirmation
balance sheet has been separated from the Preconfirmation balance sheet
and prior period amounts by a bold line to signify that the balance sheet
is that of a new reporting entry and has been prepared on a basis not
comparable to prior periods.
The reorganization value of the Company was determined by management
utilizing several factors and various valuation methods, including
discounted cash flows, cash flow multiple ratios, and other applicable
ratios. Reorganization value generally approximates fair value of the
entity before considering liabilities and approximates the amount a
willing buyer would pay for the assets of the entity after the
restructuring. Based on information from parties-in-interest and from the
Company's financial advisors, the total reorganization value of the
Company was estimated to be $155,993.
The estimated reorganization value of the Company was allocated to
specific asset categories as follows:
Current assets $ 118,858
Property and equipment 35,647
Other noncurrent assets 1,488
-------------
$ 155,993
=============
The primary valuation methodology employed to determine the
reorganization value of the Company was a net present value approach. The
estimated unleveraged reorganization value of the Company was computed
using a discounted cash flow analysis. This analysis included the present
values of (i) the discounted projected free cash flows of the Company
through fiscal year 1999, (ii) the discounted terminal value of the
Company at the end of that 1999 fiscal year, and (iii) projected excess
cash on hand at the Confirmation Date. For purposes of discounting
values, a discount rate of 9.5% was utilized throughout the analysis. The
terminal value was based upon a 3.5% growth factor in perpetuity with a
6% terminal discount rate.
All payments and distributions required by the Plan to be made by the
Company with respect to prepetition claims against the Company have been
made or provided for in the accompanying consolidated balance sheet at
November 22, 1996, and no further material recourse to the Company is
available to any person with respect to any prepetition claims.
(Continued)
F-10
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data)
The effect of the Plan and the implementation of Fresh-Start Reporting
for the Company's consolidated balance sheet as of November 22, 1996 was
as follows:
<TABLE>
<CAPTION>
Pre-Fresh Start Adjustments Fresh Start
balance sheet to record the balance sheet
November 22, Plan at Fair value November 22,
1996 confirmation(a) adjustments(b) 1996
---- --------------- -------------- ----
<S> <C> <C> <C> <C>
Cash $ 1,329 -- -- 1,329
Other current assets 117,802 (13,549) 13,276 117,529
Property, plant, and equipment 139,026 -- (103,379) 35,647
Accumulated depreciation (89,876) -- 89,876 --
--------- --------- --------- ---------
Net property, plant, and equipment 49,150 -- (13,503) 35,647
--------- --------- --------- ---------
Other long-term assets 1,035 -- -- 1,035
Other intangible assets 3,042 (2,589) -- 453
--------- --------- --------- ---------
$ 172,358 (16,138) (227) 155,993
========= ========= ========= =========
Bank Credit Agreements $ 202,016 (201,881) -- 135
Other current liabilities 55,847 (8,723) (3,992) 43,132
Long-term debt -- 77,255 -- 77,255
Noncurrent deferred income taxes 6,651 5,198 1,506 13,355
Stockholders' equity (deficit) (92,156) 112,013 2,259 (c) 22,116
--------- --------- --------- ---------
$ 172,358 (16,138) (227) 155,993
========= ========= ========= =========
</TABLE>
(a) To record the forgiveness of the notes, the issuance of common stock, and
the related income tax effects pursuant to the Plan.
(b) To record the adjustments to assets and liabilities to their estimated
fair value.
(c) Net adjustment to equity consists of net fair value adjustments of $3,765
less related income tax effects of $1,506.
The Company adopted Fresh-Start Reporting because holders of existing
voting shares before filing and confirmation of the Plan received less
than 50% of the voting shares of the emerging entity and its
reorganization value was less than its post-petition liabilities and
allowed claims. The adjustments to reflect the consummation of the Plan,
include the pretax gain on debt discharge of $90,980 (principally accrued
interest and principal of the notes) and the adjustment of $3,765 to
record assets and liabilities at their estimated fair values, have been
reflected in the accompanying consolidated statements of operations for
the 42-week period ended November 22, 1996. Deferred taxes of
approximately $23,056 were provided as a result of the debt discharge and
the resulting reductions to the tax bases of assets in accordance with
Section 108 of the Internal Revenue Code.
(2) Summary of Significant Accounting Policies and Practices
--------------------------------------------------------
(a) Description of Business and Basis of Presentation
-------------------------------------------------
The Company is a designer, marketer, and manufacturer of
private-label women's and girls' underwear, men's and boys'
underwear, hosiery, and T-shirt products, operating distribution
and manufacturing facilities in the Southeastern United States and
off-shore manufacturing facilities in Central America.
Additionally, the Company sources some of its production from
various contractors worldwide. The Company markets its products
through a wide range of national and regional retail distribution
channels, including discount stores, department stores, specialty
stores, drug stores, and supermarkets. The majority of the
Company's raw materials are readily available and are not dependent
upon a single supplier.
(Continued)
F-11
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data)
(b) Principles of Consolidation
---------------------------
These consolidated financial statements include the financial
statements of Ithaca Industries, Inc. and its wholly owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated.
(c) Cash and Cash Equivalents
-------------------------
Cash balances at year-end reflect short-term interest-bearing
deposits, net of outstanding checks. Cash balances also include
overdraft amounts for which the right of offset with other accounts
exists. For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be cash equivalents.
Cash and cash equivalents include interest-earning deposits of
$1,329, $10,369, and $7,531 at November 22, 1996, February 2, 1996,
and January 27, 1995, respectively.
(d) Inventories
-----------
Inventories consist of raw materials, work in process, and finished
goods relating to manufacturing operations and are valued at the
lower of cost or market with cost determined using the last-in,
first-out (LIFO) basis.
(e) Property, Plant, and Equipment
------------------------------
Property, plant, and equipment are stated at cost. Upon emergence
from Chapter 11, the Company adopted Fresh-Start Reporting
effective November 22, 1996 and, accordingly, all property, plant,
and equipment was restated to its estimated fair value and
historical accumulated depreciation was eliminated. Depreciation
and amortization expense of plant and equipment is calculated using
the straight-line method over the estimated remaining useful lives
of the assets as follows:
Buildings 25 - 30 years
Property improvements 5 - 10 years
Machinery and equipment 3 - 8 years
Vehicles 3 years
(f) Intangibles
-----------
Patents, license agreements, and leasehold intangible assets are
amortized over their respective remaining terms. On an ongoing
basis, management reviews the valuation and amortization of
intangible assets. As part of the review, management estimates fair
values based upon recent historical results and expected future
results, taking into consideration events or circumstances which
might affect their fair values. As of November 22, 1996, management
does not consider the unamortized balances of the intangible assets
as being impaired.
(Continued)
F-12
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data)
Deferred debt expenses are amortized over the lives of the loans to
which the expenses relate. As a result of the adoption of
Fresh-Start Reporting and the related restructuring of the Credit
Agreement, the unamortized balance of deferred debt expense was
included in reorganization expense for the 42-week period ended
November 22, 1996.
(g) Revenue Recognition
-------------------
Sales are recognized at the time the related goods are shipped.
(h) Income Taxes
------------
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
Prior to its emergence from Chapter 11, the Company was included in
an affiliated group and the Company's Federal taxable income was
included in such group's consolidated tax return. Pursuant to a tax
sharing agreement with the Parent, the Company recognized income
tax expense or benefit as if it were to file separate Federal,
state, or local income tax returns. The Company entered into the
Intercompany Compromise and Settlement Agreement which included a
provision that terminated the tax sharing agreement effective
November 22, 1996.
(i) Stock Option Plan
-----------------
Effective November 22, 1996 with the adoption of its stock option
plan, the Company elected to account for its stock option plan in
accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and related interpretations. As such, compensation expense would be
recorded on the date of grant only if the current market price of
the underlying stock exceeded the exercise price. On November 22,
1996, the Company adopted Statement of Financial Accounting
Standards No. 123 (SFAS No. 123), ACCOUNTING FOR STOCK-BASED
COMPENSATION, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the
date of grant. Alternatively, SFAS No. 123 also allows entities to
continue to apply the provisions of APB Opinion No. 25 and provide
pro forma net income and pro forma earnings per share disclosures
for employee stock option grants made in future years as if the
fair-value based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of
SFAS No. 123.
(Continued)
F-13
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data)
(j) Fiscal Year
-----------
The Company's fiscal year ends on the last Saturday closest to the
end of January. The results of operations for November 22, 1996
reflect a 42-week period. The results of operations for 1996
reflect a 53-week period (fiscal 1996), and the results for 1995
reflect a 52-week period (fiscal 1995).
(k) Reclassifications
-----------------
Certain reclassifications were made to February 2, 1996 and January
27, 1995 amounts to conform to November 22, 1996 classifications.
(l) Use of Estimates
----------------
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosure of contingent assets and liabilities to prepare
these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
(3) Inventories
-----------
Inventories consist of the following:
<TABLE>
<CAPTION>
Post-confirmation Preconfirmation
November 22, February 2, January 27,
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
Raw materials and supplies $ 16,375 24,676 34,622
Work-in-process 15,937 16,882 17,606
Finished goods 42,030 53,962 52,997
------ ------ ------
74,342 95,520 105,225
Less excess of FIFO over LIFO cost - 10,474 8,108
Less inventory included in assets held for
disposition, net (note 13) 5,636 28,967 -
----- ------ -
$ 68,706 56,079 97,117
====== ====== ======
</TABLE>
Upon adoption of Fresh-Start Reporting at November 22, 1996, the excess
of first-in, first-out (FIFO) over LIFO cost is equal to zero as
inventories were restated to their fair value. The adjustment has been
included in fair value adjustments in note 1.
During the period ended November 22, 1996 and the year ended February 2,
1996, LIFO inventory layers were liquidated. This reduction resulted in
charging lower inventory costs prevailing in previous years to cost of
goods sold, thus reducing cost of sales by $1,367 and $271, respectively,
which is lower than the amount that would have resulted from replacing
the liquidated inventory at end of year prices.
(Continued)
F-14
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data)
(4) Property, Plant, and Equipment
------------------------------
Property, plant, and equipment consist of the following:
<TABLE>
<CAPTION>
Post-confirmation Preconfirmation
November 22, February 2, January 27,
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
Land $ 1,306 2,936 2,410
Buildings and improvements 18,295 55,838 45,976
Machinery and equipment 15,580 85,821 81,993
Vehicles 104 428 460
Construction in progress 566 241 2,588
-------- -------- --------
35,851 145,264 133,427
Less accumulated depreciation and amortization -- 84,941 78,038
Less property, plant, and equipment included in
assets held for disposition (note 12) 204 6,028 --
-------- -------- --------
$ 35,647 54,295 55,389
======== ======== ========
</TABLE>
(5) Intangible Assets
-----------------
Intangible assets consist of the following (note 13):
<TABLE>
<CAPTION>
Gross Net
amount Amortization amount
------ ------------ ------
<S> <C> <C> <C>
November 22, 1996 - Post-Confirmation $ 453 -- 453
======= ======= =======
February 2, 1996:
Patents $11,860 10,955 905
Value of work force in place 7,946 7,946 --
Licensing agreement 3,669 3,669 --
------- ------- -------
$23,475 22,570 905
======= ======= =======
January 27, 1995:
Patents $11,860 10,412 1,448
Value of work force in place 7,946 6,096 1,850
Licensing agreement 3,669 2,508 1,161
------- ------- -------
$23,475 19,016 4,459
======= ======= =======
</TABLE>
(Continued)
F-15
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data)
(6) Long-Term Debt
--------------
A summary of long-term debt follows:
<TABLE>
<CAPTION>
Post-confirmation Preconfirmation
November 22, February 2, January 27,
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
Borrowings under credit agreements:
Revolving credit facility:
Base rate loans $ 22,185 -- --
LIBOR-based loans -- 37,000 --
Term loans:
Base rate loans 55,000 -- --
LIBOR-based loans -- 77,771 96,072
Senior Subordinated Notes, due 2002 with interest
payable quarterly at 11.125%, net of unamortized
original issue discount of $375, $427, and $489 -- 124,573 124,511
9.0% to 10.5% notes, maturing through 1998 205 714 1,875
-------- -------- --------
77,390 240,058 222,458
Less current installments of long-term debt 135 240,058 639
-------- -------- --------
$ 77,255 -- 221,819
======== ======== ========
</TABLE>
Pursuant to the Plan, the Credit Agreement was amended and restated and
the Notes were canceled and exchanged for all of the Company's
outstanding capital stock on the Effective Date. The following is a
summary description of the Amended and Restated Credit Agreement
("Amended Agreement") issued on the Effective Date.
REVOLVING CREDIT COMMITMENT
The total Revolving Credit Commitment ("Revolving Loan") under the
Amended Agreement is $77,200 which is inclusive of (i) any outstanding
unpaid balance of prepetition revolving credit loans and post-petition
debtor-in-possession financing, (ii) $22,185 transferred from the
Preconfirmation term loan balance, and (iii) a $25,000 letter of credit
subfacility. For a 30-day period beginning in May and December of each
year, commitments under the revolving loan are reduced to $63 million and
$68 million, respectively.
The total outstanding Revolving Loan including letters of credit may not
exceed a borrowing base determined by specified percentages of eligible
accounts receivable and inventory as defined by the Amended Agreement. A
commitment fee of 0.5% of the unused Revolving Loan is due each year. A
letter of credit fee of 2.5% per annum of the daily stated amount of all
letters of credit and facing fees of 1/4 of 1% per annum of the daily
stated amount of all standby and trade letters of credit is payable
quarterly in arrears. The Revolving Credit Commitment expires August 31,
1999.
At November 22, 1996, there was $22,185 outstanding under the Revolving
Loan provisions and $8,997 issued under the trade and standby letters of
credit provision of the Amended Agreement. The total availability as
calculated under the provisions of the Amended Agreement at November 22,
1996 was $41,347.
(Continued)
F-16
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data)
TERM LOAN COMMITMENT
The total Term Loan Commitment ("Term Loan") under the Amended Agreement
is $55,000 which is payable in yearly installments of $2,000 on January
31, 1997; $5,000 on January 31, 1998; $4,000 on January 31, 1999; and
$44,000 on August 31, 1999. At November 22, 1996, $2,000 of the
outstanding term loan balance has been excluded from current installments
of long-term debt as this amount could be repaid using the Revolving
Loan.
The Term Loan contains mandatory prepayment provisions which require that
certain excess cash flows, proceeds from the sale of discontinued
operations, other proceeds outside the ordinary course of business, and
tax refunds as defined must be used to pay down the outstanding term loan
balance in reverse order of maturity. Once repaid, Term Loans may not be
reborrowed. The Term Loan Commitment expires August 31, 1999.
At November 22, 1996, there was $55,000 outstanding under the Term Loan
provisions of the Amended Agreement.
Except in certain limited circumstances, the Revolving Loan and the Term
Loan will bear interest at 150 basis points above the base rate which is
defined as the higher of (i) 1/2 of 1% in excess of the adjusted
certificate of deposit rate, (ii) the prime lending rate, and (iii) 1/2
of 1% in excess of the overnight federal funds rate. Interest is due in
arrears on the last day of each month. The interest rate is subject to
cumulative increases in the event the Company (i) does not achieve
certain earnings before interest taxes and depreciation (EBITDA) targets
or (ii) fails to make annual principal payments, other than regularly
scheduled term loan amortization payments, of at least $5,000. In
addition, default interest is payable at the base rate plus 2%.
Borrowings under the Amended Agreement are secured by a lien against all
assets of the Company and subsidiaries. The Amended Agreement contains
certain financial and nonfinancial covenants. As of November 22, 1996,
the Company was in compliance with all such covenants.
Prior to its amendment and restatement, the Credit Agreement had a
revolving credit facility (the "Facility") which provided for
availability of $65 million until October 31, 1998. The entire amount
outstanding under the Credit Agreement was to mature on October 31, 1998.
Advances under the Facility were not to exceed a borrowing base
determined by specific percentages of eligible accounts receivable and
inventories (each as defined in the Credit Agreement). A commitment fee
of 0.5% per annum was required on all unused amounts under the Facility.
The Company had a rate protection agreement which limited the base
interest rate payable on the first $25 million outstanding term loan
principal to 7.5% through December 21, 1995. At February 2, 1996,
installments totaling approximately $240,058 were classified as current
as these amounts were in default under the Credit Agreement.
(Continued)
F-17
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data)
Borrowings under the Credit Agreement, at the Company's option, were
either base rate loans or LIBOR (London Interbank Offered Rate) based
loans. Base rate loans bear interest at the lenders' prime rate (8.25% at
February 2, 1996 and November 22, 1996) of interest plus 1.5%.
LIBOR-based loans bear interest at the LIBOR rate of 5.375% at February
2, 1996 plus 2.75%.
Borrowings under the Credit Agreement were secured by a pledge of all
securities owned by the Company and a security interest in all the
Company's tangible and intangible assets.
Interest on the Notes was payable semiannually on each June 15 and
December 15, commencing December 15, 1992. Prior to the conversion of the
Notes to equity interests pursuant to the Plan, approximately $24,625 and
$24,573 of the Notes were held by related parties at November 22, 1996
and February 2, 1996, respectively, and are included in related party
liabilities on the accompanying consolidated balance sheets.
(7) Income Taxes
------------
Components of income tax (expense) benefit consist of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
42-week period ended November 22, 1996:
Federal $ 3,113 (7,042) (3,929)
State 1,191 (1,480) (289)
----- ------ ----
$ 4,304 (8,522) (4,218)
===== ====== ======
Year ended February 2, 1996:
Federal $ 10,302 13,639 23,941
State 1,369 1,847 3,216
----- ----- -----
$ 11,671 15,486 27,157
====== ====== ======
Year ended January 27, 1995:
Federal $ (4,751) 167 (4,584)
State (1,106) 37 (1,069)
----- ----- -----
$ (5,857) 204 (5,653)
====== ====== ======
</TABLE>
(Continued)
F-18
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data)
Income tax benefit (expense) for the 42-week period ended November 22, 1996 and
the years ended February 2, 1996 and January 27, 1995 amounted to $4,218,
$(27,157), and $5,653, an effective rate of 253.0%, 35.3%, and 42.9%,
respectively, which differs from the "expected" income tax expense (computed by
applying the U.S. Federal corporate income tax rate of 35% for the 42-week
period ended November 22, 1996, fiscal 1996, and fiscal 1995 to income (loss)
before income taxes and extraordinary item) as follows:
<TABLE>
<CAPTION>
42-week
period ended Years ended
November 22, February 2, January 27,
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
Computed "expected" income tax benefit (expense) $ (583) 26,881 (4,610)
State and local taxes, net of Federal
income tax benefit (45) 2,090 (695)
Amortization of intangible assets - (1,632) (64)
Nondeductible expenses relating to bankruptcy (744) -- --
Provision for resolution of tax audits and adjustments
to refund receivable (2,727) -- --
Other, net (119) (182) (284)
-------- -------- --------
$ (4,218) 27,157 (5,653)
======== ======== ========
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
November 22, 1996, February 2, 1996, and January 27, 1995 are presented
below:
<TABLE>
<CAPTION>
Post-confirmation Preconfirmation
November 22, February 2, January 27,
1996 1996 1995
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets:
Nondeductible accruals $ 3,927 9,036 3,050
Restructuring related reserves and write-downs
of inventory, receivables, and property, plant,
and equipment 2,199 9,049 --
Inventory write-downs 1,387 718 393
Interest on IRS settlement -- -- 173
Accounts receivable reserves and allowances -- 291 353
State taxes -- 749 613
Other -- 369 354
-------- -------- --------
Deferred tax assets 7,513 20,212 4,936
-------- -------- --------
Deferred tax liabilities:
Plant and equipment (14,258) (7,204) (7,414)
Accounts receivable (2,914) -- --
Inventory (7,989) -- --
Other (922) -- --
-------- -------- --------
Deferred tax liabilities (26,083) (7,204) (7,414)
-------- -------- --------
Net deferred tax asset (liability) $(18,570) 13,008 (2,478)
======== ======== ========
</TABLE>
In fiscal 1993, the Company paid approximately $1,600 in partial
settlement of an Internal Revenue Service audit which proposed the
disallowance of amortization of certain intangible assets. In fiscal
1995, the audit was settled with a final payment of approximately $1,600.
(Continued)
F-19
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data)
(8) Related Party Transactions
--------------------------
During the period ended November 22, 1996 and the years ended February 2,
1996 and January 27, 1995, the Company engaged in transactions with
related parties, including reimbursement for (income) expenses incurred
on behalf of the former Parent company of approximately $(299), $325, and
$2,390, respectively, with a balance receivable of $305, $604, and $926
at November 22, 1996; February 2, 1996; and January 27, 1995,
respectively.
The Company also licensed certain trademarks from an affiliate under
terms and conditions consistent within the industry. Royalties paid to
the affiliate totaled $175 in fiscal 1995. No royalty payments were made
to the affiliate in fiscal 1996 or the 42-week period ended November 22,
1996.
In connection with the Chapter 11 filing, the equity interests of the
former Parent were canceled, extinguished, and annulled. Additionally,
the Company entered into the Intercompany Compromise and Settlement
Agreement as of the Effective Date which included a provision to
terminate the license agreement.
(9) Credit Concentrations
---------------------
Most of the Company's sales are concentrated with national retailers. For
the 42-week period ended November 22, 1996, one customer individually
accounted for 47% of net sales. For the years ended February 2, 1996 and
January 27, 1995, two customers accounted for 42% and 11% and 44% and 13%
of net sales, respectively.
At November 22, 1996, February 2, 1996, and January 27, 1995, the Company
had $1,938, $2,935, and $4,634, respectively, of trade accounts
receivable due from customers that are believed to be moderate to high
credit risks. These accounts have been factored under a nonrecourse
non-notification factoring arrangement which reduces the credit risk to
the Company subject to performance by the factor. Management anticipates
the factor will be able to fulfill its obligations if required.
(10) Fair Value of Financial Instruments
-----------------------------------
At November 22, 1996, the fair value of the Company's debt is equal to
the carrying amount as it was subject to restructuring. At February 2,
1996 and January 27, 1995, the fair value of the Company's long-term debt
is estimated based on the most recent trading prices offered for the
Company's debt. The carrying amounts and estimated fair values of the
Company's long-term debt are as follows:
<TABLE>
<CAPTION>
Preconfirmation
--------------------------------------------
February 2, 1996 January 27, 1995
---------------------- -------------------
Carrying Fair Carrying Fair
amount value amount value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Long-term debt:
Revolving credit facility $ (37,000) (37,000) - -
Term loans (77,771) (72,716) (96,072) (96,072)
Senior subordinated notes (124,573) (56,250) (124,511) (117,500)
Other long-term borrowings (714) (714) (1,875) (1,875)
</TABLE>
(Continued)
F-20
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data)
The carrying value of all other financial instruments in the consolidated
balance sheets equals or approximates their fair value.
(11) Commitments and Other Matters
-----------------------------
The Company leases certain equipment and warehousing facilities under
operating leases expiring at various dates through 2010. Total rent
expense under these leases amounted to approximately $3,881, $3,414, and
$3,798 for the period ended November 22, 1996 and the years ended
February 2, 1996 and January 27, 1995, respectively. In addition, the
Company is responsible for payment of applicable real estate taxes,
insurance, and maintenance expenses.
At November 22, 1996, future minimum annual rentals under these leases
are as follows:
Fiscal years ending in:
- -----------------------
1997 $ 4,594
1998 2,769
1999 2,220
2000 1,479
2001 1,008
Thereafter 1,014
-----------
$ 13,084
===========
The Company has royalty agreements for certain licensed products. The
total royalty expense under these agreements amounted to approximately
$479, $2,541, and $2,644 for the 42-week period ended November 22, 1996
and the years ended February 2, 1996 and January 27, 1995, respectively.
At November 22, 1996, the future minimum royalty expense for the fiscal
year ending in 1997 will be approximately $642.
(12) Employee Benefit Plans
----------------------
The Company has an incentive compensation plan under which certain
employees may receive discretionary bonus awards from a bonus pool
calculated based on a specified percentage of operating income, as
defined. The Board of Directors may override the calculations with
additional bonus amounts at its discretion. Bonus amounts expensed under
these arrangements for the year ended January 27, 1995 was approximately
$1,310. No bonuses were accrued for the year ended February 2, 1996.
Bonus amounts expensed for the 42-week period ended November 22, 1996
were $1,740.
On the Effective Date, the Company adopted a stock option plan pursuant
to which the Company's Board of Directors may grant stock options to
officers and key employees. The Stock Plan authorizes grants of options
of up to 928,962 shares of authorized but unissued common stock. Stock
options may be granted at an exercise price equal to or less than fair
market value as stipulated in the applicable award agreement. Excluding a
grant of 109,290 options to certain outside consultants, 50% of the total
options available have three-year terms and one-third of these options
vest and become fully exercisable annually.
(Continued)
F-21
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data)
The remaining 50% of the options available are performance based and are
awarded based upon the achievement of certain performance targets for
each of the next three years. Up to one-third of the total performance
options granted are eligible for vesting annually. At November 22, 1996,
no stock options had been granted.
The Company maintains a medical benefits plan and trust which covers
substantially all employees of the Company. The plan is funded currently
by contributions from the Company and employees based on anticipated
claim costs. Company contributions to the plan were $5,604, $8,585, and
$9,544 for the 42-week period ended November 22, 1996 and the years ended
February 2, 1996 and January 27, 1995, respectively. Net assets available
for plan benefits held in trust were $735 at November 22, 1996; $605 at
February 2, 1996; and $78 at January 27, 1995.
The Company sponsors a defined contribution retirement plan for its
employees. Company contributions are based upon a percentage of the
employees' contributions. Contributions and administrative expenses
incurred by the Company on behalf of the plan totaled approximately $319,
$456, and $473 for the 42-week period ended November 22, 1996 and the
years ended February 2, 1996 and January 27, 1995, respectively.
(13) Restructuring
-------------
In the third quarter of fiscal 1996, in response to operating losses
resulting from decreasing sales as well as high manufacturing and
distribution costs, the Company initiated a restructuring plan to improve
operating performance and reduce costs. In connection with this plan, the
Company recorded charges totaling $51,591 ($33,379 after related income
tax benefits), of which $14,153 ($9,157 net of income tax benefits), and
$37,438 ($24,222 net of income tax benefits) were charged to operating
expenses in the third and fourth quarters of fiscal 1996, respectively.
Such charges related to (i) the closing and consolidation of certain
manufacturing and distribution facilities; (ii) the write-down of certain
equipment associated with closed facilities to net realizable value;
(iii) the write-off and establishment of reserves to reduce inventory and
accounts receivable to estimated net realizable value for amounts
associated with customers, product lines, and specific products that the
Company elected to discontinue manufacturing and distributing; (iv)
severance and other costs associated with plant closures and overhead
reductions resulting from a total domestic work force reduction in fiscal
1996 and the 42-week period ended November 22, 1996 of approximately two
thousand six hundred employees, of which approximately one thousand one
hundred and one thousand five hundred had occurred during fiscal 1996 and
the 42-week period ended November 22, 1996, respectively; and (v) the
write-off of certain impaired intangible assets, principally deferred
debt expense of $2,672 and goodwill of $2,395. As of November 22, 1996
and February 2, 1996, assets held for disposition consist of the
following:
<TABLE>
<CAPTION>
Post-confirmation Preconfirmation
November 22, February 2,
1997 1996
---- ----
<S> <C> <C>
Trade accounts receivable, net of estimated reserve of $2,176
at February 2, 1996 $ - 3,824
Property, plant, and equipment, net of estimated reserve of $4,228
at February 2, 1996 204 1,800
Inventory, net of obsolescence reserve of $17,452 and allocated
LIFO reserve of $1,033 at February 2, 1996 2,541 11,515
----- ------
$ 2,745 17,139
===== ======
</TABLE>
(Continued)
F-22
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In thousands, except share data)
The reserves reflect management estimates of the recoverability of the
related assets.
(14) Quarterly Financial Data (Unaudited)
------------------------------------
<TABLE>
<CAPTION>
First Second Third Fourth
quarter quarter quarter quarter/a/
------- ------- ------- ----------
<S> <C> <C> <C> <C>
42-week period ended November 22, 1996:
Net sales $ 97,619 78,883 98,624 22,477
Gross profit 12,691 11,707 13,367 4,295
Provision for asset write-
downs and restructuring -- (2,964) -- --
Net income (loss) (1,302) 641 (1,303) 67,336
Year ended 1996:
Net sales $ 93,661 101,688 111,521 91,949
Gross profit 16,856 13,664 12,227 2,135
Provision for asset write-
downs and restructuring -- -- (14,153) (37,438)
Net income (loss) 110 (1,907) (11,840) (36,007)
Year ended 1995:
Net sales $ 104,632 101,523 115,192 93,453
Gross profit 18,580 18,188 20,837 15,254
Net income 2,000 1,977 3,206 330
</TABLE>
/a/Results reflect three-week period ended November 22, 1996.
F-23
<PAGE>
================================================================================
NO DEALER, SALESPERSON, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER
TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
---------------------------
TABLE OF CONTENTS
Page
----
Additional Information.................................................. 3
Prospectus Summary...................................................... 4
The Company............................................................. 4
Risk Factors............................................................ 7
Use of Proceeds......................................................... 11
Dividend Policy......................................................... 11
Market for the Common Stock ............................................ 11
Capitalization.......................................................... 13
Unaudited Pro Forma Financial
Information ........................................................ 14
Selected Financial Data................................................. 16
Management's Discussion
Analysis of Financial Condition
and Results of Operations............................................ 18
Business................................................................ 24
Directors and Management................................................ 28
Description of Capital Stock............................................ 38
Selling Stockholders.................................................... 42
Plan of Distribution.................................................... 44
Legal Matters........................................................... 45
Experts................................................................. 45
Index to Financial Statements........................................... F-1
---------------------------
UNTIL JULY 1, 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS.
================================================================================
10,109,290 SHARES
ITHACA INDUSTRIES, INC.
COMMON STOCK
-------------------
PROSPECTUS
-------------------
April 3, 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses in connection with the
sale and distribution of the Shares being registered, other than underwriting
discounts and commissions. All of the amounts shown are estimated except the
Commission registration fee and NASD filing fee.
Commission registration fee........................................ 100
Legal fees and expenses............................................ 50,000
Accounting fees and expenses....................................... 30,000
Miscellaneous...................................................... 10,000
----------
Total........................................................... $ 90,100
==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the DGCL provides that a corporation may indemnify
directors and officers as well as other employees and individuals against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement in connection with specified actions, suits or proceedings, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the corporation (a "Derivative Action")), if the relevant party
acted in good faith and in a manner they reasonably believed to be in or not
opposed to the best interests of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe their conduct
was unlawful. A similar standard is applicable in the case of Derivative
Actions, except that indemnification only extends to expenses (including
attorneys' fees) incurred in connection with the defense or settlement of such
actions, and the statute requires court approval before there can be any
indemnification where the person seeking indemnification had been found liable
to the corporation. The Statute provides that it is not exclusive of other
indemnification that may be granted by a corporation's charter, by-laws,
disinterested director vote, stockholder vote, agreement or otherwise.
Section 8.1 of the Certificate and Article 8.1 of the By-Laws of the
registrant calls for indemnification to the full extent permitted under Delaware
law as from time to time in effect. Subject to any restrictions imposed by
Delaware law, the By-Laws provide a right to indemnification for expenses
(including attorneys' fees and disbursements, judgments, fines, excise taxes,
penalties, amounts paid in settlement, charges and costs) actually and
reasonably incurred or suffered by any person in connection with any actual or
threatened action, suit or proceeding, whether civil, criminal, administrative
or investigative (including, to the extent permitted by law, any Derivative
Action) by reason of the fact that such person is or was serving as a director
or officer of the registrant or that, being or having been a director or officer
or an employee of the registrant, such person is or was serving at the request
of the registrant as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, including an
employee benefit plan. The By-Laws also provide that the registrant may, by
action of its Board of Directors, provide indemnification to its employees and
agents with the same scope and effect as the foregoing indemnification of
directors and officers.
II-1
<PAGE>
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the laws of Delaware, the Certificate and Bylaws, or
otherwise, the Registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person of the
Registrant in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SELLING STOCKHOLDERS.
10,000,000 Shares of Common Stock were issued in reliance upon the
exemption provided by Section 4(2) of the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE (Defined terms are used
herein as defined in the Prospectus.)
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
----------- -----------------------
<S> <C>
2.1* Plan of Reorganization (incorporated by reference to Exhibit A of
Exhibit 2.1 to the Company's Form 8-K, dated September 3, 1996.)
2.2* Modification of the Plan of Reorganization
2.3* Second Modification of the Plan of Reorganization
3.1* Amended and Restated Certificate of Incorporation
3.2* By-Laws (incorporated by reference to Exhibit F of Exhibit 2.1 to the
Company's Form 8-K, dated September 3, 1996.)
4* Registration Rights Agreement (incorporated by
reference to Exhibit H of Exhibit 2.1 to the
Company's Form 8-K, dated September 3, 1996.)
5* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison re: legality
10.1* Credit Agreement (Exhibit P of which is incorporated by reference to
Exhibit 99.1 to the Company's Form 10-K, dated May 17, 1996 and
Exhibit Q of which is included in item 2.1
10.2* LTIP (incorporated by reference to Exhibit I of Exhibit 2.1 to the
Company's Form 8-K, dated September 3, 1996.)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
----------- -----------------------
<S> <C>
10.3* Management Agreement
10.4* Employment Agreement of Jim D. Waller
21* List of Subsidiaries of the Company
23.1* Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in
item 5)
23.2** Consent of KPMG Peat Marwick LLP
27* Financial Data Schedule for the 42-week period ended November 22,
1996 and for the fiscal year ended February 2, 1996
</TABLE>
- -----------------------
* Previously filed exhibit
** Replaces a previously filed exhibit
- -----------
FINANCIAL STATEMENT SCHEDULE:
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Schedule II Valuation and Qualifying Accounts--42-week period ended S-1
November 22, 1996 - Preconfirmation and years ended February 2,
1996 and January 27, 1995. (Previously filed)
</TABLE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes:
1. To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the Prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or
II-3
<PAGE>
high end of the estimated maximum offering range may be reflected in the
form of prospectus filed with the Commission pursuant to Rule 424(b),
if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
Registration Statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
2. That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 1 to its Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in
Wilkesboro, North Carolina, on this 3rd day of April, 1997.
ITHACA INDUSTRIES, INC.
By: /s/Jim D. Waller
-----------------------
Jim D. Waller
Chief Executive Officer
and President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman, Chief April 3, 1997
- ---------------------------------- Executive Officer,
Jim D. Waller President and Director
*
- ----------------------------------
Walter J. Branson Director April 3, 1997
*
- ----------------------------------
Marvin B. Crow Director April 3, 1997
*
- ----------------------------------
Francis Goldwyn Director April 3, 1997
*
- ----------------------------------
Morton E. Handel Director April 3 , 1997
*
- ----------------------------------
David N. Weinstein Director April 3, 1997
*
- ----------------------------------
James A. Williams Director April 3, 1997
</TABLE>
* By: /s/Jim D. Waller
-----------------------------
Name: Jim D. Waller
Title: Attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibits
----------- -----------------------
<S> <C>
2.1* Plan of Reorganization (incorporated by reference to Exhibit A of
Exhibit 2.1 to the Company's Form 8-K, dated September 3, 1996.)
2.2* Modification of the Plan of Reorganization
2.3* Second Modification of the Plan of Reorganization
3.1* Amended and Restated Certificate of Incorporation
3.2* By-Laws (incorporated by reference to Exhibit F of Exhibit 2.1 to the
Company's Form 8-K, dated September 3, 1996.)
4* Registration Rights Agreement (incorporated by reference to
Exhibit H of Exhibit 2.1 to the Company's Form 8-K, dated
September 3, 1996.)
5* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison re: legality
10.1* Credit Agreement (Exhibit P of which is incorporated by reference to
Exhibit 99.1 to the Company's Form 10-K, dated May 17, 1996 and
Exhibit Q of which is included in item 2.1
10.2* LTIP (incorporated by reference to Exhibit I of Exhibit 2.1 to the
Company's Form 8-K, dated September 3, 1996.)
10.3* Management Agreement
10.4* Employment Agreement of Jim D. Waller
21* List of Subsidiaries of the Company
23.1* Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in
item 5)
23.2** Consent of KPMG Peat Marwick LLP
27* Financial Data Schedule for the 42-week period ended November 22,
1996 and for the fiscal year ended February 2, 1996
</TABLE>
- -----------------------
* Previously filed exhibit
** Replaces a previously filed exhibit
II-6
Exhibit 23.2
KPMG PEAT MARWICK LLP
303 PEACHTREE STREET
SUITE 2000
ATLANTA, GEORGIA 30308
The Board of Directors
Ithaca Industries, Inc.
The audits referred to in our report dated January 31, 1997, included the
related financial statement schedule for the 42-week period ended November 22,
1996 and for each of the years in the two-year period ended February 2, 1996,
included in the registration statement. These financial statement schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Our report dated January 31, 1997 contains an explanatory paragraph that states
that the Company emerged from bankruptcy and as of November 22, 1996, adopted
fresh-start reporting in accordance with the American Institute of Certified
Public Accountants Statement of Position 90-7, "Financial Reporting by Entities
in
Reorganization Under the Bankruptcy Code".
We consent to the use of our reports included herein and to the reference of our
firm under the heading "Experts" in the prospectus.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
April 3, 1997 /s/ KPMG PEAT MARWICK LLP
-------------------------
