<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 28, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
HOSIERY CORPORATION OF AMERICA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 2251 36-0782950
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
3369 PROGRESS DRIVE
BENSALEM, PENNSYLVANIA 19020
(215) 244-1777
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
JOHN F. BIAGINI
CHIEF EXECUTIVE OFFICER
HOSIERY CORPORATION OF AMERICA, INC.
3369 PROGRESS DRIVE
BENSALEM, PENNSYLVANIA 19020
(215) 244-1777
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
LOU R. KLING RICHARD D. BOHM
GREGORY A. FERNICOLA ALAN H. PALEY
SKADDEN, ARPS, SLATE, MEAGHER & FLOM DEBEVOISE & PLIMPTON
919 THIRD AVENUE 875 THIRD AVENUE
NEW YORK, NEW YORK 10022 NEW YORK, NEW YORK 10022
(212) 735-3000 (212) 909-6000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
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- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF
SECURITIES TO BE PROPOSED MAXIMUM AMOUNT OF
REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE(2)
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<S> <C> <C>
Common Stock, $.01 par
value................. $172,500,000.00 $59,482.76
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</TABLE>
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(1) Includes Common Stock issuable upon exercise of the U.S. Underwriters'
over-allotment option.
(2) The registration fee has been calculated in accordance with Rule 457(o)
under the Securities Act.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION
8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION IN PROSPECTUS OF
INFORMATION
REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
FORM S-1 REGISTRATION
STATEMENT AND HEADING HEADING OR LOCATION IN PROSPECTUS
--------------------- ---------------------------------
<C> <S>
1. Forepart of Registration Statement and
Outside Front Cover Page of Forepart of the Registration
Prospectus............................. Statement; Outside Front Cover Page;
Additional Information
2. Inside Front and Outside Back Cover Inside Front Cover Page; Table of
Pages of Prospectus................... Contents; Additional Information
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.... Prospectus Summary; Risk Factors
4. Use of Proceeds........................ Prospectus Summary; Use of Proceeds
5. Determination of Offering Price........ Outside Front Cover Page; Underwriters
6. Dilution............................... Not Applicable
7. Selling Security Holders............... Not Applicable
8. Plan of Distribution................... Outside Front Cover Page; Underwriters
9. Description of Securities to be Prospectus Summary; Description of
Registered............................. Capital Stock
10. Interests of Named Experts and
Counsel................................ Not Applicable
11. Information with Respect to the Outside Front Cover Page; Prospectus
Registrant............................. Summary; Risk Factors; Dividend
Policy; Capitalization; Selected
Consolidated Financial and Other
Data; Pro Forma Financial
Information; Management's Discussion
and Analysis of Financial Condition
and Results of Operations; Business;
Management; Principal Stockholders;
Certain Relationships and Related
Transactions; Description of Capital
Stock; Shares Eligible for Future
Sale; Experts; Additional
Information; Consolidated Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... Not Applicable
</TABLE>
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus; one to be used
in connection with an underwritten offering in the United States and Canada
(the "U.S. Prospectus") and one to be used in a concurrent underwritten
offering outside the United States and Canada (the "International
Prospectus"). The U.S. Prospectus and the International Prospectus are
identical except for the front cover page. The form of U.S. Prospectus is
included herein and is followed by the front cover page to be used in the
International Prospectus, which is labeled "Alternate Page for International
Prospectus."
If required pursuant to Rule 424(b) of the General Rules and Regulations
under the Securities Act of 1933, as amended, ten copies of each of the
Prospectuses in the forms in which they are used will be filed with the
Securities and Exchange Commission.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued , 1996
Shares
LOGO
Hosiery Corporation of America, Inc.
COMMON STOCK
-----------
OF THE SHARES OF COMMON STOCK BEING OFFERED, SHARES ARE BEING OFFERED
INITIALLY IN THE UNITED STATES AND CANADA BY THE U.S. UNDERWRITERS AND
SHARES ARE BEING OFFERED INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY
THE INTERNATIONAL UNDERWRITERS. SEE "UNDERWRITERS." ALL OF THE SHARES OF
COMMON STOCK BEING OFFERED ARE BEING SOLD BY THE COMPANY. PRIOR TO THIS
OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE
COMPANY. IT IS CURRENTLY ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE
PER SHARE WILL BE BETWEEN $ AND $ . SEE "UNDERWRITERS" FOR A
DISCUSSION OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE INITIAL
PUBLIC OFFERING PRICE.
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- ----------
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total(3)..................................... $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
additional shares of Common Stock at the Price to Public less
Underwriting Discounts and Commissions for the purpose of covering over-
allotments, if any. If the U.S. Underwriters exercise such option in
full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriters."
-----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Debevoise & Plimpton, counsel for the Underwriters. It is expected that the
delivery of the Shares will be made on or about , 1996 at the offices of
Morgan Stanley & Co. Incorporated, New York, New York, against payment therefor
in same day funds.
-----------
MORGAN STANLEY & CO.
Incorporated
BEAR, STEARNS & CO. INC.
BT SECURITIES CORPORATION
DONALDSON, LUFKIN & JENRETTE
Securities Corporation
, 1996
<PAGE>
----------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
(OR OTHER SECURITIES) OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2
<PAGE>
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY ANY UNDERWRITER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREBY SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
----------------
UNTIL , 1996 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................. 4
Risk Factors....................... 9
Use of Proceeds.................... 13
Dividend Policy.................... 14
Capitalization..................... 15
Selected Consolidated Financial and
Other Data........................ 16
Pro Forma Financial Information.... 18
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 23
Business........................... 32
Management......................... 40
Principal Stockholders............. 46
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Certain Relationships and Related
Transactions...................... 47
Description of Certain
Indebtedness...................... 52
Description of Capital Stock....... 54
Shares Eligible for Future Sale.... 59
Certain United States Federal
Income Tax Considerations For Non-
U.S. Holders of Common Stock...... 60
Underwriters....................... 62
Legal Matters...................... 65
Experts............................ 65
Additional Information............. 65
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
----------------
The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by an independent public accounting
firm and quarterly reports for the first three quarters of each fiscal year
containing interim unaudited financial information.
----------------
No action has been or will be taken in any jurisdiction by the Company or
any Underwriter that would permit a public offering of the Common Stock or
possession or distribution of this Prospectus in any jurisdiction where action
for that purpose is required, other than in the United States. Persons into
whose possession this Prospectus comes are required by the Company and the
Underwriters to inform themselves about, and to observe any restrictions as
to, the offering of the Common Stock and the distribution of this Prospectus.
----------------
In this Prospectus, references to "dollar" and "$" are to United States
dollars, and the term "United States" or "U.S." means the United States of
America, its states, its territories, its possessions and all areas subject to
its jurisdiction.
----------------
Silkies(R) and Sheer Charm(R) are registered trademarks of the Company and
the Company has applications pending to register "TLC(TM)" and "Shapely
Perfection(TM)."
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless the context otherwise requires, all references herein
to the "Company" include Hosiery Corporation of America, Inc. and its
consolidated subsidiaries. Unless otherwise indicated, the information
contained in this Prospectus (i) gives effect to a for one stock split that
will be effected prior to completion of the offering and (ii) assumes no
exercise of the U.S. Underwriters' over-allotment option. Unless otherwise
indicated, all references herein to "Common Stock" include the Class A Common
Stock.
THE COMPANY
Hosiery Corporation of America, Inc. is engaged in the direct mail marketing,
manufacture and distribution of women's sheer hosiery products in the United
States. The Company has recently begun to expand its operations into the United
Kingdom and plans to enter certain other international markets. The Company has
created a marketing strategy for women's sheer hosiery that combines
innovative, highly analytical direct mail marketing techniques with a
continuous product shipment or "continuity" program. The Company's direct mail
marketing program provides customers with convenient in-home shopping for, and
timely delivery of, quality, attractively priced hosiery marketed under the
Silkies(R) brand name. The continuity program involves mailing a specially
priced introductory hosiery offer to targeted prospective customers, the
acceptance of which allows recipients to participate in the program and results
in additional shipments of hose on a regular and continuous basis upon payment
for each prior shipment. The Company has developed comprehensive statistical
models for the design and analysis of its direct-response marketing programs
using proprietary customer data compiled over 20 years. Historically, the
Company has used these models to accurately estimate its response, retention
and payment rates.
The Company's historical operating results demonstrate the success of the
Company's marketing strategy. The Company shipped approximately 42 million
pairs of hose in 1995, a 50.0% increase from the 28 million pairs shipped in
1991. Over the past five years, net revenues and adjusted operating income
(operating income before other (income) expenses) have grown at compound annual
growth rates of 11.7% and 32.2%, respectively. In addition, the Company's
adjusted operating income as a percentage of revenues increased to 23.1% for
1995 from 11.7% for 1991, primarily as a result of the implementation of
manufacturing cost reduction programs and the operating leverage inherent in
the Company's business.
The success of the Company's direct mail marketing program is based on (i)
the use of advanced statistical modelling to identify individuals who are
likely to become profitable long-term customers by remaining in the Company's
continuity program for extended periods of time, (ii) the use of innovative
marketing techniques to attract such individuals, and (iii) the retention of
customers through the delivery of quality hosiery products directly to the home
on a regular basis. Drawing on its database, which contains more than 60
million individuals, and on customer lists rented from other direct mail
marketers, the Company has developed sophisticated statistical, regression,
segmentation and other financial analyses to accurately target, test and
acquire customers through direct mail solicitation. The Company generally
attracts new customers through an initial direct mail solicitation technique of
offering one free pair of hose with two pairs of hose priced at $1.00 each plus
shipping and handling. The introductory offer is priced substantially less than
the cost of manufacturing, processing and shipping the related hosiery. In
1995, there were 4.4 million shipments (13.3 million pairs of hosiery) to new
customers resulting from 43.3 million solicitations, representing a response
rate of 11.4%. The Company's annual response rates have ranged from 9.2% to as
high as 12.3% between 1991 and 1995.
New or "front end" customers who elect to participate in the Company's
continuity program by purchasing additional hose at full price become part of
the Company's repeat or "back end" customer base. When paying for each prior
shipment, back end customers can elect to receive a subsequent shipment of
hose. Typically, back
4
<PAGE>
end customers receive shipments of hose every four to six weeks. The Company
has developed a loyal back end customer base by providing customers the
convenience of receiving attractively priced, quality hosiery on a regular
basis. This loyal customer base has allowed the Company to achieve consistent,
predictable revenues. Back end customers generated approximately 76.9% of the
Company's net revenues in 1995.
Management believes that the following factors have been instrumental in
achieving the Company's success:
Rapidly Growing Direct Marketing Distribution Channel. The Company operates
in one of the most rapidly growing distribution channels: direct mail
marketing. According to the United States Bureau of the Census, mail order
sales in the United States have increased at a compound annual growth rate of
11.4% from 1985 through 1995, which is more than twice the rate of growth of
total consumer sales, at 5.2%, over the same period. Management believes that
direct marketing will continue to be a preferred and growing method of
marketing and distribution. Furthermore, the Company benefits from marketing a
consumable, disposable product which is well positioned for the direct mail
marketing distribution channel. As retail hosiery competitors continue to be
burdened with increasing costs of traditional retail distribution, management
believes that it will be able to increase the Company's market share and
revenues as a result of its ability to market its product directly to the
consumer and to provide superior service to its substantial customer base.
Direct marketing techniques enable the Company to target selected consumers,
measure customer response and obtain direct customer feedback to changes in its
marketing strategies.
Advanced Regression Analysis Expertise. The Company attributes much of its
success in generating high response rates and retention rates to its use of
advanced regression analysis in the process of soliciting new customers. The
Company currently maintains a database of over 60 million individuals which,
along with lists rented from other direct mail marketers, is the source of
potential customers for its targeted front end solicitation efforts. These
lists, which provide valuable insight into the buying habits and payment
records of such individuals, form the basis for the rigorous regression
analyses performed by the Company. These analyses result in a list of
prospective customers, ranked by estimated profitability, whom management
believes would be most likely to buy hosiery from the Company on a regular and
long term basis.
Loyal Back End Customer Base. The Company has developed an active and growing
base of back end customers who continue to make regular purchases pursuant to
the Company's continuity program. Since 1991, revenues from sales to back end
customers have increased annually at a compound rate of 11.0% from $68.9
million in 1991 to $104.8 million in 1995. The back end customer base provides
the Company with a predictable source of revenue without significant associated
marketing costs. Many of these back end customers have participated in the
Company's continuity program for several years. In 1995, 45.3% of the total
back end pairs of hosiery shipped were to customers who had participated in the
continuity program for more than three years.
State-of-the-Art Computer System. The Company utilizes advanced, state-of-
the-art computer and data processing equipment and methodology to provide for
the comprehensive management of the Company's information technology needs. The
Company's proprietary computer systems efficiently track all aspects of the
Company's operations including customer list analysis and management, order and
payment entry, billing and collection, customer service support and delivery.
The Company's management information systems are instrumental in the
development and management of its customer base.
Low Cost Manufacturing Capability. The Company has recently completed a major
manufacturing plant modernization program that has enabled the Company to
become a low cost producer of hosiery products. The Company continues to invest
in its operations to maintain its competitive advantage as a low cost, state-
of-the-art manufacturer. As a result of the Company's efforts, it has
experienced a 10% reduction in the cost of producing hosiery since 1991. The
Company achieves manufacturing efficiencies in part because it produces only a
limited number of styles and colors of hosiery. Furthermore, the predictable
nature of the Company's business allows it
5
<PAGE>
to schedule production and manufacturing runs to meet expected consumer
shipments thereby minimizing the need to maintain high inventory levels of raw
materials or finished products.
Insulation from Traditional Fashion, Retail and Economic Influences. Because
the Company is a direct marketer of consumable, disposable, moderately priced,
basic products, its sales have not been subject to dramatic variability
associated with fashion trends and have been generally insulated from the
effects of economic cycles. In addition, the Company's continuity program has
encouraged consistent customer demand throughout the year without seasonal
fluctuations.
GROWTH STRATEGY
The Company's growth strategy is focused on the following three
opportunities: (i) increasing solicitations to acquire additional front end
customers, (ii) increasing the level of sales to the Company's existing back
end customer base and (iii) pursuing expansion into certain international
markets. The Company plans to acquire additional front end customers through
increased solicitations while maintaining or improving current response rates.
To this end, the Company continuously identifies and tests additional customer
lists and has completed testing of newly available lists containing more than
39 million individuals. The Company also intends to expand future solicitations
to include customers the Company has previously identified as being potentially
profitable. In the past, the Company's corporate strategy resulted in its not
soliciting all of the potential new customers it had identified and tested due
to production capacity limitations and the Company's focus on debt repayment.
The Company anticipates that its efforts to increase its front end customers
will result in commensurate growth of its back end customer base. In an effort
to increase sales to existing customers, the Company intends to continue to
introduce new styles to encourage existing customers to select higher priced,
higher margin products.
Additionally, the Company has identified opportunities for potential growth
in certain international markets, particularly the United Kingdom, Germany,
France and Japan, all of which have efficient mail delivery systems, accessible
mailing lists and well developed sheer hosiery markets. The aggregate
population in these four countries is approximately 323 million, compared to
approximately 263 million in the United States. In January 1996, the Company
commenced operations in the United Kingdom which, as of March 31, 1996, have
generated $2.0 million in revenue and achieved response rates superior to those
achieved by the Company in the United States. 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.
Finally, the Company will continue to evaluate acquisition opportunities in
the direct mail industry or opportunities to acquire new product lines which
may be suitable for direct mail marketing or the continuity program format.
However, the Company currently has no specific plans to pursue such
opportunities.
Although the Company believes that the foregoing objectives can be achieved,
the success of its strategy will be subject to numerous factors, many of which
will be beyond the Company's control. Accordingly, no assurance can be given
that the Company will achieve its growth objectives. See "Risk Factors--Risks
Associated with Growth Strategy."
----------------
On October 17, 1994, the Company effected a recapitalization ("the 1994
Recapitalization"), pursuant to which affiliates of Kelso & Company ("Kelso"),
certain nonaffiliated designees of Kelso and certain members of management
(collectively, the "Investor Group") acquired approximately 74% of the common
equity of the Company. Prior to the 1994 Recapitalization, Joseph A. Murphy
("Murphy") was the Company's sole stockholder. As a result of the 1994
Recapitalization, Murphy retained approximately 21% of the Company's common
equity. The Company obtained the funds necessary to effect the 1994
Recapitalization from the proceeds of certain indebtedness and the sale of
common and preferred equity securities of the Company. The Company has
commenced discussions with Murphy regarding a transaction pursuant to which the
Company will exchange, prior to completion of the offering, Murphy's common
equity interest in the Company for a newly
6
<PAGE>
issued series of preferred stock, which the Company intends to redeem with a
portion of the net proceeds of the offering, and certain other consideration.
See "Use of Proceeds," "Certain Relationships and Related Transactions--The
1994 Recapitalization and Related Transactions" and "--Exchange Transaction."
The Company was incorporated in Delaware in 1979 and maintains its principal
executive offices at 3369 Progress Drive, Bensalem, Pennsylvania 17020, and its
telephone number at that location is (215) 244-1777.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered
United States offering...... shares
International offering...... shares
Total..................... shares(1)
Common Stock to be outstanding
after the offering........... shares(1)(2)
Use of proceeds to the The net proceeds to be received by the Company
Company...................... from the offering are estimated to be approxi-
mately $138.2 million and will be used primar-
ily to repay indebtedness and to redeem pre-
ferred stock. See "Use of Proceeds."
</TABLE>
- --------
(1) Assumes the U.S. Underwriters' over-allotment option is not exercised. See
"Underwriters."
(2) Includes 75,652 shares of Class A Common Stock which will be converted into
Common Stock on a one-for-one basis upon completion of the offering and
includes shares of Common Stock to be issued upon completion of the
offering to certain holders of PIK Preferred Stock (as defined herein) to
redeem such PIK Preferred Stock. See Note (e) to "Unaudited Pro Forma
Consolidated Balance Sheet Data." Excludes 215,369 shares of Common Stock
issuable upon exercise of outstanding options under the Company's stock
option plan and excludes shares of Common Stock to be repurchased from
certain holders of preferred stock of the Company upon completion of the
offering. See "Management--Stock Option Plan" and notes to the consolidated
financial statements included elsewhere in this Prospectus.
RISK FACTORS
See "Risk Factors" for a discussion of certain factors which should be
considered in connection with an investment in the shares of Common Stock
offered in the offering.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The information set forth below should be read together with the other
information contained under the captions "Capitalization," "Selected
Consolidated Financial and Other Data," "Pro Forma Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the historical consolidated financial statements and the
related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------------- --------------------------------
PRO FORMA PRO FORMA
1991 1992 1993 1994 1995 1995(A) 1995 1996 1996(A)
-------- -------- -------- -------- -------- --------- ------- --------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues........... $ 87,713 $102,235 $109,824 $118,560 $136,299 $136,299 $33,608 $ 40,099 $ 40,099
Cost of sales.......... 42,747 49,628 49,818 52,485 60,982 60,982 17,119 20,912 20,912
Administrative and
general expenses...... 13,153 14,845 14,466 13,616 10,200 9,889 2,659 3,264 3,198
Provision for doubtful
accounts.............. 2,043 4,129 5,097 5,643 7,788 7,788 2,384 3,015 3,015
Marketing costs........ 10,395 13,055 13,925 15,542 17,442 17,442 3,473 4,606 4,606
Coupon redemption
costs................. 7,321 6,439 5,680 6,397 5,969 5,969 2,001 1,480 1,480
Depreciation and
amortization.......... 1,756 1,863 2,095 3,141 2,493 2,493 624 658 658
Other (income)
expenses(b)........... (14,634) 456 2,725 123 (2) (2) (1) 29 29
-------- -------- -------- -------- -------- -------- ------- --------- --------
Operating income....... $ 24,932 $ 11,820 $ 16,018 $ 21,613 $ 31,427 $ 31,738 $ 5,349 $ 6,135 $ 6,201
======== ======== ======== ======== ======== ======== ======= ========= ========
Interest expense....... $ 2,243 $ 1,530 $ 1,463 $ 4,811 $ 19,749 $ 14,786 $ 5,126 $ 4,678 $ 3,449
Net income............. $ 18,844 $ 4,241 $ 4,079 $ 9,746 $ 7,496 $ 10,766 $ 175 $ 933 $ 1,736
Net income per common
and common equivalent
share.................
Weighted average number
of common and common
equivalent shares
outstanding(c)........
OTHER DATA:
Adjusted operating
income(d)............. $ 10,298 $ 12,276 $ 18,743 $ 21,736 $ 31,425 $ 31,736 $ 5,348 $ 6,164 $ 6,230
Number of
Solicitations......... 16,868 31,592 30,037 30,557 43,267 43,267 23,711 27,539 27,539
Response rate(e)....... 9.2% 10.1% 10.9% 12.3% 11.4% 11.4% 8.5% 9.4% 9.4%
Number of front end
shipments(f)(g)....... 1,413 2,884 2,965 3,374 4,426 4,426 1,806 2,301 2,301
Number of back end
shipments(f)(h)....... 5,432 6,015 6,069 6,158 6,799 6,799 1,528 1,683 1,683
Total number of pairs
shipped(f)(i)......... 27,861 34,341 35,019 36,489 42,138 42,138 12,194 14,045 14,045
<CAPTION>
AS OF MARCH 31, 1996
-----------------------
ACTUAL PRO FORMA(A)
--------- ------------
(IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital....................................................................... $ (82) $ 3,444
Total assets.......................................................................... 80,039 78,665
Total debt............................................................................ 147,530 108,695
Stockholders' deficit................................................................. (101,566) (60,247)
</TABLE>
- --------
(a) The pro forma consolidated statement of operations data for the year ended
December 31, 1995 and the three months ended March 31, 1996 give pro forma
effect to the following transactions (collectively, the "Transactions") as
if they had occurred at the beginning of the periods presented: (i) the
exchange by the Company of shares of Common Stock held by Murphy for a
newly issued series of preferred stock with an aggregate liquidation
preference of $40.0 million and certain other consideration (the "Exchange
Transaction") as described under "Certain Relationships and Related
Transactions--Exchange Transaction", (ii) the issuance by the Company of
shares of Common Stock to redeem certain shares of PIK Preferred Stock
of the Company, and (iii) the sale by the Company of shares in the
offering (assuming the U.S. Underwriters' over-allotment option is not
exercised) and the anticipated use of the proceeds therefrom as described
under "Use of Proceeds." The pro forma consolidated balance sheet data give
pro forma effect to the Transactions as if they had occurred on March 31,
1996. See "Pro Forma Financial Information."
(b) See Note (a) to "Selected Consolidated Financial and Other Data" for a
discussion of the items comprising "other (income) expenses."
(c) Reflects shares of Common Stock outstanding after the offering (including
common stock equivalents calculated in accordance with the "treasury stock
method," wherein the net proceeds to the Company from the exercise of
outstanding stock options are assumed to repurchase shares of Common Stock
at $ per share (the mid-point of the range set forth on the cover page
of this Prospectus)).
(d) "Adjusted operating income" is defined as operating income before other
(income) expenses.
(e) Response rate is equal to the number of front end shipments divided by the
number of solicitations (without giving effect to returns totaling
approximately 141,000, 294,000, 316,000, 379,000 and 524,000 pairs in 1991,
1992, 1993, 1994 and 1995, respectively, and 216,000 and 287,000 in the
three months ended March 31, 1995 and March 31, 1996, respectively).
(f) All amounts are stated net of returns.
(g) Each front end shipment represents a three pair shipment unit.
(h) Each back end shipment represents a four pair shipment unit. Six pair
shipments have been adjusted for comparability since their introduction in
1993.
(i) Includes bulk shipments to the Company's former Canadian subsidiary which
was sold by the Company in 1990. Such shipments represent approximately 1.9
million, 1.6 million, 1.8 million, 1.7 million and 1.7 million pairs
shipped in 1991, 1992, 1993, 1994 and 1995, respectively, and .7 million
and .4 million in the three months ended March 31, 1995 and March 31, 1996,
respectively.
8
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Common Stock offered by this Prospectus.
COMPETITION AND INDUSTRY TRENDS
The women's sheer hosiery business is highly competitive, with two dominant
competitors, Sara Lee Hosiery (a division of Sara Lee Corporation) and Kayser-
Roth (a subsidiary of Mexican-based Grupo Synkro, S.A.). Although the Company
focuses exclusively on marketing its hosiery products through its direct mail
marketing continuity program, the Company competes with these and other
manufacturers and distributors of women's sheer hosiery that primarily focus
on sales of their products in retail stores. Several competitors have sold
their hosiery products via mail order for many years. However, management
believes these competitors, unlike the Company, have focused on the sale of
irregular or imperfect products. In addition, the Company competes with, and
faces potential competition from, other direct marketing companies. Several of
the Company's competitors have significantly greater financial and other
resources and may have greater brand recognition than the Company. See
"Business--Competition and Industry."
Management believes that the overall women's sheer hosiery market may be
declining as a result of the high cost of repeat purchases of such products
and changes in women's choices in business and leisure wear. Specifically,
certain of the Company's competitors, in recent years, have closed
manufacturing sites, consolidated distribution centers and combined operations
through acquisition activity, presumably as a result of a decline in the
women's sheer hosiery market which is greatly influenced by changing fashions.
Although the Company's sales increased by approximately 24% from 1993 to 1995,
a decline in the women's sheer hosiery market could adversely affect hosiery
manufacturers and distributors generally, including the Company. Over-capacity
in the supply of women's sheer hosiery may have contributed to the reasons for
recent closings of manufacturing sites of the Company's competitors. Continued
excess in the supply of women's sheer hosiery could adversely affect the
Company's operations.
RISKS ASSOCIATED WITH GROWTH STRATEGY
Response Rates and Customer Base. The Company's strategy for growth involves
expanding its United States operations by acquiring additional front end
customers, primarily through increased solicitations and maintenance of its
response rates, resulting in increases in the level of business with back end
customers. The Company's success in implementing this growth strategy will
depend upon the availability of additional customer lists which enable the
Company to identify sufficient numbers of potentially profitable customers,
and the ability to maintain or improve upon current response rates and
customer retention rates. The success in implementation of the Company's
strategy will also depend on numerous other factors, many of which are beyond
the Company's control, including economic, competitive and other conditions
and uncertainties. Therefore, there can be no assurance that the Company will
be successful in its strategy to acquire additional front end customers or to
increase the level of business with back end customers.
International Operations. The timing and success of the Company's plans to
expand into certain international markets will depend on its ability to
identify, attract and retain profitable customers in such markets and on other
factors, many of which are beyond its control. Economic, political,
governmental and regulatory conditions in such international markets could
adversely affect the Company's ability to successfully enter or operate in
such markets. In addition, doing business outside the United States may
subject the Company to certain risks, including imposition of or increase in
existing tariffs, foreign currency fluctuations with respect to the United
States dollar, restrictions on the repatriation of profits, compliance with
foreign laws and standards which may be burdensome, increased difficulties in
collection of accounts receivable and political uncertainties. Therefore, no
assurances can be given that the Company's attempts to expand its business
into such international markets will be successful.
9
<PAGE>
Capacity Constraints. The Company has limited ability to significantly
increase production at its existing facilities. In order to overcome short
term capacity constraints and to provide longer term flexibility for sources
of manufactured hosiery, the Company recently began purchasing a portion of
its manufactured hosiery requirements from three different hosiery
manufacturers in Mexico. In addition, the Company is currently exploring other
alternatives, both internationally and within the United States, for
outsourcing hosiery manufacturing. Currently, the Company outsources
approximately 15% of its manufactured hosiery requirements and expects to
increase its reliance on outsourced products to 20% in 1996. The Company's
outsourcing of manufacturing internationally may be adversely affected by
political instability resulting in a disruption of trade with foreign
countries in which the Company's contractors or suppliers are located, foreign
currency fluctuations with respect to the United States dollar and existing or
potential duties, tariffs or quotas that may limit the quantity of certain
types of goods that may be imported into the United States. To date, the
Company has been able to obtain hosiery that is the same quality as its own
product at a price approximately equal to the Company's cost of manufacturing
in the United States. There can be no assurance, however, that the Company
will be able to continue to purchase manufactured hosiery at approximately the
same cost and quality as its own manufactured hosiery or that such purchases
may be made in the quantities and at the delivery times required by the
Company to meet its inventory requirements.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends largely on the efforts and abilities of
certain key management employees, in particular, John F. Biagini, the
Company's Chairman, Chief Executive Officer and President, and Hans Lengers,
President of U.S. Textile Corporation, the Company's wholly owned
manufacturing subsidiary. The loss of the services of one or both of such key
personnel could have a material adverse effect on the Company's business and
financial results. See "Management."
SUBSTANTIAL LEVERAGE; STOCKHOLDERS' DEFICIT
As a result of the 1994 Recapitalization, the Company incurred substantial
indebtedness. As of March 31, 1996, the Company's total long-term indebtedness
and stockholders' deficit were approximately $147.5 million and $(101.6)
million, respectively (and approximately $108.7 million and $(60.2) million,
respectively, after giving pro forma effect to the Transactions). See
"Capitalization."
The degree to which the Company is leveraged may have important consequences
to the Company's operations, including the following: (i) a substantial
portion of the Company's cash flow from operations must be dedicated to the
payment of the principal of and interest on its indebtedness and will not be
available for other purposes; (ii) the Company's ability to obtain additional
debt financing in the future for solicitation and marketing expenditures,
working capital, capital expenditures, acquisitions or for other purposes may
be limited; and (iii) the Company's level of indebtedness could limit its
flexibility and its ability to withstand competitive pressures, and may make
it more vulnerable to economic downturns. The Company may incur additional
indebtedness from time to time to finance solicitation and marketing
expenditures, working capital, capital expenditures, acquisitions or for other
purposes. The Company's ability to satisfy its obligations will be dependent
upon its future performance, which may be affected by prevailing economic
conditions and financial, business and other factors, many of which are beyond
the Company's control.
RESTRICTIONS IMPOSED BY THE COMPANY'S INDEBTEDNESS
The instruments governing the Company's indebtedness impose significant
operating and financial restrictions on the Company. Such restrictions will
affect, and in many respects significantly limit or prohibit, among other
things, the ability of the Company to incur additional indebtedness, pay
dividends, repay indebtedness prior to its stated maturity, sell assets or
engage in mergers or acquisitions. These restrictions could also limit the
ability of the Company to effect future financing, make needed capital
expenditures, withstand a future downturn in its business or the economy in
general, or otherwise conduct necessary corporate activities. A failure by the
Company to comply with these restrictions could lead to a default under the
terms of such
10
<PAGE>
indebtedness and the related agreements. In the event of a default on such
indebtedness of the Company, the holders of such indebtedness could elect to
declare all of the amounts borrowed pursuant thereto to be immediately due and
payable together with accrued and unpaid interest. In such event, there can be
no assurance that the Company would be able to make such payments or borrow
sufficient funds from alternative sources to make any such payment. Even if
additional financing could be obtained, there can be no assurance that it
would be on terms that are favorable or acceptable to the Company. In
addition, the Company's indebtedness under its bank credit facility is secured
by a substantial portion of the assets of the Company and, upon the occurrence
of a default, the holders of such indebtedness could foreclose on such assets
and sell them as a means to satisfy all or part of such indebtedness. See
"Description of Certain Indebtedness."
RISK OF DISASTER
The Company conducts its knitting and sewing operations primarily from a
single facility in Newland, North Carolina, and conducts its dyeing and
shipping operations primarily from a single facility in Lancaster, South
Carolina. If a disaster (such as a fire) were to destroy or significantly
damage either facility, the Company would have to obtain alternative
facilities from which to conduct its operations and replenish its inventory,
all of which would result in increased operating costs and significant delays
in fulfillment of customer orders. While the Company maintains business
interruption insurance, any such increased costs or delays could have a
material adverse effect on the Company's business, financial condition and
results of operations.
GOVERNMENT REGULATION
The Company's direct mail operations are subject to regulation by the United
States Postal Service, the Federal Trade Commission (the "FTC") and various
state, local and private consumer protection and other regulatory authorities.
In general, these regulations govern the manner in which orders may be
solicited, the form and content of advertisements, information which must be
provided to prospective customers, the time within which orders must be
filled, obligations to consumers if orders are not shipped within a specified
period of time and the time within which refunds must be paid if the ordered
merchandise is unavailable or returned.
In 1984, as a result of a lawsuit brought by the FTC, the Federal District
Court for the Eastern District of Pennsylvania issued a consent injunction,
which sets forth specific rules with which the Company must comply in
conducting its mail order business and permanently enjoins the Company, its
successors and assigns, its officers, agents, representatives and employees,
and anyone acting in concert with the Company from violating various FTC and
Postal Service laws and regulations. Since entry of the consent injunction,
the FTC has not instituted any proceedings against the Company with respect to
its mail order business nor has it advised the Company that it considers the
Company to be in violation of the consent injunction. The Company believes
that it is in full compliance with the consent injunction and continued
compliance has not had a material adverse effect on the Company's business.
None of the individual officers named in the lawsuit are currently associated
with the Company.
There can be no assurance that future regulatory requirements or actions
will not have a material adverse effect on the Company's business, financial
condition or operating results.
INCREASE IN POSTAL RATES
The Company's marketing operations, as well as certain aspects of the direct
marketing services industry generally, depend upon the services provided by
the United States Postal Service. Any modification by the Postal Service of
its rate structure or any increase in public postal rates could have an
adverse effect on the Company. Postage costs represent a significant portion
of the Company's total costs. In 1994, total postal expenditures were
approximately $14.6 million and increased to $20.5 million in 1995, in part as
a result of postal rate increases in January 1995. The Company was able to
pass substantially all of such costs onto its customers in 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." There can be no assurance, however, that in the future the
Company will be able to pass on increased postal costs to its customers, in
which case there could be a material adverse effect on the Company. In
addition, the Company could also be adversely affected by postal strikes.
11
<PAGE>
PROPOSED SALES TAX LEGISLATION
Legislation was proposed in the United States Senate in March 1995 that
would have allowed each state to collect sales taxes from out-of-state mail
order companies which make sales to customers within such state. The Company
cannot predict whether, and in what form, such proposal may be adopted.
However, the adoption of such proposal, or the enactment of similar federal
legislation, could have an adverse effect on direct mail marketers, including
the Company. The Company anticipates that sales taxes resulting from any such
federal legislation would be passed on to its customers, although there can be
no assurance in this regard.
CONTROLLING STOCKHOLDERS
Upon consummation of the offering, Kelso Investment Associates V, L.P.
("KIAV") and Kelso Equity Partners V, L.P. ("KEPV" and, together with KIAV,
the "Kelso Affiliates") will beneficially own approximately % ( % if the
U.S. Underwriters' over-allotment option is exercised in full) of the
outstanding shares of Common Stock. As a result of the foregoing, the Kelso
Affiliates may effectively control the Company and determine and direct the
policies of the Company. See "Management--Directors and Executive Officers"
and "Principal Stockholders."
The level of stock ownership of the Company by the Kelso Affiliates may have
the effect of deterring hostile takeovers, delaying or preventing changes in
control or changes in management, or limiting the ability of stockholders to
approve transactions that they may deem to be in their best interests. See
"Principal Stockholders."
ABSENCE OF PRIOR PUBLIC TRADING MARKET; DETERMINATION OF OFFERING PRICE
Prior to the offering, there has been no public market for the Common Stock.
There can be no assurance that an active public market will develop for the
Common Stock or that, if such a market develops, the market price will equal
or exceed the initial public offering price set forth on the cover page of
this Prospectus. The initial public offering price will be determined by
negotiations between the Company and the representatives of the Underwriters
and will not necessarily be indicative of the market price of the Common Stock
after the offering. See "Underwriters" for a discussion of the factors to be
considered in determining the initial public offering price. The prices at
which the Common Stock trades after the offering will be determined by the
marketplace and may be influenced by many factors including, among others, the
Company's operating and financial performance, the depth and liquidity of the
market for the Common Stock, future sales of Common Stock (or the perception
thereof), investor perception of the Company and its prospects, developments
in the regulation of the direct marketing industry, the Company's dividend
policy and general economic and market conditions.
POSSIBLE FUTURE SALES OF COMMON STOCK
Subject to the restrictions described under "Shares Eligible for Future
Sale" and applicable law, the Kelso Affiliates and other current stockholders
of the Company will be free to sell any and all of the shares they own after
completion of the offering. No prediction can be made as to the effect, if
any, that future sales of Common Stock, or the availability of Common Stock
for future sale, will have on the market price of the Common Stock prevailing
from time to time. Sales of substantial amounts of Common Stock or the
perception that such sales could occur, could adversely affect prevailing
market prices for the Common Stock. The Kelso Affiliates and certain other
stockholders of the Company (who together will own shares of Common Stock,
or approximately % of the outstanding Common Stock upon completion of the
offering) and the Company have agreed, subject to certain exceptions, not to
sell or otherwise dispose of any shares of Common Stock for a period of 180
days after the date of this Prospectus without the prior written consent of
Morgan Stanley & Co. Incorporated. The Kelso Affiliates, certain of their
transferees and certain other stockholders have certain rights to have the
shares of Common Stock owned by them registered by the Company under the
Securities Act of 1933 (the "Securities Act") in order to permit the public
sale of such shares. See "Shares Eligible For Future Sale" and "Description of
Capital Stock--Stockholders Agreement--Registration Rights."
12
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common
Stock offered by the Company in the offering are estimated to be approximately
$138.2 million (or approximately $159.3 million if the U.S. Underwriters'
over-allotment option is exercised in full), after deducting estimated
underwriting discounts and commissions and offering expenses and assuming an
initial offering price of $ per share (the midpoint of the range set forth
on the cover page of this Prospectus).
The Company intends to use such net proceeds to (i) redeem a portion of its
outstanding pay-in-kind preferred stock (the "PIK Preferred Stock") for an
aggregate redemption price of approximately $51.6 million (which includes
approximately $15.1 million of cumulative undeclared dividends), (ii) redeem
for $40.0 million the preferred stock to be issued to Murphy in the Exchange
Transaction, (iii) redeem $24.5 million aggregate principal amount
(approximately $23.9 million accreted value) of its 13 3/4% Senior
Subordinated Exchange Notes due 2002 (the "Notes") at a redemption price of
112% of principal amount (representing an aggregate redemption price of $27.4
million which includes an aggregate redemption premium of approximately $3.6
million), (iv) repay approximately $15.0 million of outstanding indebtedness
under its bank credit agreement (the "Bank Credit Agreement"), (v) make a
payment of approximately $3.2 million to terminate certain financial advisory
service arrangements provided to the Company by Kelso and (vi) repurchase
shares of Common Stock from the Kelso Affiliates and certain members of the
Company's management for $1.0 million (assuming an initial offering price of
$ per share, the midpoint of the range set forth on the cover page of this
Prospectus). The following table summarizes the various uses of the net
proceeds to the Company from the sale of the shares in the offering.
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Gross proceeds from the offering........................ $150.0
Less: Underwriting discounts and commissions............ 9.8
Fees and expenses.................................... 2.0(a)
------
Net proceeds from the offering....................... $138.2
======
Redemption of PIK Preferred Stock....................... $ 51.6(b)(c)
Repayment of preferred stock held by Murphy............. 40.0
Redemption of Notes..................................... 27.4
Repayment of bank debt.................................. 15.0
Payment to terminate certain financial advisory services
....................................................... 3.2(d)
Repurchase of Common Stock.............................. 1.0
------
Total use of proceeds................................ $138.2
======
</TABLE>
- --------
(a) Includes legal, accounting, printing and other fees and expenses.
(b) Includes cumulative undeclared dividends on the PIK Preferred Stock of
approximately $15.1 million as of March 31, 1996. Dividends on the PIK
Preferred Stock accumulate at a rate of approximately 25% per annum.
Accordingly, the amount of cumulative undeclared dividends (and,
therefore, the aggregate redemption price) as of the completion of the
offering will be greater than that set forth above. The amount of net
proceeds used to repay bank debt will be reduced accordingly.
(c) Excludes PIK Preferred Stock with an aggregate redemption price of $1.4
million (which includes $.3 million of cumulative undeclared dividends as
of March 31, 1996) which will be redeemed for shares of Common Stock to
be issued upon completion of the offering (assuming an initial offering
price of $ per share, the midpoint of the range set forth on the cover
page of this Prospectus).
(d) See "Certain Relationships and Related Transactions--The 1994
Recapitalization and Related Transactions."
The PIK Preferred Stock was issued and sold to the Investor Group in October
1994 as part of the financing for the 1994 Recapitalization. As of March 31,
1996, the Term Loans (as defined below) bore interest at a weighted average
rate of 8.57% per annum. The Notes were issued on May 15, 1995 in exchange for
other outstanding notes (the "Old Notes") having financial terms identical to
the Notes. The Old Notes were issued on October 17, 1994 as part of the
financing for the 1994 Recapitalization. The Notes mature on August 1, 2002
and bear interest at a rate of 13 3/4% per annum. The bank indebtedness to be
repaid consists of term loans (the "Term Loans") incurred on October 17, 1994
as part of the financing for the 1994 Recapitalization and to refinance
certain indebtedness of the Company. See "Capitalization," "Description of
Certain Indebtedness," "Certain Relationships and Related Transactions--The
1994 Recapitalization and Related Transactions" and "--Exchange Transaction."
13
<PAGE>
DIVIDEND POLICY
The Company has not paid cash dividends on its Common Stock since 1992 and
does not anticipate paying cash dividends in the foreseeable future. The
Company intends to retain any future earnings for reinvestment in the Company.
In addition, the Bank Credit Agreement and the indenture (the "Indenture")
pursuant to which the Notes were issued place limitations on the Company's
ability to pay dividends or make certain other distributions in respect of its
Common Stock. See "Description of Certain Indebtedness." Any future
determination as to the payment of dividends will be subject to such
prohibitions and limitations, will be at the discretion of the Company's Board
of Directors and will depend on the Company's results of operations, financial
condition, capital requirements and other factors deemed relevant by the Board
of Directors, including the General Corporation Law of the State of Delaware
(the "DGCL") which provides that dividends are only payable out of the
Company's surplus or current net profits.
14
<PAGE>
CAPITALIZATION
The following table sets forth the total debt and total capitalization of
the Company at March 31, 1996 and as adjusted to give pro forma effect to
reflect (i) the sale by the Company of shares of Common Stock pursuant to
the offering (assuming that the U.S. Underwriters' over-allotment option is
not exercised) and the application of the net proceeds therefrom, (ii) the
issuance by the Company of shares of Common Stock to certain holders of
PIK Preferred Stock to redeem such PIK Preferred Stock, and (iii) the Exchange
Transaction, in each case as if they had occurred on March 31, 1996. See "Pro
Forma Financial Information."
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------------
ACTUAL PRO FORMA
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Total debt (including current portion):
Revolving Credit Facility (a)........................... $ -- $ --
Term Loan Facilities.................................... 73,150 58,184
13 3/4% Senior Subordinated Notes (b)................... 68,198 44,329
Other long-term debt.................................... 1,079 1,079
Capital lease obligations............................... 5,103 5,103
--------- --------
Total debt............................................ 147,530 108,695
--------- --------
Redeemable equity securities (c).......................... 332 --
--------- --------
Stockholders' deficit:
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; no shares issued and outstanding pro forma
(d).................................................... 37,398 --
Common stock, voting, $.01 par value: 3,000,000 shares
authorized, 1,321,522 shares issued and outstanding;
shares issued and outstanding pro forma (d)(e)..... 13 11
Common stock, Class A, non-voting, $.01 par value;
500,000 shares authorized, 75,652 issued and
outstanding; no shares issued and outstanding pro forma
(e).................................................... 1 --
Additional paid-in capital.............................. 16,805 156,323
Restricted stock (c).................................... (1,134) --
Accumulated deficit..................................... (154,655) (216,587)
Foreign currency translation adjustment................. 6 6
--------- --------
Total stockholders' deficit........................... (101,566) (60,247)
--------- --------
Total capitalization................................ $ 46,296 $ 48,448
========= ========
</TABLE>
- --------
(a) The Revolving Credit Facility provides for borrowings of up to $15.0
million. See "Description of Certain Indebtedness--Bank Credit Agreement."
(b) The Company intends to use a portion of the net proceeds from the offering
to redeem $24.5 million aggregate principal amount (approximately $23.9
million accreted value) of the Notes at a redemption price of 112% of
principal amount (representing an aggregate redemption price of $27.4
which includes a redemption premium of approximately $3.6 million). See
"Use of Proceeds." As a result of such redemption and the write-off of
related deferred debt issuance costs of $1.4 million, the Company will
record an extraordinary loss of $5.0 million ($3.1 million net of taxes).
(c) Upon closing of an initial public offering, the redemption obligations
with respect to the redeemable equity securities expire and the
restrictions on the restricted stock lapse. Accordingly, the pro forma
information reflects the reclassification of redeemable equity securities
as common and preferred stock and the acceleration of the recognition of
approximately $1.1 million of compensation expense with respect to the
restricted stock.
(d) The Company will issue shares of Common Stock to certain holders of
PIK Preferred Stock to redeem their PIK Preferred Stock with an aggregate
redemption price of $1.4 million.
(e) All outstanding Class A Common Stock will convert into Common Stock on a
one-for-one basis upon completion of the offering.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected information below presents consolidated financial information
and other data for the periods indicated. The Consolidated Statement of
Operations Data and Consolidated Balance Sheet Data for the years ended and as
of December 31, 1993, 1994 and 1995 have been derived from the consolidated
financial statements audited by Deloitte & Touche LLP, independent
accountants. The Consolidated Statement of Operations Data and Consolidated
Balance Sheet Data for the years ended and as of December 31, 1991 and 1992
have been derived from audited financial statements that are not included in
this Prospectus. The Consolidated Statement of Operations Data and
Consolidated Balance Sheet Data for the three months ended and as of March 31,
1995 and 1996 have been derived from unaudited financial statements, which in
the opinion of management contain all adjustments, consisting only of normal
recurring accruals, which are necessary for a fair statement of the results of
such periods. The information set forth below is not necessarily indicative of
the results of future operations and should be read in conjunction with the
consolidated financial statements and related notes thereto that are included
in this Prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
-------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net revenues........... $ 87,713 $102,235 $109,824 $ 118,560 $ 136,299 $ 33,608 $ 40,099
Cost of sales.......... 42,747 49,628 49,818 52,485 60,982 17,119 20,912
Administrative and
general expenses...... 13,153 14,845 14,466 13,616 10,200 2,659 3,264
Provision for doubtful
accounts.............. 2,043 4,129 5,097 5,643 7,788 2,384 3,015
Marketing costs........ 10,395 13,055 13,925 15,542 17,442 3,473 4,606
Coupon redemption
costs................. 7,321 6,439 5,680 6,397 5,969 2,001 1,480
Depreciation and
amortization.......... 1,756 1,863 2,095 3,141 2,493 624 658
Other (income)
expenses(a)........... (14,634) 456 2,725 123 (2) (1) 29
-------- -------- -------- --------- --------- --------- ---------
Operating income....... 24,932 11,820 16,018 21,613 31,427 5,349 6,135
Interest income........ 670 386 388 314 378 63 73
Interest expense(b).... 2,243 1,530 1,463 4,811 19,749 5,126 4,678
-------- -------- -------- --------- --------- --------- ---------
Income from continuing
operations before
provision for income
taxes and cumulative
effect of accounting
change................ 23,359 10,676 14,943 17,116 12,056 286 1,530
Provision for income
taxes................. 3,159 4,135 5,581 6,648 4,560 111 597
-------- -------- -------- --------- --------- --------- ---------
Income from continuing
operations before
cumulative effect of
accounting change..... 20,200 6,541 9,362 10,468 7,496 175 933
Discontinued
operations(c)......... (1,356) (2,300) (5,283) (559) -- -- --
Cumulative effect of
accounting change..... -- -- -- (163) -- -- --
-------- -------- -------- --------- --------- --------- ---------
Net income............. $ 18,844 $ 4,241 $ 4,079 $ 9,746 $ 7,496 $ 175 $ 933
======== ======== ======== ========= ========= ========= =========
Net income per common
and common equivalent
share.................
Weighted average number
of common and common
equivalent shares
outstanding ..........
OTHER DATA:
Adjusted operating
income(d)............. $ 10,298 $ 12,276 $ 18,743 $ 21,736 $ 31,425 $ 5,348 $ 6,164
Capital
expenditures(e)....... 1,210 5,820 3,859 2,765 3,122 1,199 648
Number of
solicitations......... 16,868 31,592 30,037 30,557 43,267 23,711 27,539
Response rate(f)....... 9.2% 10.1% 10.9% 12.3% 11.4% 8.5% 9.4%
Number of front end
shipments(g)(h)....... 1,413 2,884 2,965 3,374 4,426 1,806 2,301
Number of back end
shipments(g)(i)....... 5,432 6,015 6,069 6,158 6,799 1,528 1,683
Total number of pairs
shipped(g)(j)......... 27,861 34,341 35,019 36,489 42,138 12,194 14,045
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
-------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE
SHEET DATA:
Working capital........ $ 6,132 $ 7,632 $ 7,518 $ 3,152 $ 5,794 $ 888 $ (82)
Total assets........... 64,989 66,152 66,859 74,860 82,860 78,675 80,039
Total debt(b).......... 11,954 13,455 12,305 153,442 151,093 154,348 147,530
Other long-term
obligations........... -- 1,204 584 66 -- 38 --
Redeemable equity
securities............ -- -- -- 45 332 45 332
Stockholders' equity
(deficit)(b).......... 21,802 25,656 26,318 (110,266) (102,868) (109,920) (101,566)
Cash dividends
declared.............. 738 387 -- -- -- -- --
</TABLE>
See Notes to Selected Consolidated Financial and Other Data.
16
<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(a) Included in other (income) expenses are the following:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- ---------------
1991 1992 1993 1994 1995 1995 1996
-------- ---- ------ ---- ---- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Proceeds from corporate-
owned life insurance.... $(15,000) $ -- $ -- $ -- $-- $ -- $ --
Litigation settlements
and related expense..... -- 419 2,327 -- -- -- --
Other miscellaneous (in-
come) expenses.......... 366 37 398 123 (2) (1) 29
-------- ---- ------ ---- --- ------ ------
$(14,634) $456 $2,725 $123 $(2) $ (1) $ 29
======== ==== ====== ==== === ====== ======
</TABLE>
(b) As part of the 1994 Recapitalization completed in October 1994, the
Company incurred substantial indebtedness, the net proceeds of which were
used to finance, in part, the repurchase of common and preferred stock
from Murphy for aggregate consideration of approximately $191.2 million.
Accordingly, as a result of the 1994 Recapitalization, interest expense
and total debt significantly increased and a significant stockholders'
deficit was created. See "Certain Relationships and Related Transactions--
The 1994 Recapitalization and Related Transactions."
(c) Represents the loss from discontinued operations and the loss on disposal
of discontinued operations (net of tax) related to the decision to dispose
of the Company's Book, Bag and Overseas Divisions.
(d) "Adjusted operating income" is defined as operating income before other
(income) expenses.
(e) Capital expenditures include new equipment and automobiles financed with
capital lease obligations and other financing arrangements.
(f) Response rate is equal to the number of front end shipments divided by the
number of solicitations (without giving effect to returns totaling
approximately 141,000, 294,000, 316,000, 379,000 and 524,000 pairs in
1991, 1992, 1993, 1994 and 1995, respectively, and 216,000 and 287,000 in
the three months ended March 31, 1995 and March 31, 1996, respectively).
(g) All amounts are stated net of returns.
(h) Each front end shipment represents a three pair shipment unit.
(i) Each back end shipment represents a four pair shipment unit. Six pair
shipments have been adjusted for comparability since their introduction in
1993.
(j) Includes bulk shipments to the Company's former Canadian subsidiary which
was sold by the Company in 1990. Such shipments represent approximately
1.9 million, 1.6 million, 1.8 million, 1.7 million and 1.7 million of
pairs shipped in 1991, 1992, 1993, 1994 and 1995, respectively, and .7
million and .4 million in the three months ended March 31, 1995 and March
31, 1996, respectively.
17
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated balance sheet gives pro forma
effect to the following transactions (collectively, the "Transactions") as if
they had occurred on March 31, 1996: (i) the exchange of shares of Common
Stock held by Murphy for a newly issued series of preferred stock with an
aggregate liquidation preference of $40.0 million and certain other
consideration as described under "Certain Relationships and Related
Transactions--Exchange Transaction," (ii) the issuance by the Company of
shares of Common Stock to redeem a portion of the PIK Preferred Stock with an
aggregate redemption price of $1.4 million and (iii) the completion of the
offering and the application of the net proceeds therefrom to repay
indebtedness, to redeem preferred stock and to repurchase common stock as
described under "Use of Proceeds." The following unaudited pro forma
consolidated statements of operations for the year ended December 31, 1995 and
the three months ended March 31, 1996 give pro forma effect to the
Transactions as if they had occurred at the beginning of the periods
presented.
The pro forma financial information presented below is derived from the
audited financial statements of the Company as of and for the year ended
December 31, 1995 and the unaudited financial statements of the Company as of
and for the three months ended March 31, 1996.
The following pro forma financial information should be read in conjunction
with "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Certain Relationships and Related
Transactions--Exchange Transaction" and the consolidated financial statements
of the Company and the related notes thereto appearing elsewhere in this
Prospectus. The pro forma adjustments, which are disclosed in the accompanying
notes, are based upon available information and certain assumptions that the
Company believes are reasonable. The pro forma financial information presented
herein is not necessarily indicative of the results of operations or financial
condition that would have been reported had the events assumed therein
occurred on the dates indicated, nor is it necessarily indicative of results
of operations or financial position that may be achieved in the future.
18
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DATA
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-------------------------------------------
ACTUAL PRO FORMA ADJUSTMENTS PRO FORMA
--------- --------------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......... $ 678 $ 678
Accounts receivable, less an
allowance for doubtful accounts.. 22,744 22,744
Inventories....................... 7,943 7,943
Prepaid and other current assets.. 1,283 1,283
--------- -------- ---------
Total current assets.............. 32,648 32,648
PROPERTY AND EQUIPMENT, net........ 15,379 15,379
MAILING LIST RIGHTS................ 60 60
DEFERRED CUSTOMER ACQUISITION
COSTS............................. 22,364 22,364
DEFERRED DEBT ISSUANCE COSTS, less
accumulated amortization.......... 8,436 $ (1,374)(a) 7,062
OTHER ASSETS....................... 1,152 1,152
--------- -------- ---------
TOTAL.............................. $ 80,039 $ (1,374) $ 78,665
========= ======== =========
LIABILITIES AND STOCKHOLDERS'
DEFICIENCY
CURRENT LIABILITIES
Current portion of long-term
debt............................. $ 4,796 $ 4,796
Current portion of capital lease
obligations...................... 1,461 1,461
Accounts payable.................. 6,655 6,655
Accrued expenses and other current
liabilities...................... 4,606 $ (3,526)(b) 1,080
Accrued interest.................. 2,355 2,355
Accrued coupon redemption costs... 6,071 6,071
Deferred income taxes............. 6,786 6,786
--------- -------- ---------
Total current liabilities......... 32,730 (3,526) 29,204
LONG-TERM DEBT, less current
portion........................... 137,631 (38,835)(c) 98,796
CAPITAL LEASE OBLIGATIONS, less
current portion................... 3,642 3,642
ACCRUED COUPON REDEMPTION COSTS.... 517 517
DEFERRED INCOME TAXES.............. 6,753 6,753
--------- -------- ---------
Total liabilities................. 181,273 (42,361) 138,912
--------- -------- ---------
COMMITMENTS AND CONTINGENT
LIABILITIES
REDEEMABLE EQUITY SECURITIES....... 332 (332)(d) --
--------- -------- ---------
STOCKHOLDERS' DEFICIENCY
Preferred Stock................... 37,398 (37,398)(e) --
Common Stock, voting.............. 13 (2)(f)(g) 11
Common Stock, Class A, non-
voting........................... 1 (1)(g) --
Additional paid-in capital........ 16,805 138,200 (h) 156,323
(72)(f)
108 (d)
(124)(i)
1,406 (e)
Accumulated deficit............... (154,655) (15,378)(e) (216,587)
(3,066)(j)
(39,925)(f)
(1,984)(k)
(703)(d)
(876)(i)
Restricted Stock.................. (1,134) 1,134 (d) --
Foreign currency translation
adjustment....................... 6 6
--------- -------- ---------
Stockholders' deficiency.......... (101,566) 41,319 (60,247)
--------- -------- ---------
TOTAL.............................. $ 80,039 $ (1,374) $ 78,665
========= ======== =========
</TABLE>
See notes to Unaudited Pro Forma Consolidated Balance Sheet Data.
19
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET DATA
(a) Adjustment to write-off deferred debt issuance costs of approximately $1.4
million as a result of the redemption of $24.5 million aggregate principal
amount of the Notes.
(b) Adjustment to accrued expenses and other current liabilities to reflect
the aggregate tax effects of the following:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Redemption of the Notes at a premium and write-off of de-
ferred debt issuance costs................................ $1.9
Payment to terminate certain financial advisory service ar-
rangements (see note (k) below)........................... 1.2
Recognition of compensation expense related to the re-
stricted stock (see note (d) below)....................... 0.4
----
Total.................................................... $3.5
====
</TABLE>
(c) Adjustment to record the repayment of approximately $37.4 million of
indebtedness, consisting of the redemption of approximately $23.9 million
accreted value ($24.5 million aggregate principal amount) of Notes and the
repayment of approximately $15.0 million of bank debt.
(d) Adjustment to reclassify redeemable equity securities as common and
preferred stock as a result of the expiration of the redemption
obligations with respect thereto upon completion of the offering and to
accelerate the recognition of approximately $1.1 million of compensation
expense ($.7 million after the related tax effect) due to the lapse of the
restrictions thereon as a result of the completion of the offering.
(e) Adjustment to record the redemption of the PIK Preferred Stock (having an
aggregate initial liquidation preference of approximately $37.6 million)
for an aggregate redemption price of approximately $53.0 million ($51.6
million of which will be paid in cash and $1.4 million of which will be
paid to Messrs. Biagini, Lengers and Hughes in the form of shares of
Common Stock, assuming an initial offering price of $ per share, the
midpoint of the range set forth on the cover page of this Prospectus),
which includes approximately $15.4 million of cumulative undeclared
dividends as of March 31, 1996 ($15.1 million of which will be paid in
cash and $.3 million of which will be paid to Messrs. Biagini, Lengers and
Hughes in the form of shares of Common Stock).
(f) Adjustment to record the issuance of preferred stock with an aggregate
liquidation preference of $40.0 million in exchange for common stock held
by Murphy and the subsequent redemption of such preferred stock with a
portion of the proceeds from the offering.
(g) All outstanding Class A Common Stock will convert into Common Stock on a
one-for-one basis upon completion of the offering.
(h) Adjustment to record the issuance and sale of the shares in the offering
at a net issue price of $138.2 million, representing gross proceeds of
$150.0 million less underwriting discounts and commissions of
approximately $9.8 million and other fees and expenses of approximately
$2.0 million.
(i) Adjustment to record the repurchase of shares of Common Stock from
certain holders of the PIK Preferred Stock for an aggregate repurchase
price of $1.0 million.
(j) Adjustment to record an after tax charge of approximately $3.1 million
(approximately $5.0 million before the related tax effect) as a result of
the redemption of $24.5 million aggregate principal amount of the Notes
with an accreted value of approximately $23.9 million. The $5.0 million
pre-tax charge consists of an aggregate redemption premium of
approximately $3.6 million and the write-off of approximately $1.4 million
of deferred debt issuance costs referred to in note (a) above.
(k) Adjustment to record an after tax charge of approximately $2.0 million as
a result of the payment of approximately $3.2 million to terminate certain
financial advisory service arrangements provided to the Company by Kelso.
20
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS(A) PRO FORMA
------------ ---------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues............... $ 136,299 $ 136,299
Cost of sales.............. 60,982 60,982
Administrative and general
expenses.................. 10,200 $ (311)(b) 9,889
Provision for doubtful
accounts.................. 7,788 7,788
Marketing costs............ 17,442 17,442
Coupon redemption costs.... 5,969 5,969
Depreciation and
amortization.............. 2,493 2,493
Other income............... (2) (2)
------------ ----------- ------------
Operating income........... 31,427 311 31,738
Interest income............ 378 378
Interest expense........... 19,749 (4,963)(c) 14,786
------------ ----------- ------------
Income before income
taxes..................... 12,056 5,274 17,330
Provision for income
taxes..................... 4,560 2,004 (d) 6,564
------------ ----------- ------------
Net income................. $ 7,496 $ 3,270 $ 10,766
============ =========== ============
Net income per common and
common equivalent share...
============
Weighted average number of
common and common
equivalent shares
outstanding............... (e)
============
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
----------------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS(A) PRO FORMA
------------ ---------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net revenues............... $ 40,099 $ 40,099
Cost of sales.............. 20,912 20,912
Administrative and general
expenses.................. 3,264 $ (66)(b) 3,198
Provision for doubtful
accounts.................. 3,015 3,015
Marketing costs............ 4,606 4,606
Coupon redemption costs.... 1,480 1,480
Depreciation and
amortization.............. 658 658
Other expenses............. 29 29
------------ ----------- ------------
Operating income........... 6,135 66 6,201
Interest income............ 73 73
Interest expense........... 4,678 (1,229)(c) 3,449
------------ ----------- ------------
Income before income
taxes..................... 1,530 1,295 2,825
Provision for income
taxes..................... 597 492 (d) 1,089
------------ ----------- ------------
Net income................. $ 933 $ 803 $ 1,736
============ =========== ============
Net income per common and
common equivalent share...
============
Weighted average number of
common and common
equivalent shares
outstanding............... (e)
============
</TABLE>
See notes to Unaudited Pro Forma Consolidated Statement of Operations Data.
21
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS DATA
(a) The Unaudited Pro Forma Consolidated Statements of Operations Data exclude
the following estimated non-recurring expenses which were incurred in
connection with, or due to, the offering:
(1) The payment made to terminate certain financial advisory service
arrangements provided to the Company by Kelso of $3.2 million ($2.0
million after the related tax effect).
(2) The acceleration of the recognition of compensation expense of $1.1
million ($.7 million after related tax effects) related to the vesting
of the restricted stock as a result of the offering.
(3) The premium paid and the write-off of deferred debt issuance costs of
$5.0 million ($3.1 million after related tax effect) in connection with
the redemption of $24.5 million principal amount of the Notes.
(4) The cumulative undeclared dividends of $15.4 million ($.3 million of
which will be paid in the form of shares of Common Stock, assuming an
initial offering price of $ per share, the midpoint of the range set
forth on the cover page of this Prospectus) that will be paid upon the
redemption of the PIK Preferred Stock.
(b) The administrative and general expenses adjustment reflects the
elimination of the arrangement with Kelso to provide financial advisory
services.
(c) The interest expense adjustment is as follows:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, 1995 MARCH 31, 1996
----------------- ------------------
(IN THOUSANDS)
<S> <C> <C>
Interest expense on bank debt repaid.. $(1,283) $ (321)
Interest expense on the Notes re-
deemed............................... (3,680) (908)
------- -------
Net adjustment to interest expense.... $(4,963) $(1,229)
======= =======
</TABLE>
(d) The tax effect of pro forma adjustments to income before income taxes is
based on the estimated applicable statutory tax rates. The income tax
adjustment also excludes the tax effect of non-recurring adjustments as
described in (a) above.
(e) Reflects shares of Common Stock outstanding after the offering (including
common stock equivalents calculated in accordance with the "treasury stock
method," wherein the net proceeds to the Company from the exercise of
outstanding stock options are assumed to repurchase shares of Common Stock
at $ per share (the mid-point of the range set forth on the cover
page of this Prospectus).)
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis should be read in conjunction with "Selected
Consolidated Financial and Other Data" and the consolidated financial
statements of the Company and related notes, all included elsewhere in this
Prospectus. The discussion that follows reflects historical results of
operations, and does not take into consideration the effects of the 1994
Recapitalization on results of operations, unless so specifically stated. See
"Certain Relationships And Related Transactions--The 1994 Recapitalization and
Related Transactions."
GENERAL
The Company sells its hose exclusively through its direct mail marketing
continuity program. The Company's sales are a mix of front end shipments to
new customers (as well as customers who had previously discontinued their
participation) and back end shipments to customers in the continuity program.
Pursuant to its direct mail marketing continuity program, the Company solicits
its front end customers through initial offers of specially priced hose. The
Company incurs significant marketing costs and a loss on the initial offer in
connection with the solicitation of front end customers. Back end customers
who continue in the continuity program and make repeat purchases at regular
prices generate the substantial majority of the Company's net revenues and
income from continuing operations. Sales from front end and back end shipments
represented 10.6% and 77.3% of net revenues, respectively, for the year ended
December 31, 1993, 11.1% and 76.9% of net revenues, for the year ended
December 31, 1994 and 12.9% and 76.9% of net revenues for the year ended
December 31, 1995. Since 1992, the back end pairs of hosiery shipped has
increased annually at a rate of 0.9%, 1.5% and 10.4% in 1993, 1994 and 1995,
respectively, from 24.1 million pairs in 1992, to 24.3 million pairs in 1993
to 24.6 million pairs in 1994 and to 27.2 million pairs in 1995.
The Company seeks to retain back end customers by providing hosiery on a
regular basis at competitive prices and by offering flexibility in shipment
programs based on a customer's particular buying habits. Through such efforts
the Company has been able to establish a predictable back end customer base
that is increased through the conversion of front end customers into back end
customers. The Company is working continually to develop means of improving
its retention of back end customers, for example, through the introduction of
new products. Customers, however, exit the continuity program for various
reasons.
As is common to continuity programs, the Company loses the majority of
respondents soon after they enter the program. However, the longer a customer
continues in the program, the probability that the customer will remain in the
program increases.
The Company's results in any period are generally affected by the number of
solicitations made, response rates, retention rates, and sales per shipment,
as well as other variables, including the number of mailings and the dates on
which such mailings are made. Accordingly, period-to-period comparability of
the Company's results will be affected by changes in such variables. The
Company has structured its front end solicitation mailings so that they occur
at times when management believes response rates will be maximized. Two
mailings occur in the Company's first fiscal quarter, one in each of the
second and third fiscal quarters, and none in the fourth fiscal quarter. As a
result, the Company experiences higher costs in the first six months than in
the second six months of the year, with highest costs in the first fiscal
quarter.
23
<PAGE>
The following table sets forth certain operating data of the Company:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- -----------------------
1993 1994 1995 1995 1996
-------- -------- --------- -----------------------
(IN THOUSANDS, EXCEPT PER SHIPMENT INFORMATION)
<S> <C> <C> <C> <C> <C>
Solicitations............... 30,037 30,557 43,267 23,711 27,539
Response rate (a)........... 10.9% 12.3% 11.4% 8.5% 9.4%
Front end (b)
Shipments (c)............. 2,965 3,374 4,426 1,806 2,301
Pairs shipped............. 8,895 10,122 13,279 5,418 6,903
Sales..................... $ 11,642 $ 13,183 $ 17,585 $ 7,135 $ 9,187
Sales per shipment........ $ 3.93 $ 3.91 $ 3.97 $ 3.95 $ 3.99
Back end (b)
Shipments (d)............. 6,069 6,158 6,799 1,528 1,683
Pairs shipped............. 24,276 24,633 27,195 6,112 6,734
Sales..................... $ 84,923 $ 91,130 $ 104,769 $ 22,894 $ 27,494
Sales per shipment (d).... $ 13.99 $ 14.80 $ 15.41 $ 14.98 $ 16.33
Total shipments (b) (d)..... 9,034 9,532 11,225 3,334 3,984
Total pairs shipped (b)
(e)........................ 35,019 36,489 42,138 12,194 14,045
</TABLE>
- --------
(a) Response rate is equal to the number of front end shipments divided by the
number of solicitations (without giving effect to returns totaling
approximately 316,000, 379,000 and 524,000 pairs in 1993, 1994 and 1995,
respectively) and approximately 216,000 and 287,000 in the three months
ended March 31, 1995 and March 31, 1996, respectively.
(b) All amounts are stated net of returns.
(c) Each front end shipment represents a three pair shipment unit.
(d) Each back end shipment represents a four pair shipment unit. Six pair
shipments have been adjusted for comparability since their introduction in
1993.
(e) Includes bulk shipments to the former Canadian subsidiary of the Company
which was sold by the Company in 1990. Such shipments represent 1.9
million, 1.7 million and 1.7 million pairs shipped in 1993, 1994 and 1995,
respectively, and .7 million and .4 million in the three months ended
March 31, 1995 and March 31, 1996, respectively.
The following table sets forth certain income statement data for the Company
expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------- --------------------
1993 1994 1995 1995 1996
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues.................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............... 45.4 44.3 44.7 50.9 52.2
Administrative and general
expenses................... 13.2 11.5 7.5 7.9 8.1
Provision for doubtful ac-
counts..................... 4.6 4.8 5.7 7.1 7.5
Marketing costs............. 12.7 13.1 12.8 10.3 11.5
Coupon redemption costs..... 5.2 5.4 4.4 6.0 3.7
Depreciation and amortiza-
tion....................... 1.9 2.6 1.8 1.9 1.6
------- ------- ------- --------- ---------
Subtotal.................. 83.0 81.7 76.9 84.1 84.6
------- ------- ------- --------- ---------
Income from continuing
operations before interest,
other (income) expenses and
provision for income taxes... 17.0% 18.3% 23.1% 15.9% 15.4%
======= ======= ======= ========= =========
</TABLE>
Components of Income from Continuing Operations
Net revenues include hosiery shipments (net of returns) to front end and
back end customers (representing approximately 89.8% of net revenues in 1995),
as well as catalog sales of lingerie and intimate apparel products,
24
<PAGE>
mailing list rentals, insert fees, computer services and bulk sales to the
former Canadian subsidiary of the Company. Cost of sales represents raw
materials, manufacturing, packaging and delivery and related postage costs.
The Company records a provision for doubtful accounts for each shipment of
hose. At the end of each accounting period, the Company makes an adjustment to
reflect the actual collection of accounts receivable and the estimated
recovery of the accounts receivable. The level of bad debt associated with
front end shipments and initial back end shipments of hose has been
significantly greater than with later shipments and the provision for doubtful
accounts therefore is likely to be higher in periods in which front end
shipments represent a larger portion of total shipments. Administrative and
general expenses represent order processing, purchasing, legal, accounting and
corporate costs. The Company incurs costs in connection with obtaining new
customers and regaining old customers who had previously discontinued their
participation in its continuity program. These costs are included in cost of
sales and marketing costs. The economic benefits derived from a portion of
those expenditures included in marketing costs extend to future periods as
customers make repeat purchases. As a result, the Company defers a portion of
certain marketing costs spent in the current period to future periods. These
marketing costs are aggregated in each period, and amortized on an accelerated
basis based upon the estimated current year revenue in proportion to the
expected future revenue generated by these customers. Marketing costs include
both the costs that are expended currently and the amortization of costs which
were capitalized in prior periods.
The Company offers long-term back end customers in the United States
certificates which can be redeemed for gifts from the Company. The Company
records a provision for coupon redemption based on historical customer
redemption patterns applicable to outstanding coupons and average gift costs.
In the past, management has managed these costs by updating the redemption
catalogs with new products and by increasing the number of coupons required to
redeem gifts in order to offset the increased product cost to the Company.
Operational Changes
The Company has undertaken certain steps to improve profitability over the
last three years. The first step reduced the cost of acquiring new customers
by improving the response rates to its mailings while maintaining quality
customers. Management believes that response rate increases are primarily a
result of improved targeting of front end customers and new promotional
techniques. The second step involved emphasizing sales of higher-margin
hosiery through the introduction and promotion of compression hose containing
spandex. The Company has increased the percent of its total shipments which
contained higher-margin compression hose from approximately 69.4% in 1992 to
approximately 79.7% in 1995. The third step introduced an option for back end
customers to receive six pairs of hose in each shipment instead of four. The
six pair option has been well received, with orders increasing to 14.7% of
total shipments in 1994 and 37.0% in 1995, as compared to 3.8% in 1993.
Modernization Program
The Company has recently completed a major manufacturing plant modernization
program that has enabled it to become a low cost producer of hosiery products.
This program expanded capacity, reduced production costs and waste, and
increased efficiency. Since 1990, the Company has replaced over half of its
knitting capacity with computerized, high-speed knitting machines. Sewing
capacity has also been updated with robotics. The Company's dyeing, packaging
and fulfillment operations were also modernized by investing in a new facility
containing new dye vats and modern, automated packaging machines.
RESULTS OF OPERATIONS
Three Month Period Ended March 31, 1996 Compared to Three Month Period Ended
March 31, 1995
Net revenues increased by 19.3% to $40.1 million in the first three months
of 1996 from $33.6 million in the first three months of 1995. This increase in
net revenues was the result of a combination of pricing ($2.2 million), the
introduction of a new style of hose ($0.9 million) and increased volume ($3.4
million).
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Cost of sales increased 22.2% to $20.9 million in the first quarter of 1996
from $17.1 for the first quarter of 1995. This increase was primarily
attributable to higher front end shipments and the related continuation of
back end shipments for these new customers. There were 600 thousand additional
front end shipments in the first quarter of 1996 compared to the first quarter
of 1995. The cost of sales for front end shipments is substantially higher as
a percentage of sales than the cost of back end shipments, resulting in an
increase in cost of sales as a percent of sales in 1996 to 52.2% from 50.9% in
1995. Offsetting the higher front end shipment costs were increased pricing
effective January 1, 1996 and the sale of a new, higher margin garment.
Administrative and general expenses have increased to $3.3 million in the
first quarter of 1996 from $2.7 million for the same period of 1995. Increased
personnel and higher wages account for the increase.
Provision for doubtful accounts increased $0.6 million to $3.0 million in
the first quarter of 1996 from $2.4 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 0.7 million shipments), which have a higher rate of
uncollectible accounts.
Marketing costs increased 32.6% to $4.6 million from $3.5 million for the
three month periods ended March 31, 1996 and March 31, 1995, respectively. A
portion of this increase was attributable to higher front end solicitations,
as 3.8 million additional solicitations were mailed in the first quarter of
1996 compared to the same period of 1995. The increase was also attributable
to higher amortization of deferred marketing costs in the first quarter of
1996 compared to the first quarter of 1995 related to the substantial increase
in solicitations in 1995 versus 1994 (up 13.3 million solicitations).
Coupon redemption costs have declined to $1.5 million for the first quarter
of 1996 from $2.0 million for the same period of 1995. Lower redemptions
account for $0.1 million of the decrease. The remaining decrease relates to
the issuance of a new gift catalog in both 1996 and 1995 that has 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.
Interest expense has decreased to $4.7 million for the three month period
ended March 31, 1996 from $5.1 million for the three month period ended March
31, 1995. This decrease in interest expense was a combination of less debt
($0.1 million) and lower rates ($0.3 million) on the bank debt.
Pretax income increased to $1.5 million for the three month period ended
March 31, 1996 from $0.3 million for the three month period ended March 31,
1995. The increase in pretax income 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.
Net income increased to $0.9 million in the first three months of 1996 from
$0.2 million for the comparable period of 1995. This increase in net income
resulted from increased operating results of $1.2 million, offset by a $0.5
million increase in the provision for income taxes.
Fiscal 1995 Compared to Fiscal 1994
Solicitations to front end customers were increased by 41.6% from 30.6
million in fiscal 1994 to 43.3 million in fiscal 1995. Due to the increased
number of mailings, front end shipments increased 31.2% from 10.1 million
pairs in 1994 to 13.3 million pairs in 1995. As a direct result of higher
front end shipments, the Company's back end shipments increased by 10.4% from
24.6 million pairs in 1994 to 27.2 million pairs in 1995.
Net revenues increased by 15.0% from $118.6 million in fiscal 1994 to $136.3
million in fiscal 1995. This increase was the result of higher solicitations
to elicit additional front end customers (up 1.2 million customers from the
comparable period). The increase in net revenues was primarily the result of
these additional front end shipments, the related continuation of back end
shipments for these new customers and there was a $.05 per pair
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price increase in both fiscal 1995 and 1994. Price variance accounts for
approximately 25% of the sales increase, while the balance relates to volume
increases.
Returns of front end shipments increased from 378 thousand in fiscal 1994 to
524 thousand in fiscal 1995, or 38.6%. These returns resulted in $1.5 million
and $2.1 million in deductions from sales for front end shipments for these
respective periods. Returns of back end shipments also increased from 680
thousand in fiscal 1994 to 766 thousand in fiscal 1995, or 12.6%. These
returns resulted in $10.0 million and $11.8 million in deductions from sales
for back end shipments for these respective periods.
Cost of sales increased 16.2% from $52.5 million in fiscal 1994 to $61.0
million in fiscal 1995. This increase was primarily attributable to the higher
front end and back end shipments. There were 1.2 million additional front end
shipments in 1995 compared to 1994. The cost of sales for front end shipments
is higher as a percent of sales than the cost of back end shipments, resulting
in an increase in cost of sales as a percent of sales from 1994 (44.3%) to
1995 (44.7%). The higher cost of front end shipments was partially offset by
lower manufacturing costs and lower acquisition cost for raw materials.
Administrative and general expenses decreased 25.1% from $13.6 million in
fiscal 1994 to $10.2 million in fiscal 1995. As a percentage of net revenues,
these expenses decreased from 11.5% in fiscal 1994 to 7.5% in fiscal 1995.
This decrease was primarily due to lower personnel costs ($2.6 million) and
the elimination of a corporate-owned life insurance program ($0.8 million).
Provision for doubtful accounts increased $2.1 million from $5.6 million in
fiscal 1994 to $7.8 million in fiscal 1995. This increase was partially caused
by additional front end, second and third shipments in fiscal 1995 as compared
to fiscal 1994 (1.7 million), which have a higher rate of uncollectible
accounts, resulting in $1.3 million of the increase. The balance of the
increase was attributable to a lower payment rate ($0.4 million) as compared
to fiscal 1994, and an increase in agency fees and volume increases for other
hose shipments ($0.4 million).
Marketing costs increased 12.2% from $15.5 million for fiscal 1994 to $17.4
million for fiscal 1995. This increase was directly attributable to the
substantial increase in front end solicitations (30.6 million in 1994 compared
to 43.3 million in 1995).
Coupon redemption costs decreased from $6.4 million in fiscal 1994 to $6.0
million in fiscal 1995. This decrease is the result of providing a new gift
catalog to customers with an average cost per gift to the Company that is less
than that of previous catalogs. As a percentage of net revenues, redemption
costs were 5.4% in 1994 and 4.4% in 1995 reflecting the lower gift costs in
1995 versus 1994.
Depreciation expense has declined from $3.1 million in fiscal 1994 to $2.5
million in fiscal 1995. The primary reason for the decrease related to
accelerated depreciation of computer equipment in 1994 that was replaced in
early 1995.
Interest expense has increased from $4.8 million in fiscal 1994 to $19.7
million in fiscal 1995. This increase was the direct result of the issuance by
the Company of approximately $149 million of debt in October 1994 as part of
the 1994 Recapitalization.
Pretax income from continuing operations declined from $17.1 million in
fiscal 1994 to $12.1 million in fiscal 1995. The decline in pretax income from
continuing operations was attributable to the increased interest expense
related to the 1994 Recapitalization, as well as increases in cost of sales,
bad debts and marketing costs, offset by increases in sales and reductions in
administrative and general expenses.
Net income decreased from $9.7 million for the year ended December 31, 1994
to $7.5 million for the comparable period of 1995. Adjusted for the losses on
discontinued operations and the cumulative effect of a change in accounting,
net income decreased from $10.5 million in 1994 to $7.5 million in 1995. This
decrease in net income resulted from decreased operating results ($5.1
million), offset by a $2.1 million decrease in the provision for income taxes.
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Fiscal 1994 Compared to Fiscal 1993
Solicitations to front end customers were increased by 1.7% from 30.0
million in fiscal 1993 to 30.6 million in fiscal 1994. Due to the increased
number of mailings and improved response rates, front end shipments increased
13.8% from 8.9 million pairs in fiscal 1993 to 10.1 million pairs in fiscal
1994. The Company's back end shipments increased by 1.5% from 24.3 million
pairs in fiscal 1993 to 24.6 million pairs in fiscal 1994, as a direct result
of higher front end shipments.
Net revenues increased $8.8 million (8.0%) to $118.6 million in fiscal 1994
from $109.8 million in fiscal 1993. This increase was the result of higher
front end shipments and conversion of back end customers to a six pair program
from four pairs. Sales in fiscal 1993 for the six pair program were $7.4
million (program only in effect for six months; initiated in June 1993), while
sales for fiscal 1994 for the six pair program were $33.9 million.
Additionally, there was a price increase of $.05 (approximately 1.3%) in
January 1994. The $6.2 million increase in back end sales was attributable to
higher volume ($1.2 million), price increases ($3.7 million) and product mix
($1.3 million).
Returns of front end shipments increased from 316 thousand in fiscal 1993 to
378 thousand in fiscal 1994. These returns resulted in $l.2 million and $1.5
million deductions from sales for front end shipments for these respective
periods. Returns of back end shipments also increased from 588 thousand in
fiscal 1993 to 680 thousand in fiscal 1994. These returns resulted in $8.2
million and $10.0 million deductions from sales for back end shipments for
these respective periods.
Cost of sales increased 5.4% from $49.8 million in fiscal 1993 to $52.5
million in fiscal 1994. This increase was attributable to the higher front and
back end shipments. Cost of sales, as a percentage of sales, declined from
45.4% in fiscal 1993 to 44.3% in fiscal 1994. This decrease reflects continued
benefits from the Company's modernization program in the manufacturing of hose
($1.0 million) and conversion of customers to higher margin spandex products.
These improvements offset higher costs associated with the increase in front
end shipments (increase of 409 thousand shipments from 1993 to 1994), which
increased as a percentage of total shipments from 32.8% in fiscal 1993 to
35.4% in fiscal 1994.
Administrative and general expenses decreased by 5.9% from $14.5 million in
fiscal 1993 to $13.6 million in fiscal 1994. This decrease was due to the
decrease in corporate-owned life insurance premiums which totaled $2.7 million
in 1993 as compared to $0.8 million in 1994, offset by one time increased
salaries and benefit costs ($0.6 million), severance payments ($0.4 million)
and costs associated with the sale of the Company ($0.2 million). As a
percentage of net revenues these expenses decreased from 13.2% in fiscal 1993
to 11.5% in fiscal 1994.
Provision for doubtful accounts increased 10.7% from $5.1 million in fiscal
1993 to $5.6 million for fiscal 1994. The increase was caused by the increase
in front end shipments in fiscal 1994 (409 thousand) as compared to fiscal
1993. Front end shipments and the next two subsequent shipments consistently
generate a higher level of bad debt expense than exists for established
customers. While the allowance for doubtful accounts receivable decreased from
$1.1 million to $0.9 million from December 31, 1993 to December 31, 1994,
after adjusting for a one time accrual for specific receivables of $0.3
million, the Company's adjusted allowance for doubtful accounts receivable
increased from $0.8 million to $0.9 million or from 4.9% to 5.1% of accounts
receivable as of December 31, 1993 and 1994, respectively.
Marketing costs increased 11.6% from $13.9 million in fiscal 1993 to $15.5
million in fiscal 1994 due to costs associated with the increased front end
solicitations ($0.7 million), the conversion of customers to the six pair
program ($0.4 million) and an increased rate of accelerated amortization of
deferred marketing costs due to the implementation of the six pair program.
Coupon redemption costs increased 12.6% from $5.7 million in fiscal 1993 to
$6.4 million in fiscal 1994 due to increased redemptions from a larger base of
back end customers ($0.3 million) and an increase in the
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reserve account for potential future redemptions ($0.3 million) reflecting the
growth in the six pair program which enables customers to earn additional
certificates. As a percentage of net revenues, redemption costs were 5.2%
versus 5.4% in fiscal 1993 and fiscal 1994, respectively.
Depreciation and amortization expense increased from $2.1 million in fiscal
1993 to $3.1 million in fiscal 1994. The primary reason for this increase
related to accelerated depreciation of computer equipment which was replaced
in early 1995.
Interest expense increased from $1.5 million in fiscal 1993 to $4.8 million
in fiscal 1994. This increase was the direct result of the issuance by the
Company of approximately $149 million of debt in October 1994 as a result of
the 1994 Recapitalization.
Other expenses were $2.3 million in fiscal 1993 whereas fiscal 1994 had $0.2
million of other income. In 1993, such expenses included $1.7 million for a
litigation settlement, $0.2 million legal costs associated with the
settlement, as well as $0.4 million legal fees associated with the estate of a
former stockholder of the Company. Other income in fiscal 1994 related
primarily to interest income.
Pretax income from continuing operations increased 14.5% from $14.9 million
in fiscal 1993 to $17.1 million in fiscal 1994. The growth in pretax income
from continuing operations is attributable to the increase in net revenues and
improvements in the Company's margins. This margin increase is due primarily
to the decrease in cost of sales as a percentage of net revenues, offset by
higher interest and marketing costs.
Net income increased from $4.1 million in fiscal 1993 to $9.7 million in
fiscal 1994. Adjusted for the losses on discontinued operations and the
cumulative effect of a change in accounting, net income increased 11.8% from
$9.4 million in fiscal 1993 to $10.5 million in fiscal 1994. This increase in
net income resulted from an improvement in operating results ($2.2 million),
offset by $1.1 million increase in the provision for taxes. Income from
continuing operations represented 8.5% of net revenues in fiscal 1993, as
compared to 8.8% in fiscal 1994.
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
112, Employers Accounting for Postemployment Benefits, which was effective
January 1, 1994. The cumulative effect of the adoption was to decrease net
income by $163 thousand, net of taxes of $87 thousand.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash requirements arise principally from the need to finance
new front end solicitations (customers), capital expenditures, debt repayment
and other working capital requirements. The Company mailed 30.0 million, 30.6
million and 43.3 million solicitations during the years 1993, 1994 and 1995,
respectively. The Company financed these solicitations and expects to finance
future solicitations from internally generated funds.
In fiscal 1993, 1994 and 1995, capital expenditures were $3.9 million, $2.8
million and $3.1 million, respectively. The majority of the expenditures were
for the purchase of knitting, sewing and dyeing equipment and facility
enhancements. These expenditures were financed substantially through the
assumption of capital leases. Also, the Company expects to expend
approximately $3.0 million in 1996 for additional equipment. These capital
expenditures will be financed through the assumption of capital leases or
other appropriate financing facilities.
Working capital decreased from $7.5 million at December 31, 1993, to $3.2
million at December 31, 1994, and increased to $5.8 million at December 31,
1995. Increased interest, taxes and financing costs accounted for the decrease
from 1993 to 1994. In fiscal 1995, increased cash, receivables and inventories
offset by higher interest and taxes were responsible for the increase.
Cash flows provided by operations for 1993, 1994 and 1995 of $5.1 million,
$6.3 million and $8.5 million, respectively, were derived principally from
income from continuing operations of $9.4 million, $10.5 million
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and $7.5 million (before the cumulative effect of a change in accounting) in
1993, 1994 and 1995, respectively, adjusted for non-cash expenses for
depreciation and amortization, including amortization of deferred customer
acquisition costs of $15.2 million, $17.0 million and $19.9 million in 1993,
1994 and 1995, respectively, and amortization of debt issuance costs and
discounts of $0.4 million and $1.8 million in 1994 and 1995, respectively,
offset by changes in operating assets and liabilities of $14.4 million, $9.9
million and $18.8 million in 1993, 1994 and 1995, respectively, and cash flows
to fund discontinued operations of $5.3 million and $0.6 million in 1993 and
1994, respectively. The changes in operating assets and liabilities included
increases in accounts receivable of $1.4 million, $2.7 million and $2.1
million in 1993, 1994 and 1995, respectively, as well as payments for deferred
customer acquisition costs of $12.8 million, $12.1 million and $17.9 million
in 1993, 1994 and 1995, respectively. These increases and payments reflected
the increase in volume and the significant marketing campaigns in the past
three years. The proceeds from the 1994 Recapitalization were also used, in
part, to pay debt issuance costs associated therewith totaling approximately
$9.2 million in 1994 and $1.7 million in 1995, net of amounts paid or accrued
through the use of the Company's general working capital.
Net cash used in investing activities in 1995 was $1.0 million. Investing
activities provided cash totaling $2.2 million and $5.9 million 1993 and 1994,
respectively. The predominant use of cash in investing activities resulted
from the acquisition of property and equipment of $1.1 million, $2.0 million
and $1.0 million in 1993, 1994 and 1995, respectively, and net investments in
operations that were subsequently discontinued totaling $0.4 million 1993.
Additionally, the Company invested $1.7 million in 1993 in assets later sold
to a stockholder. The assets sold to the stockholder consisted primarily of an
investment in a foreign subsidiary, property and loans to that stockholder.
Proceeds were received from the disposal of the Company's book division for
$5.1 million in 1993 and the sale of certain discontinued operations and other
assets to the stockholder in connection with the 1994 Recapitalization
totaling $7.1 million.
During 1993, 1994 and 1995, the Company used $8.0 million, $8.2 million and
$4.4 million, respectively, in financing activities. Net payments on bank and
other financing, including capital lease obligations, totaled $6.8 million,
$9.9 million and $4.6 million in 1993, 1994 and 1995, respectively. In 1994,
the Company received proceeds from the issuance of common and preferred stock
totaling $53.4 million, long-term debt totaling $80.0 million and Units
totaling $69.2 million in connection with the 1994 Recapitalization. The
proceeds in 1994 from the 1994 Recapitalization were primarily used to
purchase shares for treasury totaling $199.0 million. The proceeds from the
1994 Recapitalization were also utilized, in part, to pay fees related to the
issuance of stock associated therewith totaling approximately $2.0 million,
net of amounts paid or accrued through the use of the Company's general
working capital. The Company used cash totaling $3.4 million in 1993 to redeem
certain shares of its stock. All shares purchased for treasury, or otherwise
redeemed, were subsequently retired.
On October 17, 1994, the Company effected the 1994 Recapitalization. As a
result of the substantial indebtedness incurred in connection with the 1994
Recapitalization, the Company has significant debt service obligations. At
December 31, 1995, the outstanding amount of the Company's indebtedness (other
than trade payables) was $151.1 million, including $78.6 million of
indebtedness under the Bank Credit Agreement and $68.2 million of Notes.
Since consummation of the 1994 Recapitalization, the Company's ongoing cash
requirements through the end of fiscal 1999 will consist primarily of interest
payments and required remaining amortization payments under the Bank Credit
Agreement, interest payments on the Notes, payments of capital lease
obligations, front end marketing expenditures, working capital, capital
expenditures and taxes. The Company intends to use a substantial portion of
the net proceeds from the sale of the Common Stock in the offering by the
Company to repay indebtedness and to redeem PIK Preferred Stock. See "Use of
Proceeds." After giving effect to such redemption and repayment, the remaining
required principal payments under the Bank Credit Agreement will be: $2.0
million in 1996, $7.0 million in 1997, $11.5 million in 1998, $8.7 million in
1999, $13.8 million in 2000 and $15.2 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 their stated
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maturity in August 2002. The Company's primary source of liquidity will be cash
flow from operations and funds available to it under the Bank Credit Agreement.
The Bank Credit Agreement contains a revolving credit facility that provides
for maximum borrowings of $15.0 million, all of which was available at December
31, 1995. See "Description of Certain Indebtedness."
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.
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BUSINESS
The Company is engaged in the direct mail marketing, manufacture and
distribution of women's sheer hosiery products in the United States. The
Company has recently begun to expand its operations into the United Kingdom
and plans to enter certain other international markets. The Company has
created a marketing strategy for women's sheer hosiery that combines
innovative, highly analytical direct mail marketing techniques with a
continuous product shipment or "continuity" program. The Company's direct mail
marketing program provides customers with convenient in-home shopping for and
timely delivery of quality, attractively priced hosiery marketed under the
Silkies(R) brand name. The continuity program involves mailing a specially
priced introductory hosiery offer to targeted prospective customers, the
acceptance of which allows recipients to participate in the program and
results in additional shipments of hose on a regular and continuous basis upon
payment for each prior shipment. The Company has developed comprehensive
statistical models for the design and analysis of its direct-response
marketing programs using proprietary customer data compiled over 20 years.
Historically, the Company has used these models to accurately estimate its
response, retention and payment rates.
The Company's historical operating results demonstrate the success of the
Company's marketing strategy. The Company shipped approximately 42 million
pairs in 1995, a 50% increase from the 28 million pairs shipped in 1991. Over
the past five years, net revenues and adjusted operating income (operating
income before other (income) expenses) have grown at compound annual growth
rates of 11.7% and 32.2%, respectively. In addition, the Company's adjusted
operating income as a percentage of revenues increased to 23.1% for 1995 from
11.7% for 1991, primarily as a result of the implementation of manufacturing
cost reduction programs and the operating leverage inherent in the Company's
business.
The success of the Company's direct mail marketing program is based on (i)
the use of advanced statistical modelling to identify individuals who are
likely to become profitable long-term customers by remaining in the Company's
continuity program for extended periods of time, (ii) the use of innovative
marketing techniques to attract such individuals, and (iii) the retention of
customers through the delivery of quality hosiery products directly to the
home on a regular basis. Drawing on its database, which contains more than 60
million individuals and on customer lists rented from other direct mail
marketers, the Company has developed sophisticated statistical, regression,
segmentation and other financial analyses to accurately target, test and
acquire customers through direct mail solicitation. The Company generally
attracts new customers through an initial direct mail solicitation technique
of offering one free pair of hose with two pairs of hose priced at $1.00 each
plus shipping and handling. The introductory offer is priced substantially
less than the cost of manufacturing, processing and shipping the related
hosiery. In 1995, there were 4.4 million shipments (13.3 million pairs of
hosiery) to new customers resulting from 43.3 million solicitations,
representing a response rate of 11.4%. The Company's annual response rates
have ranged from 9.2% to as high as 12.3% between 1991 and 1995.
New or "front end" customers who elect to participate in the Company's
continuity program by purchasing additional hose at full price become part of
the Company's repeat or "back end" customer base. When paying for each prior
shipment, back end customers can elect to receive a subsequent shipment of
hose. Typically, back end customers receive shipments of hose every four to
six weeks. The Company has developed a loyal back end customer base by
providing customers the convenience of receiving attractively priced, quality
hosiery on a regular basis. This loyal customer base has allowed the Company
to achieve consistent, predictable revenues. Back end customers generated
approximately 76.9% of the Company's net revenues in 1995.
Management believes that the following factors have been instrumental in
achieving the Company's success:
Rapidly Growing Direct Marketing Distribution Channel. The Company operates
in one of the most rapidly growing distribution channels: direct mail
marketing. According to the United States Bureau of the Census, mail order
sales in the United States have increased at a compound annual growth rate of
11.4% from 1985 through 1995, which is more than twice the rate of growth of
total consumer sales, at 5.2%, over the same period. Management believes that
direct marketing will continue to be a preferred and growing method of
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marketing and distribution. Furthermore, the Company benefits from marketing a
consumable, disposable product which is well positioned for the direct mail
marketing distribution channel. As retail hosiery competitors continue to be
burdened with increasing costs of traditional retail distribution, management
believes that it will be able to increase the Company's market share and
revenues as a result of its ability to market its product directly to the
consumer and to provide superior service to its substantial customer base.
Direct marketing techniques enable the Company to target selected consumers,
measure customer response and obtain direct customer feedback to changes in
its marketing strategies.
Advanced Regression Analysis Expertise. The Company attributes much of its
success in generating high response rates and retention rates to its use of
advanced regression analysis in the process of soliciting new customers. The
Company currently maintains a database of over 60 million individuals which,
along with lists rented from other direct mail marketers, is the source of
potential customers for its targeted front end solicitation efforts. These
lists, which provide valuable insight into the buying habits and payment
records of such individuals, form the basis for the rigorous regression
analyses performed by the Company. These analyses result in a list of
prospective customers, ranked by estimated profitability, whom management
believes would be most likely to buy hosiery from the Company on a regular and
long term basis.
Loyal Back End Customer Base. The Company has developed an active and
growing base of back end customers who continue to make regular purchases
pursuant to the Company's continuity program. Since 1991, revenues from sales
to back end customers have increased annually at a compound rate of 11.0% from
$68.9 million in 1991 to $104.8 million in 1995. The back end customer base
provides the Company with a predictable source of revenue without significant
associated marketing costs. Many of these back end customers have participated
in the Company's continuity program for several years. In 1995, 45.3% of the
total back end pairs of hosiery shipped were to customers who had participated
in the continuity program for more than three years.
State-of-the-Art Computer System. The Company utilizes advanced, state-of-
the-art computer and data processing equipment and methodology to provide for
the comprehensive management of the Company's information technology needs.
The Company's proprietary computer systems efficiently track all aspects of
the Company's operations including customer list analysis and management,
order and payment entry, billing and collection, customer service support and
delivery. The Company's management information systems are instrumental in the
development and management of its customer base.
Low Cost Manufacturing Capability. The Company has recently completed a
major manufacturing plant modernization program that has enabled the Company
to become a low cost producer of hosiery products. The Company continues to
invest in its operations to maintain its competitive advantage as a low cost,
state-of-the-art manufacturer. As a result of the Company's efforts, it has
experienced a 10% reduction in the cost of producing hosiery since 1991. The
Company achieves manufacturing efficiencies in part because it produces only a
limited number of styles and colors of hosiery. Furthermore, the predictable
nature of the Company's business allows it to schedule production and
manufacturing runs to meet expected consumer shipments thereby minimizing the
need to maintain high inventory levels of raw materials or finished products.
Insulation from Traditional Fashion, Retail and Economic Influences. Because
the Company is a direct marketer of consumable, disposable, moderately priced,
basic products, its sales have not been subject to dramatic variability
associated with fashion trends and have been generally insulated from the
effects of economic cycles. In addition, the Company's continuity program has
encouraged consistent customer demand throughout the year without seasonal
fluctuations.
GROWTH STRATEGY
The Company's growth strategy is focused on the following three
opportunities: (i) increasing solicitations to acquire additional front end
customers, (ii) increasing the level of sales to the Company's existing back
end customer base and (iii) pursuing expansion into certain international
markets. The Company plans to acquire additional front end customers through
increased solicitations while maintaining or improving current response
33
<PAGE>
rates. To this end, the Company continuously identifies and tests additional
customer lists and has completed testing of newly available lists containing
more than 39 million individuals. The Company also intends to expand future
solicitations to include customers the Company has previously identified as
being potentially profitable. In the past, the Company's corporate strategy
resulted in its not soliciting all of the potential new customers it had
identified and tested due to production capacity limitations and the Company's
focus on debt repayment. The Company anticipates that its efforts to increase
its front end customers will result in commensurate growth of its back end
customer base. In an effort to increase sales to existing customers, the
Company intends to continue to introduce new styles to encourage existing
customers to select higher priced, higher margin products.
Additionally, the Company has identified opportunities for potential growth
in certain international markets, particularly the United Kingdom, Germany,
France and Japan, all of which have efficient mail delivery systems,
accessible mailing lists and well developed sheer hosiery markets. The
aggregate population in these four countries is approximately 323 million,
compared to approximately 263 million in the United States. In January 1996,
the Company commenced operations in the United Kingdom which, as of March 31,
1996, have generated $2.0 million in revenue and achieved response rates
superior to those achieved by the Company in the United States. 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.
Finally, the Company will continue to evaluate acquisition opportunities in
the direct mail industry or opportunities to acquire new product lines which
may be suitable for direct mail marketing or the continuity program format.
However, the Company currently has no specific plans to pursue such
opportunities.
MARKETING
From its inception in 1979 until 1990, the Company's marketing efforts
included cooperative advertising, package inserts and space ads, primarily in
newspaper advertisements. Although the Company's initial marketing efforts
were inexpensive and reached a broad customer group, management believed it
would gain longer term financial benefits by altering its marketing efforts.
Following test programs begun in the spring of 1988, the Company fully
implemented in 1991 its strategy of focusing exclusively on its direct mail
marketing continuity program. The Company's current marketing efforts focus on
targeting and acquiring front end customers, as well as maintaining a strong
relationship with continuity or back end customers, through efficient delivery
of quality products, customer service and creative new product introductions.
These direct mail marketing initiatives, refined by advanced statistical and
regression analyses, have increased the size and quality of the Company's
customer base.
Acquiring Front End Customers. Direct mail marketing has become the
Company's sole means of attracting new front end customers and reactivating
previous customers. Given the response rates, continuation rates and profit
per order that direct mail generates, management believes that direct mail is
superior to all other marketing methods for its continuity program. Four major
solicitations featuring the Company's specially priced introductory offer are
mailed in January, March, June and September of each year.
The Company employs advanced statistical and regression analyses in
conjunction with each of its solicitation promotions. The Company utilizes its
proprietary in-house database of 60 million individuals, as well as lists
rented from other direct marketing firms, and analyzes information concerning
consumer buying habits and payment records in order to determine which
potential customers are likely to purchase hosiery from the Company on a
regular and long-term basis. All potential customers are ranked by potential
realizable profit and solicitations are mailed to the customers who meet the
Company's targeted profitability profile.
The Company's current initial direct mail solicitation offers the
opportunity to receive one free pair of hose with two pairs of hose priced at
$1.00 each plus shipping and handling. The recipient is able to choose the
size, style and color of hosiery for this initial shipment. Upon receiving the
first shipment, the customer can (i) pay for the product and order a second
shipment, (ii) pay for the product and elect not to order a second shipment,
or (iii) return the product and keep the free pair.
34
<PAGE>
The Continuity Program. By paying for the product and ordering a second
shipment of hosiery, the customer joins the Company's continuity program and
becomes a repeat or back end customer. Upon payment for each shipment,
customers are sent a subsequent shipment of regularly priced hose, on average
every four to six weeks, with some customers electing a bi-monthly shipment
option. With each shipment, customers may change the selection of styles,
colors and sizes. Back end shipments contain either four or six pairs of
hosiery which vary in price according to style. All shipments are made on
credit, but the Company's exposure to any one customer is limited to the cost
of one shipment. Customers are not required to commit to a minimum purchase
amount and can cancel the program at any time and for any reason. The Company
seeks to retain its back end customers by providing high quality hosiery on a
timely basis and at competitive prices at the customer's convenience. The
Company believes it has been able to establish a predictable base of back end
customers.
The Company actively resolicits customers who have chosen to discontinue
their participation in the continuity program. Based upon the number of
previous shipments and the circumstances regarding cancellation of previous
enrollment, the Company will send as many as nine reactivation offers to
reinstate these customers. In total, the Company sends about 6 million such
offers annually, and believes that approximately 30% of those customers rejoin
the continuity program as the result of these efforts. The Company also
maintains a database of inactive customers who receive variations of the
standard front end solicitation.
Through its data processing capabilities, the Company tracks a customer's
order history from the initial order through each subsequent purchase, whether
the purchase is a hosiery product, merchandise from the women's wear
merchandise catalog, or other consumer products received through gift
redemptions. Each of the Company's customer service representatives has on-
line capabilities to retrieve customer specific queries and purchasing
history.
The following table sets forth certain information regarding the number of
pairs of hose shipped in 1995, classified as front end and back end pairs
shipped. The number of back end pairs are further classified by the number of
pairs shipped to back end customers who have entered the program within the
last three years and by those who have been in the program for more than three
years.
<TABLE>
<CAPTION>
PAIRS SHIPPED(A) PERCENT
---------------- -------
(IN THOUSANDS)
<S> <C> <C>
Number of front end pairs shipped.................... 13,168 32.6%
Number of back end pairs shipped (listed by customer
front end response year)
1995 through 1993.................................. 14,890 36.9
1992 and prior..................................... 12,310 30.5
Total number of back end pairs shipped............... 27,200 67.4
------ -----
Total number of pairs shipped(b)..................... 40,368 100.0%
====== =====
</TABLE>
- --------
(a) Net of returns.
(b) Excludes 1.7 million pairs shipped to the Company's former Canadian
subsidiary (sold by the Company in 1990) which markets such hose in
Canada.
Customer Testing. The Company continually tests various aspects of its
direct mail marketing program. Such testing enables the Company to (i)
estimate the profitability of certain in-house and outside customer lists;
(ii) maintain and improve response rates to front end solicitations; (iii)
increase payment and retention rates of back end customers; (iv) determine the
profitability of the product mix offered to back end customers; (v) determine
optimal pricing strategy; and (vi) improve scheduling of production runs to
meet anticipated demand, minimizing inventory risk. Constant refinement of
test programs through creative design, offer upgrades, new hosiery products
and referral programs are conducted through various mailings with the
objective of increasing response rates or reducing costs, without negatively
impacting continuation or retention.
35
<PAGE>
The time from test to application can take between three and twelve months
depending on the testing employed. Historically, the Company has been able to
accurately estimate its response, retention and payment rates based on its
test results.
Customer Profile. Management believes that the Company's average customer is
a working woman between age 30 and 55. The Company estimates that its average
customer buys approximately 60% of her sheer hosiery products from the
Company, and many of such customers purchase hosiery for other household
members.
Additional Product Offerings. The Company also offers a women's wear
brochure featuring branded and private label lingerie and intimate apparel
products in conjunction with third party manufacturers.
PRODUCTS AND DEVELOPMENT
The Company manufactures moderately-priced, quality women's sheer hosiery
under the Silkies(R) brand name. The Company's product line is designed to
include the more popular product styles and colors for which most customers
have the greatest demand and includes six styles of sheer hosiery, in nine
different colors and six sizes, plus knee-hi's. The Company's elastomer
products (compression garments containing spandex) include Control Top, Total
Leg Control, Sheer Charm and Shapely Perfection styles. The Company's
elastomer products currently represent approximately 80% of its total
production. The remainder of the Company's production consists of its non-
elastomer products including Panty 'n Hose, Sheer-to-Waist and Knee-Hi styles.
The styles range in price from $2.33 to $4.69 per pair. The Company performs
extensive consumer research and product testing to: (i) ensure product
quality, (ii) service all significant markets and (iii) convert existing
compression hose customers to higher-margin, sheer compression hosiery
products.
DATA PROCESSING AND MANAGEMENT INFORMATION SYSTEMS
The Company has computer and data processing capabilities which it believes
are adequate for its current and planned level of operations. This in-house
capability will be used to support international operations and is capable of
handling the planned international expansion in the United Kingdom, France,
Germany and Japan. The Company has a full back-up and disaster recovery
program for its data processing system which would enable the Company to
resume operations at an outside facility within twelve hours of the onset of
such need.
The Company provides data processing services to its marketing operations
that manage the flow of all hosiery products from solicitation to customer
delivery. These services include direct mail solicitations, customer list
management and customer service operations, including order input, billing,
collection, printing and tracking of customer ordering history. Through its
database capabilities, the Company is also able to store and manage a
proprietary database of customer purchasing habits gathered from the Company's
hosiery sales history. This historical database of customer purchasing habits
covers current and past hosiery shipments, customer credit statistics, buying
patterns and purchasing records.
MANUFACTURING AND DISTRIBUTION
The Company manages all phases of the manufacturing and delivery of hosiery
products, including planning, purchasing, production, packaging and
distribution. The Company's direct mail marketing program is vertically
integrated into its manufacturing and production operations, the latter
currently providing the Company's marketing operations with approximately 85%
of the Company's hosiery needs. By spreading the volume of yearly orders over
four major solicitation dates, manufacturing and fulfillment are able to avoid
extreme variations, and thereby ensure higher efficiency and better product
quality. The Company achieves manufacturing efficiencies in part because it
produces only a limited number of styles and colors of hosiery. Additionally,
the results of the Company's direct mail marketing program allow the Company
quickly to adjust its manufacturing output according to customer demand.
36
<PAGE>
Production Process. Once front end and back end orders have been received,
the shipment information is communicated via computer to the Company's
facilities at Lancaster, South Carolina. The Company's ability to schedule its
annual output allows the Company to minimize the need to maintain high
inventory levels of raw materials or finished products. The primary raw
materials utilized by the Company are nylon and spandex yarn, dye and
chemicals. Such raw materials are purchased directly from suppliers which
provide the Company with technical support. All knitting operations are
located at the Company's facility in Newland, North Carolina. Sewing
operations are performed at the Company's facilities in Newland, North
Carolina, and Heath Springs, South Carolina. Once the hosiery products have
been manufactured, they are transported to the Company's Lancaster, South
Carolina, facility where the products are dyed, packaged and prepared for
delivery.
Packaging and Distribution. The Company operates fully-automated, high-speed
packaging machines and distributes its products through the United States
Postal Service directly to the customer's home. The Company's use of
standardized and fully automated packaging allows the Company to achieve
significant efficiencies. The Company uses the United States Postal Service
and has been able to control delivery costs by passing on to its customers any
increases in postal rates. In its international operations, the Company will
use such countries' national postal services. However, there can be no
assurance that in the future the Company will be able to pass on increased
shipping costs to its customers. See "Risk Factors--Increase in Postal Rates."
Capital Investment. The Company has recently completed a major manufacturing
plant modernization program that has enabled it to become a low cost producer
of hosiery products. During the past five years, the Company has spent
approximately $17 million replacing the majority of its knitting and sewing
capacity with advanced robotics, installing automatic packaging equipment for
more timely response through efficient delivery, building a new dye house and
distribution facility and upgrading its computer facilities. The Company
maintains relationships with its machinery producers in order to keep up-to-
date on changing manufacturing methods. The Company's current manufacturing
operations have the capacity to produce approximately 60 million pairs
annually. In addition, the modernization program has provided the Company with
the ability to expand future production capacity by approximately 20% from
current levels without significant incremental capital investment.
Outsourcing of Product. In order to overcome short term capacity constraints
and to provide longer term flexibility for sources of manufactured hosiery,
the Company recently began purchasing a portion of its manufactured hosiery
requirements from three different hosiery manufacturers in Mexico. To date,
the Company has been able to obtain hosiery that is the same quality as its
own product at a price approximately equal to the Company's cost of
manufacturing in the United States. Currently, the Company outsources
approximately 15% of its manufactured hosiery requirements and expects to
increase its reliance on outsourced products to 20% in 1996.
COMPETITION AND INDUSTRY
The Company operates exclusively in the women's hosiery industry, targeting
adult women as customers. Management believes that the overall women's hosiery
market may be declining as a result of the high cost of repeat purchases of
such products and changes in women's choices in business and leisure wear.
Despite this apparent overall market decline, the Company has been able to
increase its sales from $109.8 million in 1993 to $136.3 million in 1995.
Women's sheer hosiery is sold through a variety of distribution channels,
including discount stores, grocery and drug stores, specialty stores, national
chains and direct marketing. Although several competitors have sold their
hosiery products via mail order for many years, this distribution has
concentrated on the large quantity sale of irregulars, as opposed to the
Company's direct mail marketing of high quality women's hosiery products in a
continuity program.
37
<PAGE>
The Company competes with major manufacturers and distributors of women's
sheer hosiery, which primarily sell through the retail channel and some of
which are larger and better capitalized than the Company, and may have greater
brand recognition than the Company. The major United States hosiery
manufacturers include Sara Lee Hosiery, Kayser-Roth, the Company and Americal,
a privately held U.S. concern. More than 60 other smaller manufacturers also
produce women's sheer hosiery primarily for sale under private labels.
Competition in the women's sheer hosiery market is generally based on price,
quality and customer service.
In addition, the Company competes with, and faces potential competition from,
other direct marketing companies. Such competitors include businesses which
engage in direct mail, catalog sales, telemarketing and other methods of sale
which compete for the attention and spending dollars of consumers in the home.
There are numerous direct marketing companies that are larger and better
capitalized than the Company and that offer more varied product assortments.
SUPPLIERS
The primary raw materials utilized in the Company's manufacturing operations
are nylon and spandex yarn, dye and chemicals. Although the Company generally
stocks only a two to three week supply of raw materials in order to manage
inventory efficiently, the predictable nature of the Company's shipments
generally allows it to order raw materials one year in advance and secure an
adequate supply at prearranged costs.
FACILITIES
The Company owns or leases facilities at six principal locations. The
following sets forth the general location of each, its size, whether the
facility is owned or leased and the principal function of each.
<TABLE>
<CAPTION>
SIZE OWNED/
LOCATION SQUARE FEET LEASED FUNCTION
-------- ----------- ------ --------
<S> <C> <C> <C>
Bensalem, Pennsylvania....... 60,000 Leased Headquarters; Administration;
Marketing; Data Processing;
Customer Service
Bensalem, Pennsylvania....... 13,000 Leased Warehousing
Newland, North Carolina...... 150,000 Owned Knitting; Sewing
Lancaster, South Carolina.... 142,000 Owned Dyeing; Packaging; Delivery
Operations; Warehousing
Heath Springs, South Caroli- 16,000 Leased Sewing; Warehousing
na..........................
Liverpool, United Kingdom.... 15,000 Leased United Kingdom Headquarters
</TABLE>
The two owned facilities are subject to mortgages and security interests
granted to secure payment of the Company's obligations under the Bank Credit
Agreement. See "Description of Certain Indebtedness--Bank Credit Agreement" and
Note 11 to the consolidated financial statements included elsewhere in this
Prospectus. Management considers the Company's facilities to be well-maintained
and satisfactory for the Company's operations, and believes that the Company's
facilities provide sufficient capacity for its current and expected production
requirements.
EMPLOYEES
As of December 31, 1995, the Company had 843 employees, 164 of whom were
located at its headquarters and operations center in Bensalem, Pennsylvania,
384 of whom were located at its manufacturing facility in Newland, North
Carolina, and 291 of whom were located at its manufacturing, packaging and
fulfillment operations facility in Lancaster, South Carolina. Additionally,
four employees have been added in the United Kingdom. Of the total number of
employees, 121 are salaried workers. The remaining 722 are non-salaried
employees, the majority of whom are paid an hourly wage plus incentive
compensation based on productivity measures. The Company's hourly workforce is
not affiliated with any unions. The Company has not experienced any work
stoppages and believes its relations with its employees are good.
38
<PAGE>
GOVERNMENTAL REGULATION
The Company's direct mail operations are subject to regulation by the United
States Postal Service, the FTC and various state, local and private consumer
protection and other regulatory authorities. In general, these regulations
govern the manner in which orders may be solicited, the form and content of
advertisements, information which must be provided to prospective customers,
the time within which orders must be filled, obligations to consumers if
orders are not shipped within a specified period of time and the time within
which refunds must be paid if the ordered merchandise is unavailable or
returned.
In 1984, as a result of a lawsuit brought by the FTC, the Federal District
Court for the Eastern District of Pennsylvania issued a consent injunction,
which sets forth specific rules with which the Company must comply in
conducting its mail order business and permanently enjoins the Company, its
successors and assigns, its officers, agents, representatives and employees,
and anyone acting in concert with the Company from violating various FTC and
Postal Service laws and regulations. Since entry of the consent injunction,
the FTC has not instituted any proceedings against the Company with respect to
its mail order business nor has it advised the Company that it considers the
Company to be in violation of the consent injunction. The Company believes
that it is in full compliance with the consent injunction and continued
compliance has not had a material adverse effect on the Company's business.
None of the individual officers named in the lawsuit are currently associated
with the Company.
There can be no assurance that future regulatory requirements or actions
will not have a material adverse effect on the Company's business, financial
condition or operating results.
The Company has all material state and local environmental operating permits
required for its manufacturing and distribution activities at Newland, North
Carolina, Heath Springs, South Carolina, and Lancaster, South Carolina.
Management believes that the Company's operations currently satisfy all
material Environmental Protection Agency ("EPA") requirements and that as a
result of its modernization program, its manufacturing, dye house and
production facilities are likely to meet projected EPA standards for the
foreseeable future.
LEGAL PROCEEDINGS
The Company is involved in, or has been involved in, litigation arising in
the normal course of its business. Currently, the Company is not involved in
any litigation which is expected to have a material adverse effect on the
financial position, business or results of operations and cash flows of the
Company.
39
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to executive
officers and directors of the Company as of March 31, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ------------------------------------------------
<S> <C> <C>
John F. Biagini............ 52 Chairman, Chief Executive Officer and President
Darrell Edwards............ 37 Vice President and Director of Marketing
Robert M. Henry............ 49 Senior Vice President, Business Development
Arthur Hughes.............. 55 Vice President and Chief Financial Officer
William J. Kelly........... 46 Vice President, Systems and Operations
Hans Lengers............... 51 President, U.S. Textile Corporation and Director
Robert Mooney.............. 54 Vice President and General Counsel
Frank K. Bynum, Jr......... 33 Director
Michael B. Goldberg........ 49 Director
Joseph A. Murphy........... 52 Director
</TABLE>
Mr. Biagini has been the Chairman, Chief Executive Officer and President of
the Company since consummation of the 1994 Recapitalization. Mr. Biagini
served as President and Chief Operating Officer since June 1992. From March
1988 until June 1992, Mr. Biagini was Vice President of Marketing of the
Company. Before joining the Company in March 1988, Mr. Biagini was President
of the Direct Marketing Division of Harlequin Enterprises from 1983 to 1988
and served in various United States and international direct mail assignments
for Reader's Digest Association from 1972 to 1983.
Mr. Edwards has been the Vice President and Director of Marketing of the
Company since consummation of the 1994 Recapitalization. Mr. Edwards served as
Vice President and Director of Marketing since he joined the Company in
October 1992. Before joining the Company in October 1992, Mr. Edwards held
various magazine marketing positions at Reader's Digest Association since at
least 1989.
Mr. Henry has been Senior Vice President, Business Development since
September 1995. From 1993 to 1995, he served as Chairman, Marketing Services,
for Bates Advertising U.S. From 1990 to 1993, Mr. Henry was Vice Chairman and
Chief Operating Officer of McCaffrey and McColl Advertising.
Mr. Hughes has been the Vice President and Chief Financial Officer of the
Company since August 1995. Mr. Hughes served as Vice President and Controller
since September 1990. From August 1988 until September 1990, Mr. Hughes was
Controller for the Company's catalog company (which was later discontinued).
Before joining the Company in August 1988, Mr. Hughes worked at Lukens Steel
Company and W. Atlee Burpee Seed Company, where he was Chief Financial Officer
and Secretary-Treasurer.
Mr. Kelly has been the Vice President, Systems and Operations, of the
Company since December 1993. From November 1988 until December 1993, Mr. Kelly
was Vice President, Systems and Programming. Before joining the Company in
November 1988, Mr. Kelly held various data processing systems and data
processing operations management positions.
Mr. Lengers has been the President of U.S. Textile Corporation (the
Company's wholly owned manufacturing subsidiary) and a Director of the Company
since 1978, and is one of the founders of U.S. Textile Corporation.
Mr. Mooney has been the Vice President, General Counsel and Secretary of the
Company since consummation of the 1994 Recapitalization. Mr. Mooney served as
the Vice President and General Counsel since joining the Company in September
1988. Before joining the Company in September 1988, Mr. Mooney served as the
Company's outside counsel for several years.
40
<PAGE>
Mr. Bynum has been a director of the Company since the consummation of the
1994 Recapitalization. Mr. Bynum has been a Vice President of Kelso since July
1991, and was an Associate of Kelso from October 1987 to July 1991. He is a
director of Ellis Communications, Inc., United Refrigerated Services, Inc.,
IXL Holdings, Inc., and Universal Outdoor Holdings, Inc.
Mr. Goldberg has been a director of the Company since consummation of the
1994 Recapitalization. Mr. Goldberg has been a Managing Director of Kelso
since October 1991. Mr. Goldberg served as a Managing Director and jointly
managed the merger and acquisitions department at The First Boston Corporation
from 1989 to May 1991. Mr. Goldberg was a partner at the law firm of Skadden,
Arps, Slate, Meagher & Flom from 1980 to 1989. Mr. Goldberg is a director of
General Medical Corporation, United Refrigerated Services, Inc. and Universal
Outdoor Holdings, Inc.
Mr. Murphy has been a director of the Company since consummation of the 1994
Recapitalization. Mr. Murphy joined the Company in September 1980 as Chief
Operating Officer. In December 1983 Mr. Murphy was promoted to President and
Chief Executive Officer and was simultaneously elected to the Board of
Directors. In June 1992, Mr. Murphy ceased serving as President of the Company
but continued to serve as Chairman and Chief Executive Officer, a position
from which he resigned prior to consummation of the 1994 Recapitalization.
Directors are elected annually by a plurality of the votes cast at annual
meetings of stockholders (except in the case of vacancies on the Board of
Directors). All directors of the Company serve for a one year term or until
their successors are duly elected and qualified or until death, retirement,
resignation, or removal. All executive officers hold office at the pleasure of
the Board of Directors.
Non-officer directors of the Company, other than those directors who are
affiliated with Kelso, are paid an annual retainer of $20,000. In addition,
all out-of-pocket expenses of non-officer directors, including those directors
who are affiliated with Kelso, related to meetings attended are reimbursed by
the Company. Non-officer directors, including those directors affiliated with
Kelso, receive no additional compensation for their services as directors of
the Company except as described above. Officers of the Company who serve as
directors do not receive compensation for their services as directors other
than the compensation they receive as officers of the Company.
There are no family relationships among directors and executive officers of
the Company. For certain information regarding the stock ownership of the
Company, see "Principal Stockholders."
On December 23, 1992, Kelso and its chief executive officer, without
admitting or denying the findings contained therein, consented to an
administrative order in respect of the Securities and Exchange Commission (the
"Commission") inquiry relating to the 1990 acquisition of a portfolio company
by a Kelso affiliate. The order found that Kelso's tender offer filing in
connection with the acquisition did not comply fully with the Commission's
tender offer reporting requirements, and required Kelso and its chief
executive officer to comply with such requirements in the future.
The Company intends to appoint at least one additional unaffiliated
director. Such person has not yet been identified.
COMMITTEES OF THE BOARD OF DIRECTORS
Prior to the completion of the offering, the Board of Directors will have
established an Executive Committee, an Audit Committee and an Executive
Compensation Committee.
The Executive Committee will have all powers and rights necessary to
exercise the full authority of the Board of Directors in the management of the
business and affairs of the Company when necessary in between meetings of the
Board of Directors. The members of the Executive Committee have not yet been
determined.
The Audit Committee will be primarily concerned with the effectiveness of
the Company's accounting policies and practices, financial reporting and
internal controls. The Audit Committee will be authorized to (i) make
recommendations to the Board of Directors regarding the engagement of the
Company's independent
41
<PAGE>
accountants, (ii) review the plan, scope and results of the annual audit, the
independent accountants' letter of comments and management's response thereto,
and the scope of any non-audit services which may be performed by the
independent accountants, (iii) manage the Company's policies and procedures
with respect to internal accounting and financial controls, and (iv) review
any changes in accounting policy. The members of the Audit Committee have not
yet been determined.
The Executive Compensation Committee is authorized and directed to review
and approve the compensation and benefits of the executive officers, to review
and approve the annual salary plans, to review management organization and
development, to review and advise management regarding the benefits, including
bonuses, and other terms and conditions of employment of other employees, to
administer any stock option plans which may be adopted and the granting of
options under such plans, and to review and recommend for the approval of the
Board the compensation of directors. The members of the Executive Compensation
Committee are Messrs. Biagini, Bynum and Goldberg.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATIONS IN COMPENSATION
DECISIONS
Mr. Biagini was the Chairman, President and Chief Executive Officer of the
Company during the last fiscal year. Mr Bynum is a Vice President of Kelso and
Mr. Goldberg is a Managing Director of Kelso. See "Certain Relationships and
Related Transactions" for a discussion of certain relationships between Kelso
and the Company.
42
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the cash and noncash compensation for the
last three fiscal years awarded to or earned by the Chief Executive Officer
and the four other most highly compensated executive officers of the Company,
with respect to services performed in such capacities.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------ ---------------------
RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING
NAME YEAR SALARY BONUS(A) COMPENSATION AWARDS(B) OPTIONS
---- ---- -------- -------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John F. Biagini......... 1995 $340,622 $250,000 $ 7,182(c) $ -- --
Chairman of the Board, 1994 321,194 200,000 12,486(c) 1,000,000 --
Chief Executive Officer 1993 288,634 -- 12,486(c) -- --
and President
Hans Lengers............ 1995 402,663 -- 1,800(c) -- --
President, U.S. Textile 1994 391,696 -- 1,882(c) 499,000 --
Corporation 1993 380,288 -- 1,882(c) -- --
William J. Kelly........ 1995 210,652 24,250 7,182(c) -- --
Vice President, Systems 1994 205,281 26,500 9,779(c) -- --
and Operations 1993 185,618 17,500 9,779(c) -- --
Darrell Edwards......... 1995 139,470 29,100 7,182(c) -- --
Vice President and 1994 151,472 21,000 9,277(d) -- --
Director of Marketing 1993 120,240 5,000 59,987(d) -- --
Arthur Hughes........... 1995 133,786 34,200 4,833(c) -- --
Vice President and 1994 110,846 19,200 4,412(c) -- --
Chief Financial Officer 1993 101,957 -- 4,244(c) -- --
</TABLE>
- --------
(a) Represents amounts awarded as cash bonuses.
(b) Represents compensation associated with restricted stock awards for
certain officers. See "--Management Stock Purchases." The value of the
restricted stock awards as of December 31, 1995 was $2,182,013 for Mr.
Biagini, including 68,120 shares of PIK Preferred Stock and 18,841 shares
of Common Stock, and $1,091,039 for Mr. Lengers, including 34,060 shares
of PIK Preferred Stock and 9,421 shares of Common Stock. All shares of
restricted stock will vest upon completion of the offering.
(c) Amounts represent Company contributions to the 401(k) Plan, which is a
defined contribution plan.
(d) Represents relocation expenses for Mr. Edwards.
MANAGEMENT STOCK PURCHASES
Prior to the closing of the 1994 Recapitalization, Messrs. Biagini and
Lengers entered into Management Stock Purchase and Restricted Stock Award
Agreements with the Company (the "Management Stock Agreements") pursuant to
which Mr. Biagini was granted 18,841 shares of Common Stock and 68,120 shares
of PIK Preferred Stock, and Mr. Lengers was granted 9,421 shares of Common
Stock and 34,060 shares of PIK Preferred Stock in addition to the shares of
Common Stock and PIK Preferred Stock purchased by Messrs. Biagini and Lengers.
The Common Stock was sold at $16.92 per share and the PIK Preferred Stock was
sold at $10.00 per share to the Investor Group. Compensation with respect to
the grant of shares is being recognized ratably over the six year period for
which services must be performed in order for Messrs. Biagini and Lengers
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<PAGE>
to receive the shares without restriction. In August 1995, the Company sold an
aggregate of 3,106 shares of Common Stock and 11,237 shares of PIK Preferred
Stock to certain members of management for aggregate consideration of
approximately $165,000. In October 1995, Mr. Henry purchased from the Company
942 shares of Common Stock and 3,406 shares of PIK Preferred Stock for
aggregate consideration of $49,999. In 1996, Messrs. Biagini and Lengers were
issued 2,956 shares and 1,478 shares, respectively, of Common Stock as
additional compensation for 1996.
STOCK OPTION PLAN
On June 28, 1996, the Board of Directors approved and adopted a stock option
plan (the "Option Plan"), the terms and conditions of which have not been
finalized, providing for the grant to employees of the Company and its
subsidiaries of options to purchase up to 215,369 shares of Common Stock.
Consistent with an understanding reached with management at the time of the
1994 Recapitalization and subsequently, on June 28, 1996, the Board of
Directors granted options to purchase an aggregate of 199,458 shares of Common
Stock to Messrs. Biagini (86,721 shares), Lengers (43,361 shares), Kelly
(17,344 shares), Edwards (17,344 shares), Hughes (17,344 shares) and Henry
(17,344 shares). The exercise price with respect to the 199,458 shares is
$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. The
difference between the fair market value of the Common Stock, which for
financial reporting purposes will be based on the initial public offering
price, and the exercise price of such options, will be recorded as
compensation expense in the Company's financial statements for the six-months
ending June 30, 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 to Messrs. Biagini
(7,955 shares), Lengers (3,978 shares) and Hughes (3,978 shares). The exercise
price with respect to the 15,911 shares will be the initial public offering
price per share set forth on the cover page of this Prospectus. Such options
vested on the date of such grant and are only exercisable upon an initial
public offering of the Common Stock.
Upon completion of the offering, the vesting criteria with respect to all of
the outstanding options will have been satisfied. Accordingly, upon completion
of the offering, there will be outstanding options to purchase an aggregate of
215,369 shares of Common Stock, all of which will be vested and exercisable.
No options were granted to the Chief Executive Officer or the four most
highly compensated executive officers of the Company in 1995. No options were
exercised in 1995.
EMPLOYMENT AGREEMENTS
In August 1980, Hans Lengers entered into an Employment Agreement with the
Company's manufacturing subsidiary, U.S. Textile Corporation ("U.S. Textile"),
pursuant to which he is employed as President and Chief Executive Officer of
U.S. Textile and to manage and operate its business and affairs for his
lifetime, such agreement having been amended on September 12, 1994. Mr.
Lengers is not entitled to receive compensation upon the voluntary termination
of his employment with U.S. Textile. In addition, the Company may abrogate the
terms and conditions of the Employment Agreement for good cause as defined by
the law of North Carolina, and in any event, the Employment Agreement will
terminate upon Mr. Lengers' death, adjudicated incompetency, bankruptcy or
physical or mental inability to perform his duties thereunder. The agreement
provides for a base salary of $5,000 per month and additional compensation in
the amount that 25.0% of the U.S. Textile net profits exceeds such base
compensation, such that the sum of the base compensation and this additional
compensation does not exceed $250,000 per annum, adjusted each year for cost
of living increases. The Consumer Price Index for Urban Wage Earners and
clerical workers is used as the index to compute cost of living increases. The
ceiling for Mr. Lengers salary in 1995 was $412,730. In addition, Mr. Lengers
has agreed during the time of his employment not to devote any of his time and
efforts to the affairs of any other business in direct competition with U.S.
Textile.
In August 1992, Arthur C. Hughes entered into an Executive Employment
Agreement with the Company pursuant to which he is employed as Vice President
and Chief Financial Officer of the Company. The initial
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<PAGE>
term of the agreement is five years. The agreement provides for an initial base
salary of $97,825 and 6.5% annual increases. In addition, Mr. Hughes is
entitled to receive a bonus as defined by the President and the Board of
Directors to be calculated based on the results of the fiscal year, in
particular on achieving budgeted corporate profits (35%) and achieving
management objectives that are developed each year (65%). Mr. Hughes is also
entitled to participate in all standard employee benefits provided by the
Company and to use an automobile provided by the Company.
In September 1993, Robert J. Mooney entered into an Executive Employment
Agreement with the Company pursuant to which he is employed as Vice President
and General Counsel of the Company. The initial term of the agreement is five
years. The agreement provides for an initial base salary of $142,851 and 5.0%
annual increases. Solely at the discretion of the Board of Directors, Mr.
Mooney receives a bonus of not less than $10,000 in January of each year. In
addition, Mr. Mooney is entitled to standard Company medical benefits, as well
as term life insurance in the amount of $500,000 and the use of an automobile.
In September 1995, Robert M. Henry entered into an Executive Employment
Agreement with the Company pursuant to which he is employed as Senior Vice
President of Business Development of the Company. The term of the agreement is
indefinite. The agreement provides for an initial base salary of $250,000. In
addition, Mr. Henry is entitled to receive a bonus the amount of which is based
on achieving objectives defined by the President and the performance of the
Company against annual corporate targets. Mr. Henry is also entitled to
participate in all standard employee benefits provided by the Company, to use
an automobile provided by the Company, and to participate in the Option Plan on
terms and conditions enjoyed by other executive officers.
All four aforementioned employment agreements require a successor to the
employer thereunder to assume the respective obligations of such employer under
the applicable agreement.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of shares of Common Stock of all stockholders of the Company who are
known by the Company to beneficially own more than 5% of any such class, by
each director, by each executive officer of the Company named in the summary
compensation table and by all directors and executive officers of the Company
as a group, as determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Upon completion of the
offering, all of the outstanding Class A Common Stock will be converted to
Common Stock. Accordingly, the Common Stock referred to in the following table
includes Common Stock and Class A Common Stock. Prior to the con-summation of
the 1994 Recapitalization, all of the issued and outstanding shares of capital
stock were owned by Murphy.
<TABLE>
<CAPTION>
PERCENT
NAME AND ADDRESS --------------------------
OF NUMBER OF SHARES BEFORE THE AFTER
BENEFICIAL OWNER OF COMMON STOCK BENEFICIALLY OWNED OFFERING THE OFFERING(A)
-------------------------------- ------------------ ---------- ---------------
<S> <C> <C> <C>
Kelso Investment Associates V,
L.P.(b)(c)(d)................... 1,000,660 71.0% %
Kelso Equity Partners V,
L.P.(b)(c)(d)................... 1,000,660 71.0
Joseph S. Schuchert(c)........... (e) (e)
Frank T. Nickell(c).............. (e) (e)
George E. Matelich(c)............ (e) (e)
Thomas R. Wall, IV(c)............ (e) (e)
Michael B. Goldberg(c)(f)........ -- --
Frank K. Bynum, Jr.(c)(f)........ -- --
Joseph A. Murphy(g).............. 292,600 20.8
John F. Biagini(g)(h)............ 118,357 7.9
Hans Lengers(g)(h)............... 59,180 4.1
William J. Kelly(g)(h)........... 17,532 1.3
Robert J. Mooney(g).............. 471 *
Darrell Edwards(g)(h)............ 18,097 1.3
Arthur C. Hughes(g)(h)........... 21,793 1.5
Robert M. Henry(g)(h)............ 18,286 1.3
All directors and executive
officers of the Company as a
group
(8 persons)(h)(i)............... 546,316 33.7
</TABLE>
- --------
* less than 1.0%.
(a) Gives effect to the Exchange Transaction, the issuance of shares of
Common Stock to redeem certain shares of PIK Preferred Stock and the
application of the net proceeds from the offering as described under "Use
of Proceeds."
(b) As part of the 1994 Recapitalization, KIAV and KEPV acquired respectively
960,634 and 40,026 shares of Common Stock, representing 68.6% and 0.9%,
respectively, of the shares of Common Stock outstanding. The Kelso
Affiliates, due to their common control, could be deemed to beneficially
own each of the other's shares, but disclaims such beneficial ownership.
(c) The business address for such person(s) is c/o Kelso & Company, 320 Park
Avenue, 24th Floor, New York, New York 10022.
(d) Includes approximately shares of Common Stock that may be distributed
to certain partners of KIAV and KEPV in conjunction with the offering. See
"Shares Eligible for Future Sale."
(e) Messrs. Schuchert, Nickell, Matelich and Wall may be deemed to share
beneficial ownership of shares of Common Stock and PIK Preferred Stock
owned of record by KIAV and KEPV, by virtue of their status as general
partners of the general partner of KIAV and general partners of KEPV.
Messrs. Schuchert, Nickell, Matelich and Wall share investment and voting
power with respect to securities owned by the KIAV and KEPV. Messrs.
Schuchert, Nickell, Matelich and Wall disclaim beneficial ownership of
shares of Common Stock and PIK Preferred Stock owned of record by KIAV and
KEPV.
(f) Excludes shares to be distributed to Messrs. Goldberg and Bynum in
conjunction with the offering (see note (d)). Messrs. Goldberg and Bynum
may be deemed to share beneficial ownership of shares of Common Stock
owned of record by KIAV by virtue of their status as limited partners of
the general partner of KIAV and as limited partners of KEP V. Messrs.
Goldberg and Bynum disclaim beneficial ownership of such securities. Mr.
Goldberg and Mr. Bynum are directors of the Company.
(g) The business address of such person(s) is c/o Hosiery Corporation of
America, Inc., 3369 Progress Drive, Bensalem, Pennsylvania 19020.
(h) Includes outstanding options to purchase Common Stock which will become
fully exercisable upon completion of the offering. See "Management--Stock
Option Plan."
(i) Excludes shares of Common Stock referred to in notes (b), (d) and (e)
above. If such shares of Common Stock were included, the number of shares
of Common Stock beneficially owned and the percentages before and after
the offering for all directors and executive officers of the Company as a
group would be 1,546,976, 95.3% and %, respectively.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
THE 1994 RECAPITALIZATION AND RELATED TRANSACTIONS
Recapitalization Agreement. On October 17, 1994, the Company effected the
1994 Recapitalization, pursuant to which an investor group consisting of the
Kelso Affiliates, other affiliates of Kelso, certain designees of Kelso not
affiliated with Kelso and John F. Biagini and Hans Lengers (collectively, the
"Investor Group"), acquired a controlling equity interest in the Company. HCA
Holdings, Inc. (an affiliate of Kelso), the Company and Murphy entered into a
Recapitalization and Stock Purchase Agreement dated as of July 19, 1994 (as
amended, the "Recapitalization Agreement"). Pursuant to the Recapitalization
Agreement, the Company repurchased from Murphy, for approximately $191.2
million, which includes approximately $0.9 million of post-closing
adjustments, all of its then outstanding shares of preferred stock (the "Old
Preferred Stock") and a substantial portion of its then outstanding shares of
common stock. Murphy received an aggregate of $32.0 million for his Old
Preferred Stock and approximately $159.2 million (which includes the post-
closing adjustment referred to above) for his Common Stock. Murphy first
acquired a beneficial interest in the Company in 1984 when he purchased, for
approximately $1,000, the right to receive approximately 25% of the Company's
then outstanding shares of Common Stock from distributions of the original
shareholder's estate. Through various purchase agreements and court orders the
Company repurchased or was awarded the remaining then outstanding shares of
Common Stock of the Company, and Murphy, by 1993, was the sole stockholder of
the Company. See "--Certain Transactions Prior to the 1994 Recapitalization."
The Company effected the 1994 Recapitalization with the proceeds of the
Financing (as defined below). As a result of the 1994 Recapitalization (and
the purchase of common stock by the Investor Group pursuant to the Financing),
the Investor Group currently owns approximately 74% of the Company's common
equity, while Murphy retains approximately 21% of the Company's common equity.
At December 31, 1995, the Company had a stockholders' deficit of approximately
$101.6 million, resulting in large part from the transactions related to the
1994 Recapitalization.
The Company obtained the funds necessary to effect the repurchase of the
shares of capital stock of Murphy, repay a limited amount of certain existing
indebtedness of the Company, and pay the fees and expenses incurred in
connection with the 1994 Recapitalization from the proceeds of a financing
(the "Financing") which included (i) borrowings of approximately $80.0 million
under the Bank Credit Agreement, (ii) gross proceeds of approximately $69.1
million from the issuance and sale of units consisting of the Old Notes and an
aggregate of 70,000 shares (the "Unit Shares" and, together with the Old
Notes, the "Units") of Class A Common Stock (the "Unit Offering"), (iii) gross
proceeds of approximately $36.5 million from the sale to the Investor Group of
shares of a new class of pay-in-kind preferred stock of the Company (the "PIK
Preferred Stock") for cash (the "PIK Preferred Equity Financing"), and (iv)
gross proceeds of approximately $17.1 million from the sale to the Investor
Group of shares of Common Stock for cash (the "New Common Equity Financing"
and together with the PIK Preferred Equity Financing, the "Equity
Financings"). The Company also utilized working capital of approximately $2.0
million to pay fees and expenses incurred in connection with the 1994
Recapitalization. The repurchase of capital stock from Murphy, the repayment
of indebtedness described above, the Unit Offering, the Equity Financings, the
execution of, and initial borrowings under, the Bank Credit Agreement and the
payment of fees and expenses in connection with such transactions are referred
to herein collectively as the "1994 Recapitalization."
In connection with the transactions contemplated by the Recapitalization
Agreement, the Company paid Kelso a fee of $2.625 million for financial
advisory services and reimbursed Kelso for out-of-pocket expenses incurred in
connection with rendering such services. In addition, the Company agreed to
pay Kelso an annual fee of $262,500 for financial advisory services and to
reimburse Kelso for out-of-pocket expenses incurred. It is currently expected
that, prior to completion of the offering, the foregoing arrangement will be
terminated upon the making of a one-time payment by the Company to Kelso, the
amount of which has not been finally determined but which is estimated to be
approximately $3.2 million; however, arrangements for indemnification and
reimbursement of certain expenses may remain. The Company has also agreed to
indemnify Kelso against certain claims, losses, damages, liabilities and
expenses which may arise in connection with rendering such financial advisory
services.
47
<PAGE>
Indemnification Arrangements. The Recapitalization Agreement provides that
Murphy, on the one hand, and Company, on the other, will, subject to certain
limitations set forth therein, indemnify each other and certain of their
related parties against and in respect of any damages, losses, deficiencies,
liabilities, costs and expenses, incurred, among other things, as a result of
any misrepresentations or breaches of warranties set forth in the
Recapitalization Agreement including with respect to ownership of stock,
capitalization, financial statements, absence of defaults under agreements and
violations of law and similar matters. In addition, the Recapitalization
Agreement provides for similar indemnification by Murphy with respect to
certain other matters, including, among other things, claims by third parties
resulting from or arising out of certain activities in connection with
Murphy's auction and sale of the Company and certain liabilities incurred as a
result of the operations (or relating to the assets) which were transferred to
Murphy prior to the 1994 Recapitalization (as described below) or arising out
of such transfer. Under the Recapitalization Agreement, such indemnification
is subject to certain baskets and deductibles and, in general, an aggregate
limit of $15 million. The Recapitalization Agreement also provided for Murphy
and the Company to enter into an escrow agreement (the "Escrow Agreement")
pursuant to which, among other things, $10.0 million of the aggregate purchase
price paid by the Company to Murphy pursuant to the 1994 Recapitalization is
held in escrow to provide a source of payment to satisfy Murphy's
indemnification obligations under the Recapitalization Agreement. In addition,
Murphy has pledged to the Company the shares of Common Stock which were not
purchased by the Company pursuant to the 1994 Recapitalization and which
Murphy continues to own following the consummation of the 1994
Recapitalization (such shares represented approximately 21% of the Company's
Common Stock outstanding following the consummation of the 1994
Recapitalization).
Transfer of Certain Non-Hosiery Assets. In connection with the 1994
Recapitalization, the Company transferred to Murphy certain assets consisting
primarily of the stock of all of its non-hosiery related subsidiaries, some of
which are inactive businesses, certain receivables, equipment leased to one of
the non-hosiery subsidiaries, certain life insurance policies, four owned or
leased automobiles and three owned or leased personal computers. None of the
assets transferred to Murphy, except the life insurance policies and loans
thereon, automobiles and computers, were used in the Company's hosiery
business.
STOCKHOLDERS AGREEMENT
In connection with the 1994 Recapitalization, the Kelso Affiliates, Murphy
and certain members of management entered into a stockholders agreement (the
"Stockholders Agreement"). The Stockholders Agreement provides, among other
things, that (subject to changes that may be made from and after such time
with respect to the members and size of the Board of Directors in accordance
with the Company's Restated Certificate of Incorporation and By-Laws), the
Company's Board of Directors will consist of five members, including (i) two
officers of the Company designated by Kelso from certain management
stockholders of the Company, (ii) two other individuals designated by Kelso
(who may be affiliates of Kelso) and (iii) Murphy. In addition, Kelso and
Murphy agreed pursuant to the Stockholders Agreement that (i) so long as
Murphy and certain of his transferees collectively own 10% or more of the
outstanding Common Stock, Murphy will be a director of the Company and (ii) so
long as Kelso and its affiliates collectively are the largest stockholders of
the Company and collectively own at least 35% of the outstanding stock of the
Company, Kelso shall be entitled to elect a majority of the Board of Directors
of the Company. Under the Company's Restated Certificate of Incorporation and
By-Laws, the Board of Directors will consist of not less than three (3) nor
more than eight (8) members, and will be fixed from time to time by resolution
of the Board of Directors (the "Board Resolution"), or by resolution adopted
by the vote of a majority of the stockholders of the Common Stock or by
consent executed on behalf of such stockholders (the "Stockholder
Resolution"); provided, that in the event of a conflict between the Board
Resolution and the Stockholder Resolution, the Stockholder Resolution governs.
The Stockholders Agreement also limits transfers of Common Stock and Class A
Common Stock by certain parties thereto, and provides for certain tag-along,
drag-along and registration rights. See "Description of Capital Stock--
Stockholders Agreement."
In August 1995, the Kelso Affiliates and certain members of the Company's
management entered into another stockholders agreement (the "Preferred
Stockholders Agreement") in connection with the purchase of
48
<PAGE>
an aggregate of 11,237 shares of PIK Preferred Stock. The terms of the
Preferred Stockholders Agreement are substantially similar to the terms of the
Stockholders Agreement except that the Preferred Stockholders Agreement does
not provide for registration rights.
Upon completion of the offering, the provisions of the Stockholders
Agreement terminate other than the provisions relating to registration rights
and certain provisions relating to the PIK Preferred Stock. In connection with
the offering, the Company intends to enter into new stockholders agreements
with the Kelso Affiliates and certain other stockholders, the final terms of
which have not yet been determined.
INVESTOR RELATIONSHIPS
Pursuant to the Recapitalization Agreement, the Company paid Kelso a fee of
$2.625 million for financial advisory services and agreed to reimburse it for
out-of-pocket expenses incurred in connection with rendering such services. In
addition, the Company has agreed to indemnify Kelso and its affiliates against
certain claims, losses, damages, liabilities and expenses which may arise in
connection with the transactions contemplated by the Recapitalization
Agreement. The Company also agreed to pay, and has paid, Kelso an annual fee
of $262,500 for financial advisory services and has agreed to reimburse it for
out-of-pocket expenses incurred, and to indemnify it against certain claims,
losses, damages, liabilities and expenses which may arise, in connection with
rendering such services. Kelso's out-of-pocket expenses in connection with its
services rendered in the 1994 Recapitalization transactions were approximately
$151,000. As discussed above under "--The 1994 Recapitalization and Related
Transactions," it is expected that the foregoing arrangement with respect to
the payment to Kelso of an annual fee for financial advisory services will be
terminated prior to completion of the offering.
Certain Kelso affiliates are parties to the Stockholders Agreement. In
addition, certain affiliates of Kelso, the Company and certain other investors
who are designees of Kelso entered into Letter Agreements (collectively, the
"Letter Agreements"), each of which, among other things, provides for certain
restrictions on the transfer of stock by such investors. The Stockholders
Agreement also provides, among other things, for certain other restrictions on
the transfer of the Company's stock. See "Description of Capital Stock--
Stockholders Agreement."
EXCHANGE TRANSACTION
The Company commenced discussions with Murphy regarding a transaction
pursuant to which the Company will exchange, prior to completion of the
offering, a newly issued series of redeemable preferred stock of the Company
with an aggregate liquidation preference of $40.0 million and certain other
consideration for the 292,600 shares of Common Stock held by Murphy. Although
there can be no assurance that such transaction with Murphy will be completed,
the Company, as discussed under "Use of Proceeds," intends to use a portion of
the net proceeds from the offering to redeem such preferred stock, if issued.
CERTAIN TRANSACTIONS PRIOR TO THE 1994 RECAPITALIZATION
The following is a description of certain transactions between the Company
and certain related parties. The transactions occurred while the Company was
privately owned by Murphy and others and there can be no assurance that such
transactions were as favorable to the Company as could be expected from
unaffiliated parties.
Prior to November 1980, Claire Nelson ("Claire") and her husband, Jules
Nelson ("Jules"), jointly held 99% of the issued and outstanding stock of the
Company (consisting of common stock and preferred stock). Ronald Silk
("Silk"), Claire's half brother, was the beneficial owner of the remaining 1%
of the issued and outstanding voting stock of the Company. On or about
November 5, 1980, Jules purchased from Silk the shares of the Company owned by
Silk.
On December 2, 1980, Jules and Claire entered into an Agreement of
Separation (the "Separation Agreement") which provided, among other things,
for the division of their assets and liabilities, including the division of
the 99% interest in the Company which they owned jointly (such that Jules and
Claire would each
49
<PAGE>
own half of the amount of each class of stock that had been jointly owned).
Claire was also obligated to sell her remaining shares of stock to the
Company, subject to the Company's obligation to pay her $125,000 per year for
ten years as set forth in a Stock Purchase Agreement dated December 2, 1980.
In December 1982, Jules commenced an action (the "Divorce Action") seeking a
judgment of divorce incorporating the Separation Agreement. On November 19,
1983 while the Divorce Action was still pending, Jules died and his estate
(the "Estate") became the legal owner of the shares of the Company then held
by him. Claire filed an action in the Surrogate's Court of New York contesting
Jules' will. She also joined in the Divorce Action among others, the Company
and the executors of Jules' will. The Divorce Action and all other issues
between the Estate, Claire and others were settled by a settlement order
entered by the Surrogate's Court on May 31, 1988 (the "Order"). The Order,
among other things, required the discontinuance of the Divorce Action with
prejudice, compelled Claire to waive or withdraw any objections to any
distribution of Estate property to those beneficiaries named in Jules' will,
and to withdraw her then pending claim to an elective share of the Estate. The
Order had the effect of confirming Jules' ownership of 50.5% of the Company's
common and preferred stock and the Company's ownership of the remaining 49.5%
of the Company's common and preferred stock previously owned by Claire.
Since the sole asset of any significance of the Estate was the stock of the
Company, the Order recognized that estate taxes and other obligations of the
Estate would have to be paid with dividends or capital distributions from the
Company to the Estate. In February 1989, attorneys for the Estate entered into
a settlement agreement with the Internal Revenue Service relating to taxes due
from the Estate. The Company agreed to fund all of the taxes and interest
thereon through partial stock redemptions from the Estate's holdings of the
Company's common stock.
In 1993, the Internal Revenue Service issued a "thirty-day letter" to the
Estate assessing an additional amount of approximately $691,000 in back taxes
for the years 1988 through 1991 in connection with certain deductions taken on
the income tax returns of the Estate for these years. The Company believes
that all deductions taken on the Estate income tax returns should be allowed
and, alternatively, if they are disallowed, the Estate has recourse against a
former beneficiary of the Estate pursuant to a non-contested court order
entered in the Superior Court in New York in 1988. No provision to fund
additional taxes has been made.
At his death, Jules owned 92,466 shares of Class A Common Stock, 50,500
shares of $5 Cumulative Preferred Non-Voting Preferred Stock (the "Class A
Preferred Stock"), and 90,000 shares of Class B Non-Voting Preferred Stock
(the "Class B Preferred Stock") of the Company. Pursuant to Jules' will, Bryan
Nelson, Jules' son, was the beneficiary of 97% of the Class A Common Stock,
38% of the Class A Preferred Stock and 38% of the Class B Preferred Stock, and
Jeffrey Nelson, also Jules' son, was the beneficiary of 46% of each of the
Class A and Class B Preferred Stock. After accounting for certain transfers
from Bryan Nelson to Murphy and a transfer from Jeffrey Nelson to Bryan
Nelson, (i) Bryan Nelson, Murphy and others were entitled to receive from the
Estate 72.7%, 24.7% and 2.6%, respectively, of the Class A Common Stock and
(ii) Bryan Nelson, Jeffrey Nelson, Murphy and others were entitled to receive
from the Estate 37%, 38%, 11% and 14%, respectively, of each of the Class A
and Class B Preferred Stock.
In late 1991, the Company entered into agreements whereby the Company agreed
to purchase from certain beneficiaries (other than Murphy, Jeffrey Nelson and
Bryan Nelson named in the preceding paragraph) the right to receive from the
Estate certain shares of the Class A and Class B Preferred Stock of the
Company.
On November 3, 1991, Bryan Nelson died. Pursuant to an agreement entered
into in July 1984 among Bryan Nelson, Murphy and the Company (the "Repurchase
Agreement"), the Company notified the estate of Bryan Nelson that it was
exercising its right to purchase all of the common stock and preferred stock
of the Company which Bryan Nelson was entitled to receive from the Estate.
On November 19, 1991, the Company purchased all of Jeffrey Nelson's right,
title and interest in and to all of the shares of the Company which he owned
or which he would ultimately become entitled to receive upon settlement and
distribution of the Estate.
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<PAGE>
In 1992, both Uri Shoham and Steven Solomon sold to the Company, for $1.6
million and $0.4 million, respectively, all of their rights to receive shares
of the Company from the Estate.
On April 14, 1992, Sarah Nelson, Administratrix of the estate of Bryan
Nelson, filed a petition in Montgomery County, Pennsylvania, Court of Common
Pleas regarding the validity of the Repurchase Agreement and the disposition
of Bryan Nelson's shares in the Company. Pursuant to a settlement agreement
(the "Settlement Agreement") entered into at the end of 1993 by, among other
parties, the Company, Murphy and the estate of Bryan Nelson, the Company
agreed that a total of $7.85 million would be paid to Sarah Nelson, as the
Administratrix of the estate of Bryan Nelson ($2.1 million and $2.6 million
having already been paid in 1991 and 1992, respectively, and $3.15 million to
be paid upon settlement), and each party to the Settlement Agreement released
the other parties to the Settlement Agreement from all claims relating to the
validity of the Repurchase Agreement and the disposition of Bryan Nelson's
estate. The Settlement Agreement was approved by the Montgomery County,
Pennsylvania, Court of Common Pleas on December 30, 1993. See Note 14 to
consolidated financial statements included elsewhere in this Prospectus. As a
result of the approval of the Settlement Agreement, the Company was able to
purchase the shares of the Company which Bryan Nelson was entitled to receive
from the Estate and, consequently, Murphy became the sole stockholder of the
Company.
In 1993, the Company entered into a refunding agreement with Murphy in
connection with the distribution by the Estate of the common and preferred
stock which it owned, to Murphy. Pursuant to such refunding agreement, the
Company agreed to reimburse Murphy, through the payment of a dividend, for all
taxes which may be assessed to him in connection with any inheritance or
income tax which may be imposed on the Estate. In connection with the 1994
Recapitalization, Murphy terminated the refunding agreement without any
liability to the Company. During 1993, the Estate transferred real property to
the Company in lieu of payment for advances the Company had made for the
Estate's administration expenses and taxes totaling $150,000. The Company, on
October 1, 1993, sold the property to an unrelated party resulting in a loss
to the Company in the amount of $113,919.
During 1992, the Company purchased real property in Lancaster, South
Carolina, from Murnel Associates ("Murnel"), a limited partnership that was
owned equally by Murphy and a former stockholder of the Company. Prior to the
purchase, the Company had leased the property from Murnel pursuant to a
twenty-year agreement entered into by the parties in 1990 (the "Lancaster
Lease"). The purchase price of approximately $2.0 million, which approximated
the fair value of the property acquired, was determined based on the then
discounted present value of the non-cancelable portion of the Lancaster Lease.
The Company advanced funds to Murphy, Uri Shoham, a former officer of the
Company and Steven L. Solomon, a former officer of the Company, totaling
$197,852 and $1,206,413 in the years 1992 and 1993, respectively. The advances
to Messrs. Shoham and Solomon are evidenced by demand notes that bear interest
at rates equal to the prime rate plus 1% per annum. In addition, in 1994 the
Company advanced an additional $375,000 to Murphy; such loan bears an interest
rate equal to the prime rate plus 1.5% per annum. Giving effect to payments by
the officers (other than Murphy) to the Company in December 1993, the amount
owed by such officers severally, was $200,000. All such advanced amounts were
repaid by Murphy and Mr. Shoham, on behalf of himself and after assuming the
obligations of Mr. Solomon in connection with the consummation of the 1994
Recapitalization.
During 1993, the Company also paid a $1.0 million brokerage fee to Sheffield
Enterprises, a corporation controlled by Murphy, in connection with the sale
of certain assets and rights of Meteor Incorporated, a former subsidiary of
the Company, to an unrelated third party.
In August 1988, Murphy entered into an Executive Employment Agreement with
the Company, pursuant to which Murphy served as Chairman of the Board and
Chief Executive Officer of the Company and received $1,079,151, $745,452 and
$1,041,410 for 1994, 1993 and 1992, respectively. In August, 1991, Uri Shoham
entered into an Executive Employment Agreement with the Company, pursuant to
which Mr. Shoham served as Vice President and Chief Financial Officer of the
Company and received $226,091, $179,748 and $205,976 for the years 1994, 1993
and 1992, respectively. Each of the Executive Employment Agreements referred
to above were terminated in connection with the consummation of the 1994
Recapitalization.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
The following is a description of the principal agreements governing the
indebtedness of the Company as of the date hereof and after giving effect to
the use of proceeds of the offering and to certain amendments to the Bank
Credit Amendment which are being entered into in connection with the offering.
The following summaries of certain provisions of the Indenture governing the
Notes and the Bank Credit Agreement are qualified in their entirety by
reference to the agreement to which each summary relates, a copy of which is
an exhibit to the registration statement of which this Prospectus is a part.
See "Available Information." Defined terms used below and not defined have the
meanings set forth in the respective agreements.
THE SENIOR SUBORDINATED NOTES
General. On October 17, 1994, the Company issued $70 million aggregate
principal amount of 13 3/4% Senior Subordinated Notes due 2002 (the "Old
Notes"), pursuant to an indenture (the "Indenture") between the Company and
the United States Trust Company of New York, as trustee (the "Trustee"). On
May 15, 1995 the Notes, which have financial terms identical to the Old Notes,
were issued in exchange for the Old Notes.
The Notes mature on August 1, 2002. The Notes constitute general unsecured
obligations of the Company, and are subordinated in right of payment to all
Senior Indebtedness of the Company, including indebtedness under the Bank
Credit Agreement. The Old Notes were issued at a discount of $29.12 from their
principal amount of $1,000. The Notes bear interest at the rate of 13 3/4% per
annum until maturity. Interest is payable semi-annually on each February 1 and
August 1.
Optional Redemption. Except as set forth below, the Notes are not redeemable
at the option of the Company prior to October 1, 1999. On or after October 1,
1999, the Notes will be subject to redemption at the option of the Company, at
any time in whole or in part, at the redemption prices (expressed as a
percentage of the principal amount) set forth below, plus accrued and unpaid
interest thereon to the applicable redemption date, if redeemed during the
twelve-month period beginning October 1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
1999........................................ 106.875%
2000........................................ 103.438%
2001........................................ 100.000%
</TABLE>
Equity Offering Redemption. Notwithstanding the foregoing, in the event the
Company consummates one or more Equity Offerings (which defined term includes
the offering) on or prior to October 1, 1997, the Company may redeem up to 35%
of the aggregate principal amount of the Notes originally issued with all or a
portion of the aggregate net proceeds of such Equity Offering or Equity
Offerings at a redemption price of 112% of the aggregate principal amount of
Notes so redeemed, plus accrued and unpaid interest on the Notes so redeemed
up to and including the redemption date; provided, however, that following
redemption, at least 60% of the aggregate principal amount of the Notes
originally issued remains outstanding. The Company intends to use a portion of
the net proceeds of the offering to redeem $24.5 million aggregate principal
amount of the Notes for an aggregate redemption price of $27.4 million. See
"Use of Proceeds."
Covenants. The Indenture restricts the Company and its subsidiaries from,
among other things: (i) subject to certain exceptions, incurring indebtedness
or liens; (ii) entering into mergers, consolidations or similar transactions
unless certain conditions are satisfied; (iii) selling or otherwise disposing
of property, business or assets, subject to certain exceptions, including
exceptions which require the Company to offer to repay Notes at 100% of their
principal amount; (iv) making payments in respect of its capital stock,
including dividends on, and repurchasing shares of capital stock, or making
optional prepayments of indebtedness subordinated to the Notes; and (v)
entering into transactions with affiliates.
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Events of Default. The Notes contain customary events of default, including,
among other things and subject to appropriate grace periods, payment defaults,
covenant defaults, certain bankruptcy events, judgment defaults and
accelerations with respect to certain other indebtedness of the Company and
its subsidiaries.
Change in Control. Upon the occurrence of a "change in control," each holder
of the Notes may require the Company to repurchase such holder's Notes, in
whole or in part, at a purchase price equal to 101% of their principal amount
on the date of purchase. A "change in control" occurs upon (i) a failure of
the Kelso Affiliates, Murphy or certain other executive officers to the
Company to continue to be the "beneficial owners" (as defined in Rules 13d-3
and 13d-5 under the Exchange Act) of a majority of the capital stock of the
Company entitled to vote in an election of directors (the "Voting Stock");
(ii) acquisition by any person or group, other than the holders listed in (i),
of in excess of 35% of the Voting Stock; and (iii) during any period of two
consecutive years, individuals who at the beginning of such period constituted
the Board of Directors, together with any replacements elected or approved by
such Board of Directors, fail to constitute a majority of the Board of
Directors then in office.
BANK CREDIT AGREEMENT
The Company entered into the Bank Credit Agreement with Bankers Trust
Company, as agent (the "Agent"), and other institutions party thereto (the
"Banks"). The Bank Credit Agreement consists of (i) a $15.0 million revolving
credit facility (the "Revolving Credit Facility"), (ii) a $40.0 million term
loan facility (the "A Term Loan Facility") and (iii) a $40.0 million term loan
facility (the "B Term Loan Facility" and, together with the A Term Loan
Facility, the "Term Loan Facilities").
Term Loan Facilities. The loans made pursuant to the A Term Loan Facility
(the "A Term Loans") and the B Term Loan Facility (the "B Term Loans" and,
together with the A Term Loans, the "Term Loans") were made available to the
Company in single borrowings on the closing date of the 1994 Recapitalization.
Once repaid, the Term Loans cannot be reborrowed. The A Term Loans have a
final maturity date on the fifth anniversary of the closing date. The B Term
Loans have a final maturity date, on July 31, 2001. The Company is required to
make mandatory prepayments of the Term Loans in an amount equal to (i) 100% of
the net proceeds of certain asset sales, (ii) 100% of the net proceeds from
the issuance of certain debt and equity securities and (iii) 75% of the
Company's annual excess cash flow (as defined in the Bank Credit Agreement).
Mandatory prepayments of the Term Loans will be applied ratably to the A Term
Loans and the B Term Loans and thereafter to reduce the Revolving Credit
Facility. All Loans (as hereinafter defined) are required to be repaid in the
event of a Change of Control. In connection with the offering the Company
intends to repay $7.5 million and $7.5 million of A Term Loans and B Term
Loans, respectively. See "Use of Proceeds."
Revolving Credit Facility. The Revolving Credit Facility provides for
revolving credit loans (the "Revolving Loans" and, together with the Term
Loans, the "Loans") of up to $15.0 million in the aggregate at anytime
outstanding during the period from the closing date of the 1994
Recapitalization until October 17, 1999 at which time the Revolving Credit
Facility shall terminate and all Revolving Loans shall become due and payable.
Security. All Loans and all other obligations of the Company under the Bank
Credit Agreement are guaranteed by all United States subsidiaries of the
Company, including U.S. Textile Corporation. All Loans and all other
obligations of the Company under the Bank Credit Agreement and of its
subsidiaries under the guarantees are secured by substantially all of the
assets of such respective entities.
Covenants. The Bank Credit Agreement contains customary affirmative and
restrictive covenants which, among other things and with certain exceptions,
limit the Company and its subsidiaries with respect to certain matters
including changes in business, liens, debt (including contingent obligations),
mergers, dividends, investments, capital expenditures and purchases and sales
of assets. In addition, the Company is required to maintain certain financial
ratios.
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<PAGE>
Events of Default. The Bank Credit Agreement contains customary events of
default, including, among other things and subject to appropriate grace
periods, payment defaults, material misrepresentations, covenant defaults,
certain bankruptcy events, certain ERISA events, judgment defaults and
defaults with respect to certain other indebtedness of the Company and its
subsidiaries.
Prior to the completion of the offering, the Company intends to amend the
terms of the Bank Credit Agreement. However, as of the date of this
Prospectus, no commitment or agreement with respect to such amended agreement
exists.
DESCRIPTION OF CAPITAL STOCK
The following description of the Company's capital stock does not purport to
be complete and is subject in all respects to applicable Delaware law and to
the provisions of the Company's Restated Certificate of Incorporation
(including the certificate of designation relating to the PIK Preferred Stock)
and By-Laws.
The authorized capital stock of the Company consists of (i) 3,000,000 shares
of Common Stock, par value $.01 per share, (ii) 500,000 shares of Class A
Common Stock, par value $0.01 per share (the "Class A Common Stock"), and
(iii) 12,000,000 shares of preferred stock, par value $0.01 per share (the
"Preferred Stock"). Prior to the completion of the offering, the number of
authorized shares of Common Stock will be increased to 40,000,000. The Board
of Directors of the Company is authorized, from time to time and without
further stockholder action, to issue any or all shares of authorized Preferred
Stock in one or more classes or series and to fix and determine the
designations, preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereon, of
any class or series so established, including voting powers, dividend rights,
liquidation preferences, redemption rights and conversion or exchange
privileges. The PIK Preferred Stock was designated as of the consummation of
the 1994 Recapitalization.
As of the date of this Prospectus 1,332,830 shares of Common Stock, 75,652
shares of Class A Common Stock and 3,764,643 shares of PIK Preferred Stock are
outstanding. All of the outstanding shares of Class A Common Stock will be
automatically converted into shares of Common Stock on a one-for-one basis
upon completion of the offering.
As of the date of this Prospectus, there are 20, 1 and 19 holders of record
of the Common Stock, Class A Common Stock and PIK Preferred Stock,
respectively.
COMMON STOCK AND CLASS A COMMON STOCK
Except as otherwise provided in the Restated Certificate of Incorporation or
as otherwise required by applicable law, all the shares of Common Stock and
Class A Common Stock are identical and entitle the holders thereof to the same
rights and privileges, subject to the same qualifications, limitations and
restrictions, except that the Class A Common Stock has no voting rights and,
under certain circumstances described below, will be convertible into Common
Stock on a one-for-one basis.
Holders of Common Stock are entitled to one vote per share on all matters to
be voted on by the Company's Common stockholders. Holders of Common Stock do
not have cumulative voting rights, and therefore holders of a majority of the
shares voting for the election of directors can elect all of the directors. In
such event, the holders of the remaining shares will not be able to elect any
directors.
Holders of Common Stock and Class A Common Stock are entitled to share
equally such dividends as may be declared from time to time by the Board of
Directors out of funds legally available therefor, subject to the terms of the
agreements governing the terms of the Company's long-term debt and the
certificate of designation relating to the PIK Preferred Stock. See
"Description of Certain Indebtedness" and "--PIK Preferred Stock." The
Restated Certificate of Incorporation provides, however, that if dividends are
declared which are payable in shares of Common Stock or Class A Common Stock,
the dividends will be payable at the same rate on each class of stock, and the
dividends will be paid in shares of Common Stock to holders of Common Stock,
and the dividends will be paid in shares of Class A Common Stock to holders of
Class A Common Stock.
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<PAGE>
In the event of the liquidation, dissolution or winding up of the Company,
the holders of Common Stock and Class A Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and subject to
the rights of the holders of Preferred Stock, including the PIK Preferred
Stock. See "--PIK Preferred Stock."
Pursuant to the Stockholders Agreement, if the Company issues for cash
additional shares of any class of common equity (including, without
limitation, the Common Stock and the Class A Common Stock) in order to finance
an acquisition by the Company, Murphy will be offered the right to purchase a
pro rata portion of such equity at a price not less than that available to the
other investors to whom such shares are offered. Pursuant to the Stockholders
Agreement, the Company is obligated to purchase certain shares of Common Stock
owned by certain management stockholders upon the death, disability or
retirement of such stockholders. In addition, certain management stockholders
have the obligation to sell to the Company certain shares of Common Stock
under certain circumstances, including the termination of such management
stockholders' employment under certain circumstances and the death, disability
or retirement of such management stockholder. Except as set forth in this
paragraph, the Common Stock and Class A Common Stock have no preemptive or
redemption rights and are not subject to further calls or assessments by the
Company.
Class A Common Stock Conversion Rights. The Restated Certificate of
Incorporation provides that upon the occurrence of any Conversion Event (as
defined below), each record holder of Class A Common Stock shall be entitled
to convert into the same number of shares of Common Stock any or all of the
shares of such holder's Class A Common Stock being sold, distributed or
otherwise disposed of or converted in connection with the occurrence of such
Conversion Event (the "Conversion Shares"). As defined in the Restated
Certificate of Incorporation, (i) a "Conversion Event" means (A) any transfer
of shares of Class A Common Stock to any person or persons who are not
affiliates of the transferor, including, without limitation, pursuant to any
public offering or public sale of the securities of the Company (including a
public offering registered under the Securities Act and a public sale pursuant
to Rule 144 under the Securities Act or any similar rule then in force), or
(B) conversion of shares of Class A Common Stock into shares of Common Stock
at the option of the holder upon notice to the Company (with respect to all or
a portion of such holder's shares) at such time that all applicable waiting
periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (or any successor statute), and the regulations promulgated thereunder
(the "HSR Act"), shall have expired or shall have terminated, or, if it is
determined that no filings under the HSR Act are applicable, at any time, (ii)
a "person" means any natural person or any corporation, partnership, joint
venture, trust, unincorporated organization and any other entity or
organization and (iii) an "affiliate", with respect to any person, means such
person's spouse, parents, members of such person's family or such person's
lineal descendants and any other person that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under common
control with such person. In addition, all of the Company's Class A Common
Stock will be automatically and mandatorily converted into the same number of
shares of Common Stock without any action on the part of any holder upon
notice to such effect by the Company to the record holders of Class A Common
Stock, provided that all applicable waiting periods under the HSR Act shall
have expired, shall be inapplicable or shall have terminated. The Company
intends to deliver such notice upon completion of the offering.
STOCKHOLDERS AGREEMENT
The following summaries of certain provisions of the Stockholders Agreement
are not complete and are qualified in their entirety by reference to the
Stockholders Agreement, a copy of which is filed as an exhibit to the
Registration Statement of which this Prospectus is a part. See "Certain
Relationships and Related Transactions--Stockholders Agreement" for a
description of provisions of the Stockholders Agreement pertaining to the
composition of the Company's Board of Directors.
Restrictions on Transfer. The Stockholders Agreement and the Letter
Agreements, among other things, set forth certain restrictions and rights with
respect to the transfer of the Common Stock and the Class A Common Stock by
certain parties. Unless acquired by such parties, the shares of Class A Common
Stock and Conversion Shares will not be subject to such transfer restrictions.
Under the Stockholders Agreement and Letter
55
<PAGE>
Agreements, transfers of Common Stock and Class A Common Stock are restricted,
subject to certain exceptions, including exceptions for transfers to
affiliates or to persons or entities having certain other relationships with
the transferor (including certain family relationships), certain transfers
with the prior written consent of the Board of Directors, transfers in the
event of the stockholder's death and transfers pursuant to certain other
provisions of the Stockholders Agreement.
The Stockholders Agreement also provides for certain tag-along and drag-
along rights in the event of certain sales by the Kelso Affiliates and their
permitted transferees (the "Kelso Entities"), as well as certain registration
rights. Holders of the shares of Class A Common Stock and Conversion Shares
will be entitled to such rights, and subject to such obligations, pursuant to
the Stockholders Agreement, and certificates representing the shares of Class
A Common Stock and Conversion Shares (including any global share certificate)
bear a legend to such effect. In addition, the foregoing rights and
obligations are set forth in the Company's Restated Certificate of
Incorporation.
Tag-Along and Drag-Along Rights. The tag-along rights set forth in the
Stockholders Agreement provide that the Kelso Entities shall not be allowed to
transfer any shares of Common Stock to a third party (other than in a "drag-
along" transaction, as described below, or in certain other permitted
transfers, as specified in the Stockholders Agreement) unless each holder from
time to time of the shares of Class A Common Stock and Conversion Shares
(together with other specified holders of Common Stock or Class A Common
Stock) is allowed to include in such transfer (for the same type of
consideration and for not less than the per share consideration offered to the
Kelso Entities) a number of the shares of Class A Common Stock and/or
Conversion Shares equal to the product of the total number of shares of Common
Stock and Class A Common Stock to be acquired by such third party, and a
fraction, the numerator of which is the total number of the shares of Class A
Common Stock and Conversion Shares owned by such holder and the denominator of
which is the total number of shares of Common Stock and Class A Common Stock
owned by the Kelso Entities and all parties entitled to tag-along rights
(including, without limitation, Murphy and the management stockholders). Such
tag-along rights as well as the drag-along rights described below, will expire
upon consummation of an initial public offering.
The drag-along rights provide that, if any Kelso Entity or the Kelso
Entities shall propose to transfer at least 75% of the shares of Common Stock
and Class A Common Stock collectively owned by the Kelso Entities to a third
party, then the Kelso Entities may at their option require each holder from
time to time of the shares of Class A Common Stock and Conversion Shares
(together with other specified holders of Common Stock and Class A Common
Stock) to include in such transfer (for the same type of consideration and for
not less than the per share consideration offered to the Kelso Entities) a
number of shares of Class A Common Stock and/or Conversion Shares equal to the
product of the total number of shares of Common Stock and Class A Common Stock
to be acquired by, such third party and a fraction, the numerator of which is
the total number of the shares of Class A Common Stock and Conversion Shares
owned by such holder and the denominator of which is the total number of
shares of Common Stock and Class A Common Stock owned by the Kelso Entities
and all parties subject to such drag-along provisions (including, without
limitation, Murphy and the management stockholders).
Registration Rights. Holders of Conversion Shares are entitled pursuant to
the Stockholders Agreement to certain "piggy-back" (but not demand)
registration rights in connection with registered public offerings of the
Company's common equity securities (excluding, except under certain
circumstances, an initial public offering) allowing such holders to include in
such registrations Conversion Shares. Other holders of the Company's equity
securities, including the Kelso Affiliates and designees, Murphy and their
respective permitted transferees, are also entitled to such "piggy-back"
registration rights (and Kelso is entitled to certain demand registration
rights) pursuant to the Stockholders Agreement. A holder's right to include
Conversion Shares in any such registration is subject to certain limitations.
Holders of Conversion Shares will also be entitled pursuant to the
Registration Rights Agreement to demand shelf registration rights following
the offering (and the filing of the shelf registration statement relating
thereto may not occur earlier than 90 days or later than 180 days after the
offering).
As discussed above under "Certain Relationships and Related Transactions--
Stockholders Agreement," certain provisions of the Stockholders Agreement
terminate upon completion of the offering.
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PREFERRED STOCK
The Preferred Stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the
provisions of the Restated Certificate of Incorporation and limitations
prescribed by law, the Board of Directors is expressly authorized to adopt
resolutions to issue the shares, to fix the number of shares constituting any
series, and to provide for voting powers, designations, preferences and
relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption,
redemption prices, conversion rights and rights upon dissolution of the shares
constituting any class or series of the Preferred Stock, in each case without
any further action or vote by the stockholders. Except as described under
"Certain Relationships and Related Transactions--Exchange Transaction," the
Company has no current plans to issue any additional shares of Preferred Stock
of any class or series.
One of the effects of undesignated Preferred Stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest,
merger or otherwise, and thereby to protect the continuity of the Company's
management. The issuance of shares of the Preferred Stock pursuant to the
Board of Directors' authority described above may adversely affect the rights
of the holders of Common Stock. For example, Preferred Stock issued by the
Company may rank prior to the Common Stock as to dividend rights, liquidation
preference or both, may have full or limited voting rights and may be
convertible into shares of Common Stock. Accordingly, the issuance of shares
of Preferred Stock may discourage bids for the Common Stock or may otherwise
adversely affect the market price of the Common Stock.
PIK PREFERRED STOCK
In connection with the 1994 Recapitalization, the Company issued 3,750,000
of PIK Preferred Stock. The PIK Preferred Stock is entitled to cumulative
dividends, payable solely in additional shares of PIK Preferred Stock, at a
rate of approximately 25% per annum when, as and if declared by the Board of
Directors of the Company. The PIK Preferred Stock has an aggregate liquidation
preference of approximately $37.5 million (including $36.5 million sold to the
Kelso affiliates and certain designees and certain members of the Company's
management for cash and approximately $1.0 million granted to certain members
of management) plus the liquidation preference of additional shares of PIK
Preferred Stock issued in payment of dividends on the PIK Preferred Stock and
the liquidation preference in respect of cumulative undeclared dividends,
whether or not declared. The PIK Preferred Stock is redeemable at the option
of the Company in whole or in part at any time for a redemption price equal to
the liquidation preference thereof plus all cumulative undeclared dividends,
whether or not declared, to the date of redemption. In addition, the PIK
Preferred Stock has no voting rights, except that the PIK Preferred Stock is
entitled to vote, as a separate class, in the event of any merger,
consolidation, or sale of all or substantially all of the Company's assets, or
any authorization or issuance by the Company of capital stock ranking senior
to or pari passu with the PIK Preferred Stock with respect to dividends or
liquidation preference or securities convertible into or exchangeable or
exercisable for such capital stock, or any amendment to the Company's Restated
Certificate of Incorporation, but excluding (except as provided above) the
adoption of any certificate of designation relating to any other series of
Preferred Stock; provided however, a class vote of the PIK Preferred Stock
will not be required in order to increase the authorized shares of the PIK
Preferred Stock to an amount not to exceed 4,250,000 shares, nor to authorize,
create of issue, or increase the authorized or issued amount, of any class or
series of capital stock ranking on a parity with the PIK Preferred Stock as to
dividends or as to the distribution of assets upon liquidation, dissolution or
winding up, or securities convertible into or exchangeable or exercisable for
such, in or up to an amount of shares not to exceed the difference between
4,250,000 shares and the number of issued and outstanding shares of PIK
Preferred Stock at such time. In August 1995, the Company sold an aggregate of
11,237 shares of PIK Preferred Stock to certain members of management for
aggregate consideration of $112,370. In October 1995, Mr. Henry purchased
3,406 shares of PIK Preferred Stock from the Company for $34,060.
Delaware Takeover Statute. Section 203 of the DGCL ("Section 203") prohibits
a public Delaware corporation from engaging in a "business combination" with
an "interested stockholder" for a period of three years after the date of the
transaction in which such person became an interested stockholder unless: (i)
prior to
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such date, the Board of Directors approved either the business combination or
the transaction which resulted in the stockholder becoming an interested
stockholder; or (ii) upon becoming an interested stockholder, the stockholder
then owned at least 85% of the voting stock, as defined in Section 203; or
(iii) subsequent to such date, the business combination is approved by both
the Board of Directors and by holders of at least 66 2/3% of the corporation's
outstanding voting stock, excluding shares owned by the interested
stockholder. For these purposes, the term "business combination" includes
mergers, asset sales and other similar transactions with an "interested
stockholder." An "interested stockholder" is a person who, together with
affiliates and associates, owns (or, within the prior three years, did own)
15% or more of the corporation's voting stock.
Limitations of Liability. The Company's Restated Certificate of
Incorporation contains a provision that is designed to limit the director's
liability to the extent permitted by the DGCL and any amendments thereto.
Specifically, directors will not be held liable to the Company or its
stockholders for an act or omission in such capacity as a director, except for
liability as a result of: (i) a breach of the duty of loyalty to the Company
or its stockholders, (ii) actions or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) payment of
an improper dividend or improper repurchase of the Company's stock under
Section 174 of the DGCL, or (iv) other transactions from which the director
will receive an improper personal benefit. The principal effect of the
limitation of liability provision is that a stockholder is unable to prosecute
an action for monetary damages against a director of the Company unless the
stockholder can demonstrate one of the specified bases for liability. The
provision, however, does not eliminate or limit director liability arising in
connection with causes of action brought under the federal securities laws.
The Company's Restated Certificate of Incorporation does not eliminate its
directors' duty of care. The inclusion of this provision in the Company's
Restated Certificate of Incorporation may, however, discourage or deter
stockholders or management from bringing a lawsuit against directors for a
breach of their fiduciary duties, even though such an action, if successful,
might otherwise have benefited the Company and its stockholders. This
provision should not affect the availability of equitable remedies such as
injunction or rescission based upon a director's breach of the duty of care.
Indemnification. The Company's By-laws also provide that the Company will
indemnify its current and past directors and officers to the fullest extent
permitted by Delaware law. The Company is generally required to indemnify such
directors and officers for all judgments, fines, settlements, legal fees, and
other expenses incurred in connection with pending, threatened or completed
legal proceedings because of such director's or officer's position with the
Company or another entity that the director or officer serves at the Company's
request, subject to certain conditions, and to advance funds to such directors
and officers to enable them to defend against such proceedings. To receive
indemnification, the director or officer must have acted in good faith (as
defined) and in a manner reasonably believed to be in or not opposed to the
Company's best interests.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is U.S. Trust Company
of New York.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for the Common Stock
of the Company. No prediction can be made as to the effect, if any, that
market sales of shares of Common Stock or the availability of shares of Common
Stock for sale will have on the market price prevailing from time to time.
Nevertheless, sale of substantial amounts of Common Stock of the Company in
the public market could adversely affect the prevailing market price of the
Common Stock and the ability of the Company to raise equity capital in the
future.
Upon completion of the offering, the Company will have outstanding
shares of Common Stock (excluding shares of Common Stock issuable upon the
exercise of the U.S. Underwriters' over-allotment option). Of these shares,
the shares ( shares if such over-allotment option is exercised in
full) of Common Stock sold in the offering will be freely tradeable without
restrictions or further registration under the Securities Act, except for any
shares purchased by an "affiliate" of the Company which will be subject to the
resale limitations of Rule 144 ("Rule 144") under the Securities Act.
Certain of the Company's security holders and all of its executive officers
and directors, with the power to dispose of a total of shares, have
agreed, subject to certain exceptions, not to offer, sell or otherwise dispose
of any shares of Common Stock for a period of 180 days after the date of this
Prospectus (the "Lock-up Period") without the prior written consent of Morgan
Stanley & Co. Incorporated ("Morgan Stanley") on behalf of the Underwriters.
See "Underwriters." Following the Lock-up Period, these shares are deemed
"restricted securities" within the meaning of Rule 144. These "restricted
securities" may not be sold in absence of registration under the Securities
Act other than in accordance with Rule 144 or another exemption from
registration. KIAV and KEPV expect to distribute shares of Common Stock to
their respective partners, and may in the future sell or otherwise dispose of
Common Stock, including additional distributions to their respective partners.
KIAV and KEPV may distribute up to shares of Common Stock to certain of
its partners in conjunction with the offering. The recipients of such
distributions will agree with KIAV, KEPV and the Underwriters not to offer,
sell, or otherwise dispose of such shares of Common Stock prior to the
expiration of the Lock-up Period without the prior written consent of KIAV,
KEPV and Morgan Stanley. KIAV, KEPV and their partners are entitled to certain
demand and "piggyback" registration rights. See "Description of Capital
Stock--Stockholders Agreement--Registration Rights."
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned shares for a period of at least two years (as computed under Rule 144)
is entitled to sell, within any three-month period, a number of shares that
does not exceed the greater of (i) 1% of the then-outstanding shares of Common
Stock (approximately shares after giving effect to the offering) and (ii)
the average weekly trading volume in the Common Stock during the four calendar
weeks immediately preceding the date on which the notice of such sale on Form
144 is filed with the Securities Exchange Commission (the "Commission"). Sales
under Rule 144 are also subject to certain provisions relating to notice and
manner of sale and the availability of current public information about the
Company. In addition, a person (or persons whose shares are aggregated) who
has not been an affiliate of the Company at any time during the 90 days
immediately preceding a sale, and who has beneficially owned the shares of at
least three years (as computed under Rule 144), would be entitled to sell such
shares under Rule 144(k) without regard to the volume limitation and other
conditions described above. The foregoing summary of Rule 144 is not intended
to be a complete description thereof.
In addition, the Company may file one or more registration statements on
Form S-8 under the Securities Act to register all shares of Common Stock
issuable under the Option Plan, and such registration statements are expected
to become effective upon filing. Shares of Common Stock covered by these
registration statements will thereupon be eligible for sale in the public
markets except during the Lock-up Period.
59
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following summary describes the material United States federal income
and estate tax consequences of an investment in Common Stock applicable to
"Non-United States Holders." A "Non-United States Holder" is any beneficial
owner of Common Stock that, for United States federal income or estate and
gift tax purposes, as the case may be, is a non-resident alien individual, a
foreign corporation, a foreign partnership or a foreign estate or trust as
such terms are defined in the Internal Revenue Code of 1986, as amended (the
"Code"). This discussion is based on the Code and administrative and judicial
interpretations as of the date hereof, all of which are subject to change
either retroactively or prospectively. This discussion does not address all
aspects of United States federal income and estate taxation that may be
relevant to Non-United States Holders in light of their particular
circumstances and does not address any tax consequences arising under the laws
of the state, local or foreign taxing jurisdiction. Prospective investors are
urged to consult their tax advisors regarding the United States federal,
state, local and foreign income and other tax consequences of an investment in
Common Stock.
DIVIDENDS
Subject to the discussion below, any dividend paid to a Non-United States
Holder generally will be subject to United States withholding tax either at a
rate of 30% of the gross amount of the dividend or such lower rate as may be
specified by an applicable income tax treaty. For purposes of determining
whether tax is to be withheld at a 30% rate or at a reduced rate as specified
by an income tax treaty, the Company ordinarily will presume that dividends
paid to an address in a foreign country are paid to a resident of such country
absent knowledge that such presumption is not warranted. Dividends paid to a
holder with an address within the United States generally will not be subject
to withholding tax, unless the Company has actual knowledge that the holder is
a Non-United States Holder. Treasury regulations proposed to be effective for
payments made after December 31, 1997, which have not finally been adopted,
however, would require Non-United States Holders to file certain new forms to
obtain the benefit of any applicable tax treaty providing for a lower rate of
withholding tax on dividends. Such forms would contain the holder's name,
address and certain other information.
Dividends received by a Non-United States Holder that are effectively
connected with a United States trade or business conducted by such Non-United
States Holder are exempt from withholding tax. However, such effectively
connected dividends are subject to regular United States income tax in the
same manner as if the Non-United States Holder were a United States person for
federal income tax purposes. A Non-United States Holder may claim exemption
from withholding under the effectively connected income exception by filing
Form 4224 (Statement Claiming Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of Business in the United States) each
year with the Company or its paying agent prior to the payment of the
dividends for each year. Effectively connected dividends received by a
corporate Non-United States Holder may be subject to an additional "branch
profits tax" at a rate of 30% (or such lower rate as may be specified by an
applicable tax treaty).
GAIN ON DISPOSITION OF COMMON STOCK
A Non-United States Holder generally will not be subject to United States
federal income tax with respect to gain realized upon the sale or other
disposition of Common Stock unless (i) such gain is effectively connected with
a United States trade or business of the Non-United States Holder; (ii) the
Non-United States Holder is non-resident alien individual who holds the Common
Stock as a capital asset, is present in the United States for a period or
periods aggregating 183 days or more during the calendar year in which such
sale or disposition occurs, and either the non-resident alien individual has a
"tax home" in the United States or the sale is attributable to an office or
other fixed place of business maintained by the non-resident alien individual
in the United States; or (iii) the Company is or has been a "United States
real property holding corporation" for federal income tax purposes at any time
within the shorter of the five-year period preceding such disposition or such
holder's holding period and certain other conditions are met. The Company has
determined that it is not, has
60
<PAGE>
never been, and does not believe that it will become a "United States real
property holding corporation" for federal income tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, the Company must report to the Internal Revenue Service (the
"IRS") and to each Non-United States Holder the amount of dividends paid, the
name and address of the recipient, and the amount, if any, of tax withheld.
Pursuant to tax treaties or other agreements, the IRS may make its reports
available to tax authorities in the recipient's country of residence.
Unless the Company has actual knowledge that a holder is a Non-United States
person, dividends paid to a holder at an address within the United States may
be subject to backup withholding at a rate of 31% if the holder is not an
exempt recipient as defined in Treasury Regulations Section 1.6049-4(c)(1)(ii)
(which includes corporations) and fails to provide a correct taxpayer
identification number and other information to the Company. Backup withholding
will generally not apply to dividends paid to holders at an address outside
the United States (unless the Company has knowledge that the holder is a
United States person).
Proceeds from the disposition of Common Stock by a Non-United States Holder
effected by or through a United States office of a broker will be subject to
information reporting and to backup withholding at a rate of 31% of the gross
proceeds unless such Non-United States Holder certifies as to its name,
address and status as a Non-United States Holder under penalties of perjury or
otherwise establishes an exemption. Generally, United States information
reporting and backup withholding will not apply to a payment of disposition
proceeds if the transaction is effected outside the United States by or
through a non-United States office of a Non-United States broker. United
States information reporting requirements (but not backup withholding) will
apply to a payment of disposition proceeds where the transaction is effected
outside the United States if (a) the disposition is made through an office
outside the United States of a broker that is either (i) a United States
person for United States federal income tax purposes, (ii) a "controlled
foreign corporation" for United States federal income tax purposes or (iii) a
foreign person which derives 50% or more of its gross income for certain
periods from the conduct of a United States trade or business and (b) the
broker fails to maintain documentary evidence in its files that the holder is
a Non-United States Holder and that certain conditions are met or that the
holder otherwise is entitled to an exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to 31% backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
ESTATE TAX
An individual Non-United States Holder who is treated as the owner of Common
Stock at the time of such individual's death or has made certain lifetime
transfers of an interest in Common Stock will be required to include the value
of such Common Stock in such individual's gross estate for United Stated
federal tax purposes and may be subject to United States federal estate tax,
unless an applicable estate tax treaty provides otherwise.
61
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an Underwriting
Agreement dated the date hereof (the "Underwriting Agreement"), a syndicate of
United States underwriters (the "U.S. Underwriters") named below has severally
agreed to purchase, and the Company has agreed to sell to them, severally,
shares of Common Stock, and a syndicate of international underwriters (the
"International Underwriters") named below has severally agreed to purchase,
and the Company has agreed to sell to them, severally, the respective number
of shares of Common Stock set forth opposite the names of such U.S. and
International Underwriters below.
<TABLE>
<CAPTION>
NUMBER
OF
NAME SHARES
---- ------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated................................
Bear, Stearns & Co. Inc..........................................
BT Securities Corporation........................................
Donaldson, Lufkin & Jenrette Securities Corporation..............
----
Subtotal.......................................................
----
International Underwriters:
Morgan Stanley & Co. International Limited.......................
Bear, Stearns International Limited..............................
Bankers Trust International PLC..................................
Donaldson, Lufkin & Jenrette Securities Corporation..............
----
Subtotal.......................................................
----
Total..........................................................
====
</TABLE>
The U.S. Underwriters and the International Underwriters are collectively
referred to as the "Underwriters" and the U.S. Representatives and the
International Representatives are collectively referred to as the
"Representatives." The Underwriting Agreement provides that the obligations of
the several U.S. Underwriters to pay for and accept delivery of the shares of
Common Stock being offered and the obligations of the several International
Underwriters to pay for and accept delivery of the shares of Common Stock
being offered are subject to the approval of certain legal matters by counsel
and to certain other conditions including the conditions that no stop order
suspending the effectiveness of the Registration Statement is in effect and no
proceedings for such purpose are pending before or threatened by the
Commission and that there has been no material adverse change or any
development reasonably likely to involve a prospective material adverse change
in the condition, financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, from that
set forth in this Prospectus. The Underwriters are obligated to take and pay
for all of the shares of Common Stock being offered (other than those covered
by the U.S. Underwriters' over-allotment option described below) if any such
shares are taken.
Pursuant to the Agreement Between U.S. and International Underwriters dated
the date hereof (the "Agreement Between U.S. and International Underwriters"),
each U.S. Underwriter has represented and agreed that, with certain exceptions
set forth below: (i) it is not purchasing any U.S. Shares (as defined below)
for the account of anyone other than a United States or Canadian Person (as
defined below) and (ii) it has not offered or sold, and will not offer or
sell, directly or indirectly, any U.S. Shares or distribute any prospectus
relating to the U.S. Shares outside the United States or Canada or to anyone
other than a United States or Canadian Person. Pursuant to the Agreement
Between U.S. and International Underwriters, each International Underwriter
has
62
<PAGE>
represented and agreed that, with certain exceptions set forth below: (i) it
is not purchasing any International Shares (as defined below) for the account
of any United States or Canadian Person and (ii) it has not offered or sold,
and will not offer or sell, directly or indirectly, any International Shares
or distribute any prospectus relating to the International Shares within the
United States or Canada or to any United States or Canadian Person. The
foregoing limitations do not apply to stabilization transactions or to certain
other transactions specified in the Agreement Between U.S. and International
Underwriters. As used herein, "United States or Canadian Person" means any
national or resident of the United States or Canada, or any corporation,
pension, profit-sharing or other trust or other entity organized under the
laws of the United States or Canada or of any political subdivision thereof
(other than a branch located outside the United States and Canada of any
United States or Canadian Person) and includes any United States or Canadian
branch of a person who is not otherwise a United States or Canadian Person and
"United States" means the United States of America, its territories, its
possessions and all areas subject to its jurisdiction. All shares of Common
Stock to be purchased by the U.S. Underwriters and the International
Underwriters under the Underwriting Agreement are referred to herein as the
"U.S. Shares" and the "International Shares," respectively.
Pursuant to the Agreement Between U.S. and International Underwriters, sales
may be made between the U.S. Underwriters and International Underwriters of
any number of shares of Common Stock to be purchased pursuant to the
Underwriting Agreement as may be mutually agreed. The per share price of any
shares so sold shall be the Price to Public set forth on the cover page
hereof, in United States dollars, less an amount not greater than the per
share amount of the concession to dealers set forth below.
Pursuant to the Agreement Between U.S. and International Underwriters, each
U.S. Underwriter has represented that it has not offered or sold, and has
agreed not to offer or sell, any shares of Common Stock, directly or
indirectly, in any province or territory of Canada in contravention of the
securities laws thereof and has represented that any offer or sale of Common
Stock in Canada will be made only pursuant to an exemption from the
requirement to file a prospectus in the province or territory of Canada in
which such offer or sale is made. Each U.S. Underwriter has further agreed to
send to any dealer who purchases from it any shares of Common Stock a notice
stating in substance, by purchasing such Common Stock, such dealer represents
and agrees that it has not offered or sold, and will not offer or sell,
directly or indirectly, any of such Common Stock in any province or territory
of Canada or to, or for the benefit of, any resident of any province or
territory of Canada in contravention of the securities laws thereof and that
any offer or sale of Common Stock in Canada will be made only pursuant to an
exemption from the requirement to file a prospectus in the province or
territory of Canada in which such offer or sale is made, and that such dealer
will deliver to any other dealer to whom it sells any of such Common Stock a
notice to the foregoing effect.
Pursuant to the Agreement Between U.S. and International Underwriters, each
International Underwriter has represented and agreed that (i) it has not
offered or sold and will not offer or sell any shares of Common Stock to
persons in the United Kingdom except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purpose of their business or otherwise in the
circumstances which have not resulted and will not result in an offer to the
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995 (the "Regulations"), (ii) it has complied and will
comply with all applicable provisions of the Financial Services Act of 1986
and the Regulations with respect to anything done by it in relation to the
shares of Common Stock in, from or otherwise involving the United Kingdom; and
(iii) it has only issued or passed on connection with the offering of the
shares of Common Stock if that person is of a kind described in Article 11(3)
of the Financial Services Act of 1986 (Investment Advertisements) (Exemptions)
Order 1995 or is a person to whom such document may otherwise lawfully be
issued or passed on.
The Underwriters initially propose to offer part of the shares of Common
Stock directly to the public at the Price to Public set forth on the cover
page hereof and part to certain dealers at a price that represents a
concession not in excess of $ per share of Common Stock under the public
offering price. Any Underwriter may allow, and such dealers may re-allow, a
concession not in excess of $ per share of Common Stock to other
Underwriters or to certain other dealers. After the initial offering of the
shares of Common Stock, the offering price and other selling terms may from
time to time be varied by the Underwriters.
63
<PAGE>
Pursuant to the Underwriting Agreement, the Company has granted to the U.S.
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to an aggregate of additional shares of Common
Stock at the Price to Public set forth on the cover page hereof, less
underwriting discounts and commissions. The U.S. Underwriters may exercise such
option to purchase solely for the purpose of covering over-allotments, if any,
incurred in the sale of the shares of Common Stock offered hereby. To the
extent such option is exercised, each U.S. Underwriter will become obligated,
subject to certain conditions, to purchase approximately the same percentage of
such additional shares as the number set forth next to such Underwriter's name
in the preceding table bears to the total number of shares of Common Stock
offered by the U.S. Underwriters hereby.
The Underwriters have informed the Company that they do not intend to confirm
sales to any accounts over which they exercise discretionary authority.
The Company and certain of its stockholders have agreed in the Underwriting
Agreement that, for a period of 180 days after the date of this Prospectus, it
will not (and will not permit its subsidiaries or affiliates) without the prior
written consent of Morgan Stanley, in any transaction settled by delivery of
Common Stock or other securities, in cash or otherwise, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
shares of Common Stock or (ii) enter into any swap or other arrangement that
transfers to another, in whole or in part, any of the economic risks of
ownership of the shares of Common Stock except under certain circumstances.
KIAV and KEPV may distribute up to shares of Common Stock to certain of
their respective partners. The recipients of such distributions will agree with
KIAV, KEPV and the Underwriters not to offer, sell or otherwise dispose of such
shares of Common Stock prior to the expiration of the 180-day lock-up period
referred to above without the prior written consent of KIAV, KEPV and Morgan
Stanley. Consent to sales within such 180-day lock-up period may be provided
without prior notice to holders of the Common Stock or to the markets where
such securities are traded. See "Shares Eligible for Future Sale."
At the request of the Company, the Underwriters have reserved up to not more
than % of the shares of Common Stock being offered for sale at the public
offering price to certain employees of the Company and Kelso and certain other
persons designated by the Company. The number of shares of Common Stock
available for sale to the general public will be reduced to the extent such
persons purchase such reserved shares. Any reserved shares not so purchased
will be offered by the Underwriters to the general public on the same basis as
the other shares of Common Stock being offered. All purchasers of the shares of
Common Stock reserved pursuant to this paragraph are also directors or senior
officers of the Company and will be required to enter into agreements
restricting the transferability of such shares for a period of 180 days after
the date of this Prospectus.
From time to time Bear, Stearns & Co. Inc. and BT Securities Corporation (and
certain of its affiliates) have provided and continue to provide investment
banking services to the Company and Kelso & Company, L.P. and its affiliates
and from time to time Morgan Stanley and Donaldson, Lufkin & Jenrette
Securities Corporation have provided and continue to provide investment banking
services to Kelso & Company, L.P. and its affiliates.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
PRICING OF THE OFFERING
Prior to the offering, there has been no public market for the Company's
Common Stock. The initial public offering price will be determined by
negotiation between the Company and the Representatives of the Underwriters.
Among the factors considered in determining the initial public offering price
were the future prospects of the Company and its industry in general, sales,
earnings and certain other financial and operating
64
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of December 31, 1994 and 1995............. F-3
Consolidated Statements of Operations for the years ended December 31,
1993, 1994 and 1995..................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1993, 1994 and 1995..................................................... F-5
Consolidated Statement of Stockholders' Equity (Deficiency) for the years
ended December 31, 1993, 1994 and 1995.................................. F-7
Notes to Consolidated Financial Statements............................... F-9
Condensed Consolidated Balance Sheets as of December 31, 1995 and March
31, 1996................................................................ F-22
Condensed Consolidated Statements of Operations for the three month
periods ended March 31, 1995 and 1996................................... F-23
Condensed Consolidated Statements of Cash Flows for the three month
periods ended March 31, 1995 and 1996................................... F-24
Notes to Condensed Consolidated Financial Statements..................... F-25
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Hosiery Corporation of America, Inc.
Bensalem, Pennsylvania
We have audited the accompanying consolidated balance sheets of Hosiery
Corporation of America, Inc. and subsidiaries (the "Company") as of December
31, 1995 and 1994, and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for each of the three years
in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of the Company as of December
31, 1995 and 1994, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, on July 19,
1994, the Company entered into a Recapitalization and Stock Purchase
Agreement.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 27, 1996
F-2
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1994 1995
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................... $ 3,891 $ 6,987
Accounts receivable, less an allowance for doubtful
accounts of $923 and $1,263 in 1994 and 1995,
respectively........................................... 17,158 19,708
Income tax refunds receivable........................... 530 32
Inventories............................................. 8,287 9,814
Prepaid and other current assets........................ 1,038 1,350
--------- ---------
Total current assets................................... 30,904 37,891
PROPERTY AND EQUIPMENT, net.............................. 14,849 15,334
MAILING LIST RIGHTS...................................... 1,074 90
DEFERRED CUSTOMER ACQUISITION COSTS...................... 16,173 19,485
DEFERRED DEBT ISSUANCE COSTS, less accumulated
amortization of $335 and $2,016 in 1994 and 1995,
respectively............................................ 10,510 8,853
OTHER ASSETS............................................. 1,350 1,207
--------- ---------
TOTAL.................................................. $ 74,860 $ 82,860
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt....................... $ 2,393 $ 3,421
Current portion of capital lease obligations............ 1,056 1,402
Accounts payable........................................ 3,206 3,948
Accrued expenses and other current liabilities.......... 5,514 5,644
Accrued financing costs................................. 2,242 --
Accrued interest........................................ 2,069 4,858
Mailing lists rental obligations........................ 588 38
Accrued coupon redemption costs......................... 6,320 6,117
Deferred income taxes................................... 4,364 6,540
Income taxes payable.................................... -- 129
--------- ---------
Total current liabilities.............................. 27,752 32,097
LONG-TERM DEBT, Less current portion..................... 146,789 142,565
CAPITAL LEASE OBLIGATIONS, Less current portion.......... 3,204 3,705
LONG-TERM OBLIGATION--Mailing lists rental obligations... 66 --
ACCRUED COUPON REDEMPTION COSTS.......................... 468 521
DEFERRED INCOME TAXES.................................... 6,802 6,508
--------- ---------
Total liabilities...................................... 185,081 185,396
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
REDEEMABLE EQUITY SECURITIES............................. 45 332
--------- ---------
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, 3,750,000 and 3,739,782 shares
issued and outstanding in 1994 and 1995, respectively.. 37,500 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.............................. 16,840 16,805
Accumulated deficit..................................... (162,996) (155,588)
Stock subscription receivable........................... (125) --
Restricted stock........................................ (1,499) (1,499)
Foreign currency translation adjustment................. -- 2
--------- ---------
Stockholders' deficiency............................... (110,266) (102,868)
--------- ---------
TOTAL.................................................. $ 74,860 $ 82,860
========= =========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
NET REVENUES..................................... $109,824 $118,560 $136,299
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales.................................. 49,818 52,485 60,982
Administrative and general expenses............ 14,466 13,616 10,200
Provision for doubtful accounts................ 5,097 5,643 7,788
Marketing costs................................ 13,925 15,542 17,442
Coupon redemption costs........................ 5,680 6,397 5,969
Depreciation and amortization.................. 2,095 3,141 2,493
Other (income) expenses........................ 2,725 123 (2)
-------- -------- --------
OPERATING INCOME................................. 16,018 21,613 31,427
Interest income................................ 388 314 378
Interest expense............................... 1,463 4,811 19,749
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
PROVISION FOR INCOME TAXES AND CUMULATIVE EFFECT
OF ACCOUNTING CHANGE............................ 14,943 17,116 12,056
PROVISION FOR INCOME TAXES....................... 5,581 6,648 4,560
-------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
CUMULATIVE EFFECT OF ACCOUNTING CHANGE.......... 9,362 10,468 7,496
LOSS FROM DISCONTINUED OPERATIONS (Less income
tax (benefit) provision of $(2,086) and $8 in
1993 and 1994, respectively).................... (4,548) (329) --
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS (Less
income tax benefit of $378 and $83 in 1993 and
1994, respectively)............................. (735) (230) --
-------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE.......................................... 4,079 9,909 7,496
CUMULATIVE EFFECT OF ACCOUNTING CHANGE........... -- (163) --
-------- -------- --------
NET INCOME....................................... $ 4,079 $ 9,746 $ 7,496
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income...................................... $ 4,079 $ 9,746 $ 7,496
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................... 2,095 3,141 2,493
Amortization of debt issue costs and
discounts...................................... -- 358 1,848
Cumulative effect of change in accounting
principal...................................... -- 163 --
Loss (gain) on sale and abandonments of
property and equipment......................... 218 123 (2)
Loss from discontinued operations............... 4,548 329 --
Loss on disposal of discontinued operations..... 735 230 --
Amortization of deferred customer acquisition
costs.......................................... 13,107 13,495 15,574
Debt issuance costs............................. -- (10,845) (23)
(Increase) decrease in operating assets, net of
effects from discontinued operations:
Accounts receivable............................ (1,423) (2,663) (2,052)
Inventories.................................... (949) 410 (1,527)
Payments for deferred customer acquisition
costs......................................... (12,791) (12,099) (17,902)
Prepaid and other current assets............... 154 (718) (312)
Other assets................................... (1,064) (356) (56)
Increase (decrease) in operating liabilities,
net of effects from discontinued operations:
Accounts payable, accrued expenses and other
liabilities................................... (1,273) 4,340 1,142
Deferred income taxes.......................... 3,118 1,672 1,882
Income taxes payable........................... 109 (671) 129
Accrued coupon redemption costs................ (286) 199 (150)
Operating activities of discontinued
operations..................................... (5,296) (599) --
-------- -------- --------
Net cash provided by operating activities..... 5,081 6,255 8,540
-------- -------- --------
INVESTING ACTIVITIES:
Acquisitions of property and equipment.......... (1,113) (1,989) (1,019)
Proceeds from sales of property and equipment... 211 106 6
Proceeds from disposal of a line of business.... 5,138 -- --
Proceeds from disposal of discontinued
operations to Stockholder...................... -- 3,158 --
Proceeds from sale of assets to Stockholder..... -- 3,960 --
Decrease (increase) in assets held for sale to
Stockholder.................................... (1,683) 647 --
Net investing activities of discontinued
operations..................................... (372) -- --
-------- -------- --------
Net cash provided by (used in) investing
activities................................... 2,181 5,882 (1,013)
-------- -------- --------
FINANCING ACTIVITIES:
Net repayment of note payable to bank........... (1,700) (2,300) --
Proceeds from bank and other financing.......... 2,500 80,000 --
Payments on bank and other financing............ (3,200) (4,941) (3,364)
Payments on capital leases...................... (1,848) (2,682) (1,256)
Payments of costs associated with issuance of
stock.......................................... -- (2,601) (33)
Capital contribution from Stockholder........... -- 690 --
Issuance of Preferred stock..................... -- 36,478 --
Issuance of Common stock........................ -- 16,902 --
Issuance of Redeemable Equity Securities, net of
costs to issue................................. -- 45 185
Issuance of Units............................... -- 69,146 --
Stock redemptions and purchases of Treasury
stock.......................................... (3,417) (198,983) --
Dividends paid.................................. (125) -- --
Purchase price adjustment of Treasury stock..... -- -- (88)
Proceeds from stock subscription................ -- -- 125
Net financing activities of discontinued
operations..................................... (182) -- --
-------- -------- --------
Net cash used in financing activities......... (7,972) (8,246) (4,431)
-------- -------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS..................................... (710) 3,891 3,096
Cash and cash equivalents at beginning of year... 710 -- 3,891
-------- -------- --------
Cash and cash equivalents at end of year......... $ 0 $ 3,891 $ 6,987
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the year for:
Interest........................................ $ 1,598 $ 2,436 $ 15,111
======== ======== ========
Income taxes.................................... $ 1,912 $ 4,833 $ 2,261
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations and financing arrangements of $2,746, $776 and
$2,103 were entered into for new equipment and automobiles during 1993, 1994
and 1995, respectively.
Units issued in connection with the Recapitalization Agreement in 1994
consisted of one senior subordinated note and one share of Class A, non voting
common stock. Based on the issue price of the Units and the relative fair
market value of the notes and the shares at the time of issuance, the Company
determined that $67,962 related to the notes issued and $1,184 related to the
shares issued.
During 1995, in connection with the issuance of redeemable common shares,
certain agreements were amended and executed in order that preferred stock
issued in 1995 and 1994 would be redeemable under the same basic terms of the
redeemable common stock. Due to the change in terms of the preferred stock
agreement, 10,218 shares issued in October 1994 with a value net of issuance
costs of $97 were reclassified from preferred stock to redeemable equity
securities in 1995.
See notes to consolidated financial statements.
F-6
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------------------------------------- -----------------------------------------------
CLASS A, CLASS A,
PIK CLASS A CLASS B VOTING NON VOTING
------------------ ---------------- ---------------- ---------------- ---------------- -------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------- -------- ------ -------- ------ --------- ------ -------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January
1, 1993......... -- $ -- 100,000 $100 100,000 $520 -- $-- 183,100 $183 -- $--
Net income......
Additional cost
associated with
previously
repurchased
treasury stock..
--------- ------- -------- ---- -------- ---- --------- ---- -------- ---- ------ ----
BALANCE,
December 31,
1993............ -- -- 100,000 100 100,000 520 -- -- 183,100 183 -- --
Net income......
Gain on sale of
assets to
Stockholder
recognized as
capital
contribution
(see Note 3)....
Purchase of
shares for
treasury........
Retirement of
shares in
treasury........ (100,000) (100) (100,000) (520) (178,396) (178)
Reclassification
of Class A
Common Stock
into Common
Stock and effect
of stock split
of Common Stock
on approximately
a 62.22 to 1
basis (see Note
3).............. 292,600 3 (4,704) (5)
Issuance of
Common Stock
(see Notes 3 and
20)............. 1,000,660 10 5,652 --
Issuance of PIK
Preferred Stock
(see Note 3).... 3,637,602 36,376
Issuance of
shares in
connection with
debentures (see
Note 3)......... 70,000 1
Issuance of
shares in
connection with
management grant
(see Notes 3 and
20)............. 102,180 1,022 28,262 --
Issuance of
shares in
connection with
Recapitalization
(see Note 3).... 10,218 102
Costs associated
with issuance of
stock...........
--------- ------- -------- ---- -------- ---- --------- ---- -------- ---- ------ ----
BALANCE,
December 31,
1994............ 3,750,000 37,500 -- -- -- -- 1,321,522 13 -- -- 75,652 1
Net income......
Amendment of
preferred stock
agreement
resulting in
certain
redeemable
preferred equity
securities...... (10,218) (102)
Additional costs
associated with
previously
purchased and
retired treasury
stock...........
Costs associated
with issuance of
stock...........
Receipt of stock
subscription....
Foreign currency
translation.....
--------- ------- -------- ---- -------- ---- --------- ---- -------- ---- ------ ----
BALANCE,
December 31,
1995............ 3,739,782 $37,398 -- $-- -- $-- 1,321,522 $ 13 -- $-- 75,652 $ 1
========= ======= ======== ==== ======== ==== ========= ==== ======== ==== ====== ====
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
TREASURY STOCK
--------------------------------------
PREFERRED COMMON RETAINED
STOCK STOCK ADDITIONAL EARNINGS STOCK FOREIGN
------------------ -------- PAID-IN (ACCUM. SUBSCRIPTION RESTRICTED CURRENCY
CLASS A CLASS B CLASS A AMOUNT CAPITAL DEFICIT) RECEIVABLES STOCK TRANSLATION TOTAL
-------- -------- -------- -------- ---------- --------- ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January
1, 1993......... 94,540 90,575 161,059 $(15,198) $ 4,638 $35,413 $-- $ -- $-- $ 25,656
Net income...... 4,079 4,079
Additional cost
associated with
previously
repurchased
treasury stock.. (3,417) (3,417)
-------- -------- -------- -------- ------- --------- ---- ------- ---- ---------
BALANCE,
December 31,
1993............ 94,540 90,575 161,059 (18,615) 4,638 39,492 -- -- -- 26,318
Net income...... 9,746 9,746
Gain on sale of
assets to
Stockholder
recognized as
capital
contribution
(see Note 3).... 690 690
Purchase of
shares for
treasury........ 5,460 9,425 17,337 (198,983) (198,983)
Retirement of
shares in
treasury........ (100,000) (100,000) (178,396) 217,598 (4,566) (212,234) --
Reclassification
of Class A
Common Stock
into Common
Stock and effect
of stock split
of Common Stock
on approximately
a 62.22 to 1
basis (see Note
3).............. 2 --
Issuance of
Common Stock
(see Notes 3 and
20)............. 17,017 (125) 16,902
Issuance of PIK
Preferred Stock
(see Note 3).... 36,376
Issuance of
shares in
connection with
debentures (see
Note 3)......... 1,183 1,184
Issuance of
shares in
connection with
management grant
(see Notes 3 and
20)............. 477 (1,499) --
Issuance of
shares in
connection with
Recapitalization
(see Note 3).... 102
Costs associated
with issuance of
stock........... (2,601) (2,601)
-------- -------- -------- -------- ------- --------- ---- ------- ---- ---------
BALANCE,
December 31,
1994............ -- -- -- -- 16,840 (162,996) (125) (1,499) -- (110,266)
Net income...... 7,496 7,496
Amendment of
preferred stock
agreement
resulting in
certain
redeemable
preferred equity
securities...... (102)
Additional costs
associated with
previously
purchased and
retired treasury
stock........... (88) (88)
Costs associated
with issuance of
stock........... (35) (35)
Receipt of stock
subscription.... 125 125
Foreign currency
translation..... 2 2
-------- -------- -------- -------- ------- --------- ---- ------- ---- ---------
BALANCE,
December 31,
1995............ -- -- -- $ -- $16,805 $(155,588) $-- $(1,499) $ 2 $(102,868)
======== ======== ======== ======== ======= ========= ==== ======= ==== =========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION
Hosiery Corporation of America, Inc. and subsidiaries is a company
incorporated in the State of Delaware and is engaged in the direct mail
marketing, manufacturing and distribution of quality women's sheer hosiery
products to consumers throughout the United States. The Company markets
women's sheer hosiery through a continuous product shipment or "continuity"
program. The Company's continuity program involves mailing to customers a
specially priced introductory hosiery offer, the acceptance of which enrolls
customers in the program and results in additional shipments of hose on a
regular and continuous basis upon payment of a prior hose shipment. The
Company's manufacturing operations supply all the hosiery required by the
Company's continuity program.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include
the accounts of Hosiery Corporation of America, Inc. (the "Company") and its
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Revenue Recognition--Revenue less allowance for returns is recognized when
merchandise is shipped. The Company provides for returns at the time of
shipment based upon historical experience.
Cash and Cash Equivalents--Cash and cash equivalents consist of cash and
other short-term securities purchased with maturities of less than three
months.
Inventories--Inventories are stated at the lower of cost (first-in, first-
out) or market.
Property and Equipment--Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided on a straight-line basis
using estimated lives of 31 years for buildings, 5 to 10 years for machinery
and equipment, 5 to 7 years for furniture and fixtures and 3 to 5 years for
automobiles. Leasehold improvements are amortized over the shorter of the
estimated useful life or the lease periods which are generally 15 to 18 years.
Effective January 1, 1994, the Company changed its estimate of the useful
lives of certain computer equipment. This change was made to better reflect
the estimated period during which such assets would remain in service. This
change resulted in additional depreciation expense for the year ended December
31, 1994, by approximately $700.
Deferred Customer Acquisition Costs--Deferred customer acquisition costs
consist of marketing costs (postage, printed material, customer list rentals,
etc.) of the initial shipment to a customer and similar costs associated with
the resolicitation of previously canceled customers. These costs are
aggregated by promotional program and are amortized on an accelerated basis
based upon the estimated current year revenue in proportion to the expected
future revenue generated by these customers. Approximately 56% of these costs
are amortized in the first 12 months, 69% within 18 months, and 78% within 24
months. The loss incurred on front end shipments to customers is charged to
operations at the time of the front end shipment.
Software Costs--Software costs, principally internally developed, consist of
the expenses associated with the development (computer time, license,
programming time) of material software projects with a long-term benefit and
are included in the consolidated balance sheet as Other Assets. Such assets
are amortized on a straight-line basis over a 5 to 10 year period. Effective
January 1, 1994, the Company changed its estimate of the useful life of
software costs for new software to 7 years to better reflect the estimated
period during which such assets will remain in service.
F-9
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Derivative Financial Instruments--The Company enters into interest rate caps
to manage exposure to fluctuations in interest rates. Premiums paid on caps
are amortized to interest expense over the term of the cap.
Deferred Debt Issuance Costs--Debt issuance costs represent costs associated
with bank borrowings and notes and are amortized using the effective interest
method over the terms of the related borrowings.
Income Taxes--The Company uses the liability method of accounting for income
taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under the
liability method, deferred income taxes are determined based upon enacted tax
laws and rates applied to the differences between the financial statement and
tax basis of assets and liabilities.
Mailing List Rights--Mailing list rights consist of contracts that are
recorded as an asset and a liability. The asset is allocated to deferred
customer acquisition costs based on actual usage in proportion to the total
estimated usage of the mailing list. The current and long-term portion of the
liability is recorded based on the payment terms in the contract.
Postemployment Benefits--Effective January 1, 1994, the Company adopted
Statement of Financial Accounting Standards No. 112 (SFAS No. 112), Employers'
Accounting for Postemployment Benefits. SFAS No. 112 requires the expected
cost of providing benefits to former or inactive employees after employment
but before retirement be accrued if certain conditions are met. The Company
provides sick pay, long-term disability and severance benefits for certain
employees. The liability for benefits accrued at January 1, 1994 of
approximately $163, net of tax of $87, has been reflected in the consolidated
statement of income as a cumulative effect of change in accounting. This
change had no material effect on net income for the year ended December 31,
1994.
Impairment of Long-Lived Assets--SFAS No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, is effective
for fiscal years beginning after December 15, 1995. 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. The impact of this new standard is not
expected to have a material effect on the Company's financial position or
results of operations.
Accounting for Stock-Based Compensation--SFAS No. 123, Accounting for Stock-
Based Compensation, will be adopted by the Company in fiscal year 1996 as
required by this statement. The Company has elected to continue to measure
such compensation expense using the method prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, as permitted
by SFAS No. 123. When adopted, SFAS No. 123 will not have any effect on the
Company's financial position or results of operations, but will require the
Company to provide expanded disclosure regarding its stock-based employee
compensation plans.
Foreign Currency Translation--Assets and liabilities of the foreign
affiliate are translated at the rates of exchange at the balance sheet date.
The translation adjustments that result are reported in foreign currency
translation adjustment, a separate component of deficiency in assets. Income
and expense items are translated at average monthly rates of exchange.
Use of Estimates--The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions
F-10
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications--Certain reclassifications were made to the prior year's
consolidated financial statements to conform to classifications used in the
current period.
3. RECAPITALIZATION
On July 19, 1994, an affiliate of Kelso & Company, Inc. ("Kelso"), the
Company and Joseph A. Murphy, the sole stockholder of the Company (the
"Stockholder"), entered into a Recapitalization and Stock Purchase Agreement
(the "Recapitalization Agreement"). Pursuant to the Recapitalization
Agreement, the Company repurchased from the Stockholder (the "Repurchase") for
approximately $191.2 million, which includes approximately $0.9 million in
post-closing adjustments (net of $7.8 million received from the Stockholder
for the purchase of certain assets (see below)), all of its then outstanding
shares of preferred stock and a substantial portion of its then outstanding
shares of common stock. On October 17, 1994, the Company effected the
recapitalization of its capital stock (the "Recapitalization"), pursuant to
which certain affiliates and designees of Kelso and certain members of
operating management of the Company (collectively, the "Investor Group"),
purchased a controlling equity interest in the Company. The Company effected
the Repurchase with the proceeds of the Financing (as defined below).
Following the consummation of the Repurchase (and after giving effect to the
purchase of common stock by the Investor Group pursuant to the Financing), the
Investor Group owns approximately 74% of the Company's common stock, with the
Stockholder retaining approximately 21% of the Company's common stock.
The Company obtained the funds necessary to effect the Repurchase, repay
certain existing indebtedness of the Company and pay the fees and expenses
incurred in connection with the Recapitalization primarily from the proceeds
of a financing (the "Financing") which included (i) borrowings of $80.0
million under a credit agreement, consisting of $80.0 million of term loan
facilities (the "Term Loan Facilities") and a $15.0 million revolving credit
facility, entered into among the Company, Bankers Trust Company, and the banks
signatory thereto, (ii) gross proceeds of approximately $69.1 million from the
issuance and sale of the Units (each unit consisting of one Senior
Subordinated Note and one share of Class A Common Stock), (iii) gross proceeds
of approximately $36.5 million from the sale to the Investor Group of shares
of a new class of pay-in-kind preferred stock of the Company for cash, and
(iv) gross proceeds of approximately $17.1 million from the sale to the
Investor Group of shares of Common Stock for cash. The Company also utilized
working capital of approximately $2.0 million to pay fees and expenses
incurred in connection with the Recapitalization. In addition, certain members
of the Company's management were granted restricted pay-in-kind preferred
stock and restricted common stock of $1,022 and $478, respectively (see Note
20).
The Recapitalization and Stock Purchase Agreement contained customary
representations, warranties and conditions. The Recapitalization and Stock
Purchase Agreement also provided that, at or prior to the consummation of the
Acquisition, the Stockholder and the Company enter into an Escrow agreement
pursuant to which, among other things, $10.0 million of the aggregate purchase
price paid by the Company to the Stockholder pursuant to the Repurchase be
held in escrow to provide a source of payment to satisfy the Stockholder's
indemnification obligations under the Recapitalization and Stock Purchase
Agreement.
Prior to the Recapitalization, the Company had authorized classes of voting
and non-voting common stock, with shares of voting stock issued and
outstanding. As part of the Recapitalization, such non-voting stock was
F-11
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
retired and such voting stock was changed and reclassified from Class A Common
Stock, par value $1.00 per share, into one share of Common Stock, par value
$.01 per share. In addition, in connection with the Recapitalization, the
Company issued and sold shares of non-voting Class A Common Stock, a small
number of which was purchased by certain designees of Kelso, and the remainder
of which was sold in the form of Shares as part of the Units. Upon the
occurrance of any Conversion Event (as defined, e.g., any transfer of shares
of Class A Common Stock to any persons who are not affiliates of the
transferor), each share of Class A Common Stock shall be convertible into one
share of the Company's Common Stock. Subsequent to the Recapitalization, the
Company effected a stock split of its Common Stock on approximately a 62.22-
to-1 basis.
In connection with the Recapitalization, the Company sold for cash certain
assets which were not used in its hosiery business to the Stockholder. The
assets were sold at fair value ($7.8 million) as of July 19, 1994, which
approximated their then net book value. Certain of these assets, including the
Company's Book, Bag, and Overseas Divisions, were restated in the financial
statements as discontinued operations and classified as net assets of
discontinued operations. The remainder of these assets were classified in the
financial statements as assets held for sale to stockholder. (See Notes 4 and
5.) Upon final consummation of the sale on October 17, 1994, the carrying
value of these assets had declined by approximately $690 resulting in a gain
on the sale. This gain was reflected as a capital contribution in the
accompanying financial statements.
4. DISCONTINUED OPERATIONS AND DISPOSAL OF A LINE OF BUSINESS
During 1993, the company entered into an agreement to dispose of its rights
for the sale of romance novels through direct mail. On July 30, 1993, these
rights were sold to Harlequin Enterprises Limited for $5,138 which resulted in
a loss of approximately $700 after income tax benefit. The terms of this
agreement preclude the Company from publishing and selling contemporary
romance novels in North America. On July 9, 1994, as part of the Company's
Recapitalization, the Company discontinued the remainder of its Book Division,
along with its Overseas and Bag Divisions.
Summary results of the Book, Bag, and Overseas Divisions were as follows:
<TABLE>
<CAPTION>
1993 1994
------- -----
<S> <C> <C>
Net revenues............................................... $16,582 $ 389
Loss before income taxes (benefit)......................... (6,634) (321)
Provision for income taxes (benefit)....................... (2,086) 8
Net loss................................................... (4,548) (329)
</TABLE>
5. PROVISION FOR COUPON REDEMPTION
As part of the marketing program, the Company issues coupons to program
participants based upon the products purchased or the referral of new
customers to the Company. Customers may redeem coupons for free gifts from a
program catalog once they have collected the required number of coupons.
During 1995, customers with an average of 31 coupons redeemed for a free gift
(35 coupons in 1994) after a collection period of approximately four years.
The estimated future costs for this program have been determined based on
historical customer redemption patterns applicable to outstanding coupons and
average gift costs.
F-12
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
6. INVENTORIES
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Raw materials............................................... $ 936 $ 787
Work-in-process............................................. 1,342 1,602
Finished goods.............................................. 5,231 5,763
Promotional and packing material............................ 778 1,662
------ ------
$8,287 $9,814
====== ======
</TABLE>
7. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Land and buildings........................................ $ 5,639 $ 5,873
Machinery and equipment................................... 15,948 15,990
Furniture and fixtures.................................... 1,520 1,598
Leasehold improvements.................................... 3,613 3,728
Automobiles............................................... 492 569
------- -------
27,212 27,758
Less accumulated depreciation and amortization............ 12,363 12,424
------- -------
$14,849 $15,334
======= =======
</TABLE>
Property and equipment includes assets acquired under capital leases,
principally machinery and equipment having a net book value of approximately
$4,847 and $5,618 as of December 31, 1994 and 1995, respectively. Related
accumulated depreciation and amortization was $4,361 and $3,116, respectively.
Depreciation and amortization expense for capital lease assets for 1993, 1994
and 1995 was $1,269, $1,810 and $1,077, respectively.
8. OTHER ASSETS
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Software, net of accumulated amortization of approximately
$5,150 and $5,387, respectively.......................... $ 978 $ 800
Deposits.................................................. 305 327
Miscellaneous other....................................... 67 80
------ ------
$1,350 $1,207
====== ======
</TABLE>
9. MAILING LIST RIGHTS AND OBLIGATIONS
During 1992, the Company entered into noncancelable mailing list rights
obligations expiring through 1996. Related mailing list rights as of December
31, 1994 and 1995 are $1,074 and $90, net of amounts allocated to deferred
customer acquisition costs of $3,750 and $4,733, respectively. Future minimum
payments by year under these list agreements have initial or remaining terms
of up to three years and have been recorded as mailing lists rental
obligations in current liabilities and in "Long-term obligations--Mailing
lists rental obligations" in the accompanying balance sheets.
F-13
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
10. OTHER (INCOME) EXPENSES
Included in other (income) expenses are the following:
<TABLE>
<CAPTION>
1993 1994 1995
------ ---- ----
<S> <C> <C> <C>
Litigation settlement and related expenses.............. $2,327 $-- $--
Miscellaneous (income) expenses......................... 398 $123 $ (2)
------ ---- ----
$2,725 $123 $ (2)
====== ==== ====
</TABLE>
11. LONG-TERM DEBT
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Amounts due under revolving credit and term loan
agreement.............................................. $ 80,000 $ 76,725
13.75% Senior Subordinated Notes due August 2002........ 67,984 68,153
Serial bonds issued by the South Carolina Jobs-Economic
Development Authority with interest rates ranging from
5.8% to 7.1% payable beginning July 1993 in quarterly
principal payments and semi-annual payments to the
trustee of the Bonds. Bonds are collateralized by a
letter of credit and a building addition in South
Carolina............................................... 1,196 1,108
Other................................................... 2 --
-------- --------
Total long-term debt.................................... 149,182 145,986
Less current portion.................................... 2,393 3,421
-------- --------
TOTAL LONG-TERM PORTION............................... $146,789 $142,565
======== ========
</TABLE>
On October 17, 1994, the Company entered into a revolving credit and term
loan agreement with a group of banks with outstanding borrowings totaling
$80,000 at December 31, 1994 and $76,725 at December 31, 1995. The facility is
secured by substantially all of the assets of Hosiery Corporation of America.
The facility is also subject to the continuing guarantees of the subsidiaries
of Hosiery Corporation of America. The revolving credit and term loan portions
of the facility have maximum borrowings of $15,000 and $80,000, respectively.
The term loans are segregated into two series, A Term Loans and B Term Loans,
each totaling $40,000. The revolving credit facility expires on October 17,
1999. The Company can borrow based on a formula which comprises the sum of 80%
of accounts receivable and 50% of inventory. Interest under the agreement is
payable at the banks' prime lending rate plus 1.75%. There were no borrowings
outstanding under this agreement at December 31, 1994 and 1995. The A Term
Loans are payable in quarterly installments ranging from $375 to $3,750, with
a final payment due October 17, 1999. The B Term Loans are payable in semi-
annual installments ranging from $200 to $10,000, with a final payment due
July 31, 2001. Interest is generally payable quarterly and is charged at a
premium ranging from 1.75% to 2.25% over the Base Rate or 2.75% to 3.25% over
the Eurodollar Rate as defined. The rate in effect at December 31, 1995 ranged
from 8.31% to 9.19%. Additionally, fees are charged on the average daily
amount of unused commitment and are payable quarterly. Under the terms of the
agreement, certain restrictions are placed on additional borrowings, the
purchase of property and equipment, the payment of cash dividends and the
disposition of assets. The Company has also agreed to maintain certain
financial ratios as defined in the agreement.
F-14
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
During 1994, the Company sold the 13.75% Senior Subordinated Notes, with a
principal amount of $70,000, at a discount, which discount is being amortized
using the interest method over the life of the notes. Interest is payable
semi-annually. The Notes were sold in denominations of one thousand dollars,
each of which contained one share (collectively the "Shares") of the Company's
Class A Non Voting Common Stock, par value $.01 per share. The Notes and the
Shares were immediately detachable. Beginning October 1, 1997, the Notes, or a
portion thereof, will be subject to redemption at the option of the Company at
specified redemption prices ranging from 100% to 112% of the aggregate
principal amounts of Notes so redeemed. Upon the occurence of a Change of
Control, as defined, each holder of the Notes shall have the right to require
the Company to repurchase such holder's Notes at a purchase price equal to
101% of the aggregate principal amount thereof. Under the terms of the
agreement, certain restrictions are placed on additional borrowings, the
purchase of property and equipment, the payment of cash dividends and the
disposition of assets.
The Company is currently in compliance with all debt covenants noted above.
The Company was contingently liable for outstanding letters of credit in the
amount of approximately $1,494 as of December 31, 1995.
On January 17, 1995, the Company purchased an interest rate cap for $149
from Bankers Trust Company. This cap protects $30,000 of the Term Loan Debt
from an increase in interest rates over 10%. The cap is based on the LIBOR and
pays the excess interest over 10%. The term of the interest rate cap is three
years.
Maturities of long-term debt consisted of the following as of December 31,
1995:
<TABLE>
<S> <C>
1996.............................................................. $ 3,421
1997.............................................................. 9,517
1998.............................................................. 15,517
1999.............................................................. 11,267
2000.............................................................. 18,117
Thereafter........................................................ 88,147
--------
$145,986
========
</TABLE>
12. INCOME TAXES
The provision for income taxes (benefit) consists of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Federal:
Current........................................... $6,146 $4,491 $2,432
Deferred.......................................... (956) 1,110 2,053
------ ------ ------
5,190 5,601 4,485
------ ------ ------
States:
Current........................................... 361 485 246
Deferred.......................................... 30 562 (171)
------ ------ ------
391 1,047 75
------ ------ ------
$5,581 $6,648 $4,560
====== ====== ======
</TABLE>
F-15
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The components of net deferred tax liabilities consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Deferred tax liabilities:
Deferred customer acquisition costs.................... $ 4,974 $ 6,064
Accounts receivable.................................... 4,008 5,010
Property and equipment................................. 611 741
Other assets........................................... 728 42
Other current assets................................... 1,099 1,689
Accrued coupon redemption costs........................ 141 98
------- -------
11,561 13,644
------- -------
Deferred tax assets:
Accrued expenses....................................... (383) (583)
Other.................................................. (12) (13)
------- -------
(395) (596)
------- -------
$11,166 $13,048
======= =======
</TABLE>
The following is a reconciliation of the federal statutory rate and the
Company's effective tax rate:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Tax provision at statutory rate......... $5,080 34.0% $5,820 34.0% $4,099 34.0%
State taxes, net of federal benefit..... 254 1.7 540 3.2 160 1.3
Other................................... 247 1.6 288 1.7 301 2.5
------ ---- ------ ---- ------ ----
Provision for income taxes.............. $5,581 37.3% $6,648 38.9% $4,560 37.8%
====== ==== ====== ==== ====== ====
</TABLE>
13. REDEEMABLE EQUITY SECURITIES
In connection with the Recapitalization, the Company issued 2,826 shares of
voting common stock, $.01 par value, to management stockholders for cash. The
Company is obligated to redeem these shares from the management stockholders
upon the death, disability or termination of employment of the holder. The
redeemable common stock was recorded at fair value on the date of issuance,
less issuance costs, totaling $45. During 1995, the Company issued an
additional 4,048 shares of voting common stock, $.01 par value, for cash under
the same basic terms. The redeemable common stock was recorded at fair value
on the date of issuance, less issuance costs, totaling $63. In connection with
the issuance of redeemable common shares in 1995, certain agreements were
amended and executed in order that 14,643 shares of preferred stock issued for
cash in 1995 and 10,218 of preferred stock issued for cash in October 1994
would be redeemable under the same basic terms of the redeemable common stock.
Each preferred share has a $.01 par value, a stated value at liquidation of
$10 and cumulative dividends of 25% of additional shares of PIK preferred
stock or fractions thereof. The redeemable preferred stock was recorded at
fair value on the date of issuance or amendment providing for their
redemption, less issuance costs, totaling $224. The redemption provisions
expire the earlier of the fifth anniversary of the October 17, 1994
Recapitalization or the closing of an IPO.
F-16
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
14. TREASURY STOCK
In November 1991, subsequent to the death of Bryan Nelson, and in accordance
with the Company's requirements pursuant to a buy/sell agreement dated July
25, 1984 among Joseph Murphy, President, Bryan Nelson, Executive Vice
President, (both being beneficial stockholders), and the Company, the Board of
Directors approved the Company's purchase of 64,787 shares of common stock for
approximately $4,013 and 14,145.5 shares of Class A preferred stock and 24,417
shares of Class B preferred stock for approximately $273 such stock being
beneficially owned by the estate of Bryan Nelson. The redemption price of
approximately $4,300 ("Redemption Price") was offered based on a formula
within the buy/sell agreement. In December 1991, the Company, through an
Offering Memorandum dated in October 1991, agreed to purchase, from the
beneficiaries of the Estate, 2,226 shares of common stock for $1,977 and
30,030.5 shares of Class A preferred stock and 51,839 shares of Class B
preferred stock for $2,730. The purchase price for the common stock and Class
A and Class B preferred stock utilized valuations of the Company's common and
preferred stock. The valuations were prepared by an independent third party.
In 1992, the total redemption price was approved by the Board of Directors and
was paid to an escrow agent pursuant to an escrow agreement between the
Company and the escrow agent dated March 4, 1992. The estate of Bryan Nelson
was not party to the escrow agreement. On April 14, 1992, Sarah Nelson,
Administratrix of the estate of Bryan Nelson, filed a petition in Montgomery
County, Pennsylvania, Court of Common Pleas, to void the aforementioned
agreement. On September 30, 1993, the Company reached a Settlement Agreement
with the Administratrix of the estate of Bryan Nelson to end all pending
litigation pursuant to this Settlement Agreement, which was approved by the
Montgomery County, Pennsylvania, Court of Common Pleas. The Company paid an
additional amount of approximately $3,137 in connection with this redemption.
This amount, plus approximately $280 of interest which was accrued from
amounts tendered in 1991, was accounted for as treasury stock.
Pursuant to the Recapitalization Agreement (see Note 3), the Company
repurchased from the Stockholder for approximately $199.0 million, which
includes approximately $0.9 million in post-closing adjustments, all of its
then outstanding shares of Preferred Stock (5,460 Class A shares and 9,425
Class B shares) and 17,337 shares of its then outstanding Common Stock. These
shares along with all previously acquired shares of Preferred and Common Stock
were then retired. During 1995, additional post closing adjustments totaling
$88 were made to the purchase price relating to the retired treasury shares.
F-17
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
15. LEASE COMMITMENTS
The Company leases premises under cancelable and noncancelable operating
leases with lease terms expiring through 2007. Future minimum payments by year
and in the aggregate under all noncancelable capital and operating leases
having initial or remaining terms of one year or more consisted of the
following at December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDING CAPITAL OPERATING
DECEMBER 31, LEASES LEASES
------------ ------- ---------
<S> <C> <C>
1996..................................................... $1,644 $ 984
1997..................................................... 1,451 934
1998..................................................... 989 917
1999..................................................... 784 873
2000..................................................... 379 873
Thereafter............................................... 385 5,602
------ -------
5,632 $10,183
=======
Amount representing imputed interest..................... 525
------
Present value of net minimum lease payments.............. 5,107
Less current portion..................................... 1,402
------
$3,705
======
</TABLE>
Rental expense under all operating leases for the years ended December 31,
1993, 1994 and 1995, was approximately $1,430, $1,301 and $1,046,
respectively.
16. COMMITMENTS AND CONTINGENCIES
On June 19, 1993, the Company reached a Settlement Agreement with
International Data Processing, Inc. ("IDP") to end all pending litigation
regarding a lawsuit brought by the Company against IDP for breach of contract
and intentional misrepresentation by IDP, and a counterclaim by IDP against
the Company alleging improper termination of an agreement to manage, staff and
operate the Company's data processing center for 5 years beginning in 1989.
Pursuant to the Settlement Agreement, which was approved by the Federal Court
in Newark, New Jersey, the Company paid the total amount of $1,650 to IDP and
the related legal costs of $220, which have been included in other (income)
expenses.
The Company has entered into employment agreements with certain members of
management.
The Company has agreed to pay Kelso an annual fee of $263 each year for
financial advisory services and to reimburse Kelso for out-of-pocket expenses
incurred. Non-officer directors of the Company, other than those directors who
are affiliated with Kelso, will be paid an annual retainer of $20. In
addition, all out-of-pocket expenses of non-officer directors, including those
directors who are affiliated with Kelso, related to meetings attended, will be
reimbursed by the Company. Non-officer directors, including those directors
affiliated with Kelso, will receive no additional compensation for their
services as directors of the Company except as described above.
The Company is involved in, or has been involved in, litigation arising in
the normal course of its business. The Company can not predict the timing or
outcome of these claims and proceedings. Currently, the Company is
F-18
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
not involved in any litigation which is expected to have a material effect on
the financial position of the business or the results of operations and cash
flows of the Company.
17. PROFIT SHARING PLAN
The Company has a profit sharing plan covering all employees and those of
its subsidiaries. Eligible employees can participate as of January 1 and July
1 after twelve months of service. Employee contributions are made on a pretax
basis under Section 401(k) of the Internal Revenue Code. The Company's
contribution is at the discretion of the Board of Directors. The expense
associated with the employer contribution was approximately $365, $430 and
$442 in 1993, 1994 and 1995, respectively.
All contributions and investments are held in a trust for the benefit of
plan participants. Employees with five years of service prior to January 1,
1990, are 100% vested in the entire amounts held for them under the plan. All
employees are 100% vested in their pretax contributions and earnings thereon,
but become vested in the Company contributions and earnings at a rate based on
years of service, with full vesting after five years.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company values the financial instruments as required by SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The following methods
and assumptions were used to estimate the fair value of each class of
financial instrument:
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and
Accrued Expenses. The carrying amount of these items are a reasonable
estimate of their fair values because of the short maturity of these
instruments.
Long-term Debt including Current Maturities. The fair value of the
Company's long-term debt is based on the quoted market price on the
subordinated notes and on current interest rates that are available to the
Company for debt not quoted on an exchange. At December 31, 1995 the
Company had a carrying amount of long-term debt of $145,986 and an
estimated fair value of $148,008.
19. STOCK OPTION PLAN
In October 1994, the Board of Directors resolved to adopt a stock option
plan for the issuance of 190,909 shares of common stock. Although the terms of
the stock option plan have not been finalized, the Company has agreed to grant
options to certain key employees of the Company under certain circumstances.
F-19
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
20. RELATED PARTIES TRANSACTIONS
The Company advanced funds to three of its officers totaling $1,206 during
1993 and $491 during 1994. These amounts are evidenced by demand notes with
interest at rates ranging from 1.0% to 1.5% over prime and have been recorded
together with accrued interest as assets held for sale. These advances were
repaid on October 17, 1994, as part of the Recapitalization.
During 1993, the Company paid $1,000 as a brokerage fee to a corporation
controlled by the sole Stockholder and chief executive officer of the Company
pursuant to a brokerage fee agreement in connection with the sale of certain
assets and rights of Meteor Incorporated, a former subsidiary of the Company,
to unrelated third parties.
During 1993, the Estate transferred real property to the Company in lieu of
payment for advances made for the Estate for administration expenses and taxes
totaling $150. The real property was sold on October 1, 1993, to an unrelated
party resulting in a loss of approximately $115 which was reflected in the
consolidated statement of operations in 1993.
In connection with the Recapitalization, certain members of the Company's
management were granted restricted pay-in-kind preferred stock and restricted
common stock of $1,022 and $478, respectively. Compensation associated with
the grant of these shares was measured by the difference between the aggregate
price of the restricted shares and the aggregate fair value of the shares on
the measurement date. Such compensation is being recognized ratably over the
six-year period for which services must be performed in order for these
individuals to receive the shares without restriction. The Company is
recognizing compensation expense over six years commencing October 17, 1994,
which is the date the Company effected the Recapitalization and granted the
restricted shares. Compensation expense related to these shares for the period
ended December 31, 1994 and December 31, 1995 totaled $52 and $250,
respectively.
In connection with the Recapitalization, on October 17, 1994, certain
designees of Kelso acquired shares of the Company's Common Stock. The proceeds
from the sale of these shares were received subsequent to December 31, 1994
and, accordingly, were included in the accompanying 1994 balance sheet as an
increase (stock subscriptions receivable) in deficiency in assets.
During 1994 and 1995, certain officers of the Company acquired shares of
both the Company's common and preferred stock. These shares are included in
the accompanying balance sheets as redeemable equity securities and are shown
net of issuance costs.
Kelso provides financial advisory services to the Company for an annual fee.
Payment for these services and reimbursement of expenses totalled $172 in 1994
and $308 in 1995.
21. PREFERRED STOCK
The PIK Preferred Stock is entitled to cumulative dividends, payable solely
in additional shares of PIK Preferred Stock, at an estimated rate of 25% per
annum when, as and if declared by the Board of Directors of the Company.
Cumulative dividends on preferred shares that have not been declared since The
Recapitalization total approximately 1.1 million shares of preferred stock.
The PIK Preferred Stock has an aggregate liquidation preference of
approximately $37.5 million plus the liquidation preference of additional
shares of PIK Preferred Stock issued in payment of dividends on the PIK
Preferred Stock and the liquidation preference in respect of cumulative
undeclared dividends, whether or not declared. The PIK Preferred Stock is
redeemable at the option
F-20
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
of the Company in whole or in part at any time for a redemption price equal to
the liquidation preference thereof plus all cumulative undeclared dividends,
whether or not declared, to the date of redemption. In addition, the PIK
Preferred Stock has no voting rights, except that the PIK Preferred Stock is
entitled to vote, as a separate class, in the event of any merger,
consolidation, or sale of all or substantially all of the Company's assets, any
amendment to the Company's Restated Certificate of Incorporation or any
authorization or issuance by the Company of capital stock ranking senior to or
pari passu with the PIK Preferred Stock with respect to dividends or
liquidation preference or securities convertible into or exchangeable or
exercisable for such capital stock.
22. QUARTERLY INFORMATION (UNAUDITED)
Summarized quarterly financial data for 1995 and 1994 are set forth below:
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL
-------- ------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
1995
Net Revenues................ $33,608 $36,526 $32,902 $33,263 $136,299
Gross Profit................ 16,489 20,593 18,674 19,561 75,317
Income from continuing
operations before provision
for income taxes and
cumulative effect of
accounting change.......... 286 4,572 2,467 4,731 12,056
Net Income.................. 175 2,789 1,504 3,028 7,496
1994
Net Revenue................. 31,328 29,915 28,865 28,452 118,560
Gross Profit................ 15,896 17,203 15,985 16,991 66,075
Income from continuing
operations before provision
for income taxes and
cumulative effect of
accounting change.......... 5,065 5,497 4,801 1,753 17,116
Net Income.................. 2,786 3,603 2,064 1,293 9,746
</TABLE>
F-21
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1995 AND MARCH 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ 6,987 $ 678
Accounts receivable, less an allowance for doubtful
accounts of $1,263 and $1,824 in 1995 and 1996,
respectively........................................ 19,708 22,744
Inventories.......................................... 9,814 7,943
Prepaid and other current assets..................... 1,382 1,283
--------- ---------
Total current assets................................. 37,891 32,648
PROPERTY AND EQUIPMENT, net........................... 15,334 15,379
MAILING LIST RIGHTS................................... 90 60
DEFERRED CUSTOMER ACQUISITION COSTS................... 19,485 22,364
DEFERRED DEBT ISSUANCE COSTS, less accumulated
amortization of $2,016 and $2,433 in 1995 and 1996,
respectively......................................... 8,853 8,436
OTHER ASSETS.......................................... 1,207 1,152
--------- ---------
TOTAL................................................ $ 82,860 $ 80,039
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt.................... $ 3,421 $ 4,796
Current portion of capital lease obligations......... 1,402 1,461
Accounts payable..................................... 3,948 6,655
Accrued expenses and other current liabilities....... 5,811 4,606
Accrued interest..................................... 4,858 2,355
Accrued coupon redemption costs...................... 6,117 6,071
Deferred income taxes................................ 6,540 6,786
--------- ---------
Total current liabilities............................ 32,097 32,730
LONG-TERM DEBT, Less current portion.................. 142,565 137,631
CAPITAL LEASE OBLIGATIONS, Less current portion....... 3,705 3,642
ACCRUED COUPON REDEMPTION COSTS....................... 521 517
DEFERRED INCOME TAXES................................. 6,508 6,753
--------- ---------
Total liabilities.................................... 185,396 181,273
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
REDEEMABLE EQUITY SECURITIES.......................... 332 332
--------- ---------
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
Accumulated deficit.................................. (155,588) (154,655)
Restricted stock..................................... (1,499) (1,134)
Foreign currency translation adjustment.............. 2 6
--------- ---------
Stockholders' deficiency............................. (102,868) (101,566)
--------- ---------
TOTAL................................................ $ 82,860 $ 80,039
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
F-22
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 1995 AND MARCH 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
NET REVENUES.................................................. $33,608 $40,099
------- -------
COSTS AND EXPENSES:
Cost of sales............................................... 17,119 20,912
Administrative and general expenses......................... 2,659 3,264
Provision for doubtful accounts............................. 2,384 3,015
Marketing costs............................................. 3,473 4,606
Coupon redemption costs..................................... 2,001 1,480
Depreciation and amortization............................... 624 658
Other (income) expenses..................................... (1) 29
------- -------
OPERATING INCOME.............................................. 5,349 6,135
Interest income............................................. 63 73
Interest expense............................................ 5,126 4,678
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES...................... 286 1,530
PROVISION FOR INCOME TAXES.................................... 111 597
------- -------
NET INCOME.................................................... $ 175 $ 933
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
F-23
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTH PERIOD ENDED MARCH 31, 1995 AND MARCH 31, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income................................................. $ 175 $ 933
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................ 624 658
Amortization of debt issue costs and discounts........... 567 462
Other.................................................... (4) 65
Amortization of deferred customer acquisition costs...... 2,971 3,950
(Increase) decrease in operating assets:
Accounts receivable.................................... (2,066) (3,036)
Inventories............................................ 1,211 1,871
Payments for deferred customer acquisition costs....... (5,923) (6,799)
Prepaid and other current assets....................... (162) 99
Other assets........................................... 260 (4)
Increase (decrease) in operating Liabilities:
Accounts payable, accrued expenses and other liabili-
ties.................................................. 2,186 (695)
Deferred income taxes.................................. 106 491
Accrued coupon redemption costs........................ 316 (50)
------- -------
Net cash (used in) provided by operating activities.. 261 (2,055)
------- -------
INVESTING ACTIVITIES:
Acquisitions on property and equipment..................... (114) (310)
Proceeds from sale of property and equipment............... 1 2
------- -------
Net cash used in investing activities................ (113) (308)
------- -------
FINANCING ACTIVITIES:
Payments on bank and other financing....................... (31) (3,604)
Payments on capital leases................................. (286) (342)
Proceeds from par value of restricted stock................ 1 --
Proceeds from stock subscriptions.......................... 125 --
------- -------
Net cash used in financing activities................ (191) (3,946)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................... (43) (6,309)
Cash and cash equivalents at beginning of year............... 3,891 6,987
------- -------
Cash and cash equivalents at end of period................... $ 3,848 $ 678
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................. $ 4,355 $ 6,720
======= =======
Income taxes............................................. $ 5 $ 235
======= =======
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations of $1,085 and $338 were entered into for new
equipment during the three month periods ended 1995 and 1996, respectively.
See notes to condensed consolidated financial statements.
F-24
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 March 31, 1996 and the results of operations and cash
flows for the three month periods ended March 31, 1995 and March 31, 1996.
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.
NOTE 2. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ---------
<S> <C> <C>
Raw materials....................................... $ 787 $ 592
Work-in-process..................................... 1,602 2,265
Finished goods...................................... 5,763 3,316
Promotional and packing material.................... 1,662 1,770
------ ------
$9,814 $7,943
====== ======
</TABLE>
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.
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.
F-25
<PAGE>
LOGO
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
(ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS)
PROSPECTUS (Subject to Completion)
Issued , 1996
Shares
LOGO
Hosiery Corporation of America, Inc.
COMMON STOCK
-----------
OF THE SHARES OF COMMON STOCK BEING OFFERED, SHARES ARE BEING OFFERED
INITIALLY OUTSIDE THE UNITED STATES AND CANADA BY THE INTERNATIONAL
UNDERWRITERS AND SHARES ARE BEING OFFERED INITIALLY IN THE UNITED
STATES AND CANADA BY THE U.S. UNDERWRITERS. SEE "UNDERWRITERS." ALL OF
THE SHARES OF COMMON STOCK BEING OFFERED ARE BEING SOLD BY THE
COMPANY. PRIOR TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET
FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY ESTIMATED
THAT THE INITIAL PUBLIC OFFERING PRICE PER SHARE WILL BE
BETWEEN $ AND $ . SEE "UNDERWRITERS" FOR A DISCUSSION
OF THE FACTORS TO BE CONSIDERED IN DETERMINING THE
INITIAL PUBLIC OFFERING PRICE.
-----------
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS
PRICE TO DISCOUNTS AND TO
PUBLIC COMMISSIONS(1) COMPANY(2)
-------- -------------- ----------
<S> <C> <C> <C>
Per Share.................................... $ $ $
Total(3)..................................... $ $ $
</TABLE>
- -----
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the U.S. Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
additional shares of Common Stock at the Price to Public less
Underwriting Discounts and Commissions for the purpose of covering over-
allotments, if any. If the U.S. Underwriters exercise such option in
full, the total Price to Public, Underwriting Discounts and Commissions
and Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriters."
-----------
The Shares are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Debevoise & Plimpton, counsel for the Underwriters. It is expected that the
delivery of the Shares will be made on or about , 1996 at the offices of
Morgan Stanley & Co. Incorporated, New York, New York, against payment therefor
in next day funds.
-----------
MORGAN STANLEY & CO.
International
BEAR, STEARNS INTERNATIONAL LIMITED
BANKERS TRUST INTERNATIONAL PLC
DONALDSON, LUFKIN & JENRETTE
Securities Corporation
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a list of estimated expenses in connection with the
issuance and distribution of the securities being registered:
<TABLE>
<S> <C>
SEC registration fee................................................ $59,483
Printing and engraving costs........................................ *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
Stock exchange listing fee.......................................... *
NASD filing fee..................................................... 17,750
Blue Sky fees and expenses.......................................... *
Miscellaneous....................................................... *
-------
Total............................................................. $ *
=======
</TABLE>
- --------
*To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subsection (a) of Section 145 of the General Corporation Law of the State of
Delaware (the "DGCL") empowers a corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of
the corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of
the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees) judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that he acted in any of
the capacities set forth above, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted under similar standards, except
that no indemnification may be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the Court of Chancery or the
court in which action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 145 further provides that to the extent that a director or officer
of a corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
Section 145, or in the defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith; that indemnification
provided by, or granted pursuant to, Section 145 shall not be deemed exclusive
of any other rights to which those seeking indemnification may be entitled;
and empowers the corporation to purchase and maintain insurance on behalf of
any person who is or was a director or officer of the corporation, or is or
was serving at the request of the corporation as a director, officer, employee
or against another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against him and incurred by him in
any such capacity, or
II-1
<PAGE>
arising out of his status as such whether or not the corporation would have
the power to indemnify him against such liabilities under Section 145.
As permitted by the DGCL, the Restated Certificate of Incorporation of the
Company, a copy of which is filed as Exhibit 3.1 to this Registration
Statement, eliminates all liability of the Company's directors for monetary
damages for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit.
The By-Laws of the Company, a copy of which is filed as Exhibit 3.4 to this
Registration Statement, provides the Company with the authority to indemnify
directors, officers and agents of the Company to the full extent allowed by
the laws of the State of Delaware.
The Exchange and Registration Rights Agreement, a copy of which is filed as
Exhibit 4.3 to this Registration Statement, provides that the holders of the
Notes will indemnify and hold harmless the Registrant, its directors and
officers and each person, if any, who controls the Registrant within the
meanings of Section 15 of the Securities Act or Section 20 of the Exchange Act
from and against certain specified losses, liabilities, claims, damages and
expenses caused by any untrue statements or omissions in the Shelf
Registration Statement based upon information furnished in writing to the
Registrant by such holder expressly for use therein.
The Company maintains directors' and officers' liability insurance for the
directors and officers of the Company through Federal Insurance Company up to
$1,000,000 for each loss and for each policy period.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On October 17, 1994, pursuant to the Recapitalization Agreement (see Exhibit
2.1 to this Registration Statement), the Company repurchased from Murphy all
of its then outstanding shares of Old Preferred Stock and a substantial
portion of its outstanding shares of Common Stock (the "Repurchase"). In order
to finance the Repurchase, in part, the Company on October 17, 1994 sold (i)
70,000 units consisting of $70,000,000 aggregate principal amount of the Old
Notes and 70,000 shares of Class A Common Stock, par value $.01 per share (the
"Units") for $69,146,000 less aggregate initial purchaser discount and
commissions of $2,420,110, (ii) an aggregate 1,000,660 shares of Common Stock
to affiliates of Kelso for $16,931,167, (iii) an aggregate of 2,826 shares of
Common Stock to certain members of management of the Company for $47,816, (iv)
5,652 shares of Class A Common Stock to designees of Kelso for $95,632, and
(v) an aggregate 3,647,820 shares of PIK Preferred Stock to affiliates of
Kelso and designees of Kelso for $36,478,200. In addition, the Company granted
to certain members of management of the Company an aggregate 28,262 shares of
Common Stock and an aggregate 102,180 shares of PIK Preferred Stock pursuant
to Management Stock Purchase and Restricted Stock Award Agreements (see
Exhibits 2.6 and 2.7 to this Registration Statement). Of the $69,146,000
purchase price for the Units, $67,691,600 is attributable to the Old Notes and
$1,184,400 to the shares of Class A Common Stock. In August 1995, the Company
sold an aggregate of 3,106 shares of Common Stock and 11,237 shares of PIK
Preferred Stock to certain members of management for aggregate consideration
of $165,000. In October 1995, the Company sold 942 shares of Common Stock and
3,406 shares of PIK Preferred Stock to Mr. Henry for aggregate consideration
of $49,999. In 1996, the Company issued an aggregate of 4,434 shares of Common
Stock to Messrs. Biagini and Lengers in lieu of cash compensation.
The transactions described above were exempt from the registration
requirements of the Securities Act in reliance on Section 4(2) of the
Securities Act on the basis that such transactions did not involve a public
offering.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*1.1 Form of U.S. Underwriting Agreement.
*1.2 Form of International Underwriting Agreement.
2.1 Recapitalization and Stock Purchase Agreement, dated as of July 19,
1994 among the Company, Joseph A. Murphy and HCA Holdings, Inc.
(incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 33-87393).
2.2 First Amendment to Recapitalization and Stock Purchase Agreement,
dated as of October 4, 1994 (incorporated by reference to the
Company's Registration Statement on Form S-1, File No. 33-87393).
2.3 Kelso Investment Associates V, L.P. letter agreement, dated October
17, 1994 to purchase securities of the Company (incorporated by
reference to the Company's Registration Statement on Form S-1, File
No. 33-87393).
2.4 Kelso Equity Partners V, L.P. letter agreement, dated October 17, 1994
to purchase securities of the Company (incorporated by reference to
the Company's Registration Statement on Form S-1, File No. 33-87393).
2.5 Form of Stock Subscription Agreement, dated as of October 17, 1994
between the Company and certain stockholders of the Company
(incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 33-87393).
2.6 Management Stock Purchase and Restricted Stock Award Agreement, dated
as of October 17, 1994, between the Company and John F. Biagini
(incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 33-87393).
2.7 Management Stock Purchase and Restricted Stock Award Agreement, dated
as of October 17, 1994, between the Company and Hans Lengers
(incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 33-87393).
2.8 Escrow Agreement, dated as of October 17, 1994, among the Company,
Joseph A. Murphy and Midlantic Bank, N.A., as Escrow Agent
(incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 33-87393).
2.9 Pledge Agreement, dated as of October 17, 1994, between Joseph A.
Murphy, as Pledgor, and the Company, as Pledgee (incorporated by
reference to the Company's Registration Statement on Form S-1, File
No. 33-87393).
2.10 Indemnity Agreement, dated as of October 17, 1994, between Joseph A.
Murphy and the Company (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87393).
2.11 Form of Seventh Amendment to Recapitalization and Stock Purchase
Agreement, dated as of April 12, 1995, and First Amendment to Escrow
Agreement, dated as of April 12, 1995, as a part thereof (incorporated
by reference to the Company's Registration Statement on Form S-1, File
No. 33-87393).
*3.1 Amended and Restated Certificate of Incorporation of the Company.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.2 By-Laws of the Company (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87393).
4.1 Indenture, dated as of October 17, 1994, between the Company and
United States Trust Company of New York, as Trustee (incorporated by
reference to the Company's Registration Statement on Form S-1, File
No. 33-87393).
4.2 Form of New Notes (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87393).
4.3 Exchange and Registration Rights Agreement, dated as of October 17,
1994, among the Company, Bear Stearns & Co. Inc. and BT Securities
Corporation (incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87393).
*4.4 Specimen Common Stock Certificate.
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom.
9.1 Stockholders' Agreement, dated as of October 17, 1994, among the
Company, Kelso Investment Associates V, L.P., Kelso Equity Partners V,
L.P., Joseph A. Murphy, John F. Biagini, Hans Lengers and such other
stockholders who become parties to such agreement pursuant to such
agreement (incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87393).
9.2 Form of Letter Agreement between the Company and certain stockholders
of the Company dated October 17, 1994 relating to the Stockholders'
Agreement (incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87393).
10.1 Credit Agreement, dated as of October 17, 1994, among the Company,
National Westminster Bank PLC, as Co-Agent, and the financial
institutions listed on the signature pages thereto (incorporated by
reference to the Company's Registration Statement on Form S-1, File
No. 33-87393).
10.2 Executive Employment Agreement between Hosiery Corporation of America,
Inc. and Arthur C. Hughes, dated as of August 3, 1992 (incorporated by
reference to the Company's Registration Statement on Form S-1, File
No. 33-87393).
10.3 Employment Agreement between U.S. Textile Corp. and Hans Lengers,
dated as of August 29, 1980, and an Amendment thereto among U.S.
Textile Corp., the Company and Hans Lengers, dated as of September 12,
1994 (incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87393).
10.4 Executive Employment Agreement between the Company and Robert J.
Mooney, dated as of September 16, 1993 (incorporated by reference to
the Company's Registration Statement on Form S-1, File No. 33-87393).
10.5 Letter Agreement dated October 17, 1994 between the Company and Kelso
& Company, Inc. regarding financial advisory and other services
(incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 33-87393).
10.6 Purchase Agreement, dated as of October 7, 1994 among the Company,
Bear, Stearns & Co. Inc. and BT Securities Corporation (incorporated
by reference to the Company's Registration Statement on Form S-1, File
No. 33-87393).
10.7 Mailing List Contracts (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87393).
10.8 Executive Employment Agreement between the Company and Robert M.
Henry, dated as of August 7, 1995 (incorporated by reference to the
Company's Form 10-K for the fiscal year ended December 31, 1995).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*10.9 Exchange Agreement between the Company and Joseph A. Murphy dated as
of July , 1996.
21.1 List of Subsidiaries of the Company (incorporated by reference to the
Company's Registration Statement on Form S-1, File No. 33-87393).
23.1 Consent of Independent Auditors, Deloitte & Touche LLP.
*23.2 Consent of Skadden, Arps, Slate, Meagher & Flom (included in Exhibit
5.1).
24.1 Power of Attorney (included in signature page).
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules
<TABLE>
<S> <C>
Independent Auditors' Report......................................... S-1
Schedule I--Valuation and Qualifying Accounts--For the years ended
December 31, 1993, 1994 and 1995.................................... S-2
</TABLE>
All other Financial Statement Schedules have been omitted because they are
not applicable or not required or the required information is included in the
Consolidated Financial Statements or notes thereto.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such officer, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED IN BUCKS COUNTY,
COMMONWEALTH OF PENNSYLVANIA, ON THE 28TH DAY OF JUNE, 1996.
Hosiery Corporation of America
/s/ John F. Biagini
By: _________________________________
JOHN F. BIAGINI CHAIRMAN OF THE
BOARD, PRESIDENT AND CHIEF
EXECUTIVE OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints each of Arthur C. Hughes and Robert J. Mooney
his true and lawful attorney-in-fact, each with full power of substitution and
revocation, for him and in his name, place and stead, in any and all capacities
(including his capacity as a director and/or officer of Hosiery Corporation of
America, Inc.), to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and any registration statement
relating to the same offering as this Registration Statement that is to be
effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933,
and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto each such attorney-in-fact and agent, full power and authority to do and
perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as such person might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents or
any of them, or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
/s/ John F. Biagini Chairman of the June 28, 1996
- ------------------------------------- Board, President,
JOHN F. BIAGINI Chief Executive
Officer and
Director (principal
executive officer)
/s/ Arthur C. Hughes Vice President and June 28, 1996
- ------------------------------------- Chief Financial
ARTHUR C. HUGHES Officer (principal
accounting and
financial officer)
II-6
<PAGE>
SIGNATURE TITLE DATE
/s/ Michael B. Goldberg Director June 28, 1996
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MICHAEL B. GOLDBERG
/s/ Frank K. Bynum, Jr. Director June 28, 1996
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FRANK K. BYNUM, JR.
Director June , 1996
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JOSEPH A. MURPHY
Director June , 1996
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HANS LENGERS
II-7
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Hosiery Corporation of America, Inc.
Bensalem, Pennsylvania
We have audited the consolidated financial statements of Hosiery Corporation
of America, Inc., and its subsidiaries (the "Company") as of December 31, 1995
and 1994, and for each of the three years in the period ended December 31,
1995, and have issued our report thereon dated February 27, 1996. Our audits
also included the consolidated financial statement schedule of the Company
referred to in Item 8. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 27, 1996
S-1
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SCHEDULE I
HOSIERY CORPORATION OF AMERICA, INC.
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE OF
BEGINNING OF COSTS AND AMOUNTS END OF
PERIOD EXPENSES WRITTEN OFF PERIOD
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Allowance for Uncollectible
Amounts....................... $ 923 $7,788 $7,448 $1,263
====== ====== ====== ======
YEAR ENDED DECEMBER 31, 1994
Allowance for Uncollectible
Accounts...................... $1,060 $5,643 $5,780 $ 923
====== ====== ====== ======
YEAR ENDED DECEMBER 31, 1993
Allowance for Uncollectible
Accounts...................... $ 583 $5,097 $4,620 $1,060
====== ====== ====== ======
</TABLE>
S-2
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
*1.1 Form of U.S. Underwriting Agreement.
*1.2 Form of International Underwriting Agreement.
2.1 Recapitalization and Stock Purchase Agreement, dated as of July
19, 1994 among the Company, Joseph A. Murphy and HCA Holdings,
Inc. (incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87393).
2.2 First Amendment to Recapitalization and Stock Purchase
Agreement, dated as of October 4, 1994 (incorporated by
reference to the Company's Registration Statement on Form S-1,
File No. 33-87393).
2.3 Kelso Investment Associates V, L.P. letter agreement, dated
October 17, 1994 to purchase securities of the Company
(incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87393).
2.4 Kelso Equity Partners V, L.P. letter agreement, dated October
17, 1994 to purchase securities of the Company (incorporated by
reference to the Company's Registration Statement on Form S-1,
File No. 33-87393).
2.5 Form of Stock Subscription Agreement, dated as of October 17,
1994 between the Company and certain stockholders of the
Company (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87393).
2.6 Management Stock Purchase and Restricted Stock Award Agreement,
dated as of October 17, 1994, between the Company and John F.
Biagini (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87393).
2.7 Management Stock Purchase and Restricted Stock Award Agreement,
dated as of October 17, 1994, between the Company and Hans
Lengers (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87393).
2.8 Escrow Agreement, dated as of October 17, 1994, among the
Company, Joseph A. Murphy and Midlantic Bank, N.A., as Escrow
Agent (incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87393).
2.9 Pledge Agreement, dated as of October 17, 1994, between Joseph
A. Murphy, as Pledgor, and the Company, as Pledgee
(incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87393).
2.10 Indemnity Agreement, dated as of October 17, 1994, between
Joseph A. Murphy and the Company (incorporated by reference to
the Company's Registration Statement on Form S-1, File No. 33-
87393).
2.11 Form of Seventh Amendment to Recapitalization and Stock
Purchase Agreement, dated as of April 12, 1995, and First
Amendment to Escrow Agreement, dated as of April 12, 1995, as a
part thereof (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87393).
*3.1 Amended and Restated Certificate of Incorporation of the
Company.
3.2 By-Laws of the Company (incorporated by reference to the
Company's Registration Statement on Form S-1, File No. 33-
87393).
4.1 Indenture, dated as of October 17, 1994, between the Company
and United States Trust Company of New York, as Trustee
(incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87393).
4.2 Form of New Notes (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87393).
4.3 Exchange and Registration Rights Agreement, dated as of October
17, 1994, among the Company, Bear Stearns & Co. Inc. and BT
Securities Corporation (incorporated by reference to the
Company's Registration Statement on Form S-1, File No. 33-
87393).
*4.4 Specimen Common Stock Certificate.
</TABLE>
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<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
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<C> <S> <C>
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom.
9.1 Stockholders' Agreement, dated as of October 17, 1994, among
the Company, Kelso Investment Associates V., L.P., Kelso Equity
Partners V., L.P., Joseph A. Murphy, John F. Biagini, Hans
Lengers and such other stockholders who become parties to such
agreement pursuant to such agreement (incorporated by reference
to the Company's Registration Statement on Form S-1, File No.
33-87393).
9.2 Form of Letter Agreement between the Company and certain
stockholders of the Company dated October 17, 1994 relating to
the Stockholders' Agreement (incorporated by reference to the
Company's Registration Statement on Form S-1, File No. 33-
87393).
10.1 Credit Agreement, dated as of October 17, 1994, among the
Company, National Westminster Bank PLC, as Co-Agent, and the
financial institutions listed on the signature pages thereto
(incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87393).
10.2 Executive Employment Agreement between Hosiery Corporation of
America, Inc. and Arthur C. Hughes, dated as of August 3, 1992
(incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87393).
10.3 Employment Agreement between U.S. Textile Corp. and Hans
Lengers, dated as of August 29, 1980, and an Amendment thereto
among U.S. Textile Corp., the Company and Hans Lengers, dated
as of September 12, 1994 (incorporated by reference to the
Company's Registration Statement on Form S-1, File No. 33-
87393).
10.4 Executive Employment Agreement between the Company and Robert
J. Mooney, dated as of September 16, 1993 (incorporated by
reference to the Company's Registration Statement on Form S-1,
File No. 33-87393).
10.5 Letter Agreement dated October 17, 1994 between the Company and
Kelso & Company, Inc. regarding financial advisory and other
services (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87393).
10.6 Purchase Agreement, dated as of October 7, 1994 among the
Company, Bear, Stearns & Co. Inc. and BT Securities Corporation
(incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87393).
10.7 Mailing List Contracts (incorporated by reference to the
Company's Registration Statement on Form S-1, File No. 33-
87393).
10.8 Executive Employment Agreement between the Company and Robert
M. Henry, dated as of August 7, 1995 (incorporated by reference
to the Company's Form 10-K for the fiscal year ended December
31, 1995).
*10.9 Exchange Agreement between the Company and Joseph A. Murphy
dated as of July , 1996.
21.1 List of Subsidiaries of the Company (incorporated by reference
to the Company's Registration Statement on Form S-1, File No.
33-87393).
23.1 Consent of Independent Auditors, Deloitte & Touche LLP.
*23.2 Consent of Skadden, Arps, Slate, Meagher & Flom (included in
Exhibit 5.1).
24.1 Power of Attorney (included in signature page).
</TABLE>
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* To be filed by amendment.
<PAGE>
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors
Hosiery Corporation of America
Bensalem, Pennsylvania
We consent to the use in this Registration Statement of Hosiery Corporation
of America, Inc. on Form S-1 of our report dated February 27, 1996, appearing
in the Prospectus, which is a part of this Registration Statement, and our
report dated February 27, 1996 relating to the financial statement schedule
included elsewhere in this Registration Statement.
We also consent to the reference to us under the headings "Selected
Consolidated Financial and Other Data" and "Experts" in such Prospectus.
Deloitte & Touche llp
Philadelphia, Pennsylvania
June 28, 1996
