SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 24, 1998
ITHACA INDUSTRIES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 000-22385 56-1385842
- --------------------------------------------------------------------------------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
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
2
This Form 8-K/A amends Ithaca Industries, Inc.'s ("Registrant" or the
"Company") Current Report on Form 8-K filed on April 3, 1998 with respect to
Registrant's acquisition of Glendale Hosiery Company ("Glendale"), to provide
the financial statements and pro forma financial information required by Item 7
of Form 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Pages F-1 through F-22 contain Audited Financial Statements of Glendale
Hosiery Company as of and for the years ended December 27, 1997, December 28,
1996 and December 30, 1995.
(B) PRO FORMA FINANCIAL INFORMATION
Pages F-23 though F-25 contain Unaudited Pro Forma Condensed
Consolidated Financial Information of Ithaca Industries, Inc. and its
subsidiaries.
3
(C) EXHIBITS
Exhibit Number Description
-------------- -----------
2 Asset Purchase Agreement between Ithaca
Industries, Inc. and Glendale Hosiery Company
dated March 13, 1998 (incorporated by reference to
Exhibit 2 of Registrant's Report on Form 8-K filed
April 3, 1998).
23 Consent of KPMG Peat Marwick LLP.
99.1 Press Release of Ithaca Industries, Inc. dated
March 16, 1998 (incorporated by reference to
Exhibit 99.1 of Registrant's Report on Form 8-K
filed April 3, 1998).
99.2 Press Release of Ithaca Industries, Inc. dated
March 25, 1998 (incorporated by reference to
Exhibit 99.2 of Registrant's Report on Form 8-K
filed April 3, 1998).
4
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ITHACA INDUSTRIES, INC.
Date: June 2, 1998 By: /s/ Richard P. Thrush
-------------------------
Richard P. Thrush
Senior Vice President - Finance
and Administration, Chief Accounting
and Principal Financial Officer
5
EXHIBIT INDEX
-------------
Exhibit Number Description
-------------- -----------
2 Asset Purchase Agreement between Ithaca
Industries, Inc. and Glendale Hosiery Company
dated March 13, 1998 (incorporated by reference to
Exhibit 2 of Registrant's Report on Form 8-K filed
April 3, 1998).
23 Consent of KPMG Peat Marwick LLP.
99.1 Press Release of Ithaca Industries, Inc. dated
March 16, 1998 (incorporated by reference to
Exhibit 99.1 of Registrant's Report on Form 8-K
filed April 3, 1998).
99.2 Press Release of Ithaca Industries, Inc. dated
March 25, 1998 (incorporated by reference to
Exhibit 99.2 of Registrant's Report on Form 8-K
filed April 3, 1998).
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Glendale Hosiery Company:
We have audited the accompanying balance sheet of Glendale Hosiery Company as of
December 27, 1997, and the related statements of earnings, shareholders' equity,
and cash flows for the year then ended. 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Glendale Hosiery Company as of
December 27, 1997, and the results of its operations and its cash flows for the
year then ended, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Atlanta, Georgia
March 24, 1998
F-1
GLENDALE HOSIERY COMPANY
Balance Sheet
December 27, 1997
Assets (Note 4)
Current assets:
Cash $ 20,974
Trade accounts receivable, less allowances of $167,000 in
1997 5,358,433
Inventories (note 2) 8,050,676
Prepaid expenses and other current assets 5,174
------------
Total current assets 13,435,257
Property, plant, and equipment, net (note 3) 3,457,143
------------
$ 16,892,400
Liabilities and Shareholders' Equity
Current liabilities:
Bank overdrafts $ 1,045,189
Revolving line of credit (note 4) 7,864,228
Current portion of long-term debt (note 4) 417,633
Accounts payable 1,834,629
Accrued expenses 650,908
------------
Total current liabilities 11,812,587
Shareholders' equity (note 5):
Preferred stock, $1 par value; authorized 100,000 shares,
none issued -
Common stock:
Class A, $1 par value, voting - authorized, 100,000
shares; issued and outstanding, 33,750 shares 33,750
Class B, $1 par value, nonvoting - authorized, 100,000
shares; issued and outstanding, 43,750 shares 43,750
Additional paid-in capital 647,500
Retained earnings 4,354,813
------------
Total shareholders' equity 5,079,813
Commitments (notes 7 and 10) ____________
$ 16,892,400
============
See accompanying notes to financial statements.
F-2
GLENDALE HOSIERY COMPANY
Statement of Earnings
Year ended December 27, 1997
Net sales (note 8) $ 46,966,584
Cost of goods sold 39,677,127
Gross profit 7,289,457
Selling, general, and administrative expenses (note 8) 4,963,742
------------
Operating income 2,325,715
Interest expense (833,699)
Other income 226,369
Net earnings $ 1,718,385
============
See accompanying notes to financial statements.
F-3
GLENDALE HOSIERY COMPANY
Statement of Shareholders' Equity
Year ended December 27, 1997
Class A Class B
common stock common stock Additional
paid-in Retained
Shares Amount Shares Amount capital earnings Total
------ ------ ------ ------ ------- -------- -----
Balances at December 28, 1996 33,750 $ 33,750 43,750 $ 43,750 647,500 3,458,813 4,183,813
Shareholder distributions - - - - - (822,385) (822,385)
Net earnings - - - - - 1,718,385 1,718,385
------ --------- ------ --------- ------- --------- ---------
Balances at December 27, 1997 33,750 $ 33,750 43,750 $ 43,750 647,500 4,354,813 5,079,813
====== ========= ====== ========= ======= ========= =========
See accompanying notes to financial statements.
F-4
GLENDALE HOSIERY COMPANY
Statement of Cash Flows
Year ended December 27, 1997
Cash flows from operating activities:
Net earnings $ 1,718,385
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 833,737
Decrease in trade accounts receivable 415,880
Increase in inventories (636,340)
Decrease in other assets 191,072
Decrease in accounts payable (633,793)
Increase in accrued expenses (84,997)
-----------
Net cash provided by operating activities 1,803,944
-----------
Cash flows from investing activities:
Capital expenditures (201,980)
Proceeds from sale of equipment 66,734
-----------
Net cash used in investing activities (135,246)
-----------
Cash flows from financing activities:
Net increase in revolving line of credit 655,944
Payments on long-term debt (1,524,800)
Bank overdrafts 23,201
Shareholder distributions (822,385)
-----------
Net cash used in financing activities (1,668,040)
-----------
Net increase in cash 658
Cash at beginning of year 20,316
-----------
Cash at end of year $ 20,974
===========
Supplemental disclosure of cash flow information -
cash paid during the year for interest $ 841,234
===========
See accompanying notes to financial statements.
F-5
GLENDALE HOSIERY COMPANY
Notes to Financial Statements
December 27, 1997
1. Nature of Business and Significant Accounting Policies
A. Description of Business
Glendale Hosiery Company (the "Company") is a manufacturer of
women's hosiery headquartered in Silver City, North Carolina.
The Company's private label products are sold nationwide
primarily to mass merchandisers and specialty stores.
B. Accounts Receivable
The Company grants credit to customers under credit terms that
are customary in the industry. The Company provides allowances
for doubtful accounts, claims, and discounts based upon
historical trends and periodic evaluation of the accounts.
C. Inventories
Inventories are valued at the lower of cost (first-in,
first-out method) or market.
D. Property, Plant, and Equipment
Property, plant, and equipment are recorded at cost.
Depreciation is computed principally using the straight-line
method based on the following estimated useful lives of the
related assets: buildings and improvements, ten years;
machinery and equipment, seven years; furniture and fixtures,
five years; and leasehold improvements over the lesser of the
lease term or their useful lives. Expenditures for maintenance
and repairs are charged to expense as incurred.
E. Leasehold Improvements
Leasehold improvements are amortized over a ten-year period
using the straight-line method.
F. Income Taxes
The Company has elected S Corporation status for income tax
purposes. Pursuant to the S Corporation election, federal and
state income taxes are the responsibility of the Company's
shareholders. Accordingly, no income tax provision is included
in the Company's financial statements.
F-6
GLENDALE HOSIERY COMPANY
Notes to Financial Statements
G. Fiscal Year
The Company's fiscal year ends on the final Saturday in
December. Fiscal year 1997 includes 52 weeks.
H. 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 and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
I. Stock Options
Prior to January 1, 1996, the Company accounted for its stock
option plan in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES, and related interpretations. As such,
compensation expense would be recorded on the date of grant
only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company
adopted SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION,
which allows entities to continue to apply the provisions of
APB Opinion No. 25 and provide pro forma net income
disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue
to apply the provisions of APB Opinion No. 25 and provide the
pro forma disclosure provisions of SFAS No. 123. There were no
stock option grants in the current year.
J. Revenue Recognition
Sales are recognized at the time the related goods are shipped
from the Company's facilities.
F-7
GLENDALE HOSIERY COMPANY
Notes to Financial Statements
2. Inventories
Inventories at December 27, 1997 are as follows:
Finished goods $ 3,579,239
Work in progress 2,952,216
Raw materials and supplies 1,519,221
-----------
$ 8,050,676
===========
3. Property, Plant, and Equipment
Property, plant, and equipment at December 27, 1997 are as follows:
Land 66,067
Buildings 1,173,378
Machinery and equipment $10,742,653
Leasehold improvements 2,845,325
Furniture and fixtures 540,792
-----------
15,368,215
Less accumulated depreciation and amortization 11,911,072
-----------
Net property and equipment $ 3,457,143
===========
4. Financing Arrangements
The Company has a senior debt facility with a bank at December 27, 1997
which consists of a revolving line of credit and three term loans payable
in varying installments. Under the provisions of the revolving line of
credit, the Company can borrow up to specified percentages of accounts
receivable and inventories (the borrowing base). The total amount
outstanding on the revolving line of credit (plus the aggregate stated
amount of outstanding bankers acceptance drafts at any one time) may not
exceed the lesser of $8,450,000 or the borrowing base. Interest accrues
at the bank's prime rate (8.5% at December 27, 1997) plus .75% to 1.25%.
Borrowings under the revolving line of credit are due upon
F-8
GLENDALE HOSIERY COMPANY
Notes to Financial Statements
demand, and accordingly, the amount outstanding at December 27, 1997 of
$7,864,228 is classified as a current liability in the balance sheet. The
revolving line of credit agreement expires on April 30, 1998, and
provides for automatic one-year renewal periods thereafter, subject to
provisions whereby both the Company and the bank have the right of
termination (see note 10).
Substantially all of the Company's assets are pledged to the bank under
the revolving credit and term loan obligations.
The senior debt facility includes certain restrictive covenants. Under
the more restrictive of these covenants, the Company must maintain a
minimum level of working capital and specified cash flow coverage and
debt-to-equity ratios. In addition, dividend payments are restricted to
amounts required to fund shareholder income tax liabilities arising from
the allocation of the Company's taxable income under the S Corporation
election, capital expenditures are restricted to specified levels and
limits are placed on the reacquisition of Company stock. The Company was
in compliance with all covenants as of December 27, 1997.
F-9
GLENDALE HOSIERY COMPANY
Notes to Financial Statements
Long-term debt as of December 27, 1997 consists of the following:
Term loan to bank, payable in monthly installments of $45,833,
plus interest at the bank's prime rate plus 3/4%,
through April 1998 $ 183,333
Second term loan to bank, payable in monthly installments
of $32,500, plus interest at the bank's prime rate plus
1-1/4%, through April 1998 130,000
Third term loan to bank, payable in monthly installments
of $10,417, plus interest at the bank's prime rate plus
3/4%, through June 1998 62,500
Equipment term loan, noninterest bearing, payable in
monthly installments of $41,800 through January 1998 41,800
-----------
Total long-term debt - all current $ 417,633
===========
5. Stock Option Plan
Under the Glendale 1987 Non-Qualified Stock Option Plan, options must be
exercised within two years from date of grant. An aggregate of 10,000
shares of Class B common stock are reserved for issuance under the plan.
During 1995, options for 1,250 shares of Class A common stock and 1,250
shares of Class B common stock were granted to a member of the Board of
Directors at an option price of $30 per share. These options were fully
vested upon grant. No options were granted in 1997, and as of December
27, 1997, no options had been exercised.
6. Employee Benefit Plan
The Company has a 401(k) defined contribution plan (Glendale Hosiery
Company Retirement Savings Plan). All employees of the Company are
eligible to participate in this plan. The Company, at its discretion,
may annually match a percentage of the employees' contribution. The
Company's matching contribution to the plan for the year ended December
27, 1997 was $55,702.
F-10
GLENDALE HOSIERY COMPANY
Notes to Financial Statements
7. Commitments
Leases
The Company has operating lease agreements related to equipment and a
plant building. Equipment lease terms are for five years. The building
lease-agreement is for five years and provides for seven five-year
renewal options. Under the terms of the building lease agreement, the
Company pays utilities, insurance, taxes, and maintenance costs.
The future commitments under the noncancelable operating leases are:
Year ending December,
1998 $ 110,491
1999 110,491
2000 52,360
2001 37,380
2002 31,246
Thereafter 30,050
---------
Total minimum lease payments $ 372,018
=========
Rent expense for year ended December 27, 1997 was $152,255.
8. Major Customers
Net sales for the year ended December 27, 1997 included $20,922,002 and
$15,154,341, respectively, to two major customers.
9. Fair Value of Financial Instruments
The following summarizes certain information regarding the fair value of
the Company's financial instruments at December 31, 1997:
Cash, trade accounts receivable, and accounts payable - The
carrying value approximates fair value because of the short-term
maturity of these instruments.
F-11
GLENDALE HOSIERY COMPANY
Notes to Financial Statements
Revolving line of credit and current portion of long-term debt
Substantially all of the Company's revolving credit and long-term
debt bears interest at variable rates which management believes
are commensurate with rates currently available on similar debt.
Accordingly, the carrying value approximates fair value.
10. Subsequent Event (Unaudited)
On March 24, 1998, the Company sold substantially all of its assets and
transferred substantially all of its liabilities to Ithaca Industries,
Inc. pursuant to an Asset Purchase Agreement dated March 13, 1998. Under
the terms of the agreement, the Company received consideration,
including cash, Ithaca Industries, Inc. common stock, and a subordinated
note receivable.
F-12
INDEPENDENT AUDITORS' REPORT
Board of Directors
Glendale Hosiery Company
Siler City, North Carolina
We have audited the accompanying balance sheets of Glendale Hosiery Company (the
"Company") as of December 28, 1996 and December 30, 1995, and the related
statements of earnings, shareholders' equity, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Glendale Hosiery Company as of
December 28, 1996 and December 30, 1995, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Deloitte & Touche LLP
- -------------------------
Charlotte, NC
February 17, 1997
F-13
GLENDALE HOSIERY COMPANY
BALANCE SHEETS
DECEMBER 28, 1996 AND DECEMBER 30, 1995
ASSETS (NOTE 5) 1996 1995
- --------------- ---- ----
CURRENT ASSETS:
Cash $ 20,316 $ 14,139
Trade accounts receivable, less allowance
for doubtful accounts of $16,000 and
$4,000, respectively 5,774,313 5,387,360
Inventories (Note 2) 7,414,336 6,987,588
Current portion of note receivable from
shareholder (Note 4) 75,000 75,000
Other 85,307 141,849
Total current assets 13,369,272 12,605,936
PROPERTY, PLANT AND EQUIPMENT
(Note 3) 4,155,631 4,029,105
NOTE RECEIVABLE FROM SHAREHOLDER
(Note 4) 75,000
OTHER ASSETS 35,939 47,326
TOTAL ASSETS $ 17,560,842 $ 16,757,367
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
- ------------------------------------ ---- ----
CURRENT LIABILITIES:
Revolving line of credit (Note 5) $ 7,208,284 $ 7,373,179
Current portion of long-term debt 1,524,800 1,498,840
Accounts payable 3,490,407 2,662,164
Accrued salaries, wages and related items 323,758 195,223
Accrued expenses - other 412,147 298,885
---------- ----------
Total current liabilities 12,959,396 12,028,291
---------- ----------
LONG-TERM DEBT - Less current portion
(Note 5) 417,633 1,440,834
COMMITMENTS (Note 9)
SHAREHOLDERS' EQUITY (Note 6)
Preferred stock, $1 par value; authorized
100,000 shares, none issued
Common stock:
Class A, $1 par value, voting - authorized,
100,000 shares; issued and outstanding,
33,750 shares 33,750 33,750
Class B, $1 par value, voting - authorized,
100,000 shares; issued and outstanding,
43,750 shares 43,750 43,750
Additional paid-in capital 647,500 647,500
Retained earnings 3,458,813 2,563,242
---------- ----------
Total shareholders' equity 4,183,813 3,288,242
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $17,560,842 $16,757,367
=========== ===========
F-14
GLENDALE HOSIERY COMPANY
STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 28, 1996 AND DECEMBER 30, 1995
1996 1995
---- ----
NET SALES (Note 10) $ 48,256,446 $ 44,425,767
COST OF GOODS SOLD 43,302,890 40,000,562
------------ ------------
GROSS PROFIT 4,953,556 4,425,205
SELLING, GENERAL AND ADMINISTRATIVE
(Note 8) (2,582,871) (2,530,407)
INTEREST EXPENSE (877,251) (1,103,870)
PROCEEDS FROM LIFE INSURANCE (Note 7) 2,005,588
OTHER INCOME (EXPENSE) 115,135 (124,048)
------------ ------------
NET EARNINGS $ 1,608,569 $ 2,672,468
============ ============
See notes to financial statements
F-15
GLENDALE HOSIERY COMPANY
STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 28, 1996 AND DECEMBER 30, 1995
Class A Class B
common stock common stock Additional
paid-in Retained
Shares Amount Shares Amount capital earnings
------ ------ ------ ------ ------- --------
BALANCE,
DECEMBER 31, 1994 35,000 $ 35,000 45,000 $ 45,000 $720,000 $633,750
Shares repurchased (1,250) (1,250) (1,250) (1,250) (72,500)
Shareholder distribution (742,976)
Net earnings 2,672,468
------ ------ ------ ------ ------- ---------
BALANCE,
DECEMBER 30, 1995 33,750 33,750 43,750 43,750 647,500 2,563,242
Shareholder distributions (712,998)
Net earnings 1,608,569
------ ------ ------ ------ ------- ---------
BALANCE,
DECEMBER 28, 1996 33,750 $ 33,750 43,750 43,750 $647,500 $3,458,813
====== ====== ====== ====== ======== ==========
See notes to financial statements
F-16
GLENDALE HOSIERY COMPANY
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 28, 1996 AND DECEMBER 30, 1995
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 1,608,569 $ 2,672,468
----------- -----------
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 1,115,282 1,164,254
(Gain) loss on disposal of equipment 8,821 (20,715)
Increase in trade accounts receivable (386,953) (339,890)
Increase in inventories (426,748) (1,291,673)
Decrease in other current assets 56,542 68,099
Decrease in other assets 11,387 145,038
Increase in accounts payable 828,243 277,646
Decrease (increase) in accrued salaries, wages and related items 128,535 (13,826)
Increase in accrued expenses - other 113,262 16,218
--------- ---------
Net adjustments 1,448,371 5,151
--------- ---------
Net cash provided by operating activities 3,056,940 2,677,619
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (758,029) (1,005,089)
Proceeds from sale of equipment 9,000 20,848
Proceeds from repayment of shareholder note 75,000
--------- ---------
Net cash used in investing activities (674,029) (984,241)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES;
Net increase (decrease) in revolving line of credit (164,895) 720,389
Payments on long-term debt (1,498,841) (2,350,160)
Long-term borrowings 750,000
Shareholder distributions (712,998) (742,976)
Repurchase of shares (75,000)
--------- ---------
Net cash used in financing activities (2,376,734) (1,697,747)
--------- ---------
NET INCREASE (DECREASE) IN CASH 6,177 (4,369)
CASH, BEGINNING OF YEAR 14,139 18,508
--------- ---------
CASH, END OF YEAR $ 20,316 $ 14,139
========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - Cash paid during the year for interest $ 805,251 $ 1,103,870
========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES - Noncash purchases of
machinery and equipment totaled $501,600 and $506,600 in 1996 and 1995,
respectively.
See notes to financial statements.
F-17
GLENDALE HOSIERY COMPANY
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 28, 1996 AND DECEMBER 30, 1995
1. NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Glendale Hosiery Company (the "Company") is a manufacturer of women's
hosiery headquartered in Siler City, North Carolina. The Company's private
label products are sold nationwide primarily to mass merchandisers and
specialty stores.
INVENTORIES - Inventories are valued at the lower of cost (first-in,
first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment are recorded
at cost. Depreciation is computed principally by the straight-line method
based on the estimated useful lives of the related assets. Expenditures
for maintenance and repairs are charged to expense as incurred.
LEASEHOLD INTERESTS - Leasehold interests are amortized over a ten year
period using the straight-line method.
INCOME TAXES - The Company has elected S Corporation status for income tax
purposes. Pursuant to the S Corporation election, federal and state income
taxes are the responsibility of the Company's shareholders. Accordingly,
no income tax provision is included in the financial statements.
FISCAL YEAR - The Company's fiscal year ends on the final Saturday in
December. Fiscal year 1996 and 1995 include 52 weeks.
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 and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
F-18
2. INVENTORIES
Inventories at December 28, 1996 and December 30, 1995 are as follows:
1996 1995
---- ----
Finished goods $2,751,778 $1,425,748
Work in process 3,277,022 2,296,247
Raw materials and supplies 1,385,536 3,265,593
---------- ----------
Total $7,414,336 $6,987,588
========== ==========
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 28, 1996 and December 30, 1995
is as follows:
1996 1995
---- ----
Land $ 66,067 $ 66,067
Buildings 1,142,520 1,090,331
Machinery and equipment 10,723,691 9,599,395
Leasehold improvements 2,793,266 2,756,941
Furniture and fixtures 507,424 478,416
---------- ----------
Total 15,232,968 13,991,150
Less accumulated depreciation and amortization 11,077,337 9,962,045
---------- ----------
Total $ 4,155,631 $ 4,029,105
=========== ===========
4. NOTE RECEIVABLE FROM SHAREHOLDER
During 1993, the Company loaned $300,000 to its principal shareholder, of
which $75,000 remains outstanding at December 28, 1996 from the
shareholder's estate. The final installment payment of $75,000 is due in
1997. The note bears interest at 6%, and is collateralized by a deed of
trust on certain real estate.
5. FINANCING ARRANGEMENTS
The senior debt facility with a bank at December 30, 1995 consists of a
revolving line of credit and three term loans payable in varying
installments. Under the provisions of the revolving line of credit, the
Company can borrow up to specified percentages of accounts receivable and
inventories (the borrowing base). The total amount outstanding on the
revolving line of credit (plus the aggregate stated amount of outstanding
bankers acceptance drafts at any one time) may not exceed the lesser of
$8,450,000 or the borrowing base. Interest is at the bank's prime rate
(8-1/2% at December 28, 1996) plus 3/4%. Borrowings under the agreement
are due upon demand and, accordingly, the amounts outstanding of
$7,208,284 at December 28, 1996 and $7,373,179 at December 30, 1995 are
classified as current liabilities within the balance sheets.
F-19
The line of credit agreement expires on April 30, 1997, and the agreement
provides for automatic one year renewal periods thereafter, subject to
provisions whereby both the Company and the bank have the right of
termination. Long-term debt as of December 28, 1996 and December 30, 1995
consists of the following:
1996 1995
---- ----
Term loan to bank, payable in monthly installments
of $45,833, plus interest at the bank's prime
rate plus 3/4%, through April 1998 $ 733,333 $1,283,334
Second term loan to bank, payable in monthly
installments of $32,500, plus interest at the
bank's prime rate plus 1-1/4%, through April
1998 520,000 910,000
Third term loan to bank, payable in monthly
installments of $10,417, plus interest at the
bank's prime rate plus 3/4%, through June
1998 187,500 312,500
Equipment term loan, non-interest bearing,
payable in monthly installments of $41,800
through January 1998 501,600
Equipment term loans repaid in 1996 - 433,840
----------- ----------
Total 1,942,433 2,939,674
Less current portion 1,524,800 1,498,840
----------- ----------
Long-term portion $ 417,633 $1,440,834
=========== ==========
Substantially all of the Company's assets are pledged to the bank under the
revolving credit and term loan obligations.
The senior debt facility includes certain restrictive covenants. Under the
more restrictive of these covenants, the Company must maintain a minimum
level of working capital and specified cash flow coverage and debt to equity
ratios. In addition, dividend payments are restricted to amounts required to
fund shareholder income tax liabilities arising from the allocation of the
Company's taxable income under the S Corporation election, capital
expenditures are restricted to specified levels and limits are placed on the
reacquisition of Company stock. The Company was in violation of the covenant
restricting 1996 capital expenditures and has received a waiver from the
bank.
Aggregate annual principal payments applicable to long-term debt as of
December 28, 1996 are:
1997 $1,524,800
1998 417,633
----------
Total $1,942,433
==========
F-20
6. STOCK OPTION PLAN
Under the Glendale 1987 Non-Qualified Stock Option Plan, options must be
exercised within two years from date of grant. An aggregate of 10,000
shares of Class B common stock are reserved for issuance under the plan,
with an option price of $10 per share. During 1995, options for 1,250
shares of Class A common stock and 1,250 shares of Class B common stock
were granted to a member of the Board of Directors at an option price of
$30 per share. These options were fully vested upon grant. No compensation
expense was recorded in 1995 relating to the options granted. No options
were granted in 1996, and as of December 28, 1996, no options had been
exercised.
During 1996, the Company adopted Statement of Financial Accounting
Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. As provided
under the provisions of this Statement, the Company has chosen to retain
the previous methodology of calculating compensation expense on stock
options granted as provided by Accounting Principles Board Opinion ("APB")
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. The fair value of the
stock options granted in 1995 calculated using Statement No. 123 did not
differ materially from that calculated by the Company in 1995 using APB
No. 25.
7. LIFE INSURANCE PROCEEDS
During 1995, the Company received proceeds of $2,005,588 on life insurance
policies.
8. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) defined contribution plan (Glendale Hosiery
Company Retirement Savings Plan). All employees of the Company are
eligible to participate in this plan. The Company's contribution to the
plan for the years ended December 28, 1996 and December 30, 1995, was
$57,122 and $53,780, respectively.
9. COMMITMENTS
LEASES - The Company has operating lease agreements covering equipment and
a plant building. Equipment lease terms are for five years. The plant
building lease required quarterly payments through December 31, 1991, with
a six-year moratorium on payments starting January 1, 1992. Thereafter,
the lease agreement provides for eight five-year renewal options. Under
the terms of the lease agreement, the Company pays utilities, insurance,
taxes and maintenance costs.
The future commitments under the noncancelable operating leases are:
1997 $ 73,386
1998 62,979
1999 36,392
2000 9,869
---------
Total $ 182,626
F-21
Rent expense for years ended December 28, 1996 and December 30, 1995 was
$90,141 and $81,365, respectively.
10. MAJOR CUSTOMERS
Net sales for the year ended December 28, 1996 includes $20,198,653 and
$17,261,784, respectively, to two major retail customers. Net sales for
the year ended December 30, 1995 includes $19,300,847 and $16,969,823,
respectively, to these customers.
F-22
The following Unaudited Pro Forma Condensed Consolidated Statement of
Income for the year ended January 31, 1998 gives effect to the acquisition of
Glendale and the refinancing of Ithaca Industries, Inc. long-term debt (the
"Transactions") as if each had occurred at the beginning of the period
presented. The following Unaudited Pro Forma Condensed Consolidated Balance
Sheet as of January 31, 1998 gives effect to the Transactions as if each
occurred on January 31, 1998.
The Unaudited Pro Forma Condensed Consolidated Financial Statements
have been prepared using the purchase method of accounting for the Glendale
acquisition, whereby the total cost is allocated to the tangible and intangible
assets acquired and liabilities assumed based upon their respective fair values
as of the acquisition date. For purposes of the Unaudited Pro Forma Condensed
Consolidated Financial Statements, such allocations have been made based upon
currently available information and management's estimates.
The Unaudited Pro Forma Condensed Consolidated Financial Statements for
the year ended January 31, 1998 are based on the respective audited financial
statements for the fiscal year ended January 31, 1998 of the Company and the
fiscal year ended December 27, 1997 of Glendale Hosiery Company.
The Unaudited Pro Forma Condensed Consolidated Financial Statements do
not purport to represent what the results of operations or financial position of
the Company would actually have been if any of the Transactions had occurred on
such dates or to project the results of operations or financial position of the
Company for any future date or period.
ITHACA INDUSTRIES, INC.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
(in thousands)
1/31/98 12/27/97
Ithaca Glendale Adjustments Pro Forma
------ -------- ----------- ---------
ASSETS:
Current Assets:
Cash and Cash Equivalents $ 680 21 (701) a/ --
Trade Accounts Receivable, Net 21,561 5,358 -- 26,919
Inventories 57,036 8,051 -- 65,087
Prepaid Expenses and Other
Current Assets 667 5 -- 672
------- ------- -------
Total Current Assets 79,944 13,435 (701) 92,678
Net Property, Plant, and
Equipment 34,115 3,457 1,059 b/ 38,631
Other Assets 1,931 -- 5,975 b/c/ 7,906
------- ------- ------- -------
Total Assets $115,990 16,892 6,333 139,215
======= ======= ======= =======
STOCKHOLDERS' EQUITY
AND LIABILITIES:
Current Liabilities:
Bank Overdraft -- 1,045 625 a/ 1,670
Current Installments of Long
Term Debt 13 8,282 (7,895)a/ 400
Accounts Payable 10,102 1,834 249 c/ 12,185
Accrued Payroll and Related
Expenses 7,860 7,860
Income Taxes Payable 3,667 3,667
Other Accrued Expenses 6,806 651 (147)b/ 7,310
------- ------- ------- -------
Total Current Liabilities 28,448 11,812 (7,168) 33,092
Long Term Debt Due to
Related Parties 20,036 -- (19,200)a/ 836
Long Term Debt Due to Non
Related Parties 33,483 -- 36,517 a/ 70,000
Deferred Income Taxes 13,128 -- -- 13,128
------- ------- ------- -------
Total Liabilities 95,095 11,812 10,149 117,056
STOCKHOLDERS' EQUITY:
Common Stock 100 78 (74) b/ d/ 104
Additional Paid In Capital 22,016 647 613 b/ d/ 23,276
Accumulated Deficit (1,221) 4,355 (4,355) b/ (1,221)
------- ------- ------- -------
Total Stockholders' Equity 20,895 5,080 (3,816) 22,159
Total Liabilities &
Stockholders' Equity $115,990 16,892 6,333 139,215
======= ======= ======= =======
F-23
a/ Reflects impact of the sources and uses of funds related to the Company's
cash and debt from the refinancing and Glendale acquisition.
b/ Reflects the estimated allocation of the purchase price for the
acquisition of Glendale's identifiable assets and liabilities based upon
preliminary estimates of their fair value, with a remainder of
approximately $2.8 million allocated to goodwill.
c/ Reflects adjustments for debt issuance costs incurred in connection with
the refinancing.
d/ Reflects impact of issuance of 400,000 shares of common stock in
connection with the Glendale acquisition.
F-24
ITHACA INDUSTRIES, INC.
Unaudited Pro Forma Condensed Consolidated Statement of Income
(in thousands except share and per share data)
Year ended January 31, 1998
Ithaca Glendale Adjustments Pro Forma
------ -------- ----------- ---------
Net Sales $ 237,021 46,967 -- 283,988
Cost of Sales 202,368 39,677 183 a/ 242,228
------- ------- ------- -------
Gross Profit 34,653 7,290 (183) 41,760
Selling, General and
Administrative Expenses 26,052 4,964 230 b/ 31,246
------- ------- ------- -------
Operating Income 8,601 2,326 (413) 10,514
Interest Expense - Related 1,781 -- (1,707)c/ 74
Interest Expense - Non
Related 5,094 834 1,813 c/ 7,741
Other Income 613 226 -- 839
------- ------- ------- -------
Income Before Income
Taxes 2,339 1,718 (519) 3,538
Income Tax Expense 803 -- 420 d/ 1,223
Net Income $ 1,536 1,718 (939) 2,315
======= ======= ======= =======
Basic and Dilutive Net
Income Per Common
Share $ .15 $ .22
======= =======
Weighted-Average 10,000,000 400,000 e/ 10,400,000
Common Shares
Outstanding
- -------------------
a/ Reflects pro forma depreciation expense associated with fair value
adjustment to acquired fixed assets.
b/ Reflects pro forma amortization expense related to goodwill and other
intangibles associated with the acquisition.
c/ Reflects (i) pro forma interest expense assuming a 10% rate for
subordinated notes payable to former Glendale shareholders issued in
connection with the acquisition and (ii) pro forma interest expense
assuming an effective rate of approximately 11.2% in connection with the
Refinancing.
d/ Reflects pro forma tax expense assuming an effective rate of 35%.
e/ Reflects impact of issuance of 400,000 shares of common stock in
connection with the Glendale acquisition.
F-25