SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number(s) 000-22385
-----------------------------------
ITHACA INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 56-1385842
- ------------------------------- ----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification number)
Highway 268 West, P.O. Box 620, Wilkesboro, NC 28697
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
(336) 667-5231
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(Registrant's telephone, including area code)
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(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past ninety days.
YES [X] NO [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES [X] NO [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the registrant's classes of common stock, as of the
latest practicable date. As of September 15, 1998, the registrant had 10,400,000
shares of common stock, par value $.01 per share outstanding.
<PAGE>
ITHACA INDUSTRIES, INC.
QUARTERLY REPORT
QUARTER ENDED AUGUST 1, 1998
INDEX
PART I. FINANCIAL INFORMATION Page
Item 1. Consolidated Balance Sheets - August 1, 1998 and January 31, 1998 3
Consolidated Statements of Operations - Thirteen Weeks Ended
August 1, 1998 and August 2, 1997 4
Consolidated Statements of Operations - Twenty-Six Weeks Ended 5
August 1, 1998 and August 2, 1997
Consolidated Statements of Cash Flows - Twenty-Six Weeks Ended 6
August 1, 1998 and August 2, 1997
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and 9
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings *
Item 2. Changes in Securities *
Item 3. Defaults upon Senior Securities *
Item 4. Submission of Matters to a Vote of Security Holders *
Item 5. Other Information *
Item 6. Exhibits and Reports on Form 8-K 13
Signature 14
* NO INFORMATION PROVIDED DUE TO INAPPLICABILITY OF ITEM
Page 2
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
August 1, 1998 January 31, 1998
-------------- ----------------
ASSETS
- ------
Current Assets:
Cash and Cash Equivalents $ 230 $ 680
Accounts Receivable - Net 34,114 21,561
Inventories (Note 2) 69,114 57,036
Prepaid Expenses and Other Current Assets 4,382 667
-------------- ----------------
Total Current Assets 107,840 79,944
Property, Plant and Equipment - Net 34,858 34,115
Other Assets 7,703 1,931
-------------- ----------------
Total Net Assets $ 150,401 $ 115,990
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current Installments of Long-Term Debt $ 414 $ 14
Accounts Payable 15,820 10,102
Accrued Payroll and Related Expenses 7,390 7,860
Accrued Restructuring Costs -0- 995
Other Accrued Expenses 2,892 1,387
Current Deferred Income Tax 4,424 4,424
Income Taxes Payable 3,404 3,667
-------------- ----------------
Total Current Liabilities 34,344 28,448
Long Term Debt - Related 783 20,036
Long Term Debt - Non Related 79,623 33,483
Deferred Income Taxes 13,315 13,128
-------------- ----------------
Total Liabilities 128,065 95,095
Stockholders' Equity:
Common Stock of $.01 Par Value 104 100
Additional Paid-In Capital 23,276 22,016
Accumulated Deficit (1,044) (1,221)
-------------- ----------------
Total Stockholders' Equity 22,336 20,895
Total Liabilities and Stockholders' Equity $ 150,401 $ 115,990
============== ================
Page 3
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Thirteen Weeks Ended
--------------------------------
August 1, 1998 August 2, 1997
-------------- --------------
Net Sales $ 67,249 $ 60,934
Cost of Sales 56,438 51,187
-------------- --------------
Gross Profit 10,811 9,747
Selling, General and Administrative Expenses 7,594 6,375
-------------- --------------
Operating Profit 3,217 3,372
Interest Expense, Related Parties 18 426
Interest Expense, Non-Related Parties - Net 2,182 1,339
Other Income - Net 90 127
-------------- --------------
Income Before Income Taxes 1,107 1,734
Income Tax Expense 324 729
-------------- --------------
Net Income $ 783 $ 1,005
============== ==============
Basic and Dilutive Net Income Per Common Share $ 0.08 $ 0.10
============== ==============
Weighted Average Common Shares Outstanding 10,400,000 10,000,000
============== ==============
Page 4
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
Twenty-Six Weeks Ended
--------------------------------
August 1, 1998 August 2, 1997
-------------- --------------
Net Sales $ 127,637 $ 119,676
Cost of Sales 109,082 101,714
-------------- --------------
Gross Profit 18,555 17,962
Selling, General and Administrative Expenses 14,627 13,164
-------------- --------------
Operating Profit 3,928 4,798
Interest Expense, Related Parties 315 656
Interest Expense, Non-Related Parties - Net 3,571 2,853
Other Income - Net 123 319
-------------- --------------
Income Before Income Taxes 165 1,608
Income Tax Expense (Benefit) (9) 754
-------------- --------------
Net Income $ 174 $ 854
============== ==============
Basic and Dilutive Net Income Per Common Share $ 0.02 $ 0.09
============== ==============
Weighted Average Common Shares Outstanding 10,288,520 10,000,000
============== ==============
Page 5
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
Twenty-Six Weeks Ended
--------------------------------
August 1, 1998 August 2, 1997
-------------- --------------
Cash Provided By Operating Activities:
Net Income $ 174 $ 854
Adjustments to Reconcile Net Income to Net
Cash Provided by Operations
Depreciation and Amortization 3,010 3,080
Deferred Taxes 187 1,507
Gain on Sale of Property, Plant and
Equipment (66) (65)
Changes in Assets and Liabilities:
(Increase) in Accounts Receivable (5,823) (553)
Decrease (Increase) in Inventories (4,086) 1,660
(Increase) Decrease in Assets Held for
Disposition (100) 3,626
(Increase) Decrease in Prepaid Expenses (464) (131)
Increase (Decrease) in Accounts Payable 2,239 (2,337)
(Decrease) Increase in Accrued Expenses
and Other Liabilities 20 (3,721)
Decrease In Asset Writedown and Restructuring
Reserve (1,245) (832)
Decrease in Income Taxes Payable (263) (568)
-------------- --------------
Net Cash Provided by Operations (6,417) 2,520
Cash Flows From Investing Activities:
Cash Used for the Purchase of Glendale
Hosiery Assets (6,911) -0-
Proceeds From the Sale of Property, Plant
and Equipment 545 205
Additions to Property, Plant and Equipment (2,752) (2,133)
-------------- --------------
Net Cash Used in Investing Activities (9,118) (1,928)
Cash Flows From Financing Activities:
Borrowings (Repayment) of Long-Term Debt - Net 2,895 (10,656)
Increase (Decrease) in Revolver 14,934 11,500
Cash Paid for Refinancing (2,744) -0-
-------------- --------------
Net Cash Provided by Financing
Activities 15,085 844
Net Increase (Decrease) in Cash and Cash
Equivalents (450) 1,436
Cash and Cash Equivalents at Beginning of
Period 680 66
-------------- --------------
Cash and Cash Equivalents at End of Period $ 230 $ 1,502
============== ==============
Supplemental Disclosure of Cash Paid (Received)
During the Period For:
Income Taxes $ 47 $ (182)
============== ==============
Interest $ 2,923 $ 2,599
============== ==============
Page 6
<PAGE>
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE TWENTY-SIX WEEKS ENDED
AUGUST 1, 1998 AND AUGUST 2, 1997
(UNAUDITED)
1. FINANCIAL STATEMENTS
The consolidated balance sheet as of August 1, 1998 and the
consolidated statements of operations for the thirteen and twenty-six weeks
ended August 1, 1998 and August 2, 1997, respectively, and the consolidated
statements of cash flows for the twenty-six weeks ended August 1, 1998 and
August 2, 1997 have been prepared by Ithaca Industries, Inc. the ("Company"). In
the opinion of management, all adjustments (consisting of only normal recurring
accruals) necessary for a fair presentation of the financial position of the
Company at August 1, 1998 and the results of operations for the thirteen and
twenty-six weeks ended August 1, 1998 and August 2, 1997, respectively, and the
statements of cash flows for the twenty-six weeks ended August 1, 1998 and
August 2, 1997 have been made on a consistent basis.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these financial
statements be read in conjunction with the audited financial statements and
notes thereto for the year ended January 31, 1998 and February 1, 1997 included
in the Company's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on May 2, 1998.
The results of operations for the periods presented are not necessarily
indicative of the operating results for the full year.
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 at period-end and revenues and
expenses for the periods ended to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
2. INVENTORIES
Inventories consist of the following:
August 1, 1998 January 31, 1998
-------------- ----------------
Raw Materials $ 17,492 $ 13,142
Work in Process 20,144 14,625
Finished Goods 32,028 29,519
-------------- ----------------
$ 69,664 $ 57,286
Less Excess of FIFO over LIFO Cost 550 250
-------------- ----------------
$ 69,114 $ 57,036
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Page 7
<PAGE>
3. ACQUISITION AND REFINANCING
Effective March 24, 1998, the Company purchased substantially all of
the assets and assumed substantially all liabilities of Glendale Hosiery Company
("Glendale"). Glendale is in the business of manufacturing, marketing and
distributing women's hosiery located in Siler City, North Carolina. The
aggregate purchase price included cash, the Company's common stock, subordinated
notes payable, and the assumption of indebtedness and liabilities.
The following represents the summary unaudited pro forma results of
operations for the thirteen and twenty-six week periods ended August 1, 1998 and
August 2, 1997 as if the acquisition of Glendale had occurred at the beginning
of fiscal 1997. The pro forma results are not necessarily indicative of the
results which may occur in the future.
<TABLE>
<CAPTION>
Thirteen Weeks Ended Twenty-Six Weeks Ended
-------------------------------------- ----------------------------------------
August 1, 1998 August 2, 1997 August 1, 1998 August 2, 1997
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net Sales $ 67,249 $ 71,881 $ 134,635 $ 143,219
Net Income $ 783 $ 1,104 $ 150 $ 1,165
Basic and Dilutive Net Income Per $ 0.08 $ 0.11 $ 0.01 $ 0.11
Common Share
</TABLE>
The Company has entered into a $110 million in senior credit facilities
("Senior Credit Facilities"). The Senior Credit Facilities include a five-year
bank credit facility consisting of a $25 million term loan and up to $70 million
in revolving credit loans to be provided by a syndicate of banks led by
NationsBank, N.A. The Senior Credit Facilities also include an additional $15
million term loan provided by Foothill Capital Credit Corporation and arranged
by NationsBanc Montgomery Securities LLC. The Senior Credit Facilities were also
used to refinance the Company's existing credit agreement with another bank
syndicate, to fund the acquisition of Glendale, and will also be used for
general corporate purposes.
Page 8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED AUGUST 1, 1998 COMPARED
WITH THIRTEEN WEEKS ENDED AUGUST 2, 1997
Net sales increased from $60.9 million for the thirteen weeks ended
August 2, 1997 to $67.2 million for the thirteen weeks ended August 1, 1998.
Included in this year's sales is $8.7 million for Glendale Hosiery which was
acquired on March 24, 1998. Partially offsetting this increase was a decrease of
$3.0 million in other hosiery related business from the division's major
customers due to product packaging changes and the lowering of in-store
inventory levels. The company's underwear division's sales during this period
were $500,000 higher than the same period last year.
The gross profit margin for the second quarter of fiscal 1999 increased
to 16.1% from 16.0% in the comparable period last year. This increase resulted
from improved sourcing costs in the company's underwear division partially
offset by the costs associated with consolidating the Company's two hosiery
divisions.
Selling, general and administrative expenses for the second quarter of
fiscal 1999 increased to $7.6 million from $6.4 million last year primarily due
to the higher sales volume associated with the Glendale acquisition. As a
percent of sales, this year's expense was 11.3% versus 10.5% last year.
Operating income decreased to $4.7 million for the second quarter of
fiscal 1999 from $4.8 million for the comparable period last year.
Interest expense for the thirteen weeks ended August 1, 1998 increased
to $2.2 million from $1.8 million for the same period last year. This increase
is attributed primarily to the increased average bank borrowings associated with
the Glendale Hosiery acquisition.
TWENTY-SIX WEEKS ENDED AUGUST 1, 1998 COMPARED
WITH TWENTY-SIX WEEKS ENDED AUGUST 2, 1997
Net sales increased from $119.7 million for the twenty-six weeks ended
August 2, 1997 to $127.6 million for the twenty-six weeks ended August 1, 1998.
The sales increase reflects, in part, $12.5 million for Glendale Hosiery. Sales
in this year's first half declined by $3.3 million in other hosiery related
business and by $1.2 million in the Company's underwear division.
The gross profit margin decreased for the first half of fiscal 1999 to
14.5% from 15.0% for the comparable period last year. The decrease results
primarily from the costs incurred to consolidate the Company's two hosiery
divisions.
Selling, general and administrative expenses for the first half of
fiscal 1999 increased to $14.6 million from $13.2 million last year. This
increase is due primarily to the higher sales volume associated with the
Glendale acquisition. As a percent of sales, this year's expense was 11.5%
versus 11.0% in the comparable period last year.
Page 9
<PAGE>
Operating income decreased to $3.9 million for the first half of fiscal
1999 from $4.8 million for the comparable period last year.
Interest expense for the twenty-six weeks ended August 1, 1998
increased to $3.9 million from $3.5 million in the first half last year. This
increase is attributed primarily to the increases average bank borrowings
associated with the Glendale Hosiery acquisition.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this report including information set forth under
"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
Industries, Inc., a Delaware corporation (the "Company" or "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 included in this report, 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. These risks include
business risks such as changes in the price of raw materials, concentration of
Ithaca's principal customers, availability of labor and competitive factors;
industry risks such as changes in the retailing industry and shifts in consumer
preferences; financial risks such as liquidity and access to capital;
integration of the Glendale Hosiery Company acquisition; and other risks as set
forth from time to time in the company's filings with the Securities and
Exchange Commission.
Many of the foregoing factors have been discussed in the Company's
prior filings with the Securities and Exchange Commission (the "Commission") 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.
LIQUIDITY AND CAPITAL RESOURCES
On March 24, 1998, the Company completed the acquisition of Glendale
Hosiery Company for a combination of stock, cash and the assumption of certain
indebtedness. In conjunction with the acquisition, the Company's existing Credit
Agreement was replaced by a $110.0 million new credit facility. One part of the
new facility provides for a term loan ("Term Loan") of $25.0 million and a
revolving loan facility of up to $70.0 million. A separate part of the new
credit facility provides for an additional $15.0 million term loan. The
revolving loan facility includes a sub-limit of $15.0 million for the issuance
of letters of credit. As of September 8, 1998, the Company had $38.6 million of
Term Loans outstanding, $41.9 million of borrowings under the revolving loan
facility, and $5.6 million of outstanding letters of credit. The Company at
September 8, 1998 had $11.5 million of availability under its revolving loan
facility.
Page 10
<PAGE>
YEAR 2000 ("Y2K") COMPLIANCE
Some of the Company's computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs recognize a date using "00" as the year 1900 rather than the year 2000.
This could cause a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage similar normal business activities.
To improve the Company's overall financial and operational information,
an Enterprise Resource Planning ("ERP") system was selected and is in the
process of being installed. This new ERP system which is Y2K complaint, will
replace the Company's legacy systems. The ERP project is supervised and
supported by senior management. Areas outside the scope of the ERP project that
have Y2K compliance issues, such as time clocks, phone systems and manufacturing
machines, are also being addressed.
The project is estimated to be completed not later than July 31, 1999,
which is prior to any anticipated impact on the Company's operating systems. The
Company believes that with modifications to existing software and a conversion
to new software, the Y2K issue will not pose significant operational problems
for its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Y2K issue could have a material impact on
the operations of the Company.
The Company has had formal communications with its major customers and
suppliers regarding standardizing systems for Y2K compliance. There is no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted and would not have an adverse effect on the
Company's systems.
The incremental cost of becoming Y2K compliant is not material and the
date on which the Company believes it will complete the Y2K modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources and other factors. However, there can be not guarantee that these
estimates will be achieved and actual results could differ materially from those
anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and costs of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
Page 11
<PAGE>
PART II. OTHER INFORMATION
Item 1 Legal Proceedings None
Item 2 Changes in Securities None
Item 3 Defaults upon Senior Securities None
Item 4 Submission of Matter to a Vote of Security Holders None
Item 5 Other Information None
Item 6 Exhibits and Reports on Form 8-K:
(a) Exhibits
Ex. 27 -- Financial Data Schedule
(b) Reports on Form 8-K 13
Page 12
<PAGE>
PART II.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibits
Ex. 27 - - Financial Data Schedule
(b) Reports on Form 8-K
1. Form 8-K filed July 20, 1998 reported under Item 5 "Other
Events" that the Company's Board of Directors declared a
dividend distribution of one right for each outstanding share
of common stock to stockholders of record at the close of
business on July 23, 1998.
2. Form 8-K filed July 14, 1998 reported under Item 5 "Other
Events" the issuance of a press release announcing the
Company had entered into a Rights Agreement.
3. Form 8-K filed June 10, 1998 reported under Item 5 "Other
Events" the issuance of a press release reporting results for
the fiscal 1999 first quarter ended May 2, 1998.
4. Form 8-K/A filed June 10, 1998 amended Form 8-K filed on
April 3, 1998 to include the consents of independent
accountants.
5. Form 8-K/A filed June 2, 1998 amended Form 8-K filed on April
3, 1998 to include the audited financial statements of the
business acquired, Glendale Hosiery Company, and pro forma
financial information.
Page 13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ITHACA INDUSTRIES, INC.
-----------------------
(Registrant)
By: /s/ Richard P. Thrush
-------------------------
RICHARD P. THRUSH
Senior Vice President Finance and Administration
Principal Financial and Chief Accounting Officer
Dated: September 15, 1998
Page 14
<PAGE>
Exhibit Index
- -------------
Exhibit No. Description of Exhibits
- ----------- -----------------------
27 Financial Data Schedule for the six month period ended August 1,
1998
Page 15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> AUG-01-1998
<CASH> 230
<SECURITIES> 0
<RECEIVABLES> 35,577
<ALLOWANCES> 1,463
<INVENTORY> 69,114
<CURRENT-ASSETS> 107,840
<PP&E> 43,598
<DEPRECIATION> 8,740
<TOTAL-ASSETS> 150,401
<CURRENT-LIABILITIES> 34,344
<BONDS> 0
<COMMON> 104
0
0
<OTHER-SE> 22,232
<TOTAL-LIABILITY-AND-EQUITY> 150,401
<SALES> 127,637
<TOTAL-REVENUES> 127,637
<CGS> 109,082
<TOTAL-COSTS> 109,082
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,886
<INCOME-PRETAX> 165
<INCOME-TAX> 9
<INCOME-CONTINUING> 174
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 174
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>