SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 27, 1997
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _______ to ________
Commission File No. 33-87392
HOSIERY CORPORATION OF AMERICA, INC.
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-0782950
- ---------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3369 Progress Drive
Bensalem, Pennsylvania 19020
- --------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 244-1777
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--------------- ------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 10, 1997
- ---------------------------- -------------------------------
Voting 1,332,830
Class A, non-voting 75,652
<PAGE>
INDEX PAGE
- ----- ----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 27, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
Three and nine month periods ended September 27, 1997
and September 28, 1996 4
Condensed Consolidated Statements of Cash Flows
Nine month periods ended September 27, 1997 and
September 28, 1996 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-13
PART II - OTHER INFORMATION 14-15
- ---------------------------
SIGNATURES 16
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
- -----------------------------------------------------
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 27, 1997 AND DECEMBER 31, 1996
(Dollars in thousands, except per share data)
<CAPTION>
September 27, December 31,
1997 1996
------------- ------------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ................................................... $ -- $ 1,960
Accounts receivable, less an allowance for doubtful accounts of
$1,650 and $1,540 in 1997 and 1996, respectively ........................... 23,528 22,939
Income tax refunds receivable ............................................... -- 100
Inventories ................................................................. 15,715 15,538
Prepaid and other current assets ............................................ 1,610 1,770
--------- ----------
Total current assets .................................................... 40,853 42,307
PROPERTY AND EQUIPMENT, net ...................................................... 16,828 17,422
DEFERRED CUSTOMER ACQUISITION COSTS .............................................. 31,233 24,664
DEFERRED DEBT ISSUANCE COSTS, less accumulated amortization of
$4,935 and $3,684 in 1997 and 1996, respectively ............................ 5,934 7,185
DEFERRED INCOME TAXES ............................................................ -- 375
OTHER ASSETS ..................................................................... 517 647
--------- ----------
TOTAL ............................................................................ $ 95,365 $ 92,600
========= ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Current portion of long-term debt ............................................. $ 12,322 $ 8,637
Current portion of capital lease obligations .................................. 1,487 1,627
Bank overdrafts ............................................................... 722 --
Accounts payable .............................................................. 7,125 7,885
Accrued expenses and other current liabilities ................................ 5,891 5,442
Accrued interest .............................................................. 2,499 4,703
Accrued coupon redemption costs ............................................... 4,558 5,044
Deferred income taxes ......................................................... 9,889 8,380
--------- ----------
Total current liabilities ................................................ 44,493 41,718
LONG-TERM DEBT, Less current portion ............................................... 121,826 129,142
CAPITAL LEASE OBLIGATIONS, Less current portion .................................... 4,279 4,299
ACCRUED COUPON REDEMPTION COSTS .................................................... 456 495
DEFERRED INCOME TAXES .............................................................. 1,002 --
--------- ----------
Total liabilities ........................................................ 172,056 175,654
--------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES
REDEEMABLE EQUITY SECURITIES ....................................................... 844 768
--------- ----------
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, (liquidation preference of
$75,218 and $63,082 in 1997 and 1996, respectively), 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 .................................................... 16,594 16,669
Compensatory stock options outstanding ........................................ 22,938 22,938
Accumulated deficit ........................................................... (153,720) (159,894)
Restricted stock .............................................................. (759) (947)
--------- ----------
Stockholders' deficiency .................................................... (77,535) (83,822)
--------- ----------
TOTAL .............................................................................. $ 95,365 $ 92,600
========= ==========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Three Month Periods Ended Nine Month Periods Ended
------------------------- ------------------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES .......................................................... $ 39,414 $ 38,611 $ 134,277 $ 121,333
--------- --------- --------- ---------
COSTS AND EXPENSES:
Cost of sales .................................................... 17,129 16,615 64,226 57,367
Administrative and general expenses .............................. 2,775 2,782 9,186 8,616
Provision for doubtful accounts .................................. 2,106 2,114 8,906 7,674
Marketing costs .................................................. 6,764 5,409 22,996 15,788
Coupon redemption costs .......................................... 884 825 2,578 3,438
Depreciation and amortization .................................... 803 681 2,282 1,999
Compensation related to stock options............................. -- -- -- 22,938
Other (income) expenses........................................... 87 (23) 452 (51)
--------- --------- --------- ---------
OPERATING INCOME ...................................................... 8,866 10,208 23,651 3,564
Interest income .................................................. 8 97 44 240
Interest expense ................................................. 4,507 4,591 13,655 13,847
--------- --------- --------- ---------
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES ............. 4,367 5,714 10,040 (10,043)
PROVISION (BENEFIT) FOR INCOME TAXES .................................. 1,681 2,228 3,865 (3,917)
--------- --------- --------- ---------
NET INCOME (LOSS) ..................................................... $ 2,686 $ 3,486 $ 6,175 $ (6,126)
========= ========= ========= =========
<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
NINE MONTH PERIODS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996
(Dollars in thousands)
(Unaudited)
<CAPTION>
1997 1996
-------- --------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ............................................... $ 6,175 $ (6,126)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization ................................ 2,282 1,999
Amortization of debt issue costs and discounts ............... 1,408 1,387
Compensation related to stock options ........................ -- 22,938
Amortization of deferred customer acquisition costs .......... 18,107 13,273
Other ........................................................ 185 190
(Increase) decrease in operating assets:
Accounts receivable .................................... (589) (2,811)
Inventories ............................................ (177) (2,613)
Payments for deferred customer acquisition costs ....... (24,676) (17,378)
Prepaid and other current assets ....................... 260 184
Deferred tax asset ..................................... 375 (680)
Other assets ........................................... (89) 52
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other liabilities (1,793) 328
Deferred income taxes .................................. 2,511 (4,749)
Accrued coupon redemption costs ........................ (525) (518)
-------- --------
Net cash provided by operating activities ........ 3,454 5,476
-------- --------
INVESTING ACTIVITIES:
Acquisitions of property and equipment .......................... (274) (856)
Proceeds from sale of property and equipment .................... -- 2
-------- --------
Net cash used in investing activities ............ (274) (854)
-------- --------
FINANCING ACTIVITIES:
Payments on bank and other financing ............................ (3,788) (6,037)
Payments on capital leases ...................................... (1,352) (1,100)
-------- --------
Net cash used in financing activities ............ (5,140) (7,137)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS .......................... (1,960) (2,515)
Cash and cash equivalents at beginning of year .................. 1,960 6,987
-------- --------
Cash and cash equivalents at end of period ...................... $ -- $ 4,472
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ..................................................... $ 14,340 $ 14,598
======== ========
Income taxes ................................................. $ 13 $ 1,552
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations and financing arrangements of $1,192 and $1,414
were entered into for new equipment during the nine month periods ended 1997
and 1996, respectively.
In 1996, two officers of the Company were granted approximately $300 of
redeemable equity securities as additional compensation for 1996.
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
NOTE 1. Condensed Consolidated Financial Statements
In the opinion of management, the accompanying condensed consolidated financial
statements of Hosiery Corporation of America, Inc. and subsidiaries, which are
unaudited except for the Consolidated Balance Sheet as of December 31, 1996,
which is derived from audited financial statements, include all normal and
recurring adjustments necessary to present fairly the Company's financial
position as of September 27, 1997 and the results of operations for the three
and nine month periods ended September 27, 1997 and September 28, 1996, and cash
flows for the nine month periods ended September 27, 1997 and September 28,
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 28, 1997.
NOTE 2. Inventories
September 27, December 31,
1997 1996
------------- ------------
Raw materials............................ $ 964 $ 537
Work-in-process.......................... 2,707 2,258
Finished goods........................... 9,581 10,656
Promotional and packing material......... 2,463 2,087
------- -------
$15,715 $15,538
======= =======
NOTE 3. Commitments and Contingencies
The Company has continuing obligations with certain members of management
pursuant to previously signed employment agreements.
The Company is involved in, or has been involved in, litigation arising in the
normal course of its business. The Company cannot predict the timing or outcome
of these claims and proceedings. Currently, except as discussed below, the
Company is 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.
6
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
NOTE 3. Commitments and Contingencies (continued)
The Company has received inquiries from the Federal Trade Commission ("FTC") and
fifteen state regulatory groups (the "States") concerning aspects of the
Company's promotional materials, including whether the terms of the Company's
promotional offers are sufficiently disclosed in such materials. Eleven of the
States, acting as a multi-state group, sought to impose certain disclosure
requirements on the Company's promotional materials.
The Company has reached an agreement with the multistate group in which the
Company agreed to certain modifications and clarifications of its promotional
materials. The agreement became effective as of September 1, 1997. The Company's
promotional materials for all of 1997 already include the majority of the
modifications and, consequently, the Company feels these modifications and
clarifications will have no additional negative impact on the Company's response
rates. However, there may be some additional minor modifications which will need
to be made to the Company's promotional materials to fully satisfy the terms of
the Company's agreement with the multistate group, and no assurances can be
given that such changes will not have a further effect on the Company's response
rate. In accordance with the agreement, the Company paid three hundred thousand
dollars in administrative expenses and fees during the three month period ended
September 27, 1997. The agreement also requires that refunds be made to
customers under certain circumstances for a six-month period. However, such
refunds are not expected to be material to the Company's financial condition or
results of operations.
The Company is hopeful that these modifications and clarifications will also
satisfy the inquiries from the FTC and the states not part of the multistate
group; however, no assurances can be given in this regard. The modifications the
Company has already made to its solicitation materials has had a material
adverse effect on its domestic response rates. However, response rates are only
one of several factors that affect the Company's results of operations. State
regulators from time to time contact the Company with inquiries regarding the
Company's promotional materials and state regulators could require additional
changes to the Company's promotional materials, and no assurance can be given
that such changes will not be significant or will not have a material adverse
effect on the Company's future financial condition or results of operations.
NOTE 4. Note Payable to Bank
The Company has a revolving credit facility which provides for maximum
borrowings of $15,000. The Company can borrow based on a formula which comprises
the sum of 80% of accounts receivable and 50% of inventory. Interest is charged
at the bank's prime lending rate plus 1.75% or 2.75% over the Eurodollar rate.
At September 27, 1997, there were no outstanding borrowings against the credit
facility. However, there was an outstanding letter of credit of approximately
$1,292, resulting in $13,708 available to borrow.
The Company is currently in the process of amending and restructuring its Credit
Agreement. It is anticipated after the restructuring that the interest rate the
Company currently pays will be lower, the Revolving Credit Facility will be
increased and the Debt Covenants will be changed. This change is expected late
in the fourth quarter.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three and Nine Month Periods Ended September 27, 1997
- --------------------------------------------------------------------------------
Results of Operations
- ---------------------
<TABLE>
The following table sets forth certain income statement data for the Company expressed as a percentage
of net revenues:
<CAPTION>
Three Month Periods Ended Nine Month Periods Ended
------------------------- ------------------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 43.5 43.0 47.8 47.3
Administrative and general expenses 7.1 7.2 6.9 7.1
Provision for doubtful accounts 5.3 5.5 6.6 6.3
Marketing costs 17.2 14.0 17.1 13.0
Coupon redemption costs 2.2 2.1 1.9 2.8
Depreciation and amortization 2.0 1.8 1.7 1.7
-------- ------- -------- -------
Subtotal 77.3 73.6 82.0 78.2
-------- ------- ------- -------
Income before interest-net, other (income)
expenses, compensation related to stock
options and provision for income taxes 22.7% 26.4% 18.0% 21.8%
======= ======= ======= =======
</TABLE>
8
<PAGE>
Three Month Period Ended September 27, 1997 Compared to Three Month Period Ended
September 28, 1996
- --------------------------------------------------------------------------------
Net revenues increased by 2.1% to $39.4 million in the three month period ended
September 27, 1997 from $38.6 million in the three month period ended September
28, 1996. This increase in net revenues was primarily increased volume in the
United Kingdom.
Cost of sales increased 3.1% to $17.1 million in the third quarter of 1997 from
$16.6 for the third quarter of 1996. As a percentage of net revenues, cost of
sales was 43.5% in the third quarter of 1997 versus 43.0% for the same period of
1996. The increase in cost of sales as a percentage of net revenues is caused by
the increased business and testing in Europe.
Administrative and general expenses remained the same at $2.8 million in the
third quarter of 1997 as compared to $2.8 million for the same period of 1996.
As a percentage of net revenues, administrative and general expenses were 7.1%
and 7.2% in the third quarter of 1997 and 1996, respectively.
Provision for doubtful accounts was the same in both periods of 1997 and 1996 at
$2.1 million. As a percentage of net revenues, bad debts were 5.3% in the third
quarter of 1997 versus 5.5% for the same period in 1996.
Marketing costs increased 25.1% to $6.8 million from $5.4 million for the three
month periods ended September 27, 1997 and September 28, 1996, respectively.
Solicitations to new customers in both the United States and the United Kingdom
have increased by 43.2% in the third quarter of 1997 as compared to the same
period in 1996. Amortization of prior year costs has also increased as
solicitations to new customers have grown from 30.6 million in 1994 to 43.3
million in 1995 and 52.6 million in 1996. These costs are amortized over 42
months with the greatest amortization in the first 24 months. Prior year
amortization of marketing costs was $2.3 million in the third quarter of 1997 as
compared to $1.9 million in the third quarter of 1996, an increase of $0.4
million. As a percentage of net revenues, marketing costs were 17.2% in 1997 as
compared to 14.0% in 1996.
Pretax income decreased to $4.4 million for the three month period ended
September 27, 1997 from $5.7 million for the three month period ended September
28, 1996. This decrease in pretax income was attributable to the testing in
France and Germany and the increased marketing costs experienced during 1997.
Net income was $2.7 million in the third quarter of 1997 as compared to net
income of $3.5 million in 1996 caused by the lower pretax income.
9
<PAGE>
Nine Month Period Ended September 27, 1997 Compared to Nine Month Period Ended
September 28, 1996
- ------------------------------------------------------------------------------
Net revenues increased by 10.7% to $134.3 million in the first nine months of
1997 from $121.3 million in the first nine months of 1996. This increase in net
revenues was the result of increased volume, a portion of which relates to the
Company's expansion in the United Kingdom and testing in France and Germany.
Revenues generated in Europe during the nine months of 1997 were $13.6 million
as compared to $6.9 million for the same period in 1996.
Cost of sales increased 12.0% to $64.2 million in the first nine months of 1997
from $57.4 million for the first nine months of 1996. This increase in cost of
sales was the result of increased shipments in 1997 compared to 1996. As a
percentage of net revenues, cost of sales was 47.8% in the first nine months of
1997 versus 47.3% for the same period of 1996. The increase in cost of sales as
a percentage of net revenues is caused by the significant increase in first and
second shipments in the United Kingdom and the United States, as well as the
test shipments in France and Germany. The Company's first and second shipments
result in low margins because they include the introductory offer, which is
priced substantially less than the cost of manufacturing, processing and
shipping the related hosiery, and because payment and continuation rates of new
customers are less than those of older customers.
Administrative and general expenses increased 6.6% to $9.2 million in the first
nine months of 1997 from $8.6 million for the same period of 1996. Increased
personnel costs account for the increase. As a percentage of net revenues,
administrative and general expenses were 6.9% in the first nine months of 1997
versus 7.1% for the same period in 1996.
Provision for doubtful accounts increased $1.2 million to $8.9 million in the
first nine months of 1997 versus $7.7 million for the same period of 1996. This
increase was caused by additional front end and second shipments in 1997 as
compared to 1996 (up 17.8%), which have a higher rate of uncollectable accounts.
As a percentage of net revenues, doubtful accounts were 6.6% and 6.3% for 1997
and 1996, respectively.
Marketing costs increased 45.7% to $23.0 million from $15.8 million for the nine
month periods ended September 27, 1997 and September 28, 1996, respectively.
Included in the 1997 marketing costs are $1.0 million in marketing expense for
the French and German tests and $1.1 million of additional premium incentive
costs to induce customers to purchase. These are incremental costs compared to
1996. Additionally, solicitations to new customers in both the United States and
the United Kingdom have increased by 43.6% in the first nine months of 1997 as
compared to the same period in 1996. Amortization of prior year costs has also
increased as solicitations to new customers have grown from 30.6 million in 1994
to 43.3 million in 1995 and 52.6 million in 1996. These costs are amortized over
42 months with the greatest amortization in the first 24 months. Prior year
amortization of marketing costs was $9.3 million in the first nine months of
1997 as compared to $7.5 million for the same period of 1996, an increase of
$1.8 million. As a percentage of net revenues, marketing costs (excluding the
French and German tests) were 16.4% in 1997 as compared to 13.0% in 1996.
10
<PAGE>
Coupon redemption costs have decreased to $2.6 million in 1997 from $3.4 million
in 1996. The Company continues to benefit from the lower cost gift catalogs
issued in 1995, 1996 and 1997, and commencing in 1996, the charging of shipping
and handling to redemption customers. As a percentage of net revenues, coupon
redemption costs were 1.9% in 1997 as compared to 2.8% in 1996.
Compensation related to stock option expense was $22.9 million in the nine
months ended September 28, 1996. This expense represents a non-cash charge
attributable to options granted by the Board of Directors on June 28, 1996, with
an exercise price below the estimated market price of the Company's common
stock, as part of a series of transactions in contemplation of an initial public
offering. No such charge was incurred in 1997.
Interest expense decreased to $13.7 million for the nine month period ended
September 27, 1997 from $13.8 million for the nine month period ended September
28, 1996. This decrease in interest expense is primarily due to less term debt.
As a percentage of net revenues, interest expense was 10.2% in the first nine
months of 1997 versus 11.4% for the same period in 1996.
Pretax income decreased to $10.0 million from $12.9 million (excluding stock
option compensation expense of $22.9 million in 1996) for the nine month periods
ended September 27, 1997 and September 28, 1996, respectively. Excluding the
costs of testing in France and Germany totaling $1.8 million, pretax income
decreased by $1.1 million. This decrease in pretax income (adjusted for the
French and German tests) was primarily attributable to increased revenues, lower
coupon redemption costs and lower interest costs, offset by increases in cost of
sales, administrative and general expense, bad debts and marketing costs.
Net income was $6.2 million in the first nine months of 1997 as compared to a
loss of ($6.1) million in 1996. Adjusting for testing in France and Germany in
1997 of $1.1 million, net of tax, and excluding the non-cash stock option
expense in 1996, of $14.0 million, net of tax, net income would have been
comparable at $7.3 million in the first nine months of 1997 as compared to $7.9
million for 1996, a decrease of $0.6 million caused by the lower operating
income.
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.
The Company had a working capital deficit of ($3.6) million at September 27,
1997 compared to working capital of $0.6 million at December 31, 1996. This
decrease is primarily to support the growth of the business, as well as an
increase in the current portion of long-term debt, offset by an increase in
receivables.
11
<PAGE>
Capital expenditures were $1.5 million and $1.2 million for the nine month
periods ended September 27, 1997 and September 28, 1996, respectively. A portion
of the expenditures in 1997 and 1996 were financed through the assumption of
capital leases.
Net cash provided by operating activities was $3.5 million for the first nine
months of 1997 as compared to $5.5 million in the first nine months of 1996.
This change is primarily due to increases in receivables, inventory and
marketing costs related to the growth of the business and a decrease in accounts
payable, offset by an increase in the amortization of marketing costs.
Net cash used in investing activities to acquire property and equipment was $0.3
million and $0.9 million for the nine month periods ended September 27, 1997 and
September 28, 1996, respectively.
Net cash used in financing activities was $5.1 million and $7.1 million for the
nine month periods ended September 27, 1997 and September 28, 1996,
respectively.
The Recapitalization
As a result of the substantial indebtedness incurred in connection with a
Recapitalization, in October 1994, the Company has significant debt service
obligations. At September 27, 1997, the outstanding amount of the Company's
indebtedness (other than trade payables) is $139.9 million, including $66.5
million of senior secured debt and $68.5 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: $8.7 million in 1997, $14.0 million in 1998, $10.6 million in
1999, $16.6 million in 2000 and $18.5 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, August 2002.
The Company's primary source of liquidity will be cash flow from operations and
funds available to it under a revolving credit facility. The revolving credit
facility provides for maximum borrowings of $15.0 million, $13.7 million of
which was available at September 27, 1997.
12
<PAGE>
Legal Proceedings
- -----------------
As discussed further in Part II, Item 1--Legal Proceedings, the Company has
received inquiries from the Federal Trade Commission ("FTC") and fifteen state
regulatory groups (the "States") concerning aspects of the Company's promotional
materials, including whether the terms of the Company's promotional offers are
sufficiently disclosed in such materials. Eleven of the States, acting as a
multi-state group, sought to impose certain disclosure requirements on the
Company's promotional materials.
The Company has reached an agreement with the multistate group in which the
Company agreed to certain modifications and clarifications of its promotional
materials. The agreement became effective as of September 1, 1997. The Company's
promotional materials for all of 1997 already include the majority of the
modifications and, consequently, the Company feels these modifications and
clarifications will have no additional negative impact on the Company's response
rates. However, there may be some additional minor modifications which will need
to be made to the Company's promotional materials to fully satisfy the terms of
the Company's agreement with the multistate group, and no assurances can be
given that such changes will not have a further effect on the Company's response
rate. In accordance with the agreement, the Company paid three hundred thousand
dollars in administrative expenses and fees during the three month period ended
September 27, 1997. The agreement also requires that refunds be made to
customers under certain circumstances for a six-month period. However, such
refunds are not expected to be material to the Company's financial condition or
results of operations.
The Company is hopeful that these modifications and clarifications will
also satisfy the inquiries from the FTC and the states not part of the
multistate group; however, no assurances can be given in this regard. The
modifications the Company has already made to its solicitation materials has had
a material adverse effect on its domestic response rates. However, response
rates are only one of several factors that affect the Company's results of
operations. State regulators from time to time contact the Company with
inquiries regarding the Company's promotional materials and state regulators
could require additional changes to the Company's promotional materials, and no
assurance can be given that such changes will not be significant or will not
have a material adverse effect on the Company's future financial condition or
results of operations.
Inflation
- ---------
Over the past three years, which has been a period of low inflation,
the Company has been able to increase sales volume to compensate for increases
in operating expenses. The Company has historically been able to increase its
selling prices as the cost of sales and related operating expenses have
increased and, therefore, inflation has not had a significant effect on
operations.
13
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
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, except as discussed below,
the Company is 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.
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. The FTC has recently made inquiries about some aspects of the
Company's promotional materials prompting the Company to adopt revised
promotional materials which, the Company believes but cannot assure, will meet
the concerns expressed by the FTC.
The Company has received inquiries from the Federal Trade Commission
("FTC") and fifteen state regulatory groups (the "States") concerning aspects of
the Company's promotional materials, including whether the terms of the
Company's promotional offers are sufficiently disclosed in such materials.
Eleven of the States, acting as a multi-state group, sought to impose certain
disclosure requirements on the Company's promotional materials.
The Company has reached an agreement with the multistate group in which the
Company agreed to certain modifications and clarifications of its promotional
materials. The agreement became effective as of September 1, 1997. The Company's
promotional materials for all of 1997 already include the majority of the
modifications and, consequently, the Company feels these modifications and
clarifications will have no additional negative impact on the Company's response
rates. However, there may be some additional minor modifications which will need
to be made to the Company's promotional materials to fully satisfy the terms of
the Company's agreement with the multistate group, and no assurances can be
given that such changes will not have a further effect on the Company's response
rate. In accordance with the agreement, the Company paid three hundred thousand
dollars in administrative expenses and fees during the three month period ended
September 27, 1997. The agreement also requires that refunds be made to
customers under certain circumstances for a six-month period. However, such
refunds are not expected to be material to the Company's financial condition or
results of operations.
The Company is hopeful that these modifications and clarifications will
also satisfy the inquiries from the FTC and the states not part of the
multistate group; however, no assurances can be given in this regard. The
modifications the Company has already made to its solicitation materials has had
a material adverse effect on its domestic response rates. However, response
rates are only one of several factors that affect the Company's results of
operations. State regulators from time to time contact the Company with
inquiries regarding the Company's promotional materials and state regulators
could require additional changes to the Company's promotional materials, and no
assurance can be given that such changes will not be significant or will not
have a material adverse effect on the Company's future financial condition or
results of operations.
Item 2. Change in Securities
None.
Item 3. Defaults upon Senior Securities
None.
14
<PAGE>
Item 4. Submission of Matters to a vote of Security Holders
None.
Item 5. Other Information
The Company is currently in the process of amending and restructuring
its Credit Agreement. It is anticipated after the restructuring that the
interest rate the Company currently pays will be lower, the Revolving Credit
Facility will be increased and the Debt Covenants will be changed. This change
is expected late in the fourth quarter.
Item 6. Reports on Form 8K.
No reports on Form 8K have been filed during the quarter for which this
report is filed.
15
<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: November 10, 1997 _________________________________
Arthur C. Hughes
Vice President &
Chief Financial Officer
16
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37,398
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