SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 29, 1996
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 No. 33-87392
HOSIERY CORPORATION OF AMERICA, INC.
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-0782950
--------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3369 Progress Drive
Bensalem, Pennsylvania 19020
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 244-1777
Indicate by check mark whether the Registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X___ No _______
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at August 12, 1996
----------------- -----------------------------------------------
Voting 1,332,830
Class A, non-voting 75,652
<PAGE>
INDEX PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 29, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations
Three and six month periods ended June 29, 1996 and
June 30, 1995 4
Condensed Consolidated Statements of Cash Flows
Six month periods ended June 29, 1996 and June 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-13
PART II - OTHER INFORMATION 14
SIGNATURES 15
2
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 29, 1996 AND DECEMBER 31, 1995
(Dollars in thousands, except per share data)
<CAPTION>
ASSETS June 29, 1996 December 31,1995
-------------------------------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ......................... $ 5,534 $ 6,987
Accounts receivable, less an allowance for doubtful
accounts of $1,712 and $1,263 in 1996 and 1995,
respectively ..................................... 23,033 19,708
Inventories ....................................... 8,561 9,814
Prepaid and other current assets .................. 923 1,382
--------- ---------
Total current assets .......................... 38,051 37,891
PROPERTY AND EQUIPMENT, net ............................ 15,303 15,334
MAILING LIST RIGHTS .................................... -- 90
DEFERRED CUSTOMER ACQUISITION COSTS .................... 22,613 19,485
DEFERRED DEBT ISSUANCE COSTS, less accumulated
amortization of $2,850 and $2,016 in 1996 and
1995, respectively ............................... 8,019 8,853
DEFERRED TAX ASSET ..................................... 1,430 --
OTHER ASSETS ........................................... 915 1,207
--------- ---------
TOTAL .................................................. $ 86,331 $ 82,860
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt ................. $ 5,660 $ 3,421
Current portion of capital lease obligations ...... 1,517 1,402
Accounts payable .................................. 5,395 3,948
Accrued expenses and other current liabilities .... 5,587 5,811
Accrued interest .................................. 4,669 4,858
Accrued coupon redemption costs ................... 5,954 6,117
Deferred income taxes ............................. 7,554 6,540
--------- ---------
Total current liabilities .................... 36,336 32,097
LONG-TERM DEBT, Less current portion ................... 134,408 142,565
CAPITAL LEASE OBLIGATIONS, Less current portion ........ 3,552 3,705
ACCRUED COUPON REDEMPTION COSTS ........................ 519 521
DEFERRED INCOME TAXES .................................. -- 6,508
--------- ---------
Total liabilities ............................ 174,815 185,396
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
REEDEMABLE EQUITY SECURITIES ........................... 632 332
--------- ---------
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.01 par value, 12,000,000 shares
authorized: 4,000,000 shares designated as
pay-in-kind preferred stock,stated at liquidation
value of $10 per share; 25% cumulative, 3,739,782
shares issued and outstanding .................... 37,398 37,398
Common stock, voting, $.01 par value: 3,000,000
shares authorized, 1,321,522 shares issued and
outstanding ...................................... 13 13
Common stock, Class A, non-voting, $.01 par value:
500,000 shares authorized, 75,652 shares issued
and outstanding .................................. 1 1
Additional paid-in capital ........................ 16,805 16,805
Compensatory stock options outstanding ............ 22,938 --
Accumulated deficit ............................... (165,200) (155,588)
Restricted stock .................................. (1,072) (1,499)
Foreign currency translation adjustment ........... 1 2
--------- ---------
Stockholders' deficiency ........................ (89,116) (102,868)
--------- ---------
TOTAL .................................................. $ 86,331 $ 82,860
========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Three Month Periods Six Month Periods
Ended Ended
June 29, June 30, June 29, June 30,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET REVENUES............................ $ 42,623 $ 36,526 $ 82,722 $ 70,134
------- -------- -------- --------
COSTS AND EXPENSES:
Cost of sales...................... 19,840 15,933 40,752 33,052
Administrative and general expenses 2,570 2,582 5,834 5,241
Provision for doubtful accounts.... 2,545 2,152 5,560 4,536
Marketing costs.................... 5,773 4,282 10,379 7,755
Coupon redemption costs............ 1,133 1,567 2,613 3,568
Depreciation and amortization...... 660 617 1,318 1,241
Compensation related to stock options 22,938 -- 22,938 --
Other income ...................... (57) (1) (28) (2)
-------- -------- -------- --------
OPERATING INCOME (LOSS)................. (12,779) 9,394 (6,644) 14,743
Interest income.................... 70 91 143 154
Interest expense................... 4,578 4,913 9,256 10,039
-------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES................... (17,287) 4,572 (15,757) 4,858
PROVISION (BENEFIT) FOR INCOME TAXES ... (6,742) 1,783 (6,145) 1,894
-------- -------- -------- --------
NET INCOME (LOSS)....................... $(10,545) $ 2,789 $ (9,612) $ 2,964
======== ======== ======== ========
<FN>
See notes to condensed consolidated financial statements.
4
</FN>
</TABLE>
<PAGE>
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTH PERIODS ENDED JUNE 29, 1996 AND JUNE 30, 1995
(Dollars in thousands)
(Unaudited)
<CAPTION>
1996 1995
----------------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income ...................................................... $(9,612) $ 2,964
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization ................................ 1,318 1,241
Amortization of debt issue costs and discounts ............... 924 1,021
Compensation related to stock options ........................ 22,938 --
Amortization of deferred customer acquisition costs .......... 8,773 6,766
Other ........................................................ 128 (28)
(Increase) decrease in operating assets:
Accounts receivable .................................... (3,325) (2,433)
Inventories ............................................ 1,253 1,288
Payments for deferred customer acquisition costs ....... (11,811) (9,452)
Prepaid and other current assets ....................... 459 (205)
Deferred tax asset ..................................... (1,430) --
Other assets ........................................... 174 267
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other liabilities 1,635 (403)
Deferred income taxes .................................. (5,494) 1,890
Accrued coupon redemption costs ........................ (165) 380
------- -------
Net cash provided by operating activities ........ 5,765 3,296
------- -------
INVESTING ACTIVITIES:
Acquisitions of property and equipment .......................... (499) (292)
Proceeds from sale of property and equipment .................... 2 6
------- -------
Net cash used in investing activities ............ (497) (286)
------- -------
FINANCING ACTIVITIES:
Payments on bank and other financing ............................ (6,008) (1,810)
Payments on capital leases ...................................... (713) (606)
Proceeds from par value of restricted stock ..................... -- 1
Proceeds from stock subscription ................................ -- 125
------- -------
Net cash used in financing activities ............ (6,721) (2,290)
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... (1,453) 720
Cash and cash equivalents at beginning of year ..................... 6,987 3,891
------- -------
Cash and cash equivalents at end of period ......................... $ 5,534 $ 4,611
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ..................................................... $ 8,522 $ 6,617
======= =======
Income taxes ................................................. $ -- $ 5
======= =======
<FN>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations and financing arrangements of $675 and $1,424 were
entered into for new equipment during the six month periods ended 1996
and 1995, respectively.
In 1996, two officers of the company were granted approximately $300 of
redeemable equity securities as additional compensation for 1996.
See notes to consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
NOTE 1. Condensed Consolidated Financial Statements
- -----------------------------------------------------
In the opinion of management, the accompanying condensed consolidated financial
statements of Hosiery Corporation of America, Inc. and subsidiaries, which are
unaudited except for the Consolidated Balance Sheet as of December 31, 1995,
which is derived from audited financial statements, include all normal and
recurring adjustments necessary to present fairly the Company's financial
position as of June 29, 1996 and the results of operations for the three and six
month periods ended June 29, 1996 and June 30, 1995, and cash flows for the six
month periods ended June 29, 1996 and June 30, 1995.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K as filed with the Securities and Exchange Commission on March 26, 1996 (as
amended on Form 10-K/A on July 3, 1996).
NOTE 2. Inventories
- ---------------------
June 29, December 31,
1996 1995
-------- ---------
Raw materials...................... $ 677 $ 787
Work-in-process.................... 2,104 1,602
Finished goods..................... 4,128 5,763
Promotional and packing material... 1,652 1,662
------- -------
$8,561 $9,814
======= =======
NOTE 3. Commitments and Contingencies
- --------------------------------------
The Company has continuing obligations with certain members of management
pursuant to previously signed employment agreements.
NOTE 4. Accounting for Stock Based Compensation
- ------------------------------------------------
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation, which was effective for the Company beginning January 1, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to its
stock based compensation awards to employees and will disclose the required pro
forma effect on net income in the fiscal year end December 31, 1996 financial
statements.
6
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
NOTE 5. Impairment of Long-Lived Assets
- ----------------------------------------
Effective January 1, 1996, the Company adopted SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
This statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Also, in general, long-lived assets and certain
identifiable intangibles to be disposed of should be reported at the lower of
carrying amount or fair value less cost to sell. This new standard had no impact
on the Company's financial position or results of operations.
NOTE 6. Equity Offering
- ------------------------
On June 28, 1996, the Company filed a Form S-1 Registration Statement with the
Securities and Exchange Commission to issue common stock. If consummated, the
proceeds of the equity offering are expected to be used to repurchase the PIK
preferred stock, repurchase a portion of the Company's common stock, redeem 35%
of outstanding Notes, repay a portion of bank debt and redeem stock of a
minority stockholder.
NOTE 7. Redeemable Equity Securities
- -------------------------------------
In 1996, two officers of the Company were granted 4,434 shares of common stock
as additional compensation for 1996. This resulted in an increase in Redeemable
Equity Securities of approximately $300.
NOTE 8. Stock Option Plan
- --------------------------
On June 28, 1996, the Board of Directors approved and adopted a stock option
plan under which employees of the Company and its subsidiaries may be granted
options to purchase up to 215,369 shares of common stock. Additionally, on June
28, 1996, the Board granted to certain employees options to purchase 199,458
shares at an exercise price of $30.00 per share. Such options vested on the date
of such grant and are only exercisable upon an initial public offering of the
common stock or certain change of control events. The options expire on the
tenth anniversary of the date of grant. The difference between the fair market
value of the common stock, at the date of grant, and the exercise price of such
options was recorded as compensation related to stock options in the Company's
financial statements for the three and six month period ending June 29, 1996.
In addition, on June 28, 1996, the Board of Directors also granted options to
purchase an aggregate of 15,911 shares of common stock. The exercise price with
respect to the 15,911 shares will be the initial public offering price per
share. Such options vested on the date of such grant and are only exercisable
upon an initial public offering of the common stock.
NOTE 9. Deferred Income Taxes
- ------------------------------
A long-term deferred tax asset was created as of June 29, 1996, as a result of
compensatory stock options granted in 1996 (see Note 8). This deferred tax asset
offsets long-term deferred tax liabilities totaling $7,516. The stock options
are tax deductible when they are exercised. The Company has not recorded a
valuation allowance for this deferred tax asset as management believes that it
is more likely than not that the tax benefit will be realized.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three and Six Month Periods Ended June 29, 1996
Results of Operations
The following table sets forth certain income statement data for the Company
expressed as a percentage of net revenues:
Three Month Periods Six Month Periods
Ended Ended
June 29, June 30, June 29, June 30,
1996 1995 1996 1995
--------- -------- --------- --------
Net revenues............................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ..................... 46.6 43.6 49.2 47.1
Administrative and general expenses 6.0 7.1 7.1 7.5
Provision for doubtful accounts ... 6.0 5.9 6.7 6.5
Marketing costs ................... 13.5 11.7 12.5 11.0
Coupon redemption costs ........... 2.7 4.3 3.2 5.1
Depreciation and amortization ..... 1.5 1.7 1.6 1.8
---- ---- ---- ----
Subtotal ................ 76.3 74.3 80.3 79.0
---- ---- ---- ----
Income before interest-net, other income,
compensation related to stock options
and provision for income taxes........ 23.7% 25.7% 19.7% 21.0%
====== ====== ====== ======
8
<PAGE>
Three Month Period Ended June 29, 1996 Compared to Three Month Period Ended June
30, 1995
- --------------------------------------------------------------------------------
Net revenues increased by 16.7% to $42.6 million in the three month period ended
June 29, 1996 from $36.5 million in the three months period ended June 30, 1995.
This increase in net revenues was the result of a combination of increased
volume ($4.1 million), a portion of which relates to the Company's recent
expansion into the United Kingdom, the introduction of a new style ($1.6
million) and pricing ($0.4 million). In January 1996, the Company commenced
operations in the United Kingdom which, for the three month period ended June
29, 1996, have generated $3.2 million in revenue. In addition, the Company is
currently evaluating potential programs in Germany, France and Japan, where the
Company expects to conduct tests during 1996 and 1997.
Cost of sales increased 24.5% to $19.8 million in the second quarter of 1996
from $15.9 million for the second quarter of 1995. As a percentage of net
revenues, cost of sales was 46.6% in the second quarter of 1996 versus 43.6% in
1995. This increase was primarily due to the significant increase in first and
second shipments associated with the Company's recently initiated operations in
the United Kingdom as well as the Company's efforts to increase its
solicitations to acquire additional front end customers. The Company's first and
second shipments result in low margins because they include the introductory
offer, which is priced substantially less than the cost of manufacturing,
processing and shipping the related hosiery, and because payment and
continuation rates of new customers are less than those of older customers.
First and second shipments increased by 0.5 million or 26.3% from 1.7 million in
the second quarter of 1995 to 2.2 million in the second quarter of 1996. These
additional shipments, in both the United States and the United Kingdom,
reflected primarily a 2.6 million increase (29.1%) in solicitations from 8.9
million in the second quarter of 1995 to 11.5 million in the second quarter of
1996; and, 0.4 million of the 0.5 million increase represents shipments within
the Company's new United Kingdom program.
Administrative and general expenses remained flat at $2.6 million in the second
quarter of 1996 as compared to $2.6 million for the same period of 1995. As a
percentage of net revenues, administrative and general expenses were 6.0% in the
second quarter of 1996 versus 7.1% for the same period in 1995.
Provision for doubtful accounts increased $0.4 million or 18.3% to $2.5 million
in the second quarter of 1996 from $2.2 million for the same period of 1995. As
a percentage of net revenues, bad debts were 6.0% in the second quarter of 1996
versus 5.9% for the same period in 1995. This increase was caused by additional
front end and second shipments in 1996 as compared to 1995 (up 26.3%), which
have a higher rate of uncollectable accounts.
Marketing costs increased 34.8% to $5.8 million from $4.3 million for the three
month periods ended June 29, 1996 and June 30, 1995, respectively. As a
percentage of net revenues, marketing costs were 13.5% in the second quarter of
1996 compared to 11.7% for the same period in 1995. This increase was partially
attributable to higher amortization of prior years' deferred marketing costs in
the second quarter of 1996 compared to the second quarter of 1995, related to
the substantial increase (41.6%) in solicitations in 1995 versus 1994. In 1995,
43.3 million solicitations were mailed as compared to 30.6 million in 1994.
These costs are amortized over 42 months with the greatest amortization in the
first 24 months. Additionally, a portion of this increase was attributable to
higher front end solicitations, as 2.6 million additional solicitations were
mailed in the second quarter of 1996 compared to the same period of 1995 (up
29.1%), including the start up in the United Kingdom.
Coupon redemption costs declined to $1.1 million for the second quarter of 1996
from $1.6 million for the same period of 1995. Redemption costs were 2.7% of net
revenues in the three months ended June 29, 1996 versus 4.3% for the same period
in 1995. The decrease relates to the issuance of new gift catalogs in both 1996
and 1995 that have a lower average cost per gift than the previous catalogs, and
beginning in 1996, the charging of shipping and handling to redemption customers
has also lowered the cost of future redemptions and, therefore, the reserve
balance for these future redemptions. Lower redemptions account for $0.1 million
of the decrease.
9
<PAGE>
Compensation related to stock option expense was $22.9 million in the three
months ended June 29, 1996. This expense represents a non-cash charge
attributable to options granted by the Board of Directors on June 28, 1996, with
an exercise price below the then market price of the Company's common stock, as
part of a series of transactions in contemplation of an initial public offering.
Interest expense decreased to $4.6 million for the three month period ended June
29, 1996 from $4.9 million for the three month period ended June 30, 1995. This
decrease in interest expense was a combination of less debt ($0.2 million) and
lower rates ($0.1 million) on the bank debt. As a percentage of net revenues,
interest expense was 10.7% in the second quarter of 1996 versus 13.5% for the
same period in 1995.
Excluding stock option compensation expense of $22.9 million, the Company would
have had pretax income of $5.7 million for the three month period ended June 29,
1996, compared to $4.6 million for the three month period ended June 30, 1995.
This increase was primarily attributable to increased sales, lower coupon
redemption costs, and lower interest costs, offset by increases in cost of
sales, bad debts and marketing costs. As a percentage of net revenues, pretax
income, adjusted to exclude stock option compensation expense of $22.9 million,
was 13.3% for the second quarter of 1996 versus 12.5% for the same period in
1995.
The Company incurred a net loss of $10.5 million in the second three months of
1996. Excluding the stock option compensation expense of $14.0 million net of
tax, net income would have increased to $3.4 million in the second quarter of
1996 from $2.8 million for the comparable period of 1995. This increase resulted
from the increase in pretax income of $1.1 million, adjusted to exclude stock
option compensation expense of $22.9 million, offset by a $0.4 million increase
in the provision for income taxes, excluding the $8.9 million tax benefit
related to the stock option compensation expense. As a percentage of net
revenues, net income, adjusted to exclude the net impact of the stock option
compensation expense, was 8.1% in the second quarter of 1996 versus 7.6% for the
same period in 1995.
Six Month Period Ended June 29, 1996 Compared to Six Month Period Ended
June 30, 1995
- --------------------------------------------------------------------------------
Net revenues increased by 17.9% to $82.7 million in the first six months of 1996
from $70.1 million in the first six months of 1995. This increase in net
revenues was the result of a combination of increased volume ($8.7 million), a
portion of which relates to the Company's recent expansion into the United
Kingdom, the introduction of a new style ($2.5 million) and pricing ($1.4
million). In January 1996, the Company commenced operations in the United
Kingdom which, for the six month period ended June 29, 1996, have generated $5.2
million in revenue. In addition, the Company is currently evaluating potential
programs in Germany, France and Japan, where the Company expects to conduct
tests during 1996 and 1997.
Cost of sales increased 23.3% to $40.8 million in the first six months of 1996
from $33.1 million for the first six months of 1995. As a percentage of net
revenues, cost of sales was 49.3% in the first half of 1996 versus 47.1% for the
same period of 1995. This increase was primarily due to the significant increase
in first and second shipments associated with the Company's recently initiated
operations in the United Kingdom as well as the Company's efforts to increase
its solicitations to acquire additional front end customers. The Company's first
and second shipments result in low margins because they include the introductory
offer, which is priced substantially less than the cost of manufacturing,
processing and shipping the related hosiery, and because payment and
continuation rates of new customers are less than those of older customers.
First and second shipments increased by 1.1 million or 27.7% from 4.1 million in
the first six months of 1995 to 5.3 million in the first six months of 1996.
These additional shipments, in both the United States and the United Kingdom,
reflected primarily a 6.4 million increase (19.7%) in solicitations from 32.6
million in the first six months of 1995 to 39.0 million in the first six months
of 1996; and, 0.8 million of the 1.1 million increase represents shipments
within the Company's new United Kingdom program.
10
<PAGE>
Administrative and general expenses increased 11.3% to $5.8 million in the first
six months of 1996 from $5.2 million for the same period of 1995. Increased
personnel and higher wages account for the increase. As a percentage of net
revenues, administrative and general expenses were 7.1% in the first six months
of 1996 versus 7.5% for the same period in 1995.
Provision for doubtful accounts increased $1.0 million or 22.6% to $5.6 million
in the first half of 1996 from $4.5 million for the same period of 1995. This
increase was caused by additional front end and second shipments in 1996 as
compared to 1995 (up 1.1 million shipments which is 27.7% higher than 1995),
which have a higher rate of uncollectable accounts. As a percentage of net
revenues, bad debts were 6.7% in the first six months of 1996 versus 6.5% for
the same period in 1995.
Marketing costs increased 33.8% to $10.4 million from $7.8 million for the six
month periods ended June 29, 1996 and June 30, 1995, respectively. As a
percentage of net revenues, marketing costs were 12.5% in 1996 versus 11.0% for
the same period in 1995. This increase was partially attributable to higher
amortization of prior years' deferred marketing costs in the first half of 1996
compared to the first half of 1995, related to the substantial increase (41.6%)
in solicitations in 1995 versus 1994. In 1995, 43.3 million solicitations were
mailed as compared to 30.6 million in 1994. These costs are amortized over 42
months with the greatest amortization in the first 24 months. Additionally, a
portion of this increase was attributable to higher front end solicitations, as
6.4 million additional solicitations were mailed in the first half of 1996
compared to the same period of 1995 (up 19.7%), including the start up in the
United Kingdom.
Coupon redemption costs declined to $2.6 million for the first half of 1996 from
$3.6 million for the same period in 1995. As a percentage of net revenues,
redemption costs were 3.2% in 1996 versus 5.1% for the same period in 1995. The
decrease relates to the issuance of new gift catalogs in both 1996 and 1995 that
have a lower average cost per gift to the Company, and beginning in 1996, the
charging of shipping and handling to redemption customers has also lowered the
cost of future redemptions and, therefore, the reserve balance for these future
redemptions. Lower redemptions account for $0.2 million of the decrease.
Compensation related to stock option expense was $22.9 million in the six months
ended June 29, 1996. This expense represents a non-cash charge attributable to
options granted by the Board of Directors on June 28, 1996, with an exercise
price below the then market price of the Company's common stock, as part of a
series of transactions in contemplation of an initial public offering.
Interest expense decreased to $9.3 million for the six month period ended June
29, 1996 from $10.0 million for the six month period ended June 30, 1995. This
decrease in interest expense was a combination of lower rates ($0.4 million) and
less debt ($0.3 million) on the bank debt. As a percentage of net revenues,
interest expense was 11.2% in the first six months of 1996 versus 14.3% for the
same period in 1995.
Excluding stock option compensation expense of $22.9 million, the Company would
have had pretax income of $7.2 million for the six month period ended June 29,
1996, compared to $4.9 million for the six month period ended June 30, 1995.
This increase was primarily attributable to increased sales, lower coupon
redemption costs, and lower interest costs, offset by increases in cost of
sales, bad debts and marketing costs. As a percentage of net revenues, pretax
income, adjusted to exclude stock option compensation expense of $22.9 million,
was 8.7% for the first six months of 1996 versus 6.9% for the same period in
1995.
11
<PAGE>
The Company incurred a net loss of $9.6 million in the first six months of 1996.
Excluding the stock option compensation expense of $14.0 million net of tax, net
income would have increased to $4.4 million in the first six months of 1996 from
$3.0 million for the comparable period of 1995. This increase resulted from the
increase in pretax income of $2.3 million, adjusted to exclude stock option
compensation expense of $22.9 million, offset by a $0.9 million increase in the
provision for income taxes, excluding the $8.9 million tax benefit related to
the stock option compensation expense. As a percentage of net revenues, net
income, adjusted to exclude the net impact of the stock option compensation
expense, was 5.3% for the first six months of 1996 versus 4.2% for the same
period in 1995.
Liquidity and Capital Resources
- -------------------------------
The Company's cash requirements arise principally from the need to finance new
customer acquisitions, capital expenditures, debt repayment and other working
capital requirements. The Company expects to finance these cash requirements
from internally generated funds and/or its Revolving Credit Facility.
Working capital decreased to $1.7 million at June 29, 1996 from $5.8 million at
December 31, 1995. Increased accounts payable, marketing expenses, current
portion of long-term debt, deferred taxes and a decline in inventory, prepaid
and other current assets and cash, offset by an increase in accounts receivable,
account for the decrease.
Capital expenditures were $1.2 million and $1.7 million for the six month
periods ended June 29, 1996 and June 30, 1995, respectively. A portion of the
expenditures in 1996 and 1995 were financed through the assumption of capital
leases.
Cash flows provided by operations for the six month periods ended June 29, 1996
and June 30, 1995 of $5.8 million and $3.3 million, respectively, were derived
principally from net income (loss) of $(9.6) million and $3.0 million in 1996
and 1995, respectively, adjusted for non-cash expenses for compensation related
to stock options of $22.9 million in 1996, depreciation and amortization,
including amortization of deferred customer acquisition costs of $8.8 million
and $6.8 million in 1996 and 1995, respectively, offset by changes in operating
assets and liabilities of $18.7 million and $8.7 million in 1996 and 1995,
respectively. The changes in operating assets and liabilities included increases
in accounts receivable of $3.3 million and $2.4 million in 1996 and 1995,
respectively, reductions in inventories of $1.3 million in both 1996 and 1995,
an increase in deferred tax asset of $1.4 million, payments of deferred customer
acquisition costs of $11.8 million and $9.5 million in 1996 and 1995,
respectively, an increase of $1.6 million and a decrease of $0.4 million in
accounts payable, accrued expenses and other liabilities in 1996 and 1995,
respectively, and a decrease in deferred income taxes of $5.5 million in 1996
and an increase of $1.9 million in 1995. The increases in accounts receivable,
as well as the payments of deferred customer acquisition costs reflect the
increase in volume of front end solicitations, as well as the timing of such
solicitations in the first half of the calendar year. The reduction in inventory
was primarily the result of the increase in volume of business in both 1996 and
1995. The decrease in deferred income taxes in 1996 is primarily attributable to
the tax benefit received from compensation expense related to stock options.
Net cash used in investing activities to acquire property and equipment was $0.5
million and $0.3 million for the six month periods ended June 29, 1996 and June
30, 1995, respectively.
During the six month periods ended June 29, 1996 and June 30, 1995, the Company
used $6.7 million and $2.3 million, respectively, in financing activities
related to payments on bank and other financing, including capital lease
obligations.
12
<PAGE>
The Recapitalization
As a result of the substantial indebtedness incurred in connection with a
Recapitalization, in October 1994, the Company has significant debt service
obligations. At June 29, 1996, the outstanding amount of the Company's
indebtedness (other than trade payables) was $145.1 million, including $72.5
million of senior secured debt and $68.2 million of senior subordinated debt
(represented by the Notes). Since consummation of the Recapitalization, the
Company's ongoing cash requirements through the end of fiscal 1999 will consist
primarily of interest payments and required amortization payments under the
Credit Agreement, interest payments on the Notes, payments of capital lease
obligations, front end marketing expenditures, working capital, capital
expenditures and taxes. The required amortization payments under the Credit
Agreement (after adjusting for a $2.0 million prepayment made in June 1996) are:
$6.3 million in 1996, $9.4 million in 1997, $15.4 million in 1998, $9.6 million
in 1999, $18.0 million in 2000 and $18.0 million in 2001. Other than upon a
change of control (as defined) or as a result of certain asset sales, the
Company will not be required to make any principal payments in respect of the
Notes until maturity.
The Company's primary source of liquidity will be cash flow from operations and
funds available to it under the Revolving Credit Facility. The Revolving Credit
Facility provides for maximum borrowings of $15.0 million, of which $13.3
million was available as of June 29, 1996.
Inflation
Over the past three years, which has been a period of low inflation, the Company
has been able to increase sales volume to compensate for increases in operating
expenses. The Company has historically been able to increase its selling prices
as the cost of sales and related operating expenses have increased and,
therefore, inflation has not had a significant effect on operations.
13
<PAGE>
PART II - OTHER INFORMATION PAGE
Item 1. Legal Proceedings
None.
Item 2. Change in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and reports on Form 8K.
A. Exhibit
10.3 Stock Option Plan 16-21
B. Form 8K
No reports on Form 8K have been filed during the quarter
for which this report is filed.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOSIERY CORPORATION OF AMERICA, INC.
____________________________________
(Registrant)
/s/ ARTHUR C. HUGHES
Date: August 12, 1996 _________________________________
Arthur C. Hughes
Vice President & Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000934383
<NAME> Hosiery Corporation of America,Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Jun-29-1996
<CASH> 5,534
<SECURITIES> 0
<RECEIVABLES> 24,745
<ALLOWANCES> 1,712
<INVENTORY> 8,561
<CURRENT-ASSETS> 38,051
<PP&E> 28,851
<DEPRECIATION> 13,548
<TOTAL-ASSETS> 86,331
<CURRENT-LIABILITIES> 36,336
<BONDS> 69,292
0
37,398
<COMMON> 14
<OTHER-SE> (126,528)
<TOTAL-LIABILITY-AND-EQUITY> 86,331
<SALES> 82,722
<TOTAL-REVENUES> 82,722
<CGS> 29,983
<TOTAL-COSTS> 40,752
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 5,560
<INTEREST-EXPENSE> 9,256
<INCOME-PRETAX> (15,757)
<INCOME-TAX> (6,145)
<INCOME-CONTINUING> (9,612)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,612)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 10.3
HOSIERY CORPORATION OF AMERICA, INC.
1996 STOCK OPTION PLAN
1. Purpose; Construction.
The purpose of the Hosiery Corporation of America, Inc. 1996
Stock Option Plan (the "Plan") is to afford an incentive to executive officers,
other key employees and consultants of Hosiery Corporation of America, Inc. (the
"Company"), or any subsidiary of the Company which now exists or hereafter is
organized or acquired by the Company, to acquire a proprietary interest in the
Company, to continue as employees or consultants, to increase their efforts on
behalf of the Company and to promote the success of the Company's business. The
provisions of the Plan are intended to satisfy the requirements of Section 16(b)
of the Securities Exchange Act of 1934, as amended, and shall be interpreted in
a manner consistent with the requirements thereof.
2. Definitions.
As used in this Plan, the following words and phrases shall have
the meanings indicated:
(a) "Agreement" shall mean an agreement entered into between
the Company and a Grantee in connection with an Option under the Plan.
(b)"Board" shall mean the Board of Directors of the Company.
(c) "Committee" shall mean a committee established by the
Board to administer the Plan or, if no such committee is established, the Board.
(d) "Common Stock" shall mean shares of common stock, par
value $0.01 per share, of the Company.
(e) "Company" shall mean Hosiery Corporation of America,
Inc., a corporation organized under the laws of the State of Delaware, or any
successor corporation.
(f) "Disability" shall mean a Grantee's inability to perform
his duties with the Company or any of its affiliates by reason of any physical
or mental impairment.
(g) "Exercise Price" shall mean the exercise price of the
shares of Common Stock covered by an Option.
(h) "Fair Market Value" per share of Common Stock as of a
particular date shall mean, unless otherwise provided in an Agreement (i) the
closing sales price per share of Common Stock on the national securities
exchange on which the Common Stock is principally traded for the last preceding
date on which there was a sale of such Common Stock on such exchange, or (ii) if
the shares of Common Stock are then traded in an over-the-counter market, the
average of the closing bid and asked prices for the shares of Common Stock in
such over-the-counter
16
<PAGE>
market for the last preceding date on which there was a sale of such Common
Stock in such market, or (iii) if the shares of Common Stock are not then listed
on a national securities exchange or traded in an over-the-counter market, such
value as the Committee, in its sole discretion, shall determine; provided,
however, that the Fair Market Value per share on the date of the Initial Public
Offering shall equal the Initial Public Offering price per share or such other
price that the Committee determines in its sole discretion.
(i) "Grantee" shall mean a person who receives a grant
of Options under the Plan.
(j) "Initial Public Offering" shall mean the underwritten
initial public offering of shares of Common Stock.
(k) "Option" shall mean a grant to a Grantee of an option to
purchase shares of Common Stock.
(l) "Plan" means this Hosiery Corporation of America, Inc.
1996 Stock Option Plan, as amended from time to time.
(m) "Retirement" shall mean a Grantee's retirement in
accordance with the terms of any tax-qualified retirement plan maintained by the
Company in which the Grantee participates.
3. Administration.
The Plan shall be administered by the Committee. The Committee
shall have the authority in its discretion, subject to and not inconsistent with
the express provisions of the Plan, to administer the Plan and to exercise all
the powers and authorities either specifically granted to it under the Plan or
necessary or advisable in the administration of the Plan, including, without
limitation, the authority to grant Options; to determine the Exercise Price of
each Option; to determine the persons to whom, and the time or times at which
Options shall be granted; to determine the number of shares to be covered by
each Option; to interpret the Plan; to prescribe, amend and rescind rules and
regulations relating to the Plan; to determine the terms and provisions of the
Agreements (which need not be identical) and to cancel or suspend Options, as
necessary; and to make all other determinations deemed necessary or advisable
for the administration of the Plan.
All decisions, determinations and interpretations of the
Committee shall be final and binding on all Grantees of any Options under this
Plan. No member of the Board or Committee shall be liable for any action taken
or determination made in good faith with respect to the Plan or any Option
granted hereunder.
4. Eligibility.
Options may be granted to executive officers, other key
employees and consultants of the Company or any subsidiary of the Company which
now exists or hereafter is organized or acquired by the Company. In determining
the persons to whom Options shall be granted and the number of shares to be
covered by each Option, the Committee shall take into account the duties of the
respective persons, their present and potential contributions to the success of
the Company and
17
<PAGE>
such other factors as the Committee shall deem relevant in connection with
accomplishing the purpose of the Plan.
5. Common Stock.
The maximum number of shares of Common Stock reserved for the
grant of Options under the Plan shall be 215,369, subject to adjustment as
provided in Section 7 hereof. Such shares may, in whole or in part, be
authorized but unissued shares or shares that shall have been or may be
reacquired by the Company. If any outstanding Option under the Plan should, for
any reason expire, be cancelled or be forfeited, without having been exercised
in full, the shares of Common Stock allocable to the unexercised, cancelled or
terminated portion of such Option shall become available for subsequent grants
of Options under the Plan.
6. Terms and Conditions of Options.
Each Option granted pursuant to the Plan shall be evidenced by
an Agreement, in such form and containing such terms and conditions as the
Committee shall from time to time approve, which Agreement shall comply with and
be subject to the following terms and conditions, unless otherwise specifically
provided in such Agreement.
(a) NUMBER OF SHARES. Each Agreement shall state the number
of shares of Common Stock to which the Option relates.
(b) EXERCISE PRICE. Each Agreement shall state the Exercise
Price, which shall be subject to adjustment as provided in Section 7 hereof or
as otherwise provided in the Agreement.
(c) MEDIUM AND TIME OF PAYMENT. The Exercise Price shall be
paid in full, at the time of exercise, in cash, or in such other manner as the
Committee shall determine.
(d) TERM AND EXERCISABILITY OF OPTIONS. Each Agreement shall
provide the exercise schedule for the Option as determined by the Committee;
provided, however, an Agreement may provide that the related Option is
immediately exercisable if full, and further provided, however, the Committee
shall have the authority to accelerate the exercisability of any outstanding
Option at such time and under such circumstances as it, in its sole discretion,
deems appropriate. The Agreement may provide that the vesting of Options shall
be subject to performance criteria. The exercise period for any Option granted
under the Plan shall be ten (10) years from the date of the grant of such Option
unless otherwise determined by the Committee, but in no event shall such period
extend beyond ten (10) years from the date of grant. The exercise period shall
be subject to earlier termination as provided in Sections 6(e) and 6(f) hereof.
An Option may be exercised, as to any or all full shares of Common Stock as to
which the Option has become exercisable, by written notice delivered in person
or by mail to the Secretary of the Company, specifying the number of shares of
Common Stock with respect to which the Option is being exercised.
(e) TERMINATION. Except as otherwise provided herein, or as
otherwise provided in the applicable Agreement, an Option may not be exercised
unless the Grantee is then in the employ of or maintaining a consultant
relationship with the Company or a
18
<PAGE>
subsidiary thereof, and unless the Grantee has remained continuously so employed
or in the consultant relationship since the date of grant of the Option. Except
as otherwise provided in an Agreement evidencing an Option, in the event that
the employment or consultant relationship of a Grantee shall terminate (other
than by reason of death, Disability or Retirement), all Options of such Grantee
that are exercisable at the time of such termination may, unless earlier
terminated in accordance with their terms, be exercised within ninety (90) days
after the date of such termination (or such different period as the Committee
shall prescribe) and all Options of such Grantee that are not exercisable at
such time shall automatically terminate.
(f) DEATH, DISABILITY OR RETIREMENT OF GRANTEE. Except as
otherwise provided in an Agreement evidencing an Option, if a Grantee shall die
while employed by, or maintaining a consultant relationship with, the Company or
a subsidiary thereof, or within thirty (30) days after the date of termination
of such Grantee's employment or consultant relationship (or within such
different period as the Committee may have provided pursuant to Section 6(e)
hereof), or if the Grantee's employment or consultant relationship shall
terminate by reason of Disability, all Options theretofore granted to such
Grantee (to the extent then exercisable) may, unless earlier terminated in
accordance with their terms, be exercised by the Grantee or by the Grantee's
estate or by a person who acquired the right to exercise such Options by bequest
or inheritance or otherwise by reason of death or Disability of the Grantee, at
any time within one year after the death or Disability of the Grantee (or such
different period as the Committee shall prescribe) and all Options theretofore
granted to such Grantee, to the extent not then exercisable, shall automatically
terminate. In the event that an Option granted hereunder shall be exercised by
the legal representatives of a deceased or former Grantee, written notice of
such exercise shall be accompanied by a certified copy of letters testamentary
or equivalent proof of the right of such legal representative to exercise such
Option. Except as otherwise provided in the applicable Agreement in the event
that the employment or consultant relationship of a Grantee shall terminate on
account of such Grantee's Retirement, all outstanding Options of such Grantee at
the time of such Retirement may, unless earlier terminated in accordance with
their terms, be exercised at any time within one hundred eighty (180) days after
the date of such Retirement (or such different period as the Committee shall
prescribe).
(g) OTHER PROVISIONS. The Agreements evidencing
Options under the Plan
shall contain such other terms and conditions as the Committee may determine.
7. Effect of Certain Changes.
(a) In the event of any extraordinary dividend, stock
dividend, recapitalization, merger, consolidation, stock split, warrant or
rights issuance, or combination or exchange of such shares that effects the
Common Stock, or other similar transactions, the number of shares of Common
Stock available for Options, the number of such shares covered by outstanding
Options, and the Exercise Price of Options may be equitably adjusted by the
Committee to reflect such event and preserve the value of such Options or shall
be subject to adjustment as set forth in the applicable Agreement; provided,
however, that any fractional shares resulting from such adjustment shall be
eliminated.
(b) In the event of a change in the Common Stock of the
Company as presently constituted that is limited to a change of all of its
authorized shares of Common Stock
19
<PAGE>
into the same number of shares with a different par value or without par value,
the shares resulting from any such change shall be deemed to be the Common Stock
within the meaning of the Plan.
8. Period During Which Options May Be Granted.
Options may be granted pursuant to the Plan from time to time
within a period of ten (10) years from the date the Plan is adopted by the
Board.
9. Nontransferability of Options.
Options granted under the Plan shall not be transferable
otherwise than by will or by the laws of descent and distribution, and Options
may be exercised or otherwise realized, during the lifetime of the Grantee, only
by the Grantee or by his guardian or legal representative.
10. Agreement by Grantee Regarding Withholding Taxes.
If the Committee shall so require, as a condition of exercise of
an Option (a "Tax Event"), each Grantee shall agree that no later than the date
of the Tax Event, the Grantee will pay to the Company or make arrangements
satisfactory to the Committee regarding payment of any federal, state or local
taxes of any kind required by law to be withheld upon the Tax Event.
Alternatively, the Committee may provide that a Grantee may elect, to the extent
permitted or required by law, to have the Company deduct federal, state and
local taxes of any kind required by law to be withheld upon the Tax Event from
any payment of any kind due to the Grantee. The withholding obligation may be
satisfied by the withholding or delivery of Common Stock.
11. Amendment and Termination of the Plan.
The Board at any time and from time to time may suspend,
terminate, modify or amend the Plan. Except as otherwise provided herein, no
suspension, termination, modification or amendment of the Plan may adversely
affect any Option previously granted, unless the written consent of the Grantee
is obtained. Notwithstanding the previous sentence, beginning on the date which
this Plan is first adopted by the Board and ending on the date thirty (30) days
later, the Board may, in its sole discretion, modify or amend the Plan as it
sees fit.
12. Rights as a Stockholder.
A Grantee or a transferee of an Option shall have no rights as a
stockholder with respect to any shares covered by the Option until the date of
the issuance of a stock certificate to him for such shares.
13. No Rights to Employment.
Nothing in the Plan or in any Agreement entered into pursuant
hereto shall confer upon any Grantee the right to continue in the employ of, or
in a consultant relationship with, the Company or any subsidiary or to be
entitled to any remuneration or benefits not set forth in the
20
<PAGE>
Plan or such Agreement or to interfere with or limit in any way the right of the
Company or any such subsidiary to terminate such Grantee's employment. Options
granted under the Plan shall not be affected by any change in duties or position
of a Grantee as long as such Grantee continues to be employed by, or in a
consultant relationship with, the Company or any subsidiary.
14. Beneficiary.
A Grantee may file with the Committee a written designation of a
beneficiary on such form as may be prescribed by the Committee and may, from
time to time, amend or revoke such designation. If no designated beneficiary
survives the Grantee, the executor or administrator of the Grantee's estate
shall be deemed to be the Grantee's beneficiary.
15. Governing Law.
The Plan and all determinations made and actions taken pursuant
hereto shall be governed by the laws of the State of New York.
21
