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 June 28, 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 August 6, 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
June 28, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations
Three and six month periods ended June 28, 1997 and
June 29, 1996 4
Condensed Consolidated Statements of Cash Flows
Six month periods ended June 28, 1997 and June 29, 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
- -----------------------------------------------------
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 28, 1997 AND DECEMBER 31, 1996
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 28, December 31,
1997 1996
----------- ------------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ........................................ $ 883 $ 1,960
Accounts receivable, less an allowance for doubtful accounts of
$2,033 and $1,540 in 1997 and 1996, respectively ................ 26,172 22,939
Income tax refunds receivable .................................... 100 100
Inventories ...................................................... 15,207 15,538
Prepaid and other current assets ................................. 1,725 1,770
------ ------
Total current assets ......................................... 44,087 42,307
PROPERTY AND EQUIPMENT, net ........................................... 17,294 17,422
DEFERRED CUSTOMER ACQUISITION COSTS ................................... 29,213 24,664
DEFERRED DEBT ISSUANCE COSTS, less accumulated amortization of
$4,518 and $3,684 in 1997 and 1996, respectively ................. 6,351 7,185
DEFERRED INCOME TAXES ................................................. - 375
OTHER ASSETS ......................................................... 604 647
------ ------
TOTAL ................................................................. $ 97,549 $ 92,600
====== ======
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Note payable to bank ............................................. $ 2,000 $ -
Current portion of long-term debt ................................ 10,617 8,637
Current portion of capital lease obligations ..................... 1,558 1,627
Accounts payable ................................................. 7,005 7,885
Accrued expenses and other current liabilities ................... 5,674 5,442
Accrued interest ................................................. 4,982 4,703
Accrued coupon redemption costs .................................. 4,661 5,044
Deferred income taxes ............................................ 9,522 8,380
------- -------
Total current liabilities ................................... 46,019 41,718
LONG-TERM DEBT, Less current portion ................................. 125,256 129,142
CAPITAL LEASE OBLIGATIONS, Less current portion ....................... 4,570 4,299
ACCRUED COUPON REDEMPTION COSTS ....................................... 478 495
DEFERRED INCOME TAXES ................................................. 666 -
------- -------
Total liabilities............................................ 176,989 175,654
------- -------
COMMITMENTS AND CONTINGENT LIABILITIES
REEDEMABLE EQUITY SECURITIES .......................................... 816 768
------- -------
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 $70,878 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 ........................................ 16,621 16,669
Compensatory stock options outstanding ............................ 22,938 22,938
Accumulated deficit ............................................... (156,405) (159,894)
Restricted stock .................................................. (822) (947)
------- -------
Stockholders' deficiency ........................................ (80,256) (83,822)
------- -------
TOTAL .................................................................. $ 97,549 $ 92,600
======= =======
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Month Periods Ended Six Month Periods Ended
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET REVENUES ............................. $49,589 $42,623 $94,863 $82,722
------- ------ ------- -------
COSTS AND EXPENSES:
Cost of sales ....................... 24,057 19,840 47,097 40,752
Administrative and general expenses . 2,960 2,570 6,411 5,834
Provision for doubtful accounts ..... 3,231 2,545 6,800 5,560
Marketing costs ..................... 8,011 5,773 16,232 10,379
Coupon redemption costs ............. 742 1,133 1,694 2,613
Depreciation and amortization ....... 805 660 1,479 1,318
Compensation related to stock options -- 22,938 -- 22,938
Other (income) expenses ............. 274 (57) 365 (28)
------ ------ ------ ------
OPERATING INCOME (LOSS) 9,509 (12,779) 14,785 (6,644)
Interest income ..................... 17 70 36 143
Interest expense .................... 4,608 4,578 9,148 9,256
------ ------ ------ ------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES ...................... 4,918 (17,287) 5,673 (15,757)
PROVISION (BENEFIT) FOR INCOME TAXES ..... 1,893 (6,742) 2,184 (6,145)
------ ------- ------ ------
NET INCOME (LOSS) ........................ $ 3,025 $(10,545) $ 3,489 $ (9,612)
====== ======= ====== ======
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTH PERIODS ENDED JUNE 28, 1997 AND JUNE 29, 1996
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1997 1996
---- ----
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) ............................................... $ 3,489 $ (9,612)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization ................................ 1,479 1,318
Amortization of debt issue costs and discounts ............... 937 924
Compensation related to stock options ........................ -- 22,938
Amortization of deferred customer acquisition costs .......... 12,077 8,773
Other ........................................................ 122 128
(Increase) decrease in operating assets:
Accounts receivable .................................... (3,233) (3,325)
Inventories ............................................ 331 1,253
Payments for deferred customer acquisition costs ....... (16,626) (11,811)
Prepaid and other current assets ....................... 45 459
Deferred tax asset ..................................... 375 (1,430)
Other assets ........................................... (101) 174
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other liabilities (64) 1,635
Deferred income taxes .................................. 1,808 (5,494)
Accrued coupon redemption costs ........................ (400) (165)
------ ------
Net cash provided by operating activities ........ 239 5,765
------ ------
INVESTING ACTIVITIES:
Acquisitions of property and equipment .......................... (377) (499)
Proceeds from sale of property and equipment .................... -- 2
------ ------
Net cash used in investing activities ............ (377) (497)
------ ------
FINANCING ACTIVITIES:
Net borrowings on note payable to bank .......................... 2,000 --
Payments on bank and other financing ............................ (2,009) (6,008)
Payments on capital leases ...................................... (930) (713)
------ -------
Net cash used in financing activities ............ (939) (6,721)
------ -------
NET DECREASE IN CASH AND CASH EQUIVALENTS .......................... (1,077) (1,453)
Cash and cash equivalents at beginning of year .................. 1,960 6,987
------ -------
Cash and cash equivalents at end of period ...................... $ 883 $ 5,534
====== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ..................................................... $ 7,857 $ 8,522
====== ======
<FN>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations and financing arrangements of $827 and $675 were entered into
for new equipment during the six 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.
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 June 28, 1997 and the results of operations for the three and six
month periods ended June 28, 1997 and June 29, 1996, and cash flows for the six
month periods ended June 28, 1997 and June 29, 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
June 28, December 31,
1997 1996
------- -----------
Raw materials....................... $ 1,029 $ 537
Work-in-process..................... 2,515 2,258
Finished goods...................... 9,200 10,656
Promotional and packing material.... 2,463 2,087
------ ------
$15,207 $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 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>
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 will become effective as of September 1, 1997. The
Company's promotional materials for all of 1997 already include the majority of
these modifications and, consequently, the Company feels these modifications and
clarifications will have no additional negative impact on the Company's response
rates. The agreement also calls for the payment of three hundred thousand
dollars in administrative expenses and fees, which have been reflected in the
condensed consolidated financial statements, and requires that refunds be made
to customers under certain circumstances for a six-month period. However, the
amount of 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 June 28, 1997, there were outstanding borrowings of $2,000 at an interest
rate of 8.56%. In addition, there was an outstanding letter of credit of
approximately $1,292, resulting in $11,708 available to borrow.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations Three and Six Month Periods Ended June 28, 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 Six Month Periods Ended
------------------------- -----------------------
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenues ................................ 100.0% 100.0% 100.0% 100.0%
Cost of sales ..................... 48.5 46.6 49.6 49.3
Administrative and general expenses 6.0 6.0 6.7 7.0
Provision for doubtful accounts ... 6.5 6.0 7.2 6.7
Marketing costs ................... 16.2 13.5 17.1 12.5
Coupon redemption costs ........... 1.5 2.7 1.8 3.2
Depreciation and amortization ..... 1.6 1.5 1.6 1.6
---- ---- ---- ----
Subtotal ................ 80.3 76.3 84.0 80.3
---- ---- ---- ----
Income before interest-net, other (income)
expenses, compensation related to stock
options and provision for income taxes ... 19.7% 23.7% 16.0% 19.7%
===== ===== ===== =====
</TABLE>
8
<PAGE>
Three Month Period Ended June 28, 1997 Compared to Three Month Period Ended
June 29, 1996
- ---------------------------------------------------------------------------
Net revenues increased by 16.3% to $49.6 million in the three month period ended
June 28, 1997 from $42.6 million in the three month period ended June 29, 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 second quarter of 1997 were $6.3 million as compared to $3.2 million in
1996.
Cost of sales increased 21.3% to $24.1 million in the second quarter of 1997
from $19.8 for the second quarter 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 48.5% in the second quarter of 1997 versus 46.6%
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 by 15.2% to $3.0 million in the
second quarter of 1997 as compared to $2.6 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 6.0% in both the second
quarter of 1997 and 1996.
Provision for doubtful accounts increased $0.7 million to $3.2 million in the
second quarter of 1997 from $2.5 million for the same period of 1996. As a
percentage of net revenues, bad debts were 6.5% in the second quarter of 1997
versus 6.0% for the same period in 1996. This increase was caused by additional
front end and second shipments in 1997 as compared to 1996 (up 43.7%), which
have a higher rate of uncollectable accounts.
Marketing costs increased 38.8% to $8.0 million from $5.8 million for the three
month periods ended June 28, 1997 and June 29, 1996, respectively. Included in
the 1997 marketing costs are $0.1 million in marketing expense for the French
and German tests and $0.5 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 26.0% in the second 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 $3.0 million in the second quarter of 1997
as compared to $2.4 million in the second quarter of 1996, an increase of $0.6
million. As a percentage of net revenues, marketing costs (excluding the French
and German tests) were 16.1% in 1997 as compared to 13.5% in 1996.
Coupon redemption costs have decreased to $0.7 million in the second quarter of
1997 from $1.1 million in the second quarter of 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 1.5% in
1997 as compared to 2.7% in 1996.
Compensation related to stock option expense was $22.9 million in the three
months ended June 29, 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.
9
<PAGE>
Pretax income decreased to $4.9 million for the three month period ended June
28, 1997 from $5.7 million (excluding stock option compensation expense of $22.9
million) for the three month period ended June 29, 1996. Excluding the costs of
testing in France and Germany totaling $1.6 million in 1997, pretax income
increased by $0.8 million. This increase in pretax income (adjusted for the
French and German tests) was primarily attributable to increased revenues and
lower coupon redemption costs, offset by increases in cost of sales,
administrative and general expense, bad debts and marketing costs.
Net income was $3.0 million in the second quarter of 1997 as compared to a loss
of $(10.5) million in 1996. Adjusting for testing in France and Germany in 1997
and excluding the non-cash stock option expense in 1996, net income would have
been $4.0 million in the second quarter of 1997 versus $3.4 million in 1996, an
increase of $0.6 million.
Six Month Period Ended June 28, 1997 Compared to Six Month Period Ended
June 29, 1996
- -----------------------------------------------------------------------
Net revenues increased by 14.7% to $94.9 million in the first six months of 1997
from $82.7 million in the first six months of 1996. This increase in net
revenues was the result of increased volume ($12.2 million), 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 first half of 1997 were
$10.5 million as compared to $5.2 million for the same period in 1996.
Cost of sales increased 15.6% to $47.1 million in the first six months of 1997
from $40.8 million for the first six 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 49.6% in the first half of 1997
versus 49.3% 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 9.9% to $6.4 million in the first
six months of 1997 from $5.8 million for the same period of 1996. Increased
personnel costs and higher wages account for the increase. As a percentage of
net revenues, administrative and general expenses were 6.7% in the first six
months of 1997 versus 7.0% for the same period in 1996.
Provision for doubtful accounts increased $1.2 million to $6.8 million in the
first six months of 1997 versus $5.6 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 30.9%), which have a higher rate of uncollectable accounts.
As a percentage of net revenues, doubtful accounts were 7.2% and 6.7% for 1997
and 1996, respectively.
10
<PAGE>
Marketing costs increased 56.4% to $16.2 million from $10.4 million for the six
month periods ended June 28, 1997 and June 29, 1996, respectively. Included in
the 1997 marketing costs are $1.0 million in marketing expense for the French
and German tests and $1.4 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 43.7% in the first half 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 $7.1 million in the first half of 1997 as
compared to $5.6 million in the first half of 1996, an increase of $1.5 million.
As a percentage of net revenues, marketing costs (excluding the French and
German tests) were 16.2% in 1997 as compared to 12.5% in 1996.
Coupon redemption costs have decreased to $1.7 million in 1997 from $2.6 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 1.8% in 1997 as compared to 3.2% in 1996.
Compensation related to stock option expense was $22.9 million in the six months
ended June 29, 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 $9.1 million for the six month period ended June
28, 1997 from $9.3 million for the six month period ended June 29, 1996. This
decrease in interest expense is primarily due to less debt. As a percentage of
net revenues, interest expense was 9.6% in the first half of 1997 versus 11.2%
for the same period in 1996.
Pretax income decreased to $5.7 million from $7.2 million (excluding stock
option compensation expense of $22.9 million in 1996) for the six month periods
ended June 28, 1997 and June 29, 1996, respectively. Excluding the costs of
testing in France and Germany totaling $1.6 million, pretax income increased by
$0.1 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 $3.5 million in the first half of 1997 as compared to $4.4
million in 1996. Adjusting for testing in France and Germany in 1997 of $1.0
million and excluding the non-cash stock option expense in 1996, net income
would have been comparable at $4.4 million in the first half of 1997 and 1996.
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 ($1.9) million at June 28, 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 an increase in the
current portion of long-term debt, offset by an increase in receivables.
11
<PAGE>
Capital expenditures were $1.2 million for both the six month periods ended June
28, 1997 and June 29, 1996. A portion of the expenditures in 1997 and 1996 were
financed through the assumption of capital leases.
Net cash provided by operating activities was $0.2 million for the first half of
1997 as compared to $5.8 million in the first half 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
$0.4 million and $0.5 million for the six month periods ended June 28, 1997 and
June 29, 1996, respectively.
Net cash used in financing activities was $0.9 million and $6.7 million for the
six month periods ended June 28, 1997 and June 29, 1996, respectively. In 1997,
the Company had net borrowings of $2.0 million on its Revolving Credit Facility.
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 June 28, 1997, the outstanding amount of the Company's
indebtedness (other than trade payables) is $144.0 million, including $70.4
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 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, $11.7 million of
which was available at June 28, 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 will become effective as of September 1,
1997. The Company's promotional materials for all of 1997 already include the
majority of these modifications and, consequently, the Company feels these
modifications and clarifications will have no additional negative impact on the
Company's response rates. The agreement also calls for the payment of three
hundred thousand dollars in administrative expenses and fees, which have been
reflected in the condensed consolidated financial statements, and requires that
refunds be made to customers under certain circumstances for a six-month period.
However, the amount of 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 will become effective as of September 1,
1997. The Company's promotional materials for all of 1997 already include the
majority of these modifications and, consequently, the Company feels these
modifications and clarifications will have no additional negative impact on the
Company's response rates. The agreement also calls for the payment of three
hundred thousand dollars in administrative expenses and fees, which have been
reflected in the condensed consolidated financial statements, and requires that
refunds be made to customers under certain circumstances for a six-month period.
However, the amount of 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
None.
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: August 6, 1997 _________________________________
Arthur C. Hughes
Vice President &
Chief Financial Officer
16
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<NAME> Hosiery Corporation of America, Inc.
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