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 29, 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 May 7, 1997
---------------------------- ------------------------------------------
Voting 1,332,830
Class A, non-voting 75,652
<PAGE>
<TABLE>
INDEX PAGE
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Consolidated Financial Statements (Unaudited)
<S> <C>
Condensed Consolidated Balance Sheets
March 29, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
Three month periods ended March 29, 1997 and March 31, 1996 4
Condensed Consolidated Statements of Cash Flows
Three month periods ended March 29, 1997 and March 31, 1996 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-11
PART II - OTHER INFORMATION 12-13
- ---------------------------
SIGNATURES 14
</TABLE>
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 29, 1997 AND DECEMBER 31, 1996
(Dollars in thousands, except per share data)
<CAPTION>
March 29, 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
$2,282 and $1,540 in 1997 and 1996, respectively ......................................... 26,130 22,939
Income tax refunds receivable ............................................................. 100 100
Inventories ............................................................................... 17,884 15,538
Prepaid and other current assets .......................................................... 2,240 1,770
------- -------
Total current assets .................................................................. 46,354 42,307
PROPERTY AND EQUIPMENT, net .................................................................... 17,694 17,422
DEFERRED CUSTOMER ACQUISITION COSTS ............................................................ 30,302 24,664
DEFERRED DEBT ISSUANCE COSTS, less accumulated amortization of
$4,101 and $3,684 in 1997 and 1996, respectively .......................................... 6,768 7,185
DEFERRED INCOME TAXES .......................................................................... 237 375
OTHER ASSETS ................................................................................... 589 647
------- -------
TOTAL .......................................................................................... $ 101,944 $ 92,600
======= =======
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Note payable to bank ...................................................................... $ 5,325 $ --
Current portion of long-term debt ......................................................... 8,637 8,637
Current portion of capital lease obligations .............................................. 1,822 1,627
Bank overdrafts ........................................................................... 2,138 --
Accounts payable .......................................................................... 10,768 7,885
Accrued expenses and other current liabilities ............................................ 5,591 5,442
Accrued interest .......................................................................... 2,603 4,703
Accrued coupon redemption costs ........................................................... 4,952 5,044
Deferred income taxes ..................................................................... 8,532 8,380
------- -------
Total current liabilities ............................................................ 50,368 41,718
LONG-TERM DEBT, Less current portion ........................................................... 129,164 129,142
CAPITAL LEASE OBLIGATIONS, Less current portion ................................................ 4,453 4,299
ACCRUED COUPON REDEMPTION COSTS ................................................................ 486 495
------- -------
Total liabilities .................................................................... 184,471 175,654
------- -------
COMMITMENTS AND CONTINGENT LIABILITIES
REEDEMABLE EQUITY SECURITIES ................................................................... 792 768
------- -------
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
$66,905 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 ................................................................ 16,645 16,669
Compensatory stock options outstanding .................................................... 22,938 22,938
Accumulated deficit ....................................................................... (159,430) (159,894)
Restricted stock .......................................................................... (884) (947)
------- --------
Stockholders' deficiency ................................................................ (83,319) (83,822)
------- --------
TOTAL .......................................................................................... $ 101,944 $ 92,600
======= ========
<FN>
See notes to condensed consolidated financial statements.
3
</FN>
</TABLE>
<PAGE>
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 29, 1997 AND MARCH 31, 1996
(Dollars in thousands)
(Unaudited)
1997 1996
<S> <C> <C>
NET REVENUES .................................. $45,274 $40,099
------ ------
COSTS AND EXPENSES:
Cost of sales ............................ 23,040 20,912
Administrative and general expenses ...... 3,451 3,264
Provision for doubtful accounts .......... 3,569 3,015
Marketing costs .......................... 8,221 4,606
Coupon redemption costs .................. 952 1,480
Depreciation and amortization ............ 674 658
Other expenses ........................... 91 29
------ ------
OPERATING INCOME .............................. 5,276 6,135
Interest income .......................... 19 73
Interest expense ......................... 4,540 4,678
------ ------
INCOME BEFORE PROVISION FOR INCOME TAXES ...... 755 1,530
PROVISION FOR INCOME TAXES .................... 291 597
------ ------
NET INCOME .................................... $ 464 $ 933
====== ======
<FN>
See notes to condensed consolidated financial statements.
4
</FN>
</TABLE>
<PAGE>
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTH PERIODS ENDED MARCH 29, 1997 AND MARCH 31, 1996
(Dollars in thousands)
(Unaudited)
1997 1996
OPERATING ACTIVITIES: ---- ----
<S> <C> <C>
Net income .............................................................................. $ 464 $ 933
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization ........................................................ 674 658
Amortization of debt issue costs and discounts ....................................... 468 462
Deferred income taxes ................................................................ 152 491
Other ................................................................................ 201 65
Amortization of deferred customer acquisition costs .................................. 5,270 3,950
(Increase) decrease in operating assets:
Accounts receivable ............................................................ (3,191) (3,036)
Inventories .................................................................... (2,346) 1,871
Payments for deferred customer acquisition costs ............................... (10,908) (6,799)
Prepaid and other current assets ............................................... (470) 99
Other assets ................................................................... (13) (4)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other liabilities ....................... 3,070 (695)
Accrued coupon redemption costs ................................................ (101) (50)
------ ------
Net cash used in operating activities .................................... (6,730) (2,055)
------ ------
INVESTING ACTIVITIES:
Acquisitions of property and equipment .................................................. (76) (310)
Proceeds from sale of property and equipment ............................................ -- 2
------ ------
Net cash used in investing activities .................................... (76) (308)
------ ------
FINANCING ACTIVITIES:
Net borrowings on note payable to bank .................................................. 5,325 --
Payments on bank and other financing .................................................... (29) (3,604)
Payments on capital leases .............................................................. (450) (342)
------ ------
Net cash provided by (used in) financing activities ...................... 4,846 (3,946)
------ ------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................................................. (1,960) (6,309)
Cash and cash equivalents at beginning of year .......................................... 1,960 6,987
------ ------
Cash and cash equivalents at end of period .............................................. $ - $ 678
====== ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ....................................................................... $6,135 $6,720
===== =====
Income taxes ................................................................... $ -- $ 235
===== =====
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations of $799 and $338 were entered into for new
equipment during the three month periods ended 1997 and 1996, respectively.
<FN>
See notes to condensed consolidated financial statements.
5
</FN>
</TABLE>
<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 March 29, 1997 and the results of operations and cash flows for
the three month periods ended March 29, 1997 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 28, 1997.
<TABLE>
NOTE 2. Inventories
<CAPTION>
March 29, December 31,
1997 1996
--------- -----------
<S> <C> <C>
Raw materials............................................... $ 624 $ 537
Work-in-process............................................. 3,166 2,258
Finished goods.............................................. 10,842 10,656
Promotional and packing material............................ 3,252 2,087
------ ------
$17,884 $15,538
====== ======
</TABLE>
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 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.
6
<PAGE>
NOTE 3. Commitments and Contingencies (continued)
The Company has received inquiries from fourteen 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. In January 1997, nine of the States, acting as a multi-state
group, proposed an Assurance to the Company which seeks to: require a change in
the disclosure in the Company's promotional materials regarding the initial and
subsequent hosiery shipments; require the Company to make certain disclosures in
its promotional materials if the Company offers free samples or operates any
form of continuity sales plan; prohibit the Company from seeking collection
against any consumer who receives a solicitation that is not in compliance with
the terms of the Assurance; require that certain additional disclosures be made
should the Company continue to operate a referral program; and prohibit
misrepresentation in connection with the sale of the Company's products. The
Assurance also seeks unspecified money damages and requires that refunds be made
to customers under certain circumstances, however such money damages and refunds
are not expected to be material to the Company's financial condition or results
of operations. Discussions with the States are ongoing. The Company believes it
will be able to reach an acceptable resolution of the issues raised by the
States. However, no assurance can be given that an acceptable resolution will be
reached.
In response to the inquiries from the FTC and the States, the Company has made
changes in its solicitation materials which, based on experience to date, will
have a material adverse effect on its future domestic response rates. However,
response rates are only one of several factors that affect the Company's results
of operations. The Company is unable to predict what the ultimate outcome of its
discussions with the States will be or whether such outcome will have a material
adverse effect on its revenues or profitability. 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 March 29, 1997, there were outstanding borrowings of $5,325 at a weighted
average interest rate of approximately 8.31%. In addition, there were
outstanding letters of credit of approximately $1,292, resulting in $8,383
available to borrow.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations for the Three Month Period Ended March 29, 1997
-----------------------------------------------------------------------
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 29, March 31,
1997 1996
---------- --------
Net revenues ..................................... 100.0% 100.0%
Cost of sales ........................... 50.9 52.2
Administrative and general expenses ..... 7.6 8.1
Provision for doubtful accounts ......... 7.9 7.5
Marketing costs ......................... 18.1 11.5
Coupon redemption costs ................. 2.1 3.7
Depreciation and amortization ........... 1.5 1.6
----- -----
Subtotal ....................... 88.1 84.6
----- -----
Income before interest-net, other expenses
and provision for income taxes ................ 11.9% 15.4%
===== =====
8
<PAGE>
Three Month Period Ended March 29, 1997 Compared to Three Month Period Ended
March 31, 1996
- -------------------------------------------------------------------------------
Net revenues increased by 12.9% to $45.3 million in the three month period ended
March 29, 1997 from $40.1 million in the three month period ended March 31,
1996. This increase in net revenues was primarily the result of increased
volume, a portion of which relates to the Company's recent expansion into the
United Kingdom and testing in France and Germany. Revenues generated in Europe
during the first quarter of 1997 were $4.1 million as compared to $2.0 million
in 1996.
Cost of sales increased 10.2% to $23.0 million in the first quarter of 1997 from
$20.9 for the first quarter of 1996. The 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 50.9% in the first quarter of 1997 versus 52.2% in
the first quarter of 1996. The decrease in cost of sales as a percentage of net
revenues is the result of manufacturing efficiencies and lower cost goods
obtained through outsourcing.
Administrative and general expenses increased by 5.7% to $3.5 million in the
first quarter of 1997 as compared to $3.3 million for the same period of 1996.
Increased personnel costs account for this change. As a percentage of net
revenues, administrative and general expenses were 7.6% in the first quarter of
1997 versus 8.1% for the same period in 1996.
Provision for doubtful accounts increased $0.6 million to $3.6 million in the
first quarter of 1997 from $3.0 million for the same period of 1996. As a
percentage of net revenues, bad debts were 7.9% in the first quarter of 1997
versus 7.5% for the same period in 1996. This increase was caused by additional
front end and second shipments in 1997 as compared to 1996 (up 21.9%), which
have a higher rate of uncollectable accounts.
Marketing costs increased 78.5% to $8.2 million from $4.6 million for the three
month periods ended March 29, 1997 and March 31, 1996, respectively. Included in
the 1997 marketing costs are $0.9 million in marketing expense for the French
and German tests and $0.8 million of 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 51.1% in the first quarter of 1997 as compared to the same
period in 1996. Amortization of prior year costs have also increased as
solicitations to new customers have increased 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 $4.0 million in 1997 as compared to $3.1
million in 1996, an increase of $0.9 million. As a percentage of net revenues,
marketing costs (excluding the French and German tests) were 16.2% in 1997 as
compared to 11.5% in 1996.
Coupon redemption costs have decreased to $1.0 million in 1997 from $1.5 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 2.1% in 1997 as compared to 3.7% in 1996.
Interest expense decreased to $4.5 million for the three month period ended
March 29, 1997 from $4.7 million for the three month period ended March 31,
1996. This decrease in interest expense is primarily due to less debt. As a
percentage of net revenues, interest expense was 10.0% in the first quarter of
1997 versus 11.7% for the same period in 1996.
9
<PAGE>
Pretax income decreased to $0.8 million for the three month period ended March
29, 1997 from $1.5 million for the three month period ended March 31, 1996.
Excluding the costs of testing in France and Germany totaling $1.1 million,
pretax income increased by $0.4 million. This increase 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 $0.5 million in the first quarter of 1997 as compared to $0.9
million in the first quarter of 1996. Excluding the French and German test costs
of $0.7 million net of tax, net income would have increased to $1.2 million in
the first quarter of 1997 from $0.9 million for the comparable period of 1996.
This increase resulted from the increase in pretax income of $0.4 million
adjusted to exclude French and German test costs of $1.1 million, offset by a
$0.1 million increase in the provision for income taxes, excluding $0.4 million
tax benefit related to the test costs in France and Germany.
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 ($4.0) million at March 29, 1997
compared to working capital of $0.6 million at December 31, 1996. This decrease
is primarily the result of utilizing the Company's revolving line of credit to
support the substantial growth of the business, as well as increases in accounts
payable and bank overdrafts, offset by increases in receivables and inventories.
Capital expenditures were $0.9 million and $0.6 million for the three month
periods ended March 29, 1997 and March 31, 1996, respectively. A portion of the
expenditures in 1997 and 1996 were financed through the assumption of capital
leases.
Net cash used in operating activities was $6.7 million for the first quarter of
1997 as compared to $2.1 million in the first quarter of 1996. This change is
primarily due to increases in receivables, inventory and marketing costs related
to the growth of the business offset by increases in the amortization of
marketing costs and accounts payable.
Net cash used in investing activities to acquire property and equipment was $0.1
million and $0.3 million for the three month periods ended March 29, 1997 and
March 31, 1996, respectively.
Net cash provided by (used in) financing activities was $4.8 million and $(3.9)
million for the three month periods ended March 29, 1997 and March 31, 1996,
respectively. In 1997, the Company had net borrowings of $5.3 million on its
Revolving Credit Facility. In 1996, the Company made payments on bank and other
financing totaling $3.6 million.
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 29, 1997, the outstanding amount of the Company's
indebtedness (other than trade payables) is $149.4 million, including $75.4
million of senior secured debt and $68.4 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: $8.5 million in 1997, $14.2 million in 1998, $10.7 million in
1999, $16.6 million in 2000 and $18.5 million in 2001. Other than upon a
10
<PAGE>
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, $8.4 million of which
was available at March 29, 1997.
Legal Proceedings
As discussed further in Part II, Item 1--Legal Proceedings, the Company
has received inquiries from fourteen 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. In January 1997, nine of the States, acting as a multi-state group,
proposed an Assurance to the Company which seeks to: require a change in the
disclosure in the Company's promotional materials regarding the initial and
subsequent hosiery shipments; require the Company to make certain disclosures in
its promotional materials if the Company offers free samples or operates any
form of continuity sales plan; prohibit the Company from seeking collection
against any consumer who receives a solicitation that is not in compliance with
the terms of the Assurance; require that certain additional disclosures be made
should the Company continue to operate a referral program; and prohibit
misrepresentation in connection with the sale of the Company's products. The
Assurance also seeks unspecified money damages and requires that refunds be made
to customers under certain circumstances, however such money damages and refunds
are not expected to be material to the Company's financial condition or results
of operations. Discussions with the States are ongoing. The Company believes it
will be able to reach an acceptable resolution of the issues raised by the
States. However, no assurance can be given that an acceptable resolution will be
reached.
In response to the inquiries from the FTC and the States, the Company
has made changes in its solicitation materials which, based on experience to
date, will have a material adverse effect on its future domestic response rates.
However, response rates are only one of several factors that affect the
Company's results of operations. The Company is unable to predict what the
ultimate outcome of its discussions with the States will be or whether such
outcome will have a material adverse effect on its revenues or profitability.
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.
11
<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 fourteen 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. In January 1997, nine of the States, acting as a
multi-state group, proposed an Assurance to the Company which seeks to: require
a change in the disclosure in the Company's promotional materials regarding the
initial and subsequent hosiery shipments; require the Company to make certain
disclosures in its promotional materials if the Company offers free samples or
operates any form of continuity sales plan; prohibit the Company from seeking
collection against any consumer who receives a solicitation that is not in
compliance with the terms of the Assurance; require that certain additional
disclosures be made should the Company continue to operate a referral program;
and prohibit misrepresentation in connection with the sale of the Company's
products. The Assurance also seeks unspecified money damages and requires that
refunds be made to customers under certain circumstances, however such money
damages and refunds are not expected to be material to the Company's financial
condition or results of operations. Discussions with the States are ongoing. The
Company believes it will be able to reach an acceptable resolution of the issues
raised by the States. However, no assurance can be given that an acceptable
resolution will be reached.
In response to the inquiries from the FTC and the States, the Company
has made changes in its solicitation materials which, based on experience to
date, will have a material adverse effect on its future domestic response rates.
However, response rates are only one of several factors that affect the
Company's results of operations. The Company is unable to predict what the
ultimate outcome of its discussions with the States will be or whether such
outcome will have a material adverse effect on its revenues or profitability.
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.
12
<PAGE>
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.
13
<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: May 7, 1997 _________________________________
Arthur C. Hughes
Vice President &
Chief Financial Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000934383
<NAME> Hosiery Corporation of America, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Mar-29-1997
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384
37,398
<COMMON> 14
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<CGS> 14,893
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</TABLE>
