SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _______ to ________
Commission File No. 33-87392
HOSIERY CORPORATION OF AMERICA, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-0782950
------------------------------ ----------------------------------
(State or other jurisdiction of (I.R.S.Employer Identification No.)
incorporation or organization)
3369 Progress Drive
Bensalem, Pennsylvania 19020
----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 244-1777
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes ____X____ No _______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 22, 1996
------------------------- ---------------------------------
Voting 1,328,396
Class A, non-voting 75,652
<PAGE>
INDEX PAGE
- ----- ----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Operations
Three month periods ended March 31, 1996 and March 31, 1995 4
Condensed Consolidated Statements of Cash Flows
Three month periods ended March 31, 1996 and March 31, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7-10
PART II - OTHER INFORMATION 11
- ---------------------------
SIGNATURES 12
2
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
- ------- -------------------------------------------
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1996 AND DECEMBER 31, 1995
(Dollars in thousands, except per share data)
<CAPTION>
ASSETS March 31, 1996 December 31, 1995
--------------- -----------------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents .......................... $ 678 $ 6,987
Accounts receivable, less an allowance for doubtful
accounts of $1,824 and $1,263 in 1996 and 1995,
respectively ...................................... 22,744 19,708
Inventories ........................................ 7,943 9,814
Prepaid and other current assets ................... 1,283 1,382
-------------- --------------
Total current assets ........................... 32,648 37,891
PROPERTY AND EQUIPMENT, net ............................. 15,379 15,334
MAILING LIST RIGHTS ..................................... 60 90
DEFERRED CUSTOMER ACQUISITION COSTS...................... 22,364 19,485
DEFERRED DEBT ISSUANCE COSTS, less accumulated
amortization of $2,433 and $2,016 in 1996 and 1995,
respectively ....................................... 8,436 8,853
OTHER ASSETS............................................. 1,152 1,207
-------------- --------------
TOTAL ................................................... $ 80,039 $ 82,860
-------------- --------------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt .................. $ 4,796 $ 3,421
Current portion of capital lease obligations........ 1,461 1,402
Accounts payable ................................... 6,655 3,948
Accrued expenses and other current liabilities ..... 4,606 5,811
Accrued interest ................................... 2,355 4,858
Accrued coupon redemption costs .................... 6,071 6,117
Deferred income taxes .............................. 6,786 6,540
-------------- --------------
Total current liabilities ..................... 32,730 32,097
LONG-TERM DEBT, Less current portion .................... 137,631 142,565
CAPITAL LEASE OBLIGATIONS, Less current portion.......... 3,642 3,705
ACCRUED COUPON REDEMPTION COSTS ......................... 517 521
DEFERRED INCOME TAXES ................................... 6,753 6,508
-------------- --------------
Total liabilities ............................. 181,273 185,396
-------------- --------------
COMMITMENTS AND CONTINGENT LIABILITIES
REEDEMABLE 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................................. (154,655) (155,588)
Restricted stock ................................... (1,134) (1,499)
Foreign currency translation adjustment............. 6 2
-------------- --------------
Stockholders' deficiency.......................... (101,566) (102,868)
-------------- --------------
TOTAL.................................................... $ 80,039 $ 82,860
============== ==============
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 31, 1996 AND MARCH 31, 1995
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
NET REVENUES............................................ $ 40,099 $ 33,608
-------- --------
COSTS AND EXPENSES:
Cost of sales...................................... 20,912 17,119
Administrative and general expenses................ 3,264 2,659
Provision for doubtful accounts.................... 3,015 2,384
Marketing costs.................................... 4,606 3,473
Coupon redemption costs............................ 1,480 2,001
Depreciation and amortization...................... 658 624
Interest expense................................... 4,678 5,126
Other income....................................... (44) (64)
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES................ 1,530 286
PROVISION FOR INCOME TAXES.............................. 597 111
------- -------
NET INCOME.............................................. $ 933 $ 175
======== ========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTH PERIODS ENDED MARCH 31, 1996 AND MARCH 31, 1995
(Dollars in thousands)
(Unaudited)
<CAPTION>
1996 1995
---- ----
OPERATING ACTIVITIES:
<S> <C> <C>
Net income.................................................. $ 933 $ 175
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization............................ 658 624
Amortization of debt issue costs and discounts........... 462 567
Other.................................................... 65 (4)
Amortization of deferred customer acquisition costs...... 3,950 2,971
(Increase) decrease in operating assets:
Accounts receivable................................ (3,036) (2,066)
Inventories........................................ 1,871 1,211
Payments for deferred customer acquisition costs... (6,799) (5,923)
Prepaid and other current assets................... 99 (162)
Other assets....................................... (4) 260
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and
other liabilities................................. (695) 2,186
Deferred income taxes.............................. 491 106
Accrued coupon redemption costs.................... (50) 316
----------- ------------
Net cash (used in) provided by operating
activities.................................. (2,055) 261
----------- ------------
INVESTING ACTIVITIES:
Acquisitions of property and equipment...................... (310) (114)
Proceeds from sale of property and equipment................ 2 1
----------- ------------
Net cash used in investing activities........ (308) (113)
----------- ------------
FINANCING ACTIVITIES:
Payments on bank and other financing........................ (3,604) (31)
Payments on capital leases.................................. (342) (286)
Proceeds from par value of restricted stock................. - 1
Proceeds from stock subscription............................ - 125
----------- ------------
Net cash used in financing activities........ (3,946) (191)
----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS.............. (6,309) (43)
Cash and cash equivalents at beginning of year................. 6,987 3,891
------------ ------------
Cash and cash equivalents at end of period..................... $ 678 $ 3,848
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................. $ 6,720 $ 4,355
=========== ===========
Income taxes............................................. $ 235 $ 5
=========== ===========
<FN>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations of $338 and $1,085 were entered
into for new equipment during the three month periods
ended 1996 and 1995, respectively.
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
<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, 1996 and March 31, 1995.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K as filed with the Securities and Exchange Commission on March 26, 1996.
NOTE 2. Inventories
March 31, December 31,
1996 1995
---- ----
Raw materials............................ $ 592 $ 787
Work-in-process.......................... 2,265 1,602
Finished goods........................... 3,316 5,763
Promotional and packing material......... 1,770 1,662
------ -------
$7,943 $9,814
====== ======
NOTE 3. Commitments and Contingencies
The Company has continuing obligations with certain members of management
pursuant to previously signed employment agreements.
NOTE 4. Accounting for Stock Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," which was effective for the Company beginning January 1, 1996.
SFAS No. 123 requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require) compensation
cost to be measured based on the fair value of the equity instrument awarded.
Companies are permitted, however, to continue to apply APB Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to its
stock based compensation awards to employees and will disclose the required pro
forma effect on net income in the fiscal year end December 31, 1996 financial
statements.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations Three Month Period Ended March 31, 1996
------------------------------------------------------------------
Results of Operations
- ---------------------
The following table sets forth certain income statement data for the Company
expressed as a percentage of net revenues:
Three Month Periods Ended
-------------------------
March 31, March 31,
1996 1995
---- ----
Net revenues ....................................... 100.0% 100.0%
Cost of sales ............................. 52.2 50.9
Administrative and general expenses ....... 8.1 7.9
Provision for doubtful accounts ........... 7.5 7.1
Marketing costs ........................... 11.5 10.3
Coupon redemption costs ................... 3.7 6.0
Depreciation and amortization ............. 1.6 1.9
--- ---
Subtotal ......................... 84.6 84.1
---- ----
Income before interest expense, other
income and provision for income taxes ........... 15.4% 15.9%
==== ====
7
<PAGE>
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 ($0.9 million) and increased volume ($3.4 million).
In the first quarter of 1996, Hosiery Corporation began test marketing in
Europe.
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
uncollectable 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.
8
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company's cash requirements arise principally from the need to finance new
customer acquisitions, capital expenditures, debt repayment and other working
capital requirements. The Company expects to finance these cash requirements
from internally generated funds and/or its Revolving Credit Facility.
Working capital decreased to a deficit of ($0.1) million at March 31, 1996 from
$5.8 million at December 31, 1995. Increased accounts payable, marketing
expenses, current portion of long-term debt and a decline in inventory and cash,
offset by an increase in accounts receivable, account for the decrease.
Capital expenditures were $0.6 million and $1.2 million for the three month
periods ended March 31, 1996 and March 31, 1995, respectively. A portion of the
expenditures in 1996 were financed through the assumption of capital leases.
Cash flows (used in) provided by operations for the three month periods ended
March 31, 1996 and March 31, 1995 of ($2.1) million and $0.3 million,
respectively, were derived principally from net income of $0.9 million and $0.2
million in 1996 and 1995, respectively, adjusted for non-cash expenses for
depreciation and amortization, including amortization of deferred customer
acquisition costs of $5.1 million and $4.2 million in 1996 and 1995,
respectively, offset by changes in operating assets and liabilities of $8.1
million and $4.1 million in 1996 and 1995, respectively. The changes in
operating assets and liabilities included increases in accounts receivable of
$3.0 million and $2.1 million in 1996 and 1995, respectively, reductions in
inventory of $1.9 million and $1.2 million in 1996 and 1995, respectively,
payments of deferred customer acquisition costs of $6.8 million and $5.9 million
in 1996 and 1995, respectively, and a decrease in accounts payable, accrued
expenses and other liabilities of $0.7 million in 1996. The increases in
accounts receivable, as well as the payments of deferred customer acquisition
costs reflect the increase in volume of front end solicitations, as well as the
timing of such solicitations near the beginning of the calendar year. The
reduction in inventory was primarily the result of the increase in volume of
business in both 1996 and 1995.
Net cash used in investing activities to acquire property and equipment was $0.3
million and $0.1 million for the three month periods ended March 31, 1996 and
March 31, 1995, respectively.
During the three month periods ended March 31, 1996 and March 31, 1995, the
Company used $3.9 million and $0.2 million, respectively, in financing
activities related to payments on bank and other financing, including capital
lease obligations.
The Recapitalization
As a result of the substantial indebtedness incurred in connection with a
Recapitalization, in October 1994, the Company has significant debt service
obligations. At March 31, 1996, the outstanding amount of the Company's
indebtedness (other than trade payables) is $147.5 million, including $74.9
million of senior secured debt and $68.2 million of senior subordinated debt
(represented by the Notes). Since consummation of the Recapitalization, the
Company's ongoing cash requirements through the end of fiscal 1999 will consist
primarily of interest payments and required amortization payments under the
Credit Agreement, interest payments on the Notes, payments of capital lease
obligations, front end marketing expenditures, working capital, capital
expenditures and taxes. The required amortization payments under the Credit
Agreement will be: $6.3 million in 1996, $9.4 million in 1997, $15.4 million in
1998, $9.6 million in 1999, $18.0 million in 2000 and $18.0 million in 2001.
Other than upon a change of control (as defined) or as a result of certain asset
sales, the Company will not be required to make any principal payments in
respect of the Notes until maturity.
The Company's primary source of liquidity will be cash flow from operations and
funds available to it under the Revolving Credit Facility. The Revolving Credit
Facility provides for maximum borrowings of $15.0 million, of which $13.5
million was available as of March 31, 1996.
9
<PAGE>
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.
10
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
None.
Item 2. Change in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Reports on Form 8K.
No reports on Form 8K have been filed during the quarter for which this
report is filed.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOSIERY CORPORATION OF AMERICA, INC.
(Registrant)
/s/ ARTHUR C. HUGHES
Date: April 22, 1996 _________________________________
---------------------
Arthur C. Hughes
Vice President &
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000934383
<NAME> HOSIERY CORPORATION OF AMERICA, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Mar-31-1996
<CASH> 678
<SECURITIES> 0
<RECEIVABLES> 24,568
<ALLOWANCES> 1,824
<INVENTORY> 7,943
<CURRENT-ASSETS> 32,648
<PP&E> 28,325
<DEPRECIATION> 12,946
<TOTAL-ASSETS> 80,039
<CURRENT-LIABILITIES> 32,730
<BONDS> 69,277
0
37,398
<COMMON> 14
<OTHER-SE> (138,978)
<TOTAL-LIABILITY-AND-EQUITY> 80,039
<SALES> 40,099
<TOTAL-REVENUES> 40,099
<CGS> 16,859
<TOTAL-COSTS> 20,912
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,015
<INTEREST-EXPENSE> 4,678
<INCOME-PRETAX> 1,530
<INCOME-TAX> 597
<INCOME-CONTINUING> 933
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 933
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
