UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For fiscal year ended January 31, 1999
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 000-22385
ITHACA INDUSTRIES, INC.
-----------------------
(Exact name of issuer as specified in its charter)
Delaware 56-1385842
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Highway 268 West, P.O. Box 620, Wilkesboro, North Carolina 28697
---------------------------------------------------------- -----
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (336) 667-5231
Securities registered pursuant to Section 12(b) of the Act:
(Title of each class Name of each exchange on which registered:)
-------------------- -------------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Title and class
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period than the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant can not be determined in the manner called for by Form 10-K. See Item
5.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 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 [ ]
The number of shares of the Registrant's common stock outstanding as of May 5,
1999 was 10,000,000.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10,11, and 12) of this Form
10-K is incorporated by reference to the Registrants definitive proxy statement
relating to its annual meeting of stockholders to be held on June 14, 1999,
which was filed the same day this Form 10-K was filed with the Commission.
The Exhibit Index is located on page 39
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PART I
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. 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, Gap, and Sears which accounted for approximately 50%, 11% and 10%
respectively of the Company's total net sales for the 52-week period ended
January 31, 1999; (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 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 Mexico and other foreign nations where the Company currently or in
the future sources its products; (7) the successful completion of the Company's
Y2K compliance project; (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 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.
Fiscal Year End
For purposes of presenting financial information in this report (other
than the Financial Statements included in Item 8), the Company's fiscal years
are indicated as ending on January 31, although such periods actually ended on
the Saturday nearest such date.
ITEM 1. Business
General
Ithaca is a leading designer, marketer and manufacturer of private
brand men's and boys' underwear and outerwear T-shirt products, and women's and
girls' underwear. The Company believes it is the largest manufacturer of private
brand men's underwear and the second largest private brand manufacturer of
women's underwear in the United States, operating distribution and manufacturing
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facilities in the southeastern United States and off-shore manufacturing
facilities in Central America. The key elements of the Company's strategy are to
supply a wide variety of product offerings at a number of price points, to
maintain a strong presence in multiple channels of distribution, to maintain
close customer relationships by developing products and programs that suit
individual customer needs, and to maintain a low cost and flexible manufacturing
capability.
The Company has adopted a plan to discontinue its hosiery business and
has entered into and consummated, an agreement to sell substantially all of the
Company's hosiery division assets (the "Agreement"). As a result, the Company
will no longer be in the business of manufacturing hosiery and, accordingly,
this line of business has been reported as a discontinued operation in the
financial statements. Accordingly, the information in this report is provided
after giving effect to the disposition of the Company's hosiery division. This
transaction was consummated on April 30, 1999.
The Agreement requires the purchaser to pay the Company 100% of the
estimated tangible net worth of the hosiery business plus $1.5 million. 95% was
paid at closing and the balance is subject to adjustments based on a final audit
to be performed by the purchaser. The purchaser delivered to the Company at the
closing a certificate representing 400,000 shares of the Company's common stock,
par value $.01 per share. The purchaser also assumed: (i) the Company's
liabilities under a Subordinated Promissory Note, dated March 24, 1998, from the
Company to Glendale Hosiery Company in the principal amount of $736,000 and (ii)
certain additional obligations in an amount up to $100,000.
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 (336) 667-5231.
Plan of Reorganization and Capital Structure
On December 16, 1996, the Company emerged from bankruptcy pursuant to
the Plan of Reorganization, dated as of August 29, 1996 (the "Plan of
Reorganization"). As a result of the reorganization, the Company significantly
reduced its debt and simplified its capital structure. Pursuant to the Plan of
Reorganization, prior equity interests in the Company were canceled, 10,000,000
shares of the Company's common stock, par value $0.01 (the "Common Stock") were
distributed to the holders of the Company's outstanding 11.125% Senior
Subordinated Notes due 2002 (the "Notes"), the Notes were retired, the Company
ceased to be a subsidiary of Ithaca Holdings, Inc., the Company's bank credit
agreement, which was subsequently replaced on March 24, 1998, was amended and
restated and general unsecured claims, administrative claims, tax claims,
priority claims and general secured claims allowed by the Bankruptcy Court for
the District of Delaware (the "Bankruptcy Court") were paid in full.
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. 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.
On January 31, 1999, the capital structure of the Company consisted of
approximately $77.7 million of long-term debt exclusive of current maturities,
and approximately $14.3 million of net equity.
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Fresh Start Reporting
The Company adopted Fresh Start Reporting on November 22, 1996, the day
the Plan of Reorganization was confirmed by the Bankruptcy Court. Accordingly,
the Company's Consolidated Balance Sheets as of January 31, 1999, and January
31, 1998 and its Consolidated Statements of Operations, Consolidated Statements
of Stockholders' Equity (Deficit) and Consolidated Statements of Cash Flows for
the years ended January 31, 1999 and 1998 and the 10-week period ended January
31, 1997 will not be comparable to the prior periods included elsewhere herein.
Products and Sales
The Company's two principal product lines are men's and boys' underwear
and outerwear T-shirts, and women's and girls' underwear. 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 discount stores to higher quality, higher
priced styles sold by department and specialty stores. Management believes that
this product breadth gives it a competitive advantage over other U.S. private
brand 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, and
specialty stores.
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 and over 100 styles of briefs, hip huggers and bikini
panties for its line of women's and girls' 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 and outerwear T-shirts accounted for
approximately 82% of the Company's net sales in the year ending January 31, 1999
and approximately 79% in the year ending January 31, 1998. Women's and girls'
underwear sales accounted for approximately 15% of the Company's net sales in
the year ending January 31, 1999 and 17% in the year ending January 31, 1998.
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 located principally within 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 its
needs. The Company has not experienced any significant shortages of raw
materials during the past 30 years.
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Manufacturing and Sourcing
Ithaca manufactures its products at 10 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 approximately 3.3 times in the year ending January
31, 1999. In its fabric production facility, Ithaca has the flexibility to shift
its manufacturing processes easily among many styles, colors and sizes in
response to changes in demand. In the year ending January 31, 1999,
approximately 64% of the Company's production was either assembled off-shore
from components that were cut in the United States or sourced from the Far East
versus 59% in the prior fiscal year.
Trademarks, Licenses and Patents
Ithaca's products are predominantly sold under the private brand names
or trade names of its customers. The Company usually seeks to obtain trademark
registration protection for those private brand names developed by the Company,
although such protection generally is not as critical as with branded products.
The Company has registered 14 trademarks in the United States, and has 2
trademark applications pending as of April 15, 1999.
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.
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 products are shipped F.O.B.
shipping point.
Seasonality
The Company does not regard its overall business as highly seasonal.
Importance of Major Customers
For the year ended January 31, 1999, J.C. Penney accounted for 50%, Gap
accounted for 11%, and Sears accounted for 10% of the total net sales of the
Company, compared to 47%, 11%, and 10% respectively in fiscal 1998. No other
customers accounted for 10% or more of net sales in these periods. 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 is not
material for an understanding of the business of the Company.
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Competition
The underwear market in the United States is highly competitive. The
Company's products compete with products manufactured by other private brand
suppliers as well as with products manufactured under recognized name brands.
Ithaca believes it is the largest manufacturer of private brand
merchandise in its men's underwear and the second largest manufacturer of
private brand merchandise in its women's underwear line, offering a broad
selection of styles, sizes and colors. The private brand underwear products
business is generally comprised of small scale, privately owned companies with
limited product lines. However, management is aware of several large private
brand manufacturers with substantial resources. Ithaca's principal private brand
competitors include: Beltex, Springford, Tultex and Delta Woodside in men's and
boys' underwear or outerwear T-shirts and Fitzgerald and Wundies Industries Inc.
in women's and girls' underwear.
The supply of branded underwear is dominated by a few large
manufacturers, most of which have substantially greater financial resources and
market recognition than Ithaca. Many of these manufacturers also produce some
private brand underwear 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.
Competition in the underwear products market is generally based on
price, quality and service. The Company believes that it offers a higher level
of merchandising and marketing services to retailers implementing private brand
programs.
Imports and Export Sales
Ithaca's products compete with goods produced worldwide. Over the past
decade, US imports of underwear have increased substantially. US manufacturers
have responded to the influx of lower cost products by shifting production
offshore. Ithaca's management believes that a significant portion of US imports
represent goods for which cut components have been shipped overseas for
assembly. Given the variety of sources for industry data and differences in
categorization, it is difficult to compare retail spending categories to
imports, but according to the American Apparel Manufacturers Association
("AAMA"), imports represented approximately 57% of underwear sales in calendar
1998, up from approximately 49% in the prior year. The Company believes that it
is important to have the capability of sourcing a significant portion of its
products from outside the United States. The Company has consolidated certain
plants to off-shore facilities and has continued the process of moving more
sewing operations off-shore. The Company has four Honduran subsidiaries which
operate three sewing plants in that country, and uses sewing contractors in
Mexico to produce primarily for men's and boys' underwear and outerwear
T-shirts. Ithaca sources certain women's and girls' underwear products from the
Far East. 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.
Less than 1% of the Company's sales for the 52-week period ended
January 31, 1999 were made to firms outside the United States. The Company
believes that changes in the level of sales outside of the United States would
not have a material adverse effect on Ithaca's Results of Operations.
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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 has experienced no
material 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 4,611 people as of March 31, 1999,
of which approximately 4,404 were engaged in manufacturing and approximately 207
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.
ITEM 2. Properties
The Company leases its corporate headquarters in Wilkesboro, North
Carolina. The Company also leases sales offices in New York City and Dallas,
Texas. The Company distributes its women's and girls' underwear at its owned
facilities in Cairo, Georgia. 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 two owned plants in the southeastern United
States and at three facilities leased by the Company in Honduras. 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.
ITEM 3. 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.
ITEM 4. Submission of Matters to a Vote of Holders of the Common Stock
No matters have been submitted to a vote of the holders of Common Stock
during the fourth quarter of the Registrant's 1999 fiscal year.
PART II
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters
Through the date hereof, there has been no established public trading
market for the Common Stock. Application was made to list the Common Stock on
NASDAQ National Market. This application was withdrawn because the Company was
advised by NASDAQ that it would not qualify. The Company intends to reapply as
soon as it believes it meets the criteria. There can be no assurance that this
will occur or 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.
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On December 16, 1996, 10,000,000 shares of Common Stock were issued in
reliance upon the exemption provided by 11 USC 1145. These shares were
registered under the Securities Act of 1934, as amended, by means of a
Registration Statement on Form S-1 declared effective on April 4, 1997. An
additional 400,000 shares were issued on March 24, 1998 as part of the Purchase
Agreement for Glendale Hosiery Company. These 400,000 shares were repurchased by
the Company on April 30, 1999 in conjunction with the sale of its hosiery
division.
As of April 16, 1999, there were approximately 16 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 741,130 shares of Common Stock, including the options granted to
Alvarez & Marsal, Inc., issuable under the Company's 1996 Long Term Stock
Incentive Plan (the "LTIP"), of which options to purchase 542,426 shares are
currently exercisable.
The Company has not paid any cash dividends on the Common Stock and
does not anticipate that it will do so in the foreseeable future. The Company's
Bank Credit Agreements (the "Credit Agreements") restrict the Company's ability
to pay dividends on the Common Stock. Any determination to pay cash dividends in
the foreseeable future will be at the discretion of the Company's Board of
Directors (the "Board" or the "Board of Directors") and will be dependent upon
the Company's results of operations, financial condition, contractual
restrictions and other factors deemed relevant by the Board. The Company
presently intends to retain earnings for working capital, to pay down long-term
debt and to fund capital expenditures. Accordingly, there is no present
intention to pay cash dividends on any shares of the Common Stock.
ITEM 6. Selected Financial Data
The following table sets forth selected financial information with
respect to the Company for the years ended January 31, 1999 and January 31,
1998, the 10-week period ended January 31, 1997, and the 42-week period ended
November 22, 1996 and is derived from and should be read in conjunction with the
Company's audited Consolidated Financial Statements and related notes included
in Item 8 of this report. Net income per share for the periods prior to November
23, 1996 are not meaningful because during such period the Company was a wholly
owned subsidiary of Ithaca Holdings, Inc.
The selected financial information set forth below is qualified by and
should be read in conjunction with Item 8 the "Financial Statements" and the
notes thereto and Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in this report. Results of
Operations of the Company for the years ended January 31, 1999, January 31, 1998
and the 10-week period ended January 31, 1997 will generally not be comparable
to the other periods due to the effects of the Plan of Reorganization and fresh
start reporting rules and procedures.
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<TABLE>
<CAPTION>
Post Confirmation Pre-Confirmation
-------------------------------------------------------------------------------------------------
42-Week
10-Week Period Ended
Year Ended Year Ended Period Ended November 22, Year Ended Year Ended
January 31, 1999 January 31, 1998 January 31, 1997 1996 January 31, 1996 January 31, 1995
---------------- ---------------- ---------------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands), except per
share data
Statement of Operations Data: (1)
Net sales $187,660 $186,366 $30,503 $224,690 $289,850 $229,670
Gross profit 25,311 26,304 2,710 28,742 31,545 51,971
Operating income (loss) 2,944 3,980 (3,801) 8,194 6,080 29,261
Income (loss) From Continuing
Operations $ (1,650) $ (520) $(3,176) $ (5,665) $ (9,376) $ 6,882
======== ======== ======== ======== ======== ========
Basic and Diluted income
(loss) per common share
from continuing operations $ (0.16) $ (0.05) $ (0.32) n/a n/a n/a
======== ======== ======== ======== ======== ========
Balance Sheet Data
Total assets (2) $101,608 $ 95,523 $133,687 $155,993 $208,642 $224,471
Long-term debt exclusive of
current Maturities 77,713 53,519 66,069 77,255 n/a 221,819
Total stockholders' equity 14,290 20,895 19,359 22,116 (93,558) (43,814)
Equity (book value) Per
Outstanding Share 1.37 2.09 1.94 n/a n/a n/a
</TABLE>
Footnotes to the Selected Financial Data
(1) The Company has adopted a plan to divest its hosiery division, and
accordingly the operating results of this segment of the business have been
segregated from the Company's continuing operations, and are separately
reported as a discontinued operation in the financial statements.
(2) 1999 and 1998 exclude investment in discontinued operations.
ITEM 7. 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 in Item 8 of
this report.
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>
10-Week Period 42-Week Period
Fiscal Year Ended Fiscal Year Ended Ended Ended
January 31, 1999 January 31, 1998 January 31, 1997 November 22, 1996
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Net sales:
Men's & boys' underwear and T-shirts 81.8% 78.5% 71.7% 74.8%
Women's and girls' Underwear 14.9 17.2 24.0 22.7
Other 3.3 4.3 4.3 2.5
------ ------ ------ ------
Total 100.0% 100.0% 100.0% 100.0%
Cost of sales 86.5% 85.9% 91.1% 87.2%
------ ------ ------ ------
Gross profit 13.5% 14.1% 8.9% 12.8%
Income (Loss) From Continuing Operations (0.9)% (0.3)% (10.4)% (2.5)%
</TABLE>
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Results of Operations
Comparison of fiscal 1999 to fiscal 1998.
Net sales increased modestly versus the prior year. Net sales rose $1.3
million to $187.7 million for fiscal 1999. Men's and boys' underwear and T-shirt
sales were up 4.8%, while women's and girls' underwear sales were down 12.8%.
Total unit volume was down 8.7%. The average selling price per dozen for fiscal
1999 was $26.84 for men's and boys' and $16.36 for women's and girls' compared
to $25.46 and $13.45 respectively for fiscal 1998, primarily reflecting a change
in the mix among product lines.
Gross profit declined $1.0 million or 3.8% as compared to fiscal 1998.
Gross profit margins also declined for fiscal 1999 to 13.5% of net sales from
14.1% in the prior period. This decline is primarily attributable to increased
markdown allowances to dispose of excess inventory.
Selling, general and administrative expenses decreased by $.8 million
or 3.5% in fiscal 1999 versus the prior year. As a percentage of net sales,
selling, general and administrative expense decreased to 11.5% in fiscal 1999
compared to 12.0% fiscal 1998.
Net interest expense increased to $5.8 million for fiscal 1999 compared
to $5.3 for fiscal 1998. This increase is attributed primarily to increased
average bank borrowing.
The income tax benefit for fiscal 1999 was 37% of income before income
taxes compared to an expense of 34% for fiscal 1998.
Comparison of fiscal 1998 to the combined 10-week period ended January 31, 1997
and the 42-week period ended November 22, 1996.
Net sales declined 27% to $186.4 million. This decline reflected, in
part, the Company's previously announced decision to exit unprofitable lines of
business. Sales of ongoing product categories also decreased reflecting lower
sales to the Company's major customers. The 1998 fiscal year's revenue included
$5.3 million in sales of eliminated product categories compared to $45.5 million
in the comparable period last year. Men's and boys' underwear and T-shirt sales
were down 22.8%, and women's and girls' underwear sales were down 45.3%. Unit
volume was down 35.3% with men's and boys' underwear and T-shirts down 23.7%,
and women's and girls' underwear down 48.6%. The average selling price per dozen
for fiscal 1998 was $21.89 versus $20.32 in the comparable period last year,
primarily reflecting a change in the mix among product lines. There were no
significant pricing changes to the Company's customers during fiscal 1998.
Gross profit declined $5.1 million or 16.4% as compared to the
comparable period last year as a direct result of the lower sales volume. Gross
profit margins for fiscal 1998 improved to 14.1% of net sales from 12.3% in the
prior period. The improved margins resulted from the elimination of revenues
with low gross margins, the continuing emphasis of moving production to
lower-cost, offshore locations, and decreased depreciation expense as a result
of fresh start reporting.
Selling, general and administrative expenses decreased by $7.7 million
or 25.6% in fiscal 1998 versus the comparable period last year. This decrease
was a result of reduced employee related costs and reduced overhead support cost
for the discontinued sales revenues. As a percentage of net sales, selling,
general and administrative expense increased to 12.0% in fiscal 1998 compared to
11.8% in the comparable period last year.
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Net interest expense decreased to $5.3 million for fiscal 1998, a
decrease of $9.2 million or 64% for the comparable period last year. This
decrease is attributed to forgiveness of debt to restructuring reorganization.
The income tax benefit for fiscal 1998 remained constant at 34% of loss
before income taxes when compared to in the prior year's post confirmation
period.
Discontinued Operations.
The Company has adopted a plan to dispose of its hosiery business. The
Company has entered into an agreement pursuant to which the Company sold
substantially all of the assets of its hosiery division. The transaction was
completed on April 30, 1999. See "Item 1. Business - General" for more
information.
The Company had a loss from discontinued operations of $6.2 million for
the year ended January 31, 1999. This amount consisted of a net loss of $3.8
million on the operations of the segment during fiscal 1999 and an additional
net loss of $2.4 million for disposal and phaseout costs. In the prior fiscal
year, the discontinued operation generated a net profit of $2.1 million.
Liquidity and Capital Resources
As of April 16, 1999, the Company had $36.4 million of term loans
outstanding, $40.5 million of borrowings under the revolving loan facility, and
$5.0 million of outstanding letters of credit. The Company at April 16, 1999 had
$9.6 million of availability under its revolving loan facility.
Both the revolving credit and term loan facilities outlined above,
contain certain restrictive covenants, including, among others, a minimum
tangible net worth requirement, a fixed-charge ratio requirement and a maximum
funded indebtedness to cash flow ratio requirement. As of year end 1999, the
Company was in violation of certain of the above covenants. Waivers have been
obtained by the Company for the violations and new covenants were established
for future periods.
At January 31, 1999 the Company's net working capital was $45.6 million
and the current ratio was 2.7:1. At January 31, 1998 the Company's net working
capital was $39.8 million and the current ratio was 2.6:1. 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.
The Company used cash in its operating activities of $9.6 million in
the year ended January 30, 1999 compared to cash provided by operating
activities of $16.7 million in the prior year. The variance in operating cash
flow was principally caused by the operating results of the discontinued hosiery
operations as well as increases in inventory and receivables of the continuing
operations to decreases in the prior year.
Capital additions were $5.0 million for the fiscal year ended January
31, 1999 and were related primarily to the funding of the Enterprise Resource
Project ("ERP") and purchases of machinery and equipment. Capital additions of
the comparable prior year period were $4.2 million and were primarily related to
purchases of machinery and equipment.
In connection with the sale of the hosiery business discussed above,
the Company expects to apply net cash proceeds from such sale of approximately
$24 million to reduce the outstanding balance on the Company's term loan and
revolving credit facility. Management believes that the borrowing availability
Page 11
<PAGE>
under the credit agreement, as amended, and the expected cash flows from
operations will provide sufficient capital for the cash needs of the business.
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 the timing of raw materials
purchases and customer orders as well as competitive pressures.
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 may 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,
a system was selected and is in the process of being installed. This new ERP
system, which is Y2K compliant, will replace the Company's legacy systems. The
ERP project is supervised and supported by senior management. The implementation
of the ERP system is a joint effort of the Company's internal staff and outside
consultants.
The Company's Y2K compliance project was begun in July, 1996 and has
five phases. Phase one, which involved the assessment of all systems and
equipment affected by the Y2K issue, has been completed. Phase two, which
involved the defining of strategies to correct those systems and equipment which
were found to pose Y2K problems, has also been completed. Phase three involved
the remediation or replacement of the systems and equipment which were found to
be defective and were not going to be resolved by the installation of the new
ERP system mentioned above. The Company has a definitive plan in place to make
the necessary corrections and, as of April 15, 1999, has completed the required
changes for 90% of the identified problems. Phase four involved assessing the
potential impact on the Company of the Y2K compliance efforts of its customers
and suppliers. Formal communications with all major customers and suppliers by
the Company were begun in March 1998 and a follow up communication occurred in
September 1998. The Company is in the process of collecting and analyzing the
responses received and, based on those responses, will determine what corrective
actions need to be taken to minimize the impact of its customers' and suppliers'
failure to address their Y2K problems on the Company. There is no guarantee that
the systems of other companies on which the Company's systems rely will be
timely converted and will not have an adverse effect on the Company's systems.
Phase five involves the formal testing to insure Y2K compliance. This testing
began in July 1997 and is planned to continue up through December 31, 1999.
Since the actions being taken by the Company to correct the Y2K problem
are extensive and on-going, the Company's worst case scenario is unknown at this
time. The Company believes it is prudent to have contingency plans in place to
minimize the impact of internal or third party failures to correct Y2K problems.
During the first half of 1999 the Company will identify the areas where
contingency plans are required based on the best information that it has
available at that time.
The incremental cost of becoming Y2K compliant is not material. The
date on which the Company believes it will complete the Y2K modifications is
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 no guarantee that these
estimates will be
Page 12
<PAGE>
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.
The Company believes that the successful, timely completion of its Y2K
compliance project will result in the Company not suffering any material adverse
effect on its results of operations, financial position or cash flows. However,
if all Y2K issues are not properly identified, assessed, remediated, replaced or
tested, there can be no assurance that the Y2K issue will not have a material
adverse effect on its results of operations, financial position, or cash flows
or adversely affect the Company's relationship with suppliers, customers or
other third parties. Additionally, there can be no assurance that the Y2K issues
of other entities will not adversely effect the Company. (See "Special Note
Regarding Forward-Looking Statements")
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.
The Company emerged from bankruptcy on December 16, 1996 and a final
order was issued by the Bankruptcy Court on April 7, 1997. Pursuant to the Plan
of Reorganization, the Company repaid all of the secured and unsecured claims
allowed by the Bankruptcy Court as follows: general unsecured claims were
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 their outstanding shares of Ithaca
Common Stock). Prior equity interests in the Company were canceled, annulled and
extinguished. Administrative claims were paid in full, in cash, in the ordinary
course of business. Tax claims were paid in full. Priority claims were paid in
full. The Company's prior Credit Agreement was amended and restated. General
secured claims were paid in full. Each holder of an allowed general secured
claim was either paid in full on December 16, 1996 (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.
Page 13
<PAGE>
ITEM 8. Financial Statements and Supplementary Data
Ithaca Industries, Inc.
and Subsidiaries
Consolidated Financial Statements
January 30, 1999 and January 31, 1998
Page 14
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of Ithaca Industries, Inc.
In our opinion, the accompanying consolidated balance sheet as of January 30,
1999 and the related consolidated statements of operations, of stockholders'
equity and of cash flows present fairly, in all material respects, the financial
position of Ithaca Industries, Inc. and its subsidiaries (the "Company") at
January 30, 1999, and the results of their operations and their cash flows for
the year then ended, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
As explained in Note 14, the Company has adopted a plan to sell substantially
all the assets of the Hosiery Division. A loss on disposal of $2.4 million has
been provided in the financial statements for the year ended January 30, 1999,
and the results of operations of the Hosiery Division have been classified as
discontinued operations.
PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 25, 1999, except for Note 14 which is as of April 30, 1999
Page 15
<PAGE>
Independent Auditors' Report
The Board of Directors
Ithaca Industries, Inc.:
We have audited the consolidated balance sheet of Ithaca Industries, Inc. and
subsidiaries as of January 31, 1998 and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for the year ended
January 31, 1998; the 10-week period ended February 1, 1997; and the 42-week
period ended November 22, 1996. In connection with our audits, we have also
audited the related financial statement schedule of valuation and qualifying
accounts for the year ended January 31, 1998; the 10-week period ended February
1, 1997, and the 42-week period ended November 22, 1996. These consolidated
financial statements and financial statement schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule 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 January 31, 1998 and the results of their operations
and their cash flows for the year ended January 31, 1998; the 10-week period
ended February 1, 1997; and the 42-week period ended November 22, 1996, in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
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 financial statements as of
January 31, 1998 and for the year then ended and for the ten-week period ended
February 1, 1997 present the financial position, results of operations, and cash
flows of the reorganized entity and are, therefore, not comparable to the
consolidated financial statements for periods prior to the Company's emergence
from bankruptcy.
KPMG LLP
Atlanta, Georgia
March 27, 1998, except for
Note 14 which is as of
April 30, 1999
Page 16
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Consolidated Balance Sheets
January 30, 1999 and January 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
(In thousands, except share and per share data) 1999 1998
Assets
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 66 $ 680
Trade accounts receivable, net of allowance for doubtful accounts of $765 at
January 30, 1999 and January 31, 1998 (Note 8) 19,836 16,759
Inventories (Note 3) 49,707 47,214
Prepaid expenses and other current assets 270 434
Assets held for disposition, net (Note 12) 1,972 213
-------------- --------------
Total current assets 71,851 65,300
Investment in discontinued operations (Note 14) 27,553 17,513
Property, plant, and equipment, net (Note 4) 26,016 28,709
Other assets:
Intangible assets, net of accumulated amortization of $36 and $12 at
January 30, 1999 and January 31, 1998, respectively 83 107
Other 3,658 1,407
-------------- --------------
$ 129,161 $ 113,036
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Current installment of long-term debt (Notes 5 and 13) $ 14 $ 13
Accounts payable 10,723 8,233
Accrued payroll and related expenses 6,168 6,995
Income taxes payable (Note 6) 5,450 3,667
Deferred income taxes (Note 6) 1,498 4,424
Other accrued expenses 2,434 2,162
-------------- --------------
Total current liabilities 26,287 25,494
Long-term debt, excluding current installments, due to related parties (Notes 5 and 13) 43 20,036
Long-term debt, excluding current installments (Notes 5 and 13) 77,670 33,483
Deferred income taxes (Note 6) 10,788 13,128
Other non-current liabilities 83 -
-------------- --------------
Total liabilities 114,871 92,141
============== ==============
Commitments and contingencies (Note 10)
Stockholders' equity:
Preferred stock, $.01 par value; authorized 2,500,000 shares; none issued - -
Common stock of $.01 par value; authorized 27,500,000 shares; issued and outstanding
10,400,000 shares at January 30, 1999 and 10,000,000 shares at January 31, 1998 104 100
Additional paid-in capital 23,276 22,016
Accumulated deficit (9,090) (1,221)
-------------- --------------
14,290 20,895
-------------- --------------
Total stockholders' equity $ 129,161 $ 113,036
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 17
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended January 30, 1999 and January 31, 1998, 10-Week Period Ended
February 1, 1997 and 42-Week Period Ended November 22, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Post-confirmation Pre-confirmation
---------------------------------------------------------------------
10-Week Period 42-Week
Year Ended Year Ended Ended Period Ended
(in thousands, except share and per share data) January 30, 1999 January 31, 1998 February 1, 1997 November 22, 1996
<S> <C> <C> <C> <C>
Net sales $ 187,660 $ 186,366 $ 30,503 $ 224,690
Cost of sales
162,349 160,062 27,793 195,948
---------------- ---------------- ---------------- -----------------
Gross profit 25,311 26,304 2,710 28,742
Selling, general, and administrative expenses 21,535 22,324 6,511 23,512
(Recovery of) provision for restructuring costs (Note 12) 832 - - (2,964)
---------------- ---------------- ---------------- -----------------
Operating income (loss) 2,944 3,980 (3,801) 8,194
---------------- ---------------- ---------------- -----------------
Other Income (expense):
Interest expense - related parties (contractual interest
of $3,252 at November 22, 1996) (246) (1,361) (150) (1,984)
Interest expense, net of interest income of $64, $95, $81,
and $164 (contractual interest of $17,512 at November
22, 1996) (5,512) (3,892) (908) (11,378)
Other, net 195 482 68 508
---------------- ---------------- ---------------- -----------------
(5,563) (4,771) (990) (12,854)
---------------- ---------------- ---------------- -----------------
Loss before reorganization items, income taxes, discontinued
operations and extraordinary item (2,619) (791) (4,791) (4,660)
Reorganization items:
Adjustments to fair value - - - 3,765
Professional fees and other - - - (2,589)
---------------- ---------------- ---------------- -----------------
Loss before income taxes, discontinued operations and
extraordinary item (2,619) (791) (4,791) (3,484)
Income tax (benefit) expense (969) (271) (1,615) 2,181
---------------- ---------------- ---------------- -----------------
Income (loss) from continuing operations (1,650) (520) (3,176) (5,665)
---------------- ---------------- ---------------- -----------------
Discontinued operations:
Income (loss) from operations of discontinued Hosiery
Division, net of income tax (benefit) expense of
($2,295), $1,074, $215 and $2,037 (3,859) 2,056 419 3,113
Loss on disposal of Hosiery Division, including provision
of $670 for operating losses during phaseout period
(net of income tax benefit of $1,445) (2,360) - - -
---------------- ---------------- ---------------- -----------------
Income (loss) from discontinued operations (6,219) 2,056 419 3,113
---------------- ---------------- ---------------- -----------------
Income (loss) before extraordinary item (7,869) 1,536 (2,757) (2,552)
Extraordinary item - gain on debt discharge of $90,980 less
income tax expense of $23,056 - - - 67,924
---------------- ---------------- ---------------- -----------------
Net income (loss) $ (7,869)$ 1,536 $ (2,757)$ 65,372
================ ================ ================ =================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 18
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended January 30, 1999 and January 31, 1998, 10-Week Period Ended
February 1, 1997 and 42-Week Period Ended November 22, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Post-confirmation Pre-confirmation
---------------------------------------------------------------------
10-Week Period 42-Week
Year Ended Year Ended Ended Period Ended
(in thousands, except share and per share data) January 30, 1999 January 31, 1998 February 1, 1997 November 22, 1996
<S> <C> <C> <C> <C>
Basic and diluted loss from continuing operations
per common share $ (0.16)$ (0.05)$ (0.32)$ -
Basic and diluted income (loss) from discontinued operations
per common share (0.60) 0.20 0.04 -
---------------- ---------------- ---------------- -----------------
Basic and diluted net income (loss)
per common share $ (0.76) 0.15 $ (0.28)$ -
---------------- ---------------- ---------------- -----------------
Weighted-average common shares outstanding 10,344,120 10,000,000 10,000,000 -
</TABLE>
See accompanying notes to consolidated financial statements.
Page 19
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Year Ended January 30, 1999, Year Ended January 31, 1998, 10-Week Period
Ended February 1, 1997 and 42-Week Period Ended November 22, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Total
Common Additional Accumulated Stockholders'
(in thousands, except share data) Shares Stock Paid-In Capital Deficit Equity
<S> <C> <C> <C> <C> <C>
Balance at February 2, 1996 1,000 $ - $ 9,000 $ (102,558) $ (93,558)
Net income for 42-week period ended November 22,
1996 (pre-confirmation) - - - 65,372 65,372
Effect of reorganization:
Elimination of accumulated deficit - - - 37,186 37,186
Cancellation of pre-confirmation shares (1,000) - (9,000) - (9,000)
Issuance of post-confirmation shares 10,000,000 100 22,016 - 22,116
---------- ---------- ---------- ---------- ----------
Balance at November 22, 1996 10,000,000 100 22,016 - 22,116
Net loss for 10-week period ended February 1, 1997 - - - (2,757) 2,757
---------- ---------- ---------- ---------- ----------
Balance at February 1, 1997 10,000,000 100 22,016 (2,757) 19,359
Net income for year ended January 31, 1998 - - - 1,536 1,536
---------- ---------- ---------- ---------- ----------
Balance at January 31, 1998 10,000,000 100 22,016 (1,221) 20,895
Issuance of common stock 400,000 4 1,260 - 1,264
Net income for year ended January 30, 1999 - - - (7,869) (7,869)
---------- ---------- ---------- ---------- ----------
Balance at January 30, 1999 10,400,000 $ 104 $ 23,276 $ (9,090) $ 14,290
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
Page 20
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended January 30, 1999, Year Ended January 31, 1998, 10-Week Period
Ended February 1, 1997 and 42-Week Period Ended November 22, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Post-confirmation Pre-confirmation
---------------------------------------------------------------------
10-Week Period 42-Week
Year Ended Year Ended Ended Period Ended
(in thousands) January 30, 1999 January 31, 1998 February 1, 1997 November 22, 1996
<S> <C> <C> <C> <C>
Cash provided by operating activities:
Net income (loss) $ (7,869)$ 1,536 $ (2,757)$ 65,372
Adjustments to reconcile net income (loss) to net cash
provided by operations:
Recovery of restructuring costs - - - (2,964)
Gain on debt discharge - - - (90,980)
Net adjustments in accounts for fair value - - - (3,765)
Provision for reorganization items - - - 2,589
Depreciation and amortization 4,512 5,412 944 8,504
Deferred taxes (5,266) 378 (1,396) 31,578
(Gain) loss on sale of property, plant, and equipment 2,298 (153) - (292)
Changes in operating assets and liabilities before the
effects of restructuring reclassifications:
Trade accounts receivable (3,077) 4,925 18,856 (12,718)
Inventories (2,493) 8,644 3,026 (646)
Prepaid expenses and other assets 284 (590) (264) 14,204
Assets held for disposition (1,759) 3,542 (781) 18,523
Accounts payable 2,490 (640) (1,744) (3,928)
Accrued payroll and related expenses (827) (3,536) (3,347) 4,408
Other accrued expenses 2,138 (2,828) (1,811) 1,469
---------------- ---------------- ---------------- -----------------
Net cash provided by (used in) operating
activities (9,569) 16,690 10,726 31,354
---------------- ---------------- ---------------- -----------------
Cash flows from investing activities:
Proceeds from sale of property, plant, and equipment 1,138 740 59 949
Additions to property, plant, and equipment (5,028) (4,209) (797) (3,248)
Acquisition of company, net of cash acquired (236) - - -
Increase in investment in discontinued operations (8,540) - - -
---------------- ---------------- ---------------- -----------------
Net cash used in investing activities (12,666) (3,469) (738) (2,299)
---------------- ---------------- ---------------- -----------------
Cash flows from financing activities:
Repayment of long-term debt (15,805) (12,607) (11,251) (38,095)
Proceeds from long-term debt 40,000 - - -
Payment of debt acquisition costs (2,574) - - -
---------------- ---------------- ---------------- -----------------
Net cash (used in) provided by financing activities 21,621 (12,607) (11,251) (38,095)
---------------- ---------------- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents (614) 614 (1,263) (9,040)
Cash and cash equivalents at beginning of period 680 66 1,329 10,369
---------------- ---------------- ---------------- -----------------
Cash and cash equivalents at end of period $ 66 $ 680 $ 66 $ 1,329
================ ================ ================ =================
Supplemental disclosures - net cash paid (received)
during the period for:
Income taxes $ 59 $ (165)$ (360)$ (16,835)
Interest 4,736 6,232 1,991 8,011
</TABLE>
See accompanying notes to consolidated financial statements.
Page 21
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Notes to Financial Statements
Year Ended January 30, 1999 and January 31, 1998
(in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
1. Description of Business and Basis of Presentation
Ithaca Industries, Inc., (the "Company") is comprised of two segments;
the Underwear Division and the Hosiery Division. The Underwear Division
has two principal product lines: men's and boys' underwear and
outerwear T-shirts, women's and girls' underwear. As discussed in Note
14, the Company has adopted a plan to discontinue operations of the
Hosiery Division. The Company operates distribution and manufacturing
facilities in the Southeastern United States and offshore manufacturing
facilities in Central America. Additionally, the Company sources
certain 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 and specialty stores. The majority of the Company's
raw materials are readily available and are not dependent upon a single
supplier. As of January 30, 1999, the Company's net long-lived assets
outside of the U.S. (principally in Mexico and Central America)
approximate $3,339 in comparison to domestic assets of approximately
$22,677.
The hosiery segment has been reflected as discontinued operations in
the financial statements for the periods presented.
Reorganization and Emergence from Chapter 11 Bankruptcy
On December 16, 1996 (the "Effective Date"), the Company emerged from
proceedings under Chapter 11 of the United States Bankruptcy Code
("Chapter 11") pursuant to a Prepackaged Chapter 11 Plan of
Reorganization (the "Plan"), which was confirmed by United States
Bankruptcy Court for the District of Delaware (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 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 Company also has
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
Company's credit agreements, 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.
On October 8, 1996 (the "Petition Date"), the Company filed a voluntary
petition for relief under Chapter 11 in the Bankruptcy Court. The
Company filed the Plan to consummate a financial restructuring that had
been negotiated among the Company, its Noteholders and parties to the
Credit Agreement, and the sole stockholder 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.
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
Page 22
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Notes to Financial Statements
Year Ended January 30, 1999 and January 31, 1998
(in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Company adopted "Fresh-Start Reporting" and reflected the effects of
such adoption in the consolidated financial statements as of November
22, 1996. The Post-Confirmation consolidated financial statements have
been separated from the Preconfirmation amounts in the accompanying
financial statements to signify that the Post-Confirmation consolidated
financial statements are those of a new reporting entity and have been
prepared on a basis not comparable to prior periods.
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.
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. 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.
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 at November 22, 1996. 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
=========
All payments and distributions required by the Plan to be made by the
Company with respect to pre-petition claims against the Company have
been made or provided for at November 22, 1996, and no further material
recourse to the Company is available to any person with respect to any
pre-petition claims.
Page 23
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Notes to Financial Statements
Year Ended January 30, 1999 and January 31, 1998
(in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
2. Summary of Significant Accounting Policies and Practices
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.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
an initial maturity of three months or less to be cash equivalents.
Inventories
Inventories are valued at the lower of cost or market with cost
determined using the last-in, first-out (LIFO) method.
Property, Plant, and Equipment
Property, plant, and equipment acquired after November 22, 1996 are
stated at cost (see Note 1). Depreciation and amortization of property,
plant, and equipment is calculated using the straight-line method over
the estimated useful lives of the assets as follow:
Buildings and improvements 5-30 years
Machinery and equipment 3-8 years
Vehicles 3 years
Additions and major replacements or betterments are added to the assets
at cost. Maintenance and repair costs and minor replacements are
charged to expense when incurred. When assets are replaced or otherwise
disposed of, the cost and accumulated depreciation or amortization are
removed from the accounts, and the gains or losses, if any, are
reflected in income.
Intangibles and Other Assets
Intangible and other assets consist of patents, organizational costs
and deferred debt costs and are amortized over their respective useful
lives ranging from 5 to 18 years. Deferred debt expenses are amortized
over the term of the loans to which the costs relate.
The Company continually monitors conditions that may affect the
carrying value of its long lived assets. When conditions indicate
potential impairment of an asset, the Company will undertake necessary
market studies and reevaluate projected future cash flows associated
with the asset. When projected future cash flows, not discounted for
the time value of money, are less than the carrying value of the asset,
the impaired asset is written down to its net realizable value.
Revenue Recognition
Sales are recognized at the time the related goods are shipped.
Page 24
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Notes to Financial Statements
Year Ended January 30, 1999 and January 31, 1998
(in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Income Taxes
The Company provides deferred income taxes for the tax effects of
temporary differences between the financial reporting and income tax
bases of the Company's assets and liabilities.
Stock Option Plan
The Company has adopted Statement of Financial Accounting Standards No.
123 (SFAS No. 123), Accounting for Stock-Based Compensation, which
permits the Company to apply the accounting provisions of APB Opinion
No. 25 and pro forma income per share disclosures for 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 apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosures
required by SFAS No. 123.
Earnings Per Share
Basic earnings per share are calculated based upon the weighted-average
number of common shares outstanding during the year. Diluted earnings
per share are based upon the weighted-average number of common shares
and dilutive common equivalent shares outstanding during the year. The
denominators used in the calculation of basic and diluted per share
amounts are the same for all periods, as options to purchase shares of
common stock under the Company's Stock Plan were not included in the
computation of diluted per share amounts due to the fact that the
options' price was greater than the average market price of the common
shares. The numerators used in such calculations are also the same.
Insurance Programs
In general, the Company is self-insured for costs of workers'
compensation, casualty and health and welfare claims. The Company uses
commercial insurance for casualty and workers' compensation claims as a
risk reduction strategy to minimize catastrophic losses. Workers'
compensation and casualty losses are provided for using actuarial
assumptions and procedures followed in the insurance industry, adjusted
for company-specific history and expectations.
Fiscal Year
The Company's fiscal year ends on the Saturday closest to the end of
January. The results of operations for the fiscal years ended January
30, 1999 and January 31, 1998 include 52-week periods. Results of
operations for the year ended February 1, 1997 include the 10-week
period ended February 1, 1997 (post-confirmation) and the 42-week
period ended November 22, 1996 (pre-confirmation).
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information," which is effective for years
beginning after December 15, 1997. Given the exiting of the Company's
Hosiery Segment, as discussed in Note 14, the Company operates in one
business segment. The Company has implemented this statement in fiscal
year ended January 30, 1999 and has included the required information
in Note 1.
Page 25
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Notes to Financial Statements
Year Ended January 30, 1999 and January 31, 1998
(in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities and
the reported amounts of revenues and expenses. Actual results could
differ from those estimates.
3. Inventories
Inventories consist of the following as of January 30, 1999 and January
31, 1998:
1999 1998
Raw materials and supplies $ 12,615 $ 12,075
Work-in process 13,262 13,175
Finished goods 24,274 22,153
------------- -------------
50,151 47,403
Less excess of FIFO of LIFO cost 444 189
------------- -------------
$ 49,707 $ 47,214
============= =============
During the year ended January 31, 1998 and the 42-week period ended
November 22, 1996, LIFO inventory layers were liquidated. This
liquidation resulted in charging lower inventory costs prevailing in
prior years to cost of sales, thus reducing cost of sales by $71 and
$1,367, respectively.
4. Property, Plant, and Equipment
Property, plant, and equipment consist of the following as of January
30, 1999 and January 31, 1998:
1999 1998
Land $ 1,072 $ 967
Buildings and improvements 11,240 15,139
Machinery and equipment 18,477 15,837
Vehicles 74 76
Construction in progress 4,120 1,372
------------- -------------
34,983 33,391
Less accumulated depreciation and
amortization 8,967 4,682
------------- -------------
$ 26,016 $ 28,709
============= =============
Page 26
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Notes to Financial Statements
Year Ended January 30, 1999 and January 31, 1998
(in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
5. Long-Term Debt
Long-term debt as of January 30, 1999 and January 31, 1998 is comprised
of the following:
1999 1998
Borrowings under credit agreements $ 40,258 $ 17,500
Revolving loans 37,412 35,963
Term loans 57 69
------------- -------------
9.0% to 10.5% notes, maturing 2001
through 2003 77,727 53,532
Less current installments of
long-term debt (14) (13)
------------- -------------
$ 77,713 $ 53,519
============= =============
During March 1998, in conjunction with the acquisition of Glendale Hosiery
(see Note 13), the Company replaced its existing revolving credit agreement
with a new Receivable and Inventory Financing Agreement with a bank group
for a revolving credit facility ("Revolving Credit Facility"). The borrowing
base for the credit facility may not exceed a borrowing base determined by
specified percentages of eligible accounts receivable and inventory as
defined by the Agreement or $70,000. A commitment fee of .375% per annum is
due on the unused portion of the Revolving Credit Facility. Interest is
based on a performance-pricing matrix for both prime rate and Libor options
(7.87% as of January 30, 1999) and is paid approximately quarterly. Attached
to the Revolving Credit Facility is a letter of credit facility with a
maximum borrowing base of $15,000. A letter of credit fee of .75% per annum
applies to the daily stated amount of all commercial letters of credit.
Stand-by letters of credit fees include a facing fee of .125% and the
current Libor interest spread in effect. The Revolving Credit Facility
expires on March 24, 2003.
In addition to the Revolving Credit Facility, the Company has entered into a
term loan facility with the same bank group totaling $25,000. The due date
of this loan is March 24, 2003 and the current interest rate is prime +1% or
Libor +2.75% (8.01% as of January 30, 1999). Interest is paid monthly.
During fiscal year ended January 30, 1999, the Company executed a separate
term loan facility with a financial institution totaling $15,000. The due
date for this loan is September 30, 2003. The interest rate for this
facility is 15% per annum.
At January 31, 1998, there was $17,500 outstanding under the Company's
former revolving loan agreements. At January 31, 1998, the Company also had
$35,963 outstanding under former term loan agreements. These former
agreements were terminated and the balances repaid with proceeds of the new
facilities discussed above.
At January 30, 1999, $3,667 of the outstanding term loan balance had been
excluded from current installments of long-term debt as this amount could be
repaid using the Revolving Credit Facility.
Page 27
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Notes to Financial Statements
Year Ended January 30, 1999 and January 31, 1998
(in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
The principal maturities of long-term debt outstanding as of January 30,
1999 are as follows:
Fiscal years ending in:
2000 $ 3,681
2001 4,833
2002 5,833
2003 7,653
2004 55,727
---------
$ 77,727
=========
The Revolving Credit Facility and both term loan facilities contain
certain restrictive covenants, including, among others, a minimum
tangible net worth requirement, a fixed-charge ratio requirement and a
maximum funded indebtedness to cash flow ratio requirement. As of
January 30, 1999, the Company was in violation of certain of the above
covenants (see Note 14).
6. Income Taxes
Components of income tax (benefit) expense consist of:
<TABLE>
<CAPTION>
Post-confirmation Pre-confirmation
--------------------------------------------------------------------
10-Week Period 42-Week
Year Ended Year Ended Ended Period Ended
January 30, 1999 January 31, 1998 February 1, 1997 November 22, 1996
<S> <C> <C> <C> <C>
Current:
Federal $ 3,948 $ (596)$ (202)$ (5,827)
State 349 (53) (18) (514)
Deferred
Federal (4,839) 348 (1,283) 7,840
State (427) 30 (112) 682
---------------- ---------------- --------------- ------------------
$ (969)$ (271)$ (1,615)$ 2,181
================ ================ =============== ==================
</TABLE>
Page 28
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Notes to Financial Statements
Year Ended January 30, 1999 and January 31, 1998
(in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
Reported income tax (benefit) expense is reconciled to the amounts
computed on the basis of earnings (loss) before income taxes at the
statutory rate as follows:
<TABLE>
<CAPTION>
Post-confirmation Pre-confirmation
---------------------------------------------------------------------
10-Week Period 42-Week
Year Ended Year Ended Ended Period Ended
January 30, 1999 January 31, 1998 February 1, 1997 November 22, 1996
<S> <C> <C> <C> <C>
Computed "expected" Federal income tax
expense (benefit) $ (890) $ (269) $ (1,629) $ (1,185)
State and local taxes, net of Federal income
tax effect (79) (24) (144) (105)
Amortization of intangible assets - 127 - -
Nondeductible expenses relating to
reorganization - - 216 744
Provision for resolution of tax audits and
adjustments to refund receivable - - - 2,727
Other, net - (105) (58) -
----------- ----------- ----------- ------------
$ (969) $ (271) $ (1,615) $ 2,181
----------- ----------- ----------- ------------
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
January 30, 1999 and January 31, 1998 are presented below:
1999 1998
Deferred tax assets:
Nondeductible accruals $ 3,489 $ 2,631
Inventory reserves 1,202 -
Accounts receivable reserves and allowances 768 45
Other 1,084 2
--------- ---------
Deferred tax assets 6,543 2,678
--------- ---------
Deferred tax liabilities:
Tax attribute reductions of inventory, and
property, plant, and equipment (18,569) (17,090)
Other (260) (3,140)
--------- ---------
Deferred tax liabilities (18,829) (20,230)
--------- ---------
Net deferred tax liability $ (12,286) $ (17,522)
========= =========
7. Related Party Transactions
During the 42-week period ended November 22, 1996, the Company engaged
in transactions with related parties, recognizing income from the
former Parent company of approximately $299.
As of January 31, 1998, long-term debt due to related parties consists
of borrowings arising from the Reorganization (Note 1) held by a
stockholder of the Company. This borrowing was fully repaid in fiscal
1999.
Page 29
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Notes to Financial Statements
Year Ended January 30, 1999 and January 31, 1998
(in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
8. Credit Concentrations
Most of the Company's sales are concentrated with national retailers.
For the years ended January 30, 1999 and January 31, 1998, one customer
individually accounted for 50% and 47%, respectively, of net sales.
9. Fair Value of Financial Instruments
At January 30, 1999 and January 31, 1998, management believes the fair
value of the Company's debt approximates its carrying amount as it is
based upon variable and/or market rates of interest. The carrying
values of all other financial instruments in the consolidated balance
sheets approximate fair values.
10. 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 $3,546, $3,343,
$680 and $3,338, for the years ended January 30, 1999 and January 31,
1998; the 10-week period ended February 1, 1997; and the 42-week period
ended November 22, 1996, respectively. In addition, the Company is
responsible for payment of applicable real estate taxes, insurance, and
maintenance expenses.
At January 30, 1999, future minimum annual rentals under these leases
are as follow:
Fiscal years ending in:
2000 $ 3,192
2001 2,416
2002 1,954
2003 1,738
2004 663
Thereafter 739
----------
$ 10,702
==========
11. Employee Benefit Plans
The Company adopted an incentive compensation plan under which certain
employees may receive discretionary bonus awards from a bonus pool
calculated based on achievement of specified targets established by the
Board of Directors. Bonus amounts recognized for the years ended
January 30, 1999 and January 31, 1998; the 10-week period ended
February 1, 1997; and the 42-week period ended November 22, 1996 were
$0, $489, $560, and $1,740, respectively.
The Company maintains a long-term incentive plan (the "Stock Plan")
which permits the Company's Board of Directors to grant stock options
to officers and key employees. The Stock Plan initially reserved
928,962 shares of authorized but unissued common stock. Total shares
available for grant may be increased by the Board of Directors at their
discretion. Stock options
Page 30
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Notes to Financial Statements
Year Ended January 30, 1999 and January 31, 1998
(in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
may be granted at an exercise price equal to or less than fair market
value as stipulated in the applicable option agreement. Excluding a
grant of 109,290 options to certain outside consultants, certain
options vest one-third on the date of grant and one-third on the
subsequent first and second anniversaries from the date of grant. The
remaining options are performance based and vest in equal amounts based
upon the achievement of certain performance targets for each of the
three years subsequent to grant date. The exercise price for all
options granted to date was $6.00 per share.
The following table summarizes stock option activity:
Year Ended January 30, 1999 Number of shares
Outstanding at beginning of year 881,846
Granted 124,000
Exercised -
Expired (254,537)
Cancelled -
-------
Outstanding at end of year 751,309
=======
Exercisable at end of year 542,309
=======
Year Ended January 31, 1998 Number of Shares
Outstanding at beginning of year 901,014
Granted 17,500
Exercised -
Expired -
Cancelled (36,668)
-------
Outstanding at end of year 881,846
=======
Exercisable at end of year 492,718
=======
10-Week Period Ended February 1, 1997 Number of shares
Outstanding at beginning of period -
Granted 901,014
Exercised -
Expired -
Cancelled -
-------
Outstanding at end of period 901,014
=======
Exercisable at end of period 240,994
=======
Page 31
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Notes to Financial Statements
Year Ended January 30, 1999 and January 31, 1998
(in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
The company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which establishes a fair value-based method
of accounting for stock-based compensation. Had compensation cost been
determined based on the fair value at the grant date of awards during
the years ended January 30, 1999 and January 31, 1998 and the 10-week
period ended February 1, 1997 consistent with provisions of SFAS 123,
the Company's net income (loss) and net income (loss) per common share
would have been adjusted to the pro forma amounts indicated in the
table below:
<TABLE>
<CAPTION>
10-Week
Year Ended Year Ended Period Ended
January 30, 1999 January 31, 1998 February 1, 1997
<S> <C> <C> <C>
Net income (loss) - as reported $ (7,869) $ 1,536 $ (2,757)
Net income (loss) - pro forma (7,942) 1,336 (2,757)
Net income (loss) per common share - as reported (0.76) 0.15 (0.28)
Net income (loss) per common share - pro forma (0.77) 0.13 (0.28)
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions used for grants during the years ended January 30, 1999 and
January 31, 1998 and the 10-week period ended February 1, 1997:
<TABLE>
<CAPTION>
10-Week
Year Ended Year Ended Period Ended
January 30, 1999 January 31, 1998 February 1, 1997
<S> <C> <C> <C>
Dividend yield 0% 0% 0%
Expected volatility 30% 33% 33%
Weighted average risk-free interest rate 5.4% 5.5% 6.2%
Expected life 3 years 3 years 3 years
</TABLE>
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 claims costs and administrative expenses. Company
contributions to the plan were $4,472, $4,645, $1,250, and $5,604, for
the years ended January 30, 1999 and January 31, 1998; the 10-week
period ended February 1, 1997; and the 42-week period ended November
22, 1996, respectively.
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 related to this plan totaled approximately
$293, $226, $53 and $319, for the years ended January 30, 1999 and
January 31, 1998; the 10-week period ended February 1, 1997; and the
42-week period ended November 22, 1996, respectively.
Page 32
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Notes to Financial Statements
Year Ended January 30, 1999 and January 31, 1998
(in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
12. Restructuring
During fourth quarter of fiscal 1999, the Company adopted a plan to
exit two domestic facilities during fiscal 2000. In conjunction with
this plan, the Company recorded charges totaling approximately $832
($524 after related income tax expense). Such charges related primarily
to the closing of the manufacturing facilities and the write-down of
certain assets to net realizable value.
As of January 30, 1999 and January 31, 1998, assets held for
disposition consist of the following:
1999 1998
Property, plant, and equipment, net of reserve of
$4,144 at January 30, 1999 and $4,642 at
January 31, 1998 $1,972 $213
====== ====
The reserves reflect management's best estimate of the recoverability
of the related assets.
13. Acquisition
On March 24, 1998, the Company completed the acquisition of Glendale
Hosiery Company (Glendale), a manufacturer and distributor of women's
hosiery. Consideration paid included a cash payment of $1,500, issuance
of 400,000 shares of Ithaca common stock valued at approximately $1,300
and subordinated notes totaling $1,200. Ithaca was also required to
refinance $8,200 of Glendale's bank indebtedness. The transaction was
financed with the proceeds from the refinancing of the Company's
existing Credit Agreement with $110,000 in new credit facilities. This
acquisition was accounted for under the purchase method and the assets
and liabilities were recorded based on their estimated fair values
resulting in goodwill of approximately $2,800.
Unaudited pro forma information of consolidated results of operations
of the Company and Glendale as if the acquisition had occurred February
1, 1998 has not been presented as the Company has adopted a plan to
discontinue operations of the Hosiery Division in which Glendale is
included (see Note 14).
14. Subsequent Event
On April 30, 1999, the Company sold substantially all the assets of the
Hosiery Division. The results of operations of the Hosiery Division are
reflected as discontinued operations for all periods presented in the
consolidated financial statements. The Company has recorded a loss on
disposal including operating losses during the phaseout period of
$2,360, net of taxes. The investment in discontinued operations
included in the balance sheet at January 30, 1999 and January 31, 1998
is primarily comprised of accounts receivable, inventory, fixed assets,
goodwill, accounts payable and various other liabilities pertaining to
the Hosiery Division.
Page 33
<PAGE>
Ithaca Industries, Inc. and Subsidiaries
Notes to Financial Statements
Year Ended January 30, 1999 and January 31, 1998
(in thousands, except share and per share amounts)
- --------------------------------------------------------------------------------
The Company has allocated interest expense to the discontinued
operations based on the ratio of net assets of the discontinued
operations to the total net assets of the consolidated Company.
Interest expense allocated in the years ended January 30, 1999 and
January 31, 1998, the 10-week period ended February 1, 1997 and the
42-week period ended November 22, 1996 was $2,398, $1,622, $325 and
$4,110, respectively.
In connection with the sale of the Hosiery Division, the Company has
obtained waivers for violations of financial covenants referred to in
Note 5.
Operating results for discontinued operations, including an allocation
of interest expense are as follows:
<TABLE>
<CAPTION>
Post-confirmation Pre-confirmation
--------------------------------------------------------------------
10-Week Period 42-Week
Year Ended Year Ended Ended Period Ended
January 30, 1999 January 31, 1998 February 1, 1997 November 22, 1996
<S> <C> <C> <C> <C>
Net sales $ 79,655 $ 50,655 $ 12,205 $ 72,913
Income (loss)
before income tax (9,959) 3,130 634 5,150
Income (loss)
from discontinued
operations (6,219) 2,056 419 3,113
</TABLE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Page 34
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 is incorporated by reference
herein from the material under the headings "Business Experience of Directors
and Executive Officers," "Election of Directors Meetings of the Board of
Directors," and "Section 16(a) Beneficial Ownership Reporting Compliance"
contained in the Company's definitive proxy statement filed with the Commission
relating to the annual meeting of stockholders to be held on June 14, 1999.
ITEM 11. Executive Compensation
The information required by this Item 11 is incorporated by reference
herein from the material under the headings "Remuneration of Directors and
Executive Officers," and "Compensation Committee Interlocks and Insider
Participation" contained in the Company's definitive proxy statement filed with
the Commission relating to the annual meeting of stockholders to be held on June
14, 1999.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item 12 is incorporated by reference
herein from the material under the heading "Security Ownership of Certain
Beneficial Owners" contained in the Company's definitive proxy statement filed
with the Commission relating to the annual meeting of stockholders to be held on
June 14, 1999.
ITEM 13. Certain Relationships and Related Transactions
During the Company's last fiscal year there were no reportable
transactions or relationships.
Page 35
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports On Form 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
1. Financial Statements
A. Independent Auditor's Report
1. PricewaterhouseCoopers LLP
2. KPMG LLP
B. Consolidated Balance Sheets as of January 31, 1999, and
January 31, 1998.
C. Consolidated Statements of Operations for the years
ended January 31, 1999, January 31, 1998, the 10-week
period ended January 31, 1997 and the 42-Week period
ended November 22, 1996.
D. Consolidated Statements of Stockholders' Equity
(Deficit) for the year ended January 31, 1999,
January 31, 1998, the 10-Week Period ended January
31, 1997, and the 42-Week Period ended November 22,
1996.
E. Consolidated Statements of Cash Flows for the years
ended January 31, 1999, January 31, 1998, the 10-Week
Period ended January 31, 1997, and the 42-Week Period
ended November 22, 1996.
F. Notes to the Consolidated Financial Statements.
2. Financial Statement Schedule Page - 41
A. Report of Independent Accountants on Financial
Statement Schedule
B. Schedule II -- Valuation and Qualifying Accounts -
for the years ended January 31, 1999, January 31,
1998, the 10-Week Period ended January 31, 1997, and
the 42-Week Period ended November 22, 1996.
3. Exhibits
All Exhibits listed below are filed with this Annual Report on
Form 10-K unless specifically stated to be incorporated by
reference to other documents previously filed with the
Securities and Exchange Commission.
Exhibit No. Description of Exhibits
- ----------- -----------------------
THE COMPANY WILL FURNISH TO ANY STOCKHOLDER, UPON WRITTEN REQUEST, ANY EXHIBIT
LISTED BELOW UPON PAYMENT BY SUCH STOCKHOLDER OF THE COMPANY'S REASONABLE
EXPENSES IN FURNISHING ANY SUCH EXHIBIT
2 Asset Purchase Agreement between Ithaca Industries, Inc and
Glendale Group, Ltd. dated April 29, 1999 (incorporated by
reference to Exhibit 2 of the Company's Form 10-K, dated May
14, 1999).
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1, dated March 17,
1997).
3.2 Amended and Restated By-Laws of the Company (incorporated by
reference to Exhibit F of Exhibit 2.1 to the Company's Form
8-K, dated September 3, 1996).
Page 36
<PAGE>
4 Registration Rights Agreement, between the Company and various
stockholders (incorporated by reference to Exhibit H of
Exhibit 2.1 to the Company's Form 8-K, dated September 3,
1996).
10.1 Loan and Security Agreement among the Company, various banks,
NationsBank, N.A. as agent, NationsBanc Montgomery Securities
LLC as syndication agent and arranger and BankAmerica Business
Credit, Inc. as documentation agent, dated as of March 24,
1998 (incorporated by reference to Exhibit 10.1 of the
Company's Form 10-k dated May 1, 1998.)
10.2 Loan and Security Agreement among the Company, various banks
and NationsBank, N.A. as collateral agent, dated as of March
24, 1998 (incorporated by reference to Exhibit 10.2 of the
Company's Form 10-K dated May 1, 1998)
10.3 Ithaca Industries 1996 Long Term Stock Incentive Plan
(incorporated by reference to Exhibit I of Exhibit 2.1 to the
Company's Form 8-K, dated September 3, 1996).
10.4 Employment Agreement of Jim D. Waller (incorporated by
reference to Exhibit 10.4 of the Company's Registration
Statement on Form S-1, dated March 17, 1997).
10.5 Employment Agreement of Richard P. Thrush (incorporated by
reference to Exhibit 10.5 of the Company's Form 10-K, dated
May 14, 1999).
10.6 Amendment and Waiver dated April 30, 1999 of the Loan and
Security Agreement referred to in item 10.1 (incorporated by
reference to Exhibit 10.6 of the Company's Form 10-K, dated
May 14, 1999).
10.7 Amendment and Waiver dated April 30, 1999 of the Loan and
Security Agreement Referred to in item 10.2 (incorporated by
reference to Exhibit 10.7 of the Company's Form 10-K, dated
May 14, 1999).
21 List of Subsidiaries of the Company (incorporated by reference
to Exhibit 21 of the Company's Registration Statement on Form
S-1, dated March 17, 1997).
23.1 Consent of PricewaterhouseCoopers LLP (incorporated by
reference to Exhibit 23.1 of the Company's Form 10-K, dated
May 14, 1999).
23.2 Consent of KPMG LLP (incorporated by reference to Exhibit 23.2
of the Company's Form 10-K, dated May 14, 1999).
24 Power of Attorney (included in the signature page of this
report).
27 Financial Data Schedule for the year ended January 31, 1999
(incorporated by reference to Exhibit 27 of the Company's Form
10-K, dated May 14, 1999).
99 Press Release of Ithaca Industries, Inc., dated April 29,
1999 (incorporated by reference to Exhibit 99 of the Company's
Form 10-K, dated May 14, 1999).
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the Registrant during the
last quarter of the fiscal year ended January 31, 1999.
As of the date of the filing of this Annual Report on Form 10-K no
proxy materials have been furnished directly to security holders. Proxy
materials will be mailed on or about May 17, 1999 to security holders.
Page 37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Wilkesboro, North
Carolina, on this 14th day of May, 1999.
ITHACA INDUSTRIES, INC.
By: /s/ Richard P. Thrush
-------------------------
RICHARD P. THRUSH
(Secretary, Chief Financial and Accounting Officer)
We, the undersigned officers and directors of Ithaca Industries, Inc.,
hereby severally constitute Jim D. Waller, and Richard P. Thrush, and each of
them singly, our true and lawful attorneys with full power to them, and each of
them singly, to sign for us and in our names in the capacities indicated below,
any and all reports, with all exhibits thereto and any and all documents in
connection therewith, and generally do all such things in our name and on our
behalf in such capacities to enable Ithaca Industries, Inc. to comply with the
applicable provisions of the Securities Exchange Act of 1934, as amended, and
all requirements of the Securities Exchange Commission, and we hereby ratify and
confirm our signatures as they may be signed by our said attorneys, or either of
them, to any and all such amendments.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date(s)
--------- ----- -------
/s/ Jim D. Waller Chairman, Chief Executive Officer, May 14, 1999
----------------- President and Director
Jim D. Waller
/s/ Walter J. Branson Director May 14, 1999
- ---------------------
Walter J. Branson
/s/ Marvin B. Crow Director May 14, 1999
------------------
Marvin B. Crow
/s/ Francis Goldwyn Director May 14, 1999
-------------------
Francis Goldwyn
/s/ Morton E. Handel Director May 14, 1999
--------------------
Morton E. Handel
/s/ David N. Weinstein Director May 14, 1999
- ----------------------
David N. Weinstein
/s/ James A. Williams Director May 14, 1999
- ---------------------
James A. Williams
Page 38
<PAGE>
Exhibit Index
Exhibit No. Description of Exhibits
- ----------- -----------------------
THE COMPANY WILL FURNISH TO ANY STOCKHOLDER, UPON WRITTEN REQUEST, ANY EXHIBIT
LISTED BELOW UPON PAYMENT BY SUCH STOCKHOLDER OF THE COMPANY'S REASONABLE
EXPENSES IN FURNISHING ANY SUCH EXHIBIT
2 Asset Purchase Agreement between Ithaca Industries, Inc and
Glendale Group, Ltd. dated April 29, 1999 (incorporated by
reference to Exhibit 2 of the Company's Form 10-K, dated May
14, 1999).
3.1 Amended and Restated Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.1 of the
Company's Registration Statement on Form S-1, dated March 17,
1997).
3.2 Amended and Restated By-Laws of the Company (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, between the Company and various
stockholders (incorporated by reference to Exhibit H of
Exhibit 2.1 to the Company's Form 8-K, dated September 3,
1996).
10.1 Loan and Security Agreement among the Company, various banks,
NationsBank, N.A. as agent, NationsBanc Montgomery Securities
LLC as syndication agent and arranger and BankAmerica Business
Credit, Inc. as documentation agent, dated as of March 24,
1998 (incorporated by reference to Exhibit 10.1 of the
Company's Form 10-k dated May 1, 1998.)
10.2 Loan and Security Agreement among the Company, various banks
and NationsBank, N.A. as collateral agent, dated as of March
24, 1998 (incorporated by reference to Exhibit 10.2 of the
Company's Form 10-K dated May 1, 1998)
10.3 Ithaca Industries 1996 Long Term Stock Incentive Plan
(incorporated by reference to Exhibit I of Exhibit 2.1 to the
Company's Form 8-K, dated September 3, 1996).
10.4 Employment Agreement of Jim D. Waller (incorporated by
reference to Exhibit 10.4 of the Company's Registration
Statement on Form S-1, dated March 17, 1997).
10.5 Employment Agreement of Richard P. Thrush (incorporated by
reference to Exhibit 10.5 of the Company's Form 10-K, dated
May 14, 1999).
10.6 Amendment and Waiver dated April 30, 1999 of the Loan and
Security Agreement referred to in item 10.1 (incorporated by
reference to Exhibit 10.6 of the Company's Form 10-K, dated
May 14, 1999).
10.7 Amendment and Waiver dated April 30, 1999 of the Loan and
Security Agreement Referred to in item 10.2 (incorporated by
reference to Exhibit 10.7 of the Company's Form 10-K, dated
May 14, 1999).
21 List of Subsidiaries of the Company (incorporated by reference
to Exhibit 21 of the Company's Registration Statement on Form
S-1, dated March 17, 1997).
23.1 Consent of PricewaterhouseCoopers LLP (incorporated by
reference to Exhibit 23.1 of the Company's Form 10-K, dated
May 14, 1999).
23.2 Consent of KPMG LLP (incorporated by reference to Exhibit 23.2
of the Company's Form 10-K, dated May 14, 1999).
24 Power of Attorney (included in the signature page of this
report).
Page 39
<PAGE>
27 Financial Data Schedule for the year ended January 31, 1999
(incorporated by reference to Exhibit 27 of the Company's Form
10-K, dated May 14, 1999).
99 Press Release of Ithaca Industries, Inc., dated April 29,
1999 (incorporated by reference to Exhibit 99 of the Company's
Form 10-K, dated May 14, 1999).
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed by the Registrant during the
last quarter of the fiscal year ended January 31, 1999.
As of the date of the filing of this Annual Report on Form 10-K no
proxy materials have been furnished directly to security holders. Proxy
materials will be mailed on or about May 17, 1999 to security holders.
Page 40
<PAGE>
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors of
Ithaca Industries, Inc.:
Our audit of the consolidated financial statements referred to in our report
dated March 25, 1999, except as to Note 14 which is as of April 30, 1999,
appearing on page 15 of this Annual Report on Form 10-K also included an audit
of the Financial Statement Schedule for the year ended January 30, 1999 listed
in Item 14(a)(2) of this Form 10-K. In our opinion, this Financial Statement
Schedule for the year ended January 30, 1999 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements.
PricewaterhouseCoopers LLP
Charlotte, North Carolina
March 25, 1999
Page 41
<PAGE>
Schedule II
ITHACA INDUSTRIES, INC. AND SUBSIDIARIES
Valuation and Qualifying Accounts
Year ended January 30, 1999, Year ended January 31, 1998,
10-Week Period ended January 31, 1997, Post-Confirmation and
42-Week Period ended November 22, 1996; Preconfirmation
(Dollars in Thousands)
<TABLE>
<CAPTION>
Balance at Charged to
Beginning of Cost and Balance at End
Description Year/Period Expenses Deductions of Year/Period
- --------------------------------------------------- -------------------- --------------- ------------- --------------
<S> <C> <C> <C> <C>
Year ended January 30, 1999 (post-confirmation):
Allowance for doubtful accounts $ 765 -- -- 765
Provision for claims and allowances 699 2,456 2,000 1,155
Reserve for plant closures 995 207 995 207
-------------------- --------------- ------------- --------------
Total $ 2,459 2,663 2,995 2,127
==================== =============== ============= ==============
Year ended January 31, 1998 (post-confirmation):
Allowance for doubtful accounts $ 1,256 476 967 765
Provision for claims and allowances 1,029 2,970 3,300 699
Reserve for plant closures 2,106 -- 1,111 995
-------------------- --------------- ------------- --------------
Total $ 4,391 3,445 5,377 2,459
==================== =============== ============= ==============
10-week period ended February 1, 1997 (post-confirmation):
Allowance for doubtful accounts $ 1,508 2 254 1,256
Provision for discounts 5 544 549 --
Provision for claims and allowances 1,245 894 1,109 1,029
Reserve for plant closures 12,204 -- 10,098 2,106
-------------------- --------------- ------------- --------------
Total $ 14,962 1,441 12,011 4,391
==================== =============== ============= ==============
42-week period ended November 22, 1996 (pre-confirmation):
Allowance for doubtful accounts $ 1,215 333 40 1,508
Provision for discounts 99 1,926 2,020 5
Provision for claims and allowances 1,256 4,580 4,591 1,245
Reserve for plant closures 37,093 -- 24,889 12,204
-------------------- --------------- ------------- --------------
Total $39,663 6,839 31,540 14,962
==================== =============== ============= ==============
</TABLE>
Page 42
