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 September 28, 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 November 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
September 28, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations
Three and nine month periods ended September 28, 1996
and September 30, 1995 4
Condensed Consolidated Statements of Cash Flows
Nine month periods ended September 28, 1996 and
September 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>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
- ------------------------------------------------------------------
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 28, 1996 AND DECEMBER 31, 1995
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
ASSETS September 28, 1996 December 31,1995
-------------------------------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ............................... $ 4,472 $ 6,987
Accounts receivable, less an allowance for doubtful
accounts of $1,560 and $1,263 in 1996 and 1995,
respectively ........................................... 22,519 19,708
Inventories ............................................. 12,427 9,814
Prepaid and other current assets ........................ 1,198 1,382
--------- ---------
Total current assets ................................ 40,616 37,891
PROPERTY AND EQUIPMENT, net .................................. 15,777 15,334
MAILING LIST RIGHTS .......................................... -- 90
DEFERRED CUSTOMER ACQUISITION COSTS .......................... 23,680 19,485
DEFERRED DEBT ISSUANCE COSTS, less accumulated amortization of
$3,267 and $2,016 in 1996 and 1995, respectively ............ 7,602 8,853
DEFERRED TAX ASSET ........................................... 680 --
OTHER ASSETS ................................................. 978 1,207
--------- ---------
TOTAL ........................................................ $ 89,333 $ 82,860
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt ....................... $ 5,660 $ 3,421
Current portion of capital lease obligations ............ 1,566 1,402
Accounts payable ........................................ 6,402 3,948
Accrued expenses and other current liabilities .......... 5,336 5,811
Accrued interest ........................................ 2,608 4,858
Accrued coupon redemption costs ......................... 5,640 6,117
Deferred income taxes ................................... 8,299 6,540
--------- ---------
Total current liabilities .......................... 35,511 32,097
LONG-TERM DEBT, Less current portion ......................... 134,425 142,565
CAPITAL LEASE OBLIGATIONS, Less current portion .............. 3,855 3,705
ACCRUED COUPON REDEMPTION COSTS .............................. 480 521
DEFERRED INCOME TAXES ........................................ -- 6,508
--------- ---------
Total liabilities .................................. 174,271 185,396
--------- ---------
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 ..................................... (161,714) (155,588)
Restricted stock ........................................ (1,009) (1,499)
Foreign currency translation adjustment ................. (2) 2
--------- ---------
Stockholders' deficiency .............................. (85,570) (102,868)
--------- ---------
TOTAL ........................................................ $ 89,333 $ 82,860
========= =========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Month Periods Ended Nine Month Periods Ended
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
NET REVENUES ........................... $ 38,611 $ 32,902 $ 121,333 $ 103,036
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales...................... 16,615 14,228 57,367 47,280
Administrative and general expenses 2,782 2,465 8,616 7,706
Provision for doubtful accounts.... 2,114 1,765 7,674 6,301
Marketing costs.................... 5,409 5,245 15,788 13,000
Coupon redemption costs ........... 825 1,437 3,438 5,005
Depreciation and costs ............ 681 632 1,999 1,873
Compensation related to stock options -- -- 22,938 --
Other income ...................... (23) -- (51) (2)
--------- -------- --------- ---------
OPERATING INCOME ....................... 10,208 7,130 3,564 21,873
Interest income ................... 97 95 240 249
Interest expense .................. 4,591 4,758 13,847 14,797
-------- -------- -------- ---------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES .................. 5,714 2,467 (10,043) 7,325
PROVISION (BENEFIT) FOR INCOME TAXES ... 2,228 963 (3,917) 2,857
-------- -------- -------- ---------
NET INCOME (LOSS) ...................... $ 3,486 $ 1,504 $ (6,126) $ 4,468
========= ========= ========== ==========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTH PERIODS ENDED SEPTEMBER 28,1996 AND SEPTEMBER 30, 1995
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ....................................................................... $ (6,126) $ 4,468
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ....................................................... 1,999 1,873
Amortization of debt issue costs and discounts ....................................... 1,387 1,405
Compensation related to stock options ................................................ 22,938 --
Amortization of deferred customer acquisition costs .................................. 13,273 11,659
Other ................................................................................ 190 (114)
(Increase) decrease in operating assets:
Accounts receivable ............................................................ (2,811) (1,637)
Inventories .................................................................... (2,613) 174
Payments for deferred customer acquisition costs ............................... (17,378) (13,922)
Prepaid and other current assets ............................................... 184 315
Deferred tax asset ............................................................. (680) --
Other assets ................................................................... 52 (54)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other liabilities ....................... 328 (1,675)
Deferred income taxes .......................................................... (4,749) 2,563
Accrued coupon redemption costs ................................................ (518) 330
-------- --------
Net cash provided by operating activities ................................ 5,476 5,385
-------- --------
INVESTING ACTIVITIES:
Acquisitions of property and equipment .................................................. (856) (580)
Proceeds from sale of property and equipment ............................................ 2 6
-------- --------
Net cash used in investing activities .................................... (854) (574)
-------- --------
FINANCING ACTIVITIES:
Payments on bank and other financing .................................................... (6,037) (2,960)
Payments on capital leases .............................................................. (1,100) (921)
Payments of costs associated with issuance of stock ..................................... -- (33)
Issuance of redeemable equity securities, net of costs to issue ......................... -- 135
Purchase price adjustment of treasury ................................................... -- (88)
Proceeds from par value of restricted stock ............................................. -- 1
Proceeds from stock subscription ........................................................ -- 125
-------- --------
Net cash used in financing activities .................................... (7,137) (3,741)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....................................... (2,515) 1,070
Cash and cash equivalents at beginning of year ............................................. 6,987 3,891
-------- --------
Cash and cash equivalents at end of period ................................................. $ 4,472 $ 4,961
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ............................................................................... $14,598 $12,992
======== ========
Income taxes ........................................................................... $ 1,552 $ 5
======== ========
<FN>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations of $1,414 and $1,501 were entered into for new
equipment during the nine 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 condensed 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 September 28, 1996 and the results of operations for the three
and nine month periods ended September 28, 1996 and September 30, 1995, and cash
flows for the nine month periods ended September 28, 1996 and September 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
- --------------------
September 28, December 31,
1996 1995
------------ ------------
Raw materials .................. $ 619 $ 787
Work-in-process ................ 2,864 1,602
Finished goods ................. 7,181 5,763
Promotional and packing material 1,763 1,662
------- -------
$12,427 $ 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 principally to
repurchase the PIK preferred stock, repurchase a portion of the Company's
capital stock, redeem 35% of outstanding Notes and repay a portion of bank debt.
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 nine month period ending September 28, 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 a result of compensatory stock
options granted in 1996 (see Note 8). This deferred tax asset offsets long-term
deferred tax liabilities totaling $8,266. 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 Nine Month Periods Ended September 28, 1996
-------------------------------------------------------------------------
Results of Operations
- ---------------------
The following table sets forth certain income statement data for the Company
expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
Three Month Periods Ended Nine Month Periods Ended
September 28, September 30, September 28, September 30,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 43.0 43.2 47.3 45.9
Administrative and general expenses 7.2 7.5 7.1 7.5
Provision for doubtful accounts 5.5 5.4 6.3 6.1
Marketing costs 14.0 15.9 13.0 12.6
Coupon redemption costs 2.1 4.4 2.8 4.9
Depreciation and amortization 1.8 1.9 1.7 1.8
------ ------ ------ ------
Subtotal 73.6 78.3 78.2 78.8
------ ------ ------ ------
Income before interest-net, other income,
compensation related to stock options
and provision for income taxes 26.4% 21.7% 21.8% 21.2%
======= ======= ======= ======
</TABLE>
8
<PAGE>
Three Month Period Ended September 28, 1996 Compared to Three Month Period Ended
September 30, 1995
- --------------------------------------------------------------------------------
Net revenues increased by 17.4% to $38.6 million in the three month period ended
September 28, 1996 from $32.9 million in the three month period ended September
30, 1995. This increase in net revenues was the result of a combination of
increased volume ($4.2 million), a portion of which relates to the Company's
recent expansion into the United Kingdom and the introduction of a new style. In
January 1996, the Company commenced operations in the United Kingdom which, for
the three month period ended September 28, 1996, have generated $1.8 million in
revenue. In addition, the Company is currently evaluating potential programs in
Germany, France and Japan, where the Company has begun to conduct tests during
1996 and expects further testing to be conducted in 1997.
Cost of sales increased 16.8% to $16.6 million in the third quarter of 1996 from
$14.2 million for the third quarter of 1995. As a percentage of net revenues,
cost of sales was 43.0% in the third quarter of 1996 versus 43.2% in 1995,
primarily due to manufacturing efficiencies.
Administrative and general expenses increased by 12.9% to $2.8 million in the
third quarter of 1996 as compared to $2.5 million for the same period of 1995.
Increased personnel costs account for this change. As a percentage of net
revenues, administrative and general expenses were 7.2% in the third quarter of
1996 versus 7.5% for the same period in 1995.
Provision for doubtful accounts increased $0.3 million or 19.8% to $2.1 million
in the third quarter of 1996 from $1.8 million for the same period of 1995. As a
percentage of net revenues, bad debts were 5.5% in the third quarter of 1996
versus 5.4% for the same period in 1995. This increase was caused by additional
front end and second shipments in 1996 as compared to 1995 (up 30.9%), which
have a higher rate of uncollectable accounts.
Marketing costs increased 3.1% to $5.4 million from $5.2 million for the three
month periods ended September 28, 1996 and September 30, 1995, respectively.
This increase is attributable to higher front end solicitations, as 3.0 million
additional solicitations were mailed in the third quarter of 1996 compared to
the same period of 1995 (up 27.7%), including the start up in the United
Kingdom. As a percentage of net revenues, marketing costs were 14.0% in the
third quarter of 1996 compared to 15.9% for the same period in 1995.
Coupon redemption costs declined to $0.8 million for the third quarter of 1996
from $1.4 million for the same period of 1995. Redemption costs were 2.1% of net
revenues in the three months ended September 28, 1996 versus 4.4% for the same
period in 1995. This 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, which has also lowered the cost of future redemptions and,
therefore, the reserve balance for these future redemptions.
Interest expense decreased to $4.6 million for the three month period ended
September 28, 1996 from $4.8 million for the three month period ended September
30, 1995. This decrease in interest expense was a combination of less debt ($0.1
million) and lower rates ($0.1 million) on the bank debt. As a percentage of net
revenues, interest expense was 11.9% in the third quarter of 1996 versus 14.5%
for the same period in 1995.
Operating income was $10.2 million for the three month period ended September
28, 1996, a 43.2% increase over $7.1 million for the three month period ended
September 30, 1995. Pretax income was $5.7 million for the three month period
ended September 28, 1996, a 131.6% increase over $2.5 million for the three
month period ended September 30, 1995. These increases were primarily
attributable to increased sales, lower coupon redemption costs, and lower
9
<PAGE>
interest costs, offset by increases in cost of sales, bad debts, marketing costs
and administrative and general expenses. As a percentage of net revenues,
operating income was 26.4% for the three month period ended September 28, 1996
versus 21.7% for the same period in 1995. As a percentage of net revenues,
pretax income was 14.8% for the third quarter of 1996 versus 7.5% for the same
period in 1995.
Net income increased to $3.5 million in the third quarter of 1996 from $1.5
million for the comparable period of 1995. This increase resulted from the
increase in pretax income of $3.2 million, offset by a $1.3 million increase in
the provision for income taxes. As a percentage of net revenues, net income was
9.0% in the third quarter of 1996 versus 4.6% for the same period in 1995.
Nine Month Period Ended September 28, 1996 Compared to Nine Month Period Ended
September 30, 1995
- --------------------------------------------------------------------------------
Net revenues increased by 17.8% to $121.3 million in the first nine months of
1996 from $103.0 million in the first nine months of 1995. This increase in net
revenues was the result of a combination of increased volume ($12.9 million), a
portion of which relates to the Company's recent expansion into the United
Kingdom, the introduction of a new style ($4.0 million) and pricing ($1.4
million). In January 1996, the Company commenced operations in the United
Kingdom which, for the nine month period ended September 28, 1996, have
generated $6.9 million in revenue. In addition, the Company is currently
evaluating potential programs in Germany, France and Japan, where the Company
has begun to conduct tests during 1996 and expects further testing to be
conducted in 1997.
Cost of sales increased 21.3% to $57.4 million in the first nine months of 1996
from $47.3 million for the first nine months of 1995. As a percentage of net
revenues, cost of sales was 47.3% in the first nine months of 1996 versus 45.9%
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 in the United States 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 1.6 million or 28.5%
from 5.6 million in the first nine months of 1995 to 7.2 million in the first
nine months of 1996. These additional shipments, in both the United States and
the United Kingdom, reflected primarily a 9.4 million increase (21.6%) in
solicitations from 43.3 million in the first nine months of 1995 to 52.6 million
in the first nine months of 1996; and, 1.0 million of the 1.6 million increase
represents shipments within the Company's new United Kingdom program.
Administrative and general expenses increased 11.8% to $8.6 million in the first
nine months of 1996 from $7.7 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 nine months
of 1996 versus 7.5% for the same period in 1995.
Provision for doubtful accounts increased $1.4 million or 21.8% to $7.7 million
in the first nine months of 1996 from $6.3 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 1.6 million shipments which is 28.5% higher than 1995),
which have a higher rate of uncollectable accounts. As a percentage of net
revenues, bad debts were 6.3% in the first nine months of 1996 versus 6.1% for
the same period in 1995.
10
<PAGE>
Marketing costs increased 21.4% to $15.8 million from $13.0 million for the nine
month periods ended September 28, 1996 and September 30, 1995, respectively.
This increase was partially attributable to higher amortization of prior years'
deferred marketing costs in the first nine months of 1996 compared to the first
nine months 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
9.4 million additional solicitations were mailed in the first nine months of
1996 compared to the same period of 1995 (up 21.6%), including the start up in
the United Kingdom. As a percentage of net revenues, marketing costs were 13.0%
in 1996 versus 12.6% for the same period in 1995.
Coupon redemption costs declined to $3.4 million for the first nine months of
1996 from $5.0 million for the same period in 1995. As a percentage of net
revenues, redemption costs were 2.8% in 1996 versus 4.9% for the same period in
1995. This 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, which
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 nine
months ended September 28, 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 $13.8 million for the nine month period ended
September 28, 1996 from $14.8 million for the nine month period ended September
30, 1995. This decrease in interest expense was a combination of lower rates
($0.5 million) and less debt ($0.5 million) on the bank debt. As a percentage of
net revenues, interest expense was 11.4% in the first nine months of 1996 versus
14.4% for the same period in 1995.
Excluding stock option compensation expense of $22.9 million, the Company would
have had operating income of $26.5 million for the nine month period ended
September 28, 1996, a 21.2% increase over $21.9 million for the nine month
period ended September 30, 1995, and would have had pretax income of $12.9
million for the nine month period ended Septermber 28, 1996, a 76.0% increase
over $7.3 million for the nine month period ended September 30, 1995. These
increases were primarily attributable to increased sales, lower coupon
redemption costs, and lower interest costs, offset by increases in cost of
sales, bad debts, marketing costs and administrative and general expenses. As a
percentage of net revenues, operating income, adjusted to exclude stock option
compensation expense of $22.9 million, was 21.8% for the first nine months of
1996 versus 21.2% for the same period in 1995. As a percentage of net revenues,
pretax income, adjusted to exclude stock option compensation expense of $22.9
million, was 10.6% for the first nine months of 1996 versus 7.1% for the same
period in 1995.
The Company incurred a net loss of $6.1 million in the first nine months of
1996. Excluding the stock option compensation expense of $14.0 million net of
tax, net income would have increased to $7.9 million in the first nine months of
1996 from $4.5 million for the comparable period of 1995. This increase resulted
from the increase in pretax income of $5.6 million, adjusted to exclude stock
option compensation expense of $22.9 million, offset by a $2.2 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 6.5% for the first nine months of 1996 versus 4.3% for
the same period in 1995.
11
<PAGE>
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 $5.1 million at September 28, 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 cash and
prepaid and other current assets, offset by an increase in accounts receivable
and inventory account for the decrease.
Capital expenditures were $2.3 million and $2.1 million for the nine month
periods ended September 28, 1996 and September 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 nine month periods ended September 28,
1996 and September 30, 1995 of $5.5 million and $5.4 million, respectively, were
derived principally from net income (loss) of $(6.1) million and $4.5 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
$13.3 million and $11.7 million in 1996 and 1995, respectively, offset by
changes in operating assets and liabilities of $28.2 million and $13.9 million
in 1996 and 1995, respectively. The changes in operating assets and liabilities
included increases in accounts receivable of $2.8 million and $1.6 million in
1996 and 1995, respectively, an increase in inventory of $2.6 million in 1996
and a decrease of $0.2 million in 1995, a decrease of $0.2 million and $0.3
million in prepaid and other current assets in 1996 and 1995, respectively, an
increase in deferred tax asset of $0.7 million in 1996, payments of deferred
customer acquisition costs of $17.4 million and $13.9 million in 1996 and 1995,
respectively, an increase of $0.3 million and a decrease of $1.7 million in
accounts payable, accrued expenses and other liabilities in 1996 and 1995,
respectively, and a decrease in deferred income taxes of $4.7 million in 1996
and an increase of $2.6 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 start up in the
United Kingdom. The increase in inventory in 1996 is primarily the result of the
increase in volume of business for 1996 and the expected increases for 1997. 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 $0.9
million and $0.6 million for the nine month periods ended September 28, 1996 and
September 30, 1995, respectively.
During the nine month periods ended September 28, 1996 and September 30, 1995,
the Company used $7.1 million and $3.7 million, respectively, in financing
activities related to payments on bank and other financing, including capital
lease obligations.
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 September 28, 1996, the outstanding amount of the Company's
indebtedness (other than trade payables) was $145.5 million, including $72.4
million of senior secured debt and $68.3 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
12
<PAGE>
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:
$8.3 million in 1996, $8.6 million in 1997, $14.2 million in 1998, $10.7 million
in 1999, $16.6 million in 2000 and $18.3 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 $13.7
million was available as of September 28, 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
The Company has recently received inquiries from the Federal Trade
Commission (the "FTC") and certain state regulatory groups concerning
aspects of the Company's promotional materials, including whether the
terms of the Company's promotional offers are sufficiently disclosed in
such materials. The Company has responded to each of these inquiries, has
met with representatives of the FTC and each of the state regulatory
groups, and believes that it has reached agreement with them as to the
items which are to be modified. Discussions with the FTC and state
regulatory groups are ongoing with respect to the specific modifications
to be made.
Based on the discussions to date, the Company believes that the
resulting changes in its solicitation materials in response to inquiries
from the FTC and the state regulatory groups will have an adverse effect
(which is likely to be material) on the Company's domestic response
rates. However, response rates are only one of several factors that affect
the Company's results of operations. The Company is unable to predict what
the ultimate outcome of its discussions with the FTC and the state
regulators will be or whether such outcome will have a material adverse
effect on its revenues or profitability.
Regulators from time to time contact the Company with inquiries
regarding the Company's solicitation materials and regulators could
require additional changes to the Company's solicitation materials and no
assurance can be given that such changes will not be significant or will
not have a material adverse effect on the Company's financial condition or
results of operations.
Item 6. Exhibits and reports on Form 8K.
A. Exhibit
10.1 Executive Employment Agreement between the Company
and Suzanne M. Roper, dated as of July 30, 1996. 16-20
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)
Date: November 12, 1996 /s/ ARTHUR C. HUGHES
- ---------------------- ---------------------------------
Arthur C. Hughes
Vice President &
Chief Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000934383
<NAME> Hosiery Corporation of America, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Sep-28-1996
<CASH> 4,472
<SECURITIES> 0
<RECEIVABLES> 24,079
<ALLOWANCES> 1,560
<INVENTORY> 12,427
<CURRENT-ASSETS> 40,616
<PP&E> 29,947
<DEPRECIATION> 14,170
<TOTAL-ASSETS> 89,333
<CURRENT-LIABILITIES> 35,511
<BONDS> 69,310
0
37,398
<COMMON> 14
<OTHER-SE> (122,982)
<TOTAL-LIABILITY-AND-EQUITY> 89,333
<SALES> 121,333
<TOTAL-REVENUES> 121,333
<CGS> 38,401
<TOTAL-COSTS> 57,367
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 7,674
<INTEREST-EXPENSE> 13,847
<INCOME-PRETAX> (10,043)
<INCOME-TAX> (3,917)
<INCOME-CONTINUING> (6,126)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,126)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 10.1
July 30, 1996
CONFIDENTIAL
Ms. Suzanne Roper
84 Cochrane Avenue
Hastings-on-Hudson, NY 10706
Dear Suzanne:
I am delighted to extend this offer to you to join the senior management team at
Hosiery Corporation of America (HCA). We have great hopes for developing our
international businesses and I feel we are fortunate to have the benefit of your
enthusiasm and experience.
This letter summarizes the offer of employment made to you by HCA:
1. Position: Vice President, International Marketing.
2. Reporting Relationship: Report to Sr. Vice President, International.
3. Primary Responsibilities: You will work primarily on developing business
plans for entering and establishing hosiery programs in Europe and Asia; to
develop and implement marketing plans and strategies; for identifying, selecting
and directing international, domestic or HCA resources to implement those plans,
and for monitoring business plans and forecasts. Any additional responsibilities
would be consistent with those generally associated with your position.
16
<PAGE>
This will include developing appropriate and, if necessary, different
product strategies for each market and in coordinating efforts with the
US hosiery activities.
4. Base Salary: Your total annual base salary will be $159,000, to be paid in
weekly installments, and to include a $9,000 local housing allowance for as
long as you maintain two households.
You will be subject to an annual performance review, at which time you
may be eligible for increases subject to corporate guidelines.
5. Bonus: You are entitled to earn a bonus of as much as 25% of your base
salary, subject to attainment of specific performance criteria. These
criteria are established with your supervisor at the beginning of each
year.
In 1996, you will be guaranteed this bonus of 25%, prorated over your
service with the company in 1996. Bonuses are paid in the first quarter
of each year.
To be eligible to receive your bonus for the previous year, you must be
employed on January 1 (or the first working day of the new year) of the
year following the year for which the bonus is paid.
6. Stock Plan: You will be able to participate in the Company's Executive
Stock Option Plan which will be developed by the Board following the IPO.
Such a plan will be performance based and will reward you directly for your
contribution to the success of the international operation.
7. Benefits: You will be entitled to the employee benefits described in the
Employees Manual and the Salaried Employees Supplement. During your first
five years of employment, you will be entitled to three weeks vacation with
full pay and, four weeks with full pay thereafter. Vacation time shall be
taken with due regard for work schedules and the business interests of the
Company, and that are mutually determined to be convenient to HCA and you.
17
<PAGE>
8. Company Car and Other Perquisites: You will be entitled to a company car --
currently, a Buick LeSabre, with maintenance, insurance and operating
expenses paid by the Company. Future Company cars will be commensurate with
those of other HCA Senior Management.
9. Confidentiality: During the term of your employment, you will have access
to and become familiar with substantial amounts of proprietary and
confidential information concerning the business operations of the Company,
its products, marketing systems, sales information, computer systems and
software, customer lists, financial and economic data and various plans for
future operations (all of such information being herein referred to as the
"Confidential Information"). You shall not disclose any portion of the
confidential Information, directly or indirectly, or use it in any way,
either during the term of this Agreement or at any later time, except as
required in the course of your employment or by law. All files, records,
documents, drawings specifications and similar items relating to the
business of the Company, whether prepared by you or otherwise coming into
your possession, shall remain the exclusive property of the Company and
shall not be removed from the premises of the Company (except in the
performance of your responsibilities) under any circum-stances and shall be
immediately returned upon cessation of your employment.
10. Relocation: The Company will reimburse you for all reasonable and necessary
expenses incidental to moving your household goods and personal belongings
from your current residence, including reimbursement for legal and real
estate expenses incurred in the sale of your current residence.
11. Severance: It is understood that the employment relationship may be
terminated with or without Cause (defined below), by either party at any
time. However, should the company terminate the employment relationship
without Cause at any time during your employment with the Company, the
Company will continue to pay you your then current base annual salary
18
<PAGE>
(the "Severance Salary") for one year subsequent to the date of termination
(the "Continuation Period") in equal weekly or biweekly installments
less the usual deductions, plus all accrued vacation pay, so long as you
remain unemployed during the Continuation Period. However, should you
obtain employment during the Continuation Period at an annual salary equal
to or greater than the Severance Salary, the Company's obligation to
pay the then remaining installments of the Severance Salary shall end.
On the other hand, should you obtain employment during the Continuation
Period at a salary less than the Severance Salary, the Company's obligation
to pay the remaining installments of the Severance Salary shall continue
until the end of the Continuation Period but at a reduced amount equal to
the difference between the Severance Salary and the lesser salary.
a) As used herein, the term "Cause" shall mean your (i)
willful and repeated failure to comply with reasonable
directives of superior corporate officers; or (ii) inability
to perform your duties under this Agreement because of
physical or mental illness or injury for more than one hundred
eighty (180) consecutive days in any period of twelve (12)
consecutive calendar months; or (iii) willful misconduct in
performance of company duties, resulting in damage or loss to
Company, or its related or affiliated companies; or (iv)
addiction to alcohol or drugs that have not been medically
prescribed for use, which addiction shall require medical
confirmation by a licensed physician.
12. While employed at Corporate Headquarters, you will work a 4-day week; in
the event you travel to international operations or other locations, you
will be expected to adjust your schedule to that of the visited company or
location. Only with written permission of the Company will you be allowed
to provide services of a business nature directly or indirectly to any
person or organization other than the Company during your employment.
19
<PAGE>
Suzanne, I hope you are as excited as we are about HCA's growth potential. Your
position is integral to making our growth in sales and profitability come about
and I look forward to your contribution and involvement.
This offer expires one week from the date below. Please countersign below,
confirming your start date, and return this letter to me at our corporate office
so that we may process your paperwork.
If you have any questions, please feel free to contact me. We look forward to
your joining us at HCA.
Sincerely,
HOSIERY CORPORATION OF AMERICA
/S/ John F. Biagini 7/30/96
- ------------------------ ------------------
John F. Biagini Date
JFB/lbs
I intend to start employment on 8/5/96
--------------
Date
/S/ Suzanne M. Roper 7/31/96
- ---------------------- -------------------
Suzanne M. Roper Date
20
