HOSIERY CORP OF AMERICA INC, 10-K, 1997-03-28

HOSIERY CORP OF AMERICA INC
10-K, 1997-03-28
KNITTING MILLS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(MARK ONE)
( X ) ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

For the Fiscal Year Ended December 31, 1996

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)

The aggregate market value of the voting stock held by non-affiliates of the
registrant is zero. All of the voting stock is held by affiliates and there is
no established public trading market for any class of common stock of the
Registrant.

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 March 24, 1997
---------------------------- ------------------------------------------
Voting 1,332,830
Class A, non-voting 75,652

<PAGE>

PART I

ITEM 1. BUSINESS

Hosiery Corporation of America, Inc. (the "Company"), the Registrant
is a corporation organized in 1975 under the laws of the state of Delaware.

The Company is engaged in the direct mail marketing, manufacturing and
distribution of quality women's sheer hosiery products to consumers throughout
the United States. The Company has recently begun to expand its operations into
the United Kingdom and plans to enter other international markets (France and
Germany) on a test basis during 1997. The Company markets women's sheer hosiery
through a continuous product shipment or "continuity" program. The Company's
continuity program involves mailing to customers a specially priced introductory
hosiery offer, the acceptance of which enrolls customers in the program and
results in additional shipments of hose on a regular and continuous basis upon
payment of a prior hose shipment. The Company's hosiery production was
approximately 54 million pairs in 1996, primarily marketed under the Silkies(R)
brand name. The Company's manufacturing operations supplied 87% of all the
hosiery required by the Company's continuity program during 1996.

The Company markets its hosiery products exclusively through its direct
mail marketing continuity program. The success of this program depends on
targeting likely customers and on retaining customers by delivering quality
hosiery products directly to the home on a regular basis. Drawing on its
customer list of over 61 million individuals and on certain rented customer
lists, the Company has developed sophisticated statistical, regression,
segmentation and other financial analyses to accurately target, test and acquire
first-time (and previously inactive) "front end" customers through direct mail
solicitation. The Company has designed an initial direct mail solicitation offer
which has attracted front end customers and reactivated previous customers.

In order to induce customers to participate in the Company's continuity
program, the introductory hosiery offer is priced as a "loss leader". The
introductory offer is priced at a nominal amount, $1.00 per pair plus shipping
and handling, that is substantially less than the cost of manufacturing,
processing and shipping the related hosiery.

Front end customers who continue to participate in the Company's
continuity program become part of the Company's repeat or "back end" customer
base. After responding to the front end solicitation and receiving their first
shipment, customers can elect to continue in the program, receiving either four
or six pairs of hose with each subsequent shipment. A customer who chooses to
participate in the continuity program by making regular purchases pursuant
thereto is an active back end customer. Such "active back end customers" exclude
customers receiving their first shipment. Upon payment for each shipment,
customers are sent another shipment of regularly priced hose, on average every
four to six weeks. The Company has established a consistent and predictable back
end customer base by providing customers with quality hosiery products on a
regular basis. As of December 1996, the Company had approximately 1.3 million
back end customers.

Marketing Strategy

The Company has created a marketing strategy which combines direct mail
marketing techniques with its continuity program. The Company's marketing
efforts focus on targeting and acquiring front end customers, as well as
maintaining a strong relationship with continuity or back end customers through
efficient fulfillment of quality products, customer service, creative new
product introductions and unique marketing strategies. These direct mail
marketing initiatives, refined by advanced statistical and regression analyses,
have increased the size and quality of its customer base.

The Continuity Program. The Company's current initial direct mail
solicitation offers its customers the opportunity to receive one free pair of
hosiery with the purchase of two additional pairs at $1.00 per pair. The
customer is able to choose the size, style and color of hosiery for this initial
shipment.
2
<PAGE>

Upon receiving the first shipment, the customer can (i) pay for the product and
order a second shipment, (ii) pay for the product and elect not to order a
second shipment, or (iii) return the product and keep the free pair.

By paying for the product and ordering a second shipment of hosiery,
the customer joins the Company's continuity program and becomes a repeat or back
end customer. Upon payment for each shipment, customers are sent a subsequent
shipment of regularly priced hose, on average every four to six weeks, with some
customers electing a bi-monthly shipment option. With each shipment, customers
may change the selection of styles, colors and sizes. Back end shipments contain
either four or six pairs of hosiery which vary in price according to style. All
shipments are made on credit, but the Company's exposure to any one customer is
limited to the cost of one shipment. Customers are not required to commit to a
minimum purchase amount and can cancel the program at any time, for any reason.

The Company actively re-promotes customers who have chosen to
discontinue their participation in the continuity program. Based upon the number
of previous shipments and the circumstances regarding cancellation of previous
enrollment, the Company will send as many as 13 reactivation offers to reinstate
these customers. In total, the Company sends about 7 million such offers
annually, and believes that approximately 27% of those customers rejoin the
continuity program as the result of these efforts. The Company also maintains a
database of inactive customers who receive adaptations of the standard front end
solicitation.

Acquiring Front End Customers. Direct mail marketing has become the
Company's sole means of attracting new front end customers and reactivating
previous customers, and has replaced less-targeted methods previously used by
the Company, including co-operative advertising and package inserts. Four major
solicitations featuring the Company's specially priced introductory offer are
mailed each year (January, March, June, September). There is no significant
seasonality in the mailings.

The Company employs advanced statistical and regression analyses in
conjunction with each of its solicitation promotions. The Company utilizes its
proprietary in-house database of over 61 million customers, as well as lists
rented from other direct marketing firms, and analyzes information concerning
customer buying habits and payment records in order to determine which potential
customers are likely to purchase hosiery from the Company on a regular and
long-term basis. During each major solicitation, all chosen customer lists are
ranked by potential realizable profit. The mailing cut off is then matched to
budgeted production. This process ensures that anticipated profit is maximized
from each of the four mailings.

Retention of Back End Customers. The Company seeks to retain its
continuity or back end customers by providing high quality hosiery on a regular
basis and at competitive prices. In addition, as members of the continuity
program, customers receive gift certificates with each shipment of hosiery which
can be redeemed for a wide array of merchandise. The Company also offers a
women's wear catalog featuring branded and private label lingerie and intimate
apparel products in conjunction with outside manufacturers. Through these means
the Company believes it has been able to establish a predictable base of back
end customers without significant losses of customers over time. The Company
continually is working on developing new means of better retaining its back end
customers. Customers exit the continuity program for various reasons including
unavailability of certain styles and colors, preference for retail stores,
situational changes, too much hosiery, promotional sales at retail stores,
quality and garment fit.

Through its data processing capabilities, the Company tracks a
customer's order history from the initial order through each subsequent
purchase, whether the purchase is a hosiery product, merchandise from the
women's wear merchandise catalog, or other consumer products received through
gift redemptions. Each of the Company's customer service representatives has
on-line capabilities to retrieve customer specific queries and purchasing
history.
3

<PAGE>

Customer Testing. All aspects of the Company's direct mail marketing
program result from specific customer testing which the Company conducts
continuously. Such testing enables the Company to (i) project the profitability
of certain in-house and outside customer lists; (ii) maximize response rates to
front end solicitations; (iii) determine the profitability of the product mix
offered to back end customers; (iv) determine optimal pricing strategy; and (v)
increase payment and retention rates. Constant refinement of test programs
through creative design, offer upgrades, new hosiery products and referrals are
conducted throughout various mailings with the objective of increasing response
rates or reducing cost, without negatively impacting continuation or retention.
The time from test to application can take between three and twelve months
depending on the testing employed. Historically, the Company's actual results
have been similar to its test results.

Customer Profile. Management believes that the Company's average
customer is a working woman between age 30 and 55. The Company estimates that
its average customer buys approximately 60% of her sheer hosiery products from
the Company, and many of such customers purchase hosiery for other household
members.

Product and Development

The Company manufactures moderately priced, quality women's sheer
hosiery under the Silkies(R) brand name. The Company's product line is designed
to include the more popular product styles and colors for which most customers
have the greatest demand and, effective January 1997, includes six styles of
sheer hosiery, in nine different colors and six sizes, as well as knee-hi's. The
Company's elastomer products (compression garments containing spandex) include
Control Top, Total Leg Control, Sheer Charm and Shapely Perfection styles. The
Company's elastomer products currently represent approximately 93% of its total
production. The remainder of the Company's production consists of its
non-elastomer products including Panty 'n Hose, Sheer to Waist and Knee-Hi
styles. As of January 1997, the styles range in price from $2.39 to $4.79 per
pair. The Company performs extensive consumer research and product testing to:
(i) ensure product quality, (ii) service all significant markets and (iii)
convert existing compression hose customers to higher margin, sheer compression
hosiery products such as Shapely Perfection.

Data Processing and Management Information Systems

The Company has computer and data processing capabilities which are
adequate for its current level of operations. The Company has a full back up and
disaster recovery program for its data processing system which enables operation
at an outside facility within twelve hours of the onset of such need.

The Company provides data processing services, including proprietary
software programs, to its marketing operations that manage the flow of all
hosiery products from solicitation to customer fulfillment. These services
include direct mail solicitations, customer list management and customer service
operations, including order input, billing, collection, printing and tracking of
customers ordering history. Through its database capabilities, the Company is
also able to store and manage a proprietary database of customer purchasing
habits gathered from the Company's hosiery sales history in addition to customer
gift redemptions and women's wear merchandise catalogs. This historical database
of customer purchasing habits covers current and past hosiery shipments,
customers' credit statistics, buying patterns and purchasing records.

Manufacturing and Distribution

The Company manages all phases of the manufacturing and fulfillment of
hosiery products, including planning, purchasing, production, packaging and
distribution. The Company's direct mail marketing program is vertically
integrated into its manufacturing and production operations, the latter
providing the Company's marketing operations with approximately 87% of the
Company's hosiery needs. By spreading the volume of yearly orders over four
major solicitation dates, manufacturing and fulfillment
4
<PAGE>

are able to avoid extreme variations, and thereby ensure higher efficiency and
better product quality. Additionally, the results of the Company's direct mail
marketing program allow the Company quickly to adjust its manufacturing output
accordingly.

Production Process. Once front end and back end orders have been
received, the shipment information is communicated via computer to the Company's
facilities at Newland, North Carolina. The Company's ability to schedule its
annual output allows the Company to practice "Just In Time" inventory management
techniques. The primary raw materials utilized by the Company are nylon and
spandex yarn, dye and chemicals, and are all readily available. Such raw
materials are purchased directly from suppliers who provide the Company with
technical support. All knitting and sewing operations, including toe closing,
line seaming and gusset seaming, are located at the Company's facilities in
Newland, North Carolina. Once the hosiery products have been manufactured, they
are transported to the Company's Lancaster, South Carolina, facility where the
products are dyed, packaged and then to the Heath Springs, South Carolina,
facility where they are prepared for delivery.

Suppliers. The primary raw materials utilized in the Company's
manufacturing operations are nylon and spandex yarn, dye and chemicals. The
Company purchases a majority of its yarn under 6-month fixed-price contracts
from various domestic and international suppliers. Although the Company
generally stocks only a two to three week supply of raw materials in order to
manage inventory efficiently, the predictable nature of the Company's shipments
generally allows it to order raw materials up to a year in advance and secure an
adequate supply at prearranged costs.

Packaging and Distribution. The Company operates fully automated, high
speed packaging machines and distributes its products through the postal service
directly to the customer's home. The Company's use of standardized and fully
automated packaging allows the Company to achieve significant efficiencies. The
Company uses the postal service and has been able to control delivery costs by
passing on to its customers any increases in postal rates. However, there can be
no assurance that in the future the Company will be able to pass on increased
shipping costs to its customers. The Company also tries to minimize postal costs
through the use of pre-sorting, utilizing nine digit zip codes and co-mingling
of mail.

Capital Investment. During the past seven years, the Company has spent
approximately $25 million replacing the majority of its knitting and sewing
capacity with advanced robotics, installing automatic packaging equipment for
more timely response through efficient fulfillment, building a new dye house and
distribution facility and upgrading its computer facilities. The Company
maintains relationships with its machinery producers in order to keep up-to-date
on changing manufacturing methods. The Company's current manufacturing
operations have the capacity to produce approximately 61 million pairs annually.
Additional requirements are being outsourced in Mexico.

Growth Strategy

Management believes that the Company's ability to analyze and manage a
large customer base, combined with its knowledge of customer buying profiles,
provides strong potential for future growth through the direct mail marketing
channel. The Company's strategy for additional growth primarily involves
expanding its current operations by acquiring front end customers through
increased solicitations and improved response rates. In 1996, the Company
brought in 6.6 million front end customers which has increased substantially
from 1994 and 1995 where 3.8 million and 5.0 million front ends were acquired,
respectively.

The basis for the continued growth in front end acquisitions will be
the ability to obtain previously unavailable lists and new promotional
techniques which have demonstrated improved response rates. Management
anticipates that the continued increase in front end customers will continue to
lead to growth in back end shipments over the next several years. The Company
believes, based in part on management's significant experience with
international operations and test marketing during 1996 in the United Kingdom,
France and Germany, that the international markets provide significant
opportunities for growth.

5
<PAGE>

Competition and Industry

The Company operates exclusively in the women's sheer hosiery industry,
targeting adult females as customers. Management believes that the overall
women's sheer hosiery market may be declining as a result of the high cost of
repeat purchases of such products and changes in women's choices in business and
leisure wear. Despite this apparent overall market decline, the Company has been
able to increase its sales from $118.6 million in 1994 to $162.8 in 1996.

Women's sheer hosiery is sold through a variety of distribution
channels, including discount stores, grocery and drug stores, specialty stores,
national chains and direct marketing. The Company is the only organization which
focuses solely on distributing women's sheer hosiery through a direct mail
marketing continuity program. Although several competitors have sold their
hosiery products via mail order for many years, this distribution has
concentrated on the large quantity sale of irregulars, as opposed to the
Company's direct mail marketing of high quality women's hosiery products in a
continuity program. Because the Company sells women's sheer hosiery, it competes
indirectly with major manufacturers and distributors of women's sheer hosiery
who primarily sell through the retail channel and some of whom are larger and
better capitalized than the Company, and may have greater brand recognition than
the Company.

The major United States hosiery manufacturers include Sara Lee Hosiery,
a division of Sara Lee Corporation, Kayser-Roth, a subsidiary of Mexican-based
Grupo Synkro S.A., the Company and Americal, a privately held U.S. concern. Sara
Lee Hosiery and Kayser-Roth account for more than 70% of the women's sheer
hosiery market. Over 60 other smaller manufacturers also produce women's sheer
hosiery primarily for sale under private labels. Sara Lee Hosiery is also a
significant competitor in the United Kingdom, France and Germany. Competition in
the women's sheer hosiery market is generally based on price, quality and
customer service.

In addition, the Company competes, and faces potential competition,
with other direct marketing companies. Such competitors include businesses which
engage in direct mail, catalog sales, telemarketing and other methods of sale
which compete for the attention and spending dollars of consumers in the home.
There are numerous direct marketing companies that are larger and better
capitalized than the Company and that offer more varied product assortments. The
Company believes, however, that it is the only significant direct marketing
company to focus exclusively on women's sheer hosiery.

Employees

As of December 31, 1996, the Company had 1,032 employees, 173 of whom
were located at its headquarters and operations center in Bensalem,
Pennsylvania, 345 of whom were located at its manufacturing facility in Newland,
North Carolina, 271 of whom were located at its manufacturing, and packaging
facility in Lancaster, South Carolina, and 236 of whom were located at its
sewing and fulfillment operations facility in Heath Springs, South Carolina.
Additionally, 7 employees are currently employed in Europe. Of the total number
of employees, 129 are salaried workers. The remaining 903 are non-salaried
employees, the majority of whom are paid an hourly wage plus incentive
compensation based on productivity measures. The Company's hourly workforce is
not affiliated with any unions. The Company has not experienced any work
stoppages and believes its relations with its employees are good.

Recapitalization

<PAGE>

ITEM 2. PROPERTIES

The Company owns or leases facilities at six principal locations. The
following sets forth the general location of each, its size, whether the
facility is owned or leased and the principal function of each.
<TABLE>

<CAPTION>
Size in Owned/
Location Square Feet Leased Function
-------- ----------- ------ --------
Headquarters; Administration;
Marketing; Data Processing;
<S> <C>
Bensalem, Pennsylvania 60,000 Leased Customer Service

Newland, North Carolina 138,000 Owned Knitting; Sewing

Lancaster, South Carolina 142,000 Owned Dyeing; Packaging

Heath Springs, South Carolina 143,000 Owned Fulfillment Operations

Liverpool, United Kingdom 15,000 Leased Headquarters; United Kingdom

Ettligen, Germany 3,000 Leased Office
<FN>

The owned facilities are subject to mortgages and security interests granted to
secure payment of the Company's debt. See Note 10 to the Consolidated Financial
Statements of Hosiery Corporation of America, Inc. in Item 8 hereof.
</FN>
</TABLE>

ITEM 3. 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 thirteen 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
7
<PAGE>

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 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company did not submit any matter to a vote of its security holders
during the fourth quarter of 1996.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS

There is no established public trading market for any class of common
equity of the Company.

As of March 18, 1997 the Company had approximately 33 holders of record
of its common stock.

Dividend Policy

The Company has not paid cash dividends on its common stock since 1992
and does not anticipate paying such dividends in the foreseeable future. The
Company intends to retain any future earnings for reinvestment in the Company.
In addition, the Bank Credit Agreement and the indenture pursuant to which the
Notes were issued place limitations on the Company's ability to pay dividends or
make certain other distributions in respect of its common stock. Any future
determination as to the payment of dividends will be subject to such
prohibitions and limitations, will be at the discretion of the Company's Board
of Directors and will depend on the Company's results of operations, financial
condition, capital requirements and other factors deemed relevant by the Board
of Directors, including the General Corporation Law of the State of Delaware
(the "DGCL") which provides that dividends are only payable out of the Company's
surplus or current net profits.

<PAGE>

<TABLE>
ITEM 6. SELECTED FINANCIAL DATA

<CAPTION>
Year Ended December 31,
-----------------------
1996 1995 1994(a) 1993 1992
---- ---- ------- ---- ----
(In Thousands)

<S> <C> <C> <C> <C> <C>
Net Revenues $162,763 $136,299 $118,560 $109,824 $102,235

Operating Income Before
Compensation Related to Stock
Options and Expenses Related to
Stock Offering and Acquisition (b) 36,968 31,427 21,613 16,018 11,820

Income (Loss) From Continuing
Operations Before Provision
(Benefit) for Income Taxes and
Cumulative Effect of Accounting
Change (5,696) 12,056 17,116 14,943 10,676

Income From Continuing
Operations Before Compensation
Related to Stock Options,
Expenses Related to Stock
Offering and Acquisition,
Provision (Benefit) for Income
Taxes and Cumulative Effect
of Accounting Change (b) 18,829 12,056 17,116 14,943 10,676

Working Capital 589 5,794 3,152 7,518 7,632

Total Assets 92,600 82,860 74,860 66,859 66,152

Long-Term Debt 143,705 151,093 153,442 12,305 13,455

Other Long-Term Obligations 66 584 1,204

Redeemable Equity Securities 768 384 45 -- --

Stockholders' Equity
(Deficiency) (83,822) (102,920) (110,266) 26,318 25,656

Cash Dividends Declared -- -- -- -- 387

<FN>
(a) On October 17, 1994, the Company effected the recapitalization of its
capital stock. For discussion of the recapitalization, see Note 3 to the
Consolidated Financial Statements of Hosiery Corporation of America, Inc.
in Item 8 hereof.

(b) During 1996, the Company granted options to certain employees to
purchase up to 215,369 shares of common stock. The Company
recognized $22,938 of compensation expense related to the
difference between the estimated fair value of the stock at the
date of grant and the exercise price of such options. (See Note
18 to the Consolidated Financial Statements of Hosiery
Corporation of America, Inc. in Item 8 hereof for further
discussion.) Additionally during 1996, the Company incurred costs
of $1.6 million, associated with a potential initial public
offering of equity securities and a potential acquisition,
neither of which were consummated. "Operating income" and "income
(loss) from continuing operations before provision (benefit) for income
taxes and cumulative effect of accounting change" per the Consolidated
Financial Statements of Hosiery Corporation of America, Inc. have
been adjusted in the above table to exclude these charges in order to
present comparable operating information with that of previous years.

</FN>
</TABLE>
9
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995
AND 1994
<TABLE>

Results of Operations

The following table sets forth certain income statement data for the
Company expressed as a percentage of net revenues.

<CAPTION>
Fiscal Years Ended December 31,

1996 1995 1994
---- ---- ----

<S> <C> <C> <C>
Net revenues........................................................... 100.0% 100.0% 100.0%
Cost of sales.................................................... 46.2 44.7 44.3
Administrative and general expenses.............................. 7.0 7.5 11.5
Provision for doubtful accounts.................................. 6.2 5.7 4.8
Marketing costs.................................................. 13.6 12.8 13.1
Coupon redemption costs.......................................... 2.5 4.4 5.4
Depreciation and amortization.................................... 1.8 1.8 2.6
----- ----- -----

Subtotal.................................................... 77.3 76.9 81.7
---- ---- ----
<FN>

Income from continuing operations before interest, compensation related
to stock options, expenses related to stock offering and
acquisition, other (income) expenses and provision
(benefit) for income taxes........................................... 22.7% 23.1% 18.3%
==== ==== ====
</FN>
</TABLE>

Fiscal 1996 Compared to Fiscal 1995

Net revenues increased by 19.4% to $162.8 million in fiscal 1996 from
$136.3 million in fiscal 1995. This increase in net revenues was the result of a
combination of increased volume ($19.7 million), a portion of which relates to
the Company's recent expansion into the United Kingdom, the introduction of a
new style ($6.1 million) and pricing ($0.7 million). In January 1996, the
Company commenced operations in the United Kingdom which, for the year ended
December 31, 1996, generated $8.8 million in revenue. In addition, the Company
is currently evaluating potential programs in Germany, France and Japan. The
Company has begun to conduct tests during 1996 in Germany and France and expects
further testing to be conducted in 1997, as well as in Japan.

Cost of sales increased 23.3% to $75.2 million in fiscal 1996 from
$61.0 million for fiscal 1995. As a percentage of net revenues, cost of sales
was 46.2% in 1996 versus 44.7% for the same period in 1995. This increase was
primarily due to the significant increase in first and second shipments
associated with the Company's recently initiated operations in the United
Kingdom, as well as the Company's efforts to increase its solicitations in the
United States to acquire additional front end customers. 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.
First and second shipments increased by 2.5 million or 37.0% from 6.7 million in
1995 to 9.1 million in 1996. These additional shipments, in both the United
States and the United Kingdom, reflected primarily a 9.4 million increase
(21.6%) in solicitations to 52.6 million in fiscal 1996 from 43.3 million in
fiscal 1995. Of the 2.5 million increase in first and second shipments, 1.2
million represent shipments within the Company's new United Kingdom program.

Administrative and general expenses increased 11.8% to $11.4 million in
fiscal 1996 from $10.2 million for the same period of 1995. Increased personnel
and higher wages account for the increase. As a percentage of net revenues,
administrative and general expenses were 7.0% in 1996 versus 7.5% in 1995.

10
<PAGE>

Provision for doubtful accounts increased $2.3 million or 29.1% to
$10.1 million in fiscal 1996 from $7.8 million for the same period of 1995. This
increase was caused by additional front end, second and third shipments in 1996
as compared to 1995 (up 2.7 million shipments which is 37.0% higher than 1995),
which have a higher rate of uncollectable accounts. As a percentage of net
revenues, bad debts were 6.2% in 1996 versus 5.7% for 1995.

Marketing costs increased 26.4% to $22.1 million from $17.4 million for
the years ended December 31, 1996 and 1995, respectively. This increase was
partially attributable to higher amortization of prior years' deferred marketing
costs in 1996 compared to 1995, related to the substantial increase (41.6%) in
solicitations in 1995 versus 1994. In 1995, 43.3 million solicitations were
mailed as compared to 30.6 million in 1994. These costs are amortized over 42
months with the greatest amortization in the first 24 months. Additionally, a
portion of this increase was attributable to higher front end solicitations, as
9.4 million additional solicitations were mailed in 1996 compared to 1995 (up
21.6%), including the start up in the United Kingdom. Marketing expenditures
were also incurred in France and Germany for testing. As a percentage of net
revenues, marketing costs were 13.6% in 1996 versus 12.8% for 1995.

Coupon redemption costs declined to $4.1 million for fiscal 1996 from
$6.0 million for fiscal 1995. As a percentage of net revenues, redemption costs
were 2.5% in 1996 versus 4.4% for 1995. This decrease relates to the issuance of
new gift catalogs in both 1996 and 1995 that have a lower average cost per gift
to the Company, and beginning in 1996, the charging of shipping and handling to
redemption customers, which has also lowered the cost of future redemptions and,
therefore, the reserve balance for these future redemptions. Lower redemptions
account for $0.2 million of the decrease.

Compensation related to stock option expense was $22.9 million in 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 then
market price of the Company's common stock, as part of a series of transactions
in contemplation of a potential initial public offering.

Expenses of $1.6 million were incurred related to a potential initial
public offering of equity securities and a potential acquisition, neither of
which were consumated.

Interest expense decreased to $18.5 million for fiscal 1996 from $19.7
million for 1995. This decrease in interest expense was a combination of lower
rates ($0.6 million) and less debt ($0.6 million) on the bank loan. As a
percentage of net revenues, interest expense was 11.3% in 1996 versus 14.5% for
1995.

Excluding stock option compensation expense of $22.9 million and the
costs associated with the potential initial public offering and acquisition of
$1.6 million, the Company would have had operating income of $37.0 million for
fiscal 1996, a 17.6% increase over $31.4 million for 1995, and would have had
pretax income of $18.8 million for 1996, a 56.2% increase over $12.1 million for
fiscal 1995. These increases were primarily attributable to increased sales,
lower coupon redemption costs, and lower interest costs, offset by increases in
cost of sales, bad debts, marketing costs and administrative and general
expenses. As a percentage of net revenues, operating income, adjusted to exclude
stock option compensation expense and potential initial public offering and
acquisition expense of $22.9 million and $1.6 million, respectively, was 22.7%
for 1996 versus 23.1% for 1995. As a percentage of net revenues, pretax income,
adjusted to exclude stock option compensation expense of $22.9 million and the
potential initial public offering and acquisition expense of $1.6 million, was
11.5% for 1996 versus 8.8% for 1995.

The Company incurred a net loss of $4.3 million in 1996. Excluding the
stock option compensation expense and potential initial public offering and
acquisition costs of $15.9 million net of tax, net income would have increased
to $11.6 million in 1996 from $7.5 million in 1995. This increase resulted from
the increase in pretax income of $6.7 million, adjusted to exclude stock option
compensation expense of $22.9 million and the costs associated with the
potential initial public offering and acquisition of $1.6 million, offset by a
$2.6 million increase in the provision for income taxes, excluding the $8.6
11
<PAGE>

million tax benefit related to the stock option compensation expense and the
costs associated with the potential intial public offering and acquisition. As a
percentage of net revenues, net income adjusted to exclude the net impact of the
stock option compensation expense and the costs of the potential initial public
offering and acquisition, was 7.1% for 1996 versus 5.5% for 1995.

Fiscal 1995 Compared to Fiscal 1994

Net revenues increased by 15.0% to $136.3 million in fiscal 1995 from
$118.6 million in fiscal 1994. This increase was the result of higher
solicitations to elicit additional front end customers (up 1.2 million customers
from the comparable period). The increase in net revenues was primarily the
result of these additional front end shipments, the related continuation of back
end shipments for these new customers and there was a $.05 per pair price
increase in both fiscal 1995 and 1994. Price variance accounts for approximately
25% of the sales increase, while the balance relates to volume increases.

Cost of sales increased 16.2% to $61.0 million in fiscal 1995 from
$52.5 million in fiscal 1994. This increase was primarily attributable to the
higher front end and back end shipments. There were 1.2 million additional front
end shipments in 1995 compared to 1994. The cost of sales for front end
shipments is higher as a percent of sales than the cost of back end shipments,
resulting in an increase in cost of sales as a percent of sales from 1994
(44.3%) to 1995 (44.7%). The higher cost of front end shipments was partially
offset by lower manufacturing costs and lower acquisition cost for raw
materials.

Administrative and general expenses decreased 25.1% to $10.2 million in
fiscal 1995 from $13.6 million in fiscal 1994. As a percentage of net revenues,
these expenses decreased to 7.5% in fiscal 1995 from 11.5% in fiscal 1994. This
decrease was primarily due to lower personnel costs ($2.6 million) and the
elimination of a corporate-owned life insurance program ($0.8 million).

Provision for doubtful accounts increased $2.1 million to $7.8 million
in fiscal 1995 from $5.6 million in fiscal 1994. This increase was partially
caused by additional front end, second and third shipments in fiscal 1995 as
compared to fiscal 1994 (1.7 million), which have a higher rate of uncollectible
accounts, resulting in $1.3 million of the increase. The balance of the increase
was attributable to a lower payment rate ($0.4 million) as compared to fiscal
1994, and an increase in agency fees and volume increases for other hose
shipments ($0.4 million).

Marketing costs increased 12.2% to $17.4 million for fiscal 1995 from
$15.5 million for fiscal 1994. This increase was directly attributable to the
substantial increase in front end solicitations (43.3 million in 1995 compared
to 30.6 million in 1994).

Coupon redemption costs decreased to $6.0 million in fiscal 1995 from
$6.4 million in fiscal 1994. This decrease is the result of providing a new gift
catalog to customers with an average cost per gift to the Company that is less
than that of previous catalogs. As a percentage of net revenues, redemption
costs were 4.4% in 1995 and 5.4% in 1994, reflecting the lower gift costs in
1995 versus 1994.

Depreciation expense has declined to $2.5 million in fiscal 1995 from
$3.1 million in fiscal 1994. The primary reason for the decrease related to
accelerated depreciation of computer equipment in 1994 that was replaced in
early 1995.

Interest expense has increased to $19.7 million in fiscal 1995 from
$4.8 million in fiscal 1994. This increase was the direct result of the issuance
by the Company of approximately $149 million of debt in October 1994 as part of
the Recapitalization as defined in "--The Recapitalization" below.

Operating income increased to $31.4 million in fiscal 1995 from $21.6
million in fiscal 1994, a 45.4% increase. Pretax income decreased to $12.1
million in fiscal 1995 from $17.1 million in fiscal 1994, a 30% decrease. The
increase in operating income was primarily attributable to increased net
revenues, lower administrative and general expenses, lower coupon redemption
costs and lower depreciation and amortization expense, offset by increases in
cost of sales, provision for doubtful accounts and marketing costs. The decrease
in pretax income was primarily attributable to increased interest expense
related to the 1994 Recapitalization, offset by increased operating income. As a
percentage of net revenues, operating income was 23.1% in fiscal 1995 versus
18.2% in fiscal 1994. As a percentage of net revenues, pretax income was 8.8% in
fiscal 1995 versus 14.4% in fiscal 1994.

12
<PAGE>

Net income decreased to $7.5 million for 1995 from $9.7 million for
1994. Adjusted for the losses on discontinued operations and the cumulative
effect of a change in accounting, net income decreased to $7.5 million in 1995
from $10.5 million in 1994. This decrease in net income resulted from decreased
operating results ($5.1 million), offset by a $2.1 million decrease in the
provision for income taxes.

Liquidity and Capital Resources

The Company's cash requirements arise principally from the need to
finance new front end solicitations (customers), capital expenditures, debt
repayment and other working capital requirements. The Company mailed 52.6
million, 43.3 million and 30.6 million solicitations during the years 1996, 1995
and 1994, respectively. The Company financed these solicitations and expects to
finance future solicitations from internally generated funds and/or its Credit
Facility.

In fiscal 1996, 1995 and 1994, capital expenditures were $4.9 million,
$3.1 million and $2.8 million, respectively. The majority of the expenditures
were for the purchase of knitting, sewing and dyeing equipment and facility
acquisition and enhancements. These expenditures were financed substantially
through the assumption of capital leases. Also, the Company expects to expend
approximately $2.5 million in 1997 for additional equipment. These capital
expenditures will be financed through internal sources or the assumption of
capital leases.

Working capital decreased to $0.6 million at December 31, 1996, from
$5.8 million at December 31, 1995, and $3.2 million at December 31, 1994. The
decrease from 1995 to 1996 is primarily the result of increases in the current
portion of long-term debt relating to increasing debt service requirements and
accounts payable, offset by increased receivables and inventories. Increased
cash, receivables and inventories, offset by higher interest and taxes account
for the increase from 1994 to 1995.

Net cash provided from operating activities was $7.4 million in 1996 as
compared to $8.5 million in 1995 and $6.3 million in 1994. This change is
primarily due to increases in receivables, inventory and marketing costs related
to the growth of the business, offset by increases in net income, excluding
non-cash charges for stock option compensation, depreciation, and amortization
of marketing costs, and accounts payable.

Net cash used in investing activities was $2.5 million in 1996 and $1.0
million in 1995, and related primarily to the investment in equipment and the
addition of a fulfillment facility in 1996. Investing activities in 1994
provided cash of $5.9 million, primarily as a result of the sale of assets and
discontinued operations to the former stockholder.

During 1996, 1995 and 1994, the Company used $9.9 million, $4.4 million
and $8.2 million, respectively, in financing activities. Net payments on bank
and other financing, including capital lease obligations, totaled $9.9 million,
$4.6 million and $9.9 million in 1996, 1995 and 1994, respectively. In 1994, the
Company received proceeds from the issuance of common and preferred stock
totaling $53.4 million, long-term debt totaling $80.0 million and Notes totaling
$69.1 million in connection with the Recapitalization (see below). The proceeds
in 1994 from the Recapitalization were primarily used to purchase shares for
treasury totaling $199.0 million. The proceeds from the Recapitalization were
also utilized, in part, to pay fees related to the issuance of stock associated
therewith totaling approximately $2.0 million, net of amounts paid or accrued
through the use of the Company's general working capital.

13
<PAGE>

The Recapitalization

On October 17, 1994, the Company effected the recapitalization of its
capital stock (the "Recapitalization"). As a result of the substantial
indebtedness incurred in connection with the Recapitalization, the Company has
significant debt service obligations. At December 31, 1996, the outstanding
amount of the Company's indebtedness (other than trade payables) is $143.7
million, including $70.0 million of senior secured debt and $68.3 million of
senior subordinated debt (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, $13.7 million of which was available at December
31, 1996.

Legal Proceedings

As discussed further in Item 3--Legal Proceedings, the Company has
received inquiries from thirteen 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.

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.

14
<PAGE>

<TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

HOSIERY CORPORATION OF AMERICA, INC.

Index to Financial Statements and Financial Statement Schedule

<CAPTION>
Page Number

Financial Statements and Independent Auditors' Report:
<S> <C>
Independent Auditors' Report.................................................... 16
Consolidated Balance Sheets--December 31, 1996 and 1995......................... 17
Consolidated Statements of Operations--For the years ended December 31, 1996,
1995 and 1994................................................................ 18
Consolidated Statements of Cash Flows--For the years ended December 31, 1996,
1995 and 1994................................................................ 19
Consolidated Statements of Stockholders' Equity (Deficiency)--For the years
ended December 31, 1996, 1995 and 1994....................................... 21
Notes to Consolidated Financial Statements...................................... 25
Financial Statement Schedule and Independent Auditors' Report:
Independent Auditors' Report.................................................... S-1
Schedule I--Valuation and Qualifying Accounts--For the years ended
December 31, 1996, 1995 and 1994............................................. S-2
<FN>

Schedules other than those listed above are omitted because they are
either not applicable or not required or the information required is included in
the consolidated financial statements or notes thereto.
</FN>
</TABLE>

15
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Hosiery Corporation of America, Inc.
Bensalem, Pennsylvania

We have audited the accompanying consolidated balance sheets of Hosiery
Corporation of America, Inc. and subsidiaries (the "Company") as of December 31,
1996 and 1995, and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of the Company as of December 31,
1996 and 1995, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.

As discussed in Note 3 to the consolidated financial statements, on July 19,
1994, the Company entered into a Recapitalization and Stock Purchase Agreement.

Deloitte & Touche LLP
Philadelphia, Pennsylvania

February 28, 1997

16
<PAGE>
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(Dollars in thousands, except per share data)
<CAPTION>
ASSETS 1996 1995
------------------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ......................... $ 1,960 $ 6,987
Accounts receivable, less an allowance for doubtful
accounts of $1,540 and $1,263 in 1996 and 1995,
respectively ..................................... 22,939 19,708
Income tax refunds receivable ..................... 100 32
Inventories ....................................... 15,538 9,814
Prepaid and other current assets .................. 1,770 1,350
--------- ---------
Total current assets .......................... 42,307 37,891
PROPERTY AND EQUIPMENT, net ............................ 17,422 15,334
DEFERRED CUSTOMER ACQUISITION COSTS .................... 24,664 19,485
DEFERRED DEBT ISSUANCE COSTS,less accumulated
amortization of $3,684 and $2,016 in 1996 and 1995,
respectively ...................................... 7,185 8,853
DEFERRED INCOME TAXES .................................. 375 --
OTHER ASSETS ........................................... 647 1,297
--------- ---------
TOTAL .................................................. $ 92,600 $ 82,860
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:

Current portion of long-term debt ................. $ 8,637 $ 3,421
Current portion of capital lease obligations ...... 1,627 1,402
Accounts payable .................................. 7,885 3,948
Accrued expenses and other current liabilities .... 5,442 5,682
Accrued interest .................................. 4,703 4,858
Accrued coupon redemption costs ................... 5,044 6,117
Deferred income taxes ............................. 8,380 6,540
Income taxes payable .............................. -- 129
--------- ---------
Total current liabilities .................... 41,718 32,097
LONG-TERM DEBT, Less current portion ................... 129,142 142,565
CAPITAL LEASE OBLIGATIONS, Less current portion ........ 4,299 3,705
ACCRUED COUPON REDEMPTION COSTS ........................ 495 521
DEFERRED INCOME TAXES .................................. -- 6,508
-------- ---------
Total liabilities ............................ 175,654 185,396
COMMITMENTS AND CONTINGENT LIABILITIES -------- ---------
REEDEMABLE EQUITY SECURITIES ........................... 768 384
--------- --------
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 $63,082 and $49,842 in 1996 and 1995,
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 ........................ 16,669 16,753
Compensatory stock options outstanding ............ 22,938 --
Accumulated deficit ............................... (159,894) (155,588)
Restricted stock .................................. (947) (1,499)
Foreign currency translation adjustment ........... -- 2
--------- ---------
Stockholders' deficiency ........................ (83,822) (102,920)
--------- ---------
TOTAL .................................................. $ 92,600 $ 82,860
========= =========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
17
<PAGE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------ ------ ------

<S> <C> <C> <C>
NET REVENUES ................................................................. $ 162,763 $ 136,299 $ 118,560
---------- ---------- ----------
COSTS AND EXPENSES:
Cost of sales ........................................................... 75,184 60,982 52,485
Administrative and general expenses ..................................... 11,404 10,200 13,616
Provision for doubtful accounts ......................................... 10,057 7,788 5,643
Marketing costs ......................................................... 22,055 17,442 15,542
Coupon redemption costs ................................................. 4,140 5,969 6,397
Depreciation and amortization ........................................... 2,996 2,493 3,141
Compensation related to stock options ................................... 22,938 -- --
Expenses related to stock offering and acquisition ...................... 1,587 -- --
Other (income) expenses ................................................. (41) (2) 123
---------- ---------- ----------

OPERATING INCOME ............................................................. 12,443 31,427 21,613
Interest income ......................................................... 327 378 314
Interest expense ........................................................ 18,466 19,749 4,811
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE PROVISION (BENEFIT) FOR INCOME
TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE ............................ (5,696) 12,056 17,116
PROVISION (BENEFIT) FOR INCOME TAXES ......................................... (1,390) 4,560 6,648
---------- ---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE ........................................................... (4,306) 7,496 10,468
LOSS FROM DISCONTINUED OPERATIONS (net of income tax provision of $8)......... -- -- (329)
LOSS ON DISPOSAL OF DISCONTINUED OPERATIONS (net of income tax
benefit of $83) ............................................................ -- -- (230)
---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE ................. (4,306) 7,496 9,909
CUMULATIVE EFFECT OF ACCOUNTING CHANGE ....................................... -- -- (163)
---------- ---------- ----------
NET INCOME (LOSS) ............................................................ ($ 4,306) $ 7,496 $ 9,746
========== ========== ==========
<FN>
See notes to consolidated financial statements

</FN>
</TABLE>
18
<PAGE>

<TABLE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands)
<CAPTION>
1996 1995 1994
----------------------------------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) ........................................................................... $ (4,306) $ 7,496 $ 9,746
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization ............................................................ 2,996 2,493 3,141
Amortization of debt issue costs and discounts ........................................... 1,852 1,848 358
Compensation related to stock options .................................................... 22,938 -- --
Deferred income taxes .................................................................... (5,043) 1,882 1,672
Cumulative effect of change in accounting principle ...................................... -- -- 163
(Gain) loss on sale and abandonments of property and equipment ........................... (3) (2) 123
Loss from discontinued operations ........................................................ -- -- 329
Loss on disposal of discontinued operations .............................................. -- -- 230
Amortization of restricted stock ......................................................... 552 -- --
Amortization of deferred customer acquisition costs ...................................... 17,994 15,574 13,495
Debt issuance costs ...................................................................... -- (23) (10,845)
(Increase) decrease in operating assets, net of effects from discontinued operations:
Accounts receivable ................................................................ (3,231) (2,052) (2,663)
Inventories ........................................................................ (5,724) (1,527) 410
Payments for deferred customer acquisition costs ................................... (23,083) (17,902) (12,099)
Prepaid and other current assets ................................................... (488) (312) (718)
Other assets ....................................................................... 298 (56) (356)
Increase (decrease) in operating liabilities, net of effects from discontinued operations:
Accounts payable, accrued expenses and other liablilities .......................... 3,842 1,142 4,340
Income taxes payable ............................................................... (129) 129 (671)
Accrued coupon redemption costs .................................................... (1,099) (150) 199
Operating activities of discontinued operations .......................................... -- -- (599)
------ ------ ------
Net cash provided by operating activities .................................... 7,366 8,540 6,255
------ ------ ------
INVESTING ACTIVITIES:
Acquisitions of property and equipment ...................................................... (2,522) (1,019) (1,989)
Proceeds from sales of property and equipment ............................................... 39 6 106
Proceeds from disposal of discontinued operations to Stockholder ............................. -- -- 3,158
Proceeds from sale of assets to Stockholder ................................................. -- -- 3,960
Decrease in assets held for sale to Stockholder ............................................. -- -- 647
------- ------- --------
Net cash provided by (used in) investing activities .......................... (2,483) (1,013) 5,882
------- ------- --------
FINANCING ACTIVITIES:
Net repayment of note payable to bank ....................................................... -- -- (2,300)
Proceeds from bank and other financing ..................................................... -- -- 80,000
Payments on bank and other financing ........................................................ (8,391) (3,364) (4,941)
Payments on capital leases .................................................................. (1,519) (1,256) (2,682)
Payments of costs associated with issuance of stock ......................................... -- (33) (2,601)
Capital contribution from Stockholder ....................................................... -- -- 690
Issuance of Preferred stock ................................................................. -- -- 36,478
Issuance of Common stock .................................................................... -- -- 16,902
Issuance of Redeemable Equity Securities, net of costs to issue ............................. -- 185 45
Issuance of Units ........................................................................... -- -- 69,146
Stock redemptions and purchases of Treasury stock ........................................... -- -- (198,983)
Purchase price adjustment of Treasury stock ................................................. -- (88) --
Proceeds from stock subscription ............................................................ -- 125 --
-------- ------- -------
Net cash used in financing activities ........................................ (9,910) (4,431) (8,246)
-------- ------- -------

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ........................................... (5,027) 3,096 3,891
Cash and cash equivalents at beginning of year ................................................. 6,987 3,891 --
-------- -------- --------
Cash and cash equivalents at end of year ....................................................... $ 1,960 $ 6,987 $ 3,891
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ................................................................................. $16,719 $15,111 $ 2,436
========= ========= ========
Income taxes ............................................................................. $ 4,102 $ 2,261 $ 4,833
========= ========= ========
19
<PAGE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands)

(Continued)

<FN>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

Capital lease obligations of $2,338, $2,103 and $776 were entered into for new
equipment during 1996, 1995 and 1994, respectively.

In 1996, two officers of the Company were granted approximately $300 of
redeemable equity securities as additional compensation.

During 1995, in connection with the issuance of redeemable common shares,
certain agreements were amended and executed in order that preferred stock
issued in 1995 and 1994 would be redeemable under the same basic terms of the
redeemable common stock. Due to the change in terms of the preferred stock
agreement, 10,218 shares issued in October 1994 with a value net of issuance
costs of $97 were reclassified from preferred stock to redeemable equity
securities in 1995.

Units issued in connection with the Recapitalization Agreement in 1994 consisted
of one senior subordinated note and one share of Class A, non voting common
stock. Based on the issue price of the Units and the relative fair market value
of the notes and the shares at the time of issuance, the Company determined that
$67,962 related to the notes issued and $1,184 related to the shares issued.

See notes to consolidated financial statements
</FN>
</TABLE>
20
<PAGE>
<TABLE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Dollars in thousands)

<CAPTION>
PREFERRED STOCK
----------------------------------------------------------------
PIK CLASS A CLASS B
-------------------- -------------------- ----------------
Shares Amount Shares Amount Shares Amount

<S> <C> <C> <C> <C>
BALANCE, January 1, 1994 100,000 $100 100,000 $520
Net income
Gain on sale of assets to
Stockholder recognized as
capital contribution (see Note 3)
Purchase of shares for treasury
Retirement of shares in treasury (100,000) (100) (100,000) (520)
Reclassification of Class A Common
Stock into Common Stock and
effect of stock split of Common
Stock on approximately a
62.22 to 1 basis (see Note 3)
Issuance of Common Stock (see
Notes 3 and 19)
Issuance of PIK Preferred Stock
(see Notes 3 and 20) 3,637,602 $36,376
Issuance of shares in connection
with debentures (see Note 3)
Issuance of shares in connection
with management grant (see
Notes 3 and 19) 102,180 1,022
Issuance of shares in connection
with Recapitalization (see Note 3) 10,218 102
Costs associated with issuance of
stock
-------------------- ----------------- -----------------
BALANCE December 31, 1994 3,750,000 37,500 -- -- -- --
Net income
Amendment of preferred stock
agreement resulting in certain
redeemable preferred equity
securities (10,218) (102)
Additional costs associated with
previously purchased and retired
treasury stock
Costs associated with issuance of
stock
Accretion of preference value over
carrying value of redeemable
preferred stock
Receipt of stock subscription
Foreign currency translation
------------------- ----------------- -----------------
BALANCE December 31, 1995 3,739,782 37,398 -- -- -- --
Net loss
Compensation under restricted
stock awards
Stock options granted
Accretion of preference value over
carrying value of redeemable
preferred stock
Foreign currency translation
------------------- ----------------- -----------------
BALANCE December 31, 1996 3,739,782 $37,398 -- $ -- -- $ --
=================== ================= =================
<FN>

See notes to consolidated financial statements.
</FN>
</TABLE>

<PAGE>
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Dollars in thousands)

<CAPTION>
COMMON STOCK
---------------------------------------------------------
CLASS A, CLASS A,
VOTING NON VOTING
---------------- --------------- ------------------
Shares Amount Shares Amount Shares Amount
---------------- --------------- ------------------
<S> <C> <C>
BALANCE, January 1, 1994 * 183,100 $183 -- --
Net income
Gain on sale of assets to
Stockholder recognized as
capital contribution (see Note 3)
Purchase of shares for treasury
Retirement of shares in treasury (178,396) (178)
Reclassification of Class A Common
Stock into Common Stock and
effect of stock split of Common
Stock on approximately a
62.22 to 1 basis (see Note 3) 292,600 $3 (4,704) (5)
Issuance of Common Stock (see
Notes 3 and 19) 1,000,660 10 5,652 --
Issuance of PIK Preferred Stock
(see Notes 3 and 20)
Issuance of shares in connection
with debentures (see Note 3) 70,000 $1
Issuance of shares in connection
with management grant (see
Notes 3 and 19) 28,262 --
Issuance of shares in connection
with Recapitalization (see Note 3)
Costs associated with issuance of
stock
---------------- --------------- ------------------
BALANCE December 31, 1994 1,321,522 13 -- -- 75,652 1
Net income
Amendment of preferred stock
agreement resulting in certain
redeemable preferred equity
securities
Additional costs associated with
previously purchased and retired
treasury stock
Costs associated with issuance of
stock
Accretion of preference value over
carrying value of redeemable
preferred stock
Receipt of stock subscription
Foreign currency translation
---------------- --------------- ------------------
BALANCE December 31, 1995 1,321,522 13 -- -- 75,652 1
Net loss
Compensation under restricted
stock awards
Stock options granted
Accretion of preference value over
carrying value of redeemable
preferred stock
Foreign currency translation
---------------- --------------- ------------------
BALANCE December 31, 1996 1,321,522 $13 -- $ -- 75,652 $1
================ =============== ==================
<FN>
See notes to consolidated financial statements.

</FN>
</TABLE>

<PAGE>
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Dollars in thousands)

<CAPTION>
TREASURY STOCK
---------------------------------------------------
PREFERRED COMMON Retained
STOCK STOCK Additional Earnings
--------------------- ------- Paid-In (Accum.
Class A Class B Class A Amount Capital Deficit)
--------------------- -------------------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1994 94,540 90,575 161,059 ($18,615) $4,638 $ 39,492
Net income 9,746
Gain on sale of assets to
Stockholder recognized as
capital contribution (see Note 3) 690
Purchase of shares for treasury 5,460 9,425 17,337 (198,983)
Retirement of shares in treasury (100,000) (100,000) (178,396) 217,598 (4,566) (212,234)
Reclassification of Class A Common
Stock into Common Stock and
effect of stock split of Common
Stock on approximately a
62.22 to 1 basis (see Note 3) 2
Issuance of Common Stock (see
Notes 3 and 19) 17,017
Issuance of PIK Preferred Stock
(see Notes 3 and 20)
Issuance of shares in connection
with debentures (see Note 3) 1,183
Issuance of shares in connection
with management grant (see
Notes 3 and 19) 477
Issuance of shares in connection
with Recapitalization (see Note 3)
Costs associated with issuance of
stock (2,601)
--------------------- -------------------- ------- ---------
BALANCE December 31, 1994 -- -- -- -- 16,840 (162,996)
Net income 7,496
Amendment of preferred stock
agreement resulting in certain
redeemable preferred equity
securities
Additional costs associated with
previously purchased and retired
treasury stock (88)
Costs associated with issuance of
stock (35)
Accretion of preference value over
carrying value of redeemable
preferred stock (52)
Receipt of stock subscription
Foreign currency translation
--------------------- -------------------- ------- ---------
BALANCE December 31, 1995 -- -- -- -- 16,753 (155,588)
Net loss (4,306)
Compensation under restricted
stock awards
Stock options granted
Accretion of preference value over
carrying value of redeemable
preferred stock (84)
Foreign currency translation
--------------------- -------------------- ------- ---------
BALANCE December 31, 1996 -- -- -- $ -- $16,669 (159,894)
===================== ==================== ======= =========
<FN>
See notes to consolidated financial statements.

</FN>
</TABLE>
23

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Dollars in thousands)

<CAPTION>
Compensatory
Stock Stock Foreign
Subscription Restricted Options Currency
Receivables Stock Outstanding Translation Total
------------ ---------- ------------ ----------- -------
<S> <C> <C>
BALANCE, January 1, 1994 $26,318
Net income 9,746
Gain on sale of assets to
Stockholder recognized as
capital contribution (see Note 3) 690
Purchase of shares for treasury (198,983)
Retirement of shares in treasury --
Reclassification of Class A Common
Stock into Common Stock and
effect of stock split of Common
Stock on approximately a
62.22 to 1 basis (see Note 3) --
Issuance of Common Stock (see
Notes 3 and 19) $(125) 16,902
Issuance of PIK Preferred Stock
(see Notes 3 and 20) 36,376
Issuance of shares in connection
with debentures (see Note 3) 1,184
Issuance of shares in connection
with management grant (see
Notes 3 and 19) $(1,499) --
Issuance of shares in connection
with Recapitalization (see Note 3) 102
Costs associated with issuance of
stock (2,601)
------------ ---------- ------------ ----------- -------
BALANCE December 31, 1994 (125) (1,499) -- -- (110,266)
Net income 7,496
Amendment of preferred stock
agreement resulting in certain
redeemable preferred equity
securities (102)
Additional costs associated with
previously purchased and retired
treasury stock (88)
Costs associated with issuance of
stock (35)
Accretion of preference value over
carrying value of redeemable
preferred stock (52)
Receipt of stock subscription 125 125
Foreign currency translation $2 2
------------ ---------- ------------ ----------- -------
BALANCE December 31, 1995 -- (1,499) -- 2 (102,920)
Net loss (4,306)
Compensation under restricted
stock awards 552 552
Stock options granted $22,938 22,938
Accretion of preference value over
carrying value of redeemable
preferred stock (84)
Foreign currency translation (2) (2)
------------ ---------- ------------ ----------- -------
BALANCE December 31, 1996 $ -- $ (947) $22,938 $ -- $(83,822)
============ ========== ============ =========== =======
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>

<PAGE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)

1. ORGANIZATION

Hosiery Corporation of America, Inc. and subsidiaries is a company
incorporated in the State of Delaware and is engaged in the direct mail
marketing, manufacturing and distribution of quality women's sheer
hosiery products to consumers throughout the United States and the United
Kingdom. The Company markets women's sheer hosiery through a continuous
product shipment or "continuity" program. The Company's continuity
program involves mailing to customers a specially priced introductory
hosiery offer, the acceptance of which enrolls customers in the program
and results in additional shipments of hose on a regular and continuous
basis upon payment of a prior hose shipment. The Company's manufacturing
operations supply approximately 87% of all the hosiery required by the
Company's continuity program.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation - The consolidated financial statements
include the accounts of Hosiery Corporation of America, Inc. (the
"Company") and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated.

Revenue Recognition - Revenue less allowance for returns is recognized
when merchandise is shipped. The Company provides for returns at the time
of shipment based upon historical experience.

Cash and Cash Equivalents - Cash and cash equivalents consist of cash and
other short-term securities purchased with maturities of less than three
months.

Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market.

Property and Equipment - Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided on a straight-line
basis using estimated lives of 31 years for buildings, 5 to 10 years for
machinery and equipment, 5 to 7 years for furniture and fixtures and 3 to
5 years for automobiles. Leasehold improvements are amortized over the
shorter of the estimated useful life or the lease periods which are
generally 15 to 18 years. Effective January 1, 1994, the Company changed
its estimate of the useful lives of certain computer equipment. This
change was made to better reflect the estimated period during which such
assets would remain in service. This change resulted in additional
depreciation expense for the year ended December 31, 1994, by
approximately $700.

Deferred Customer Acquisition Costs - Deferred customer acquisition costs
consist of marketing costs (postage, printed material, customer list
rentals, etc.) of the initial shipment to a customer and similar costs
associated with the resolicitation of previously canceled customers.
These costs are aggregated by promo- tional program and are amortized on
an accelerated basis based upon the estimated current year revenue in
proportion to the expected future revenue generated by these customers.
Approximately 56% of these costs are amortized in the first 12 months,
69% within 18 months, and 78% within 24 months. The loss incurred on
front end shipments to customers is charged to operations at the time of
the front end shipment.

Software Costs - Software costs, principally internally developed,
consist of the expenses associated with the development (computer time,
license, programming time) of material software projects with a long-term
benefit and are included in the consolidated balance sheet as Other
Assets. Such assets are amortized on a straight-line basis over a 5 to 10
year period. Effective January 1, 1994, the Company changed its estimate
of the useful life of software costs for new software to 7 years to
better reflect the estimated period during which such assets will remain
in service.

25
<PAGE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)

Derivative Financial Instruments - The Company enters into interest rate
caps to manage exposure to fluctuations in interest rates. Premiums paid
on caps are amortized to interest expense over the term of the cap.

Deferred Debt Issuance Costs - Debt issuance costs represent costs
associated with bank borrowings and notes and are amortized using the
effective interest method over the terms of the related borrowings.

Income Taxes - The Company uses the liability method of accounting for
income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes. Under the liability method, deferred income taxes are determined
based upon enacted tax laws and rates applied to the differences between
the financial statement and tax basis of assets and liabilities.

Postemployment Benefits - Effective January 1, 1994, the Company adopted
Statement of Financial Accounting Standards No. 112 (SFAS No. 112),
Employers' Accounting for Postemployment Benefits. SFAS No. 112 requires
the expected cost of providing benefits to former or inactive employees
after employment but before retirement be accrued if certain conditions
are met. The Company provides sick pay, long-term disability and
severance benefits for certain employees. The liability for benefits
accrued at January 1, 1994 of approximately $163, net of tax of $87, has
been reflected in the consolidated statement of income as a cumulative
effect of change in accounting.

Impairment of Long-Lived Assets - Effective January 1, 1996, the Company
adopted Statement of Financial Accounting Standards No. 121 (SFAS No.
121), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. This standard prescribes the method
for asset impairment evaluation for long-lived assets and certain
identifiable intangibles that are either held and used or to be disposed.
The implementation of this standard did not have an effect on the
Company's financial position or results of operations.

Accounting for Stock-Based Compensation - As permitted by SFAS No. 123,
Accounting for Stock-Based Compensation, the Company has chosen to
measure stock-based compensation expense in accordance with the method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees.

Foreign Currency Translation - Foreign entities translate monetary assets
and liabilities at year-end exchange rates while non-monetary items are
translated at historical rates. Income and expense accounts are
translated at the average rates in effect during the year, except for
depreciation and certain marketing expenses which are translated at
historical rates. Gains or losses from changes in exchange rates are
recognized in income in the year of occurrence.

Use of Estimates - The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.

26
<PAGE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)

Reclassifications - Certain reclassifications were made to the prior
year's consolidated financial statements to conform to classifications
used in the current period.

3. RECAPITALIZATION

On July 19, 1994, an affiliate of Kelso & Company, Inc. ("Kelso"), the
Company and Joseph A. Murphy, the sole stockholder of the Company (the
"Stockholder"), entered into a Recapitalization and Stock Purchase
Agreement (the "Recapitalization Agreement"). Pursuant to the
Recapitalization Agreement, the Company repurchased from the Stockholder
(the "Repurchase") for approximately $191.2 million, which includes
approximately $0.9 million in post-closing adjustments (net of $7.8
million received from the Stockholder for the purchase of certain assets
(see below)), all of its then outstanding shares of preferred stock and a
substantial portion of its then outstanding shares of common stock. On
October 17, 1994, the Company effected the recapitalization of its
capital stock (the "Recapitalization"), pursuant to which certain
affiliates and designees of Kelso and certain members of operating
management of the Company (collectively, the "Investor Group"), purchased
a controlling equity interest in the Company. The Company effected the
Repurchase with the proceeds of the Financing (as defined below).
Following the consummation of the Repurchase (and after giving effect to
the purchase of common stock by the Investor Group pursuant to the
Financing), the Investor Group owned approximately 74% of the Company's
common stock, with the Stockholder retaining approximately 21% of the
Company's common stock.

The Company obtained the funds necessary to effect the Repurchase, repay
certain existing indebtedness of the Company and pay the fees and
expenses incurred in connection with the Recapitalization primarily from
the proceeds of a financing (the "Financing") which included (i)
borrowings of $80.0 million under a credit agreement, consisting of $80.0
million of term loan facilities (the "Term Loan Facilities") and a $15.0
million revolving credit facility, entered into among the Company,
Bankers Trust Company, and the banks signatory thereto, (ii) gross
proceeds of approximately $69.1 million from the issuance and sale of the
Units (each unit consisting of one Senior Subordinated Note and one share
of Class A Common Stock), (iii) gross proceeds of approximately $36.5
million from the sale to the Investor Group of shares of a new class of
pay-in-kind preferred stock of the Company for cash, and (iv) gross
proceeds of approximately $17.1 million from the sale to the Investor
Group of shares of Common Stock for cash. The Company also utilized
working capital of approximately $2.0 million to pay fees and expenses
incurred in connection with the Recapitalization. In addition, certain
members of the Company's management were granted restricted pay-in-kind
preferred stock and restricted common stock of $1,022 and $478,
respectively (see Note 19).

The Recapitalization and Stock Purchase Agreement contained customary
representations, warranties and conditions. The Recapitalization and
Stock Purchase Agreement also provided that, at or prior to the
consummation of the Acquisition, the Stockholder and the Company enter
into an Escrow agreement pursuant to which, among other things, $10.0
million of the aggregate purchase price paid by the Company to the
Stockholder pursuant to the Repurchase be held in escrow to provide a
source of payment to satisfy the Stockholder's indemnification
obligations under the Recapitalization and Stock Purchase Agreement.

27
<PAGE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)

3. RECAPITALIZATION (continued)

Prior to the Recapitalization, the Company had authorized classes of
voting and non-voting common stock, with shares of voting stock issued
and outstanding. As part of the Recapitalization, such non-voting stock
was retired and such voting stock was changed and reclassified from Class
A Common Stock, par value $1.00 per share, into one share of Common
Stock, par value $.01 per share. In addition, in connection with the
Recapitalization, the Company issued and sold shares of non-voting Class
A Common Stock, a small number of which was purchased by certain
designees of Kelso, and the remainder of which was sold in the form of
Shares as part of the Units. Upon the occurrance of any Conversion Event
(as defined, e.g., any transfer of shares of Class A Common Stock to any
persons who are not affiliates of the transferor), each share of Class A
Common Stock shall be convertible into one share of the Company's Common
Stock. Subsequent to the Recapitalization, the Company effected a stock
split of its Common Stock on approximately a 62.22-to-1 basis.

In connection with the Recapitalization, the Company sold for cash
certain assets which were not used in its hosiery business to the
Stockholder. The assets were sold at fair value ($7.8 million) as of July
19, 1994, which approximated their then net book value. Certain of these
assets, including the Company's Book, Bag, and Overseas Divisions, were
restated in the financial statements as discontinued operations and
classified as net assets of discontinued operations. The remainder of
these assets were classified in the financial statements as assets held
for sale to stockholder. (See Note 4.) Upon final consummation of the
sale on October 17, 1994, the carrying value of these assets had declined
by approximately $690 resulting in a gain on the sale. This gain was
reflected as a capital contribution in the accompanying financial
statements.

4. DISCONTINUED OPERATIONS AND DISPOSAL OF A LINE OF BUSINESS

On July 9, 1994, as part of the Company's Recapitalization, the Company
discontinued the remainder of its Book Division, along with its Overseas
and Bag Divisions.

Summary results of the Book, Bag, and Overseas Divisions were as follows:

1996 1995 1994
---- ---- ----

Net revenues................... $ -- $ -- $ 389
Loss before income taxes....... -- -- (321)
Provision for income taxes .... -- -- 8
Net loss....................... -- -- (329)

<PAGE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)

5. PROVISION FOR COUPON REDEMPTION

As part of the marketing program, the Company issues coupons to program
participants based upon the products purchased or the referral of new
customers to the Company. Customers may redeem coupons for free gifts
from a program catalog once they have collected the required number of
coupons. During 1996, customers with an average of 32 coupons redeemed
for a free gift (31 coupons in 1995) after a collection period of
approximately four years. The estimated future costs for this program
have been determined based on historical customer redemption patterns
applicable to outstanding coupons and average gift costs.

6. INVENTORIES

1996 1995
------- -------
Raw materials ................................. $ 537 $ 787
Work-in-process................................ 2,258 1,602
Finished goods................................. 10,656 5,763
Promotional and packing material .............. 2,087 1,662
------- -------
$15,538 $ 9,814
======= =======
7 PROPERTY AND EQUIPMENT
1996 1995
------- -------

Land and buildings ............................. $ 6,627 $ 5,873
Machinery and equipment ........................ 19,086 15,990
Furniture and fixtures ......................... 1,937 1,598
Leasehold improvements ......................... 3,759 3,728
Automobiles..................................... 628 569
------ ------
32,037 27,758
Less accumulated depreciation and amortization . 14,615 12,424
------- -------
$17,422 $15,334
======= =======

Property and equipment includes assets acquired under capital leases,
principally machinery and equipment having a net book value of
approximately $6,418 and $5,618 as of December 31, 1996 and 1995,
respectively. Related accumulated depreciation and amortization was
$4,636 and $3,116, respectively. Depreciation and amortization expense
for capital lease assets for 1996, 1995 and 1994 was $1,529, $1,077 and
$1,810, respectively.

8. OTHER ASSETS

1996 1995
---- ----

Software, net of accumulated amortization of
approximately $5,638 and $5,387, respectively.... $549 $ 800
Deposits............................................. 9 327
Mailing list rights, net of accumulated
amortization of $4,733.............................. -- 90
Miscellaneous other.................................. 89 80
---- ------
$647 $1,297
==== ======
29
<PAGE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)

9. OTHER (INCOME) EXPENSES
<TABLE>

Included in other (income) expenses are the following:
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Gain on foreign exchange ........ $ (39) $ -- $ --
Miscellaneous (income)expenses .. (2) (2) 123
------ ----- -----
$ (41) $ (2) $ 123
====== ===== =====
</TABLE>

10. LONG-TERM DEBT
<TABLE>

<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Amounts due under revolving credit and term loan agreement ....... $ 68,450 $ 76,725
13.75% Senior Subordinated Notes due August 2002 ................. 68,337 68,153
Serial bonds issued by the South Carolina Jobs-Economic
Development Authority with interest rates ranging from 5.8% to
7.1% payable beginning July 1993 in quarterly principal
payments and semi-annual payments to the trustee of the Bonds.
Bonds are collateralized by a letter of credit and a building
addition in South Carolina.................................... 992 1,108
-------- --------

Total long-term debt ............................................. 137,779 145,986
Less current portion ............................................. 8,637 3,421
-------- --------
TOTAL LONG-TERM PORTION ....................................... $129,142 $142,565
======== ========
</TABLE>

On October 17, 1994, the Company entered into a revolving credit and
term loan agreement with a group of banks. Outstanding borrowings at
December 31, 1996 and 1995 are $68,450 and $76,725, respectively. The
facility is secured by substantially all of the assets of Hosiery
Corporation of America. The facility is also subject to the continuing
guarantees of the subsidiaries of Hosiery Corporation of America. The
revolving credit and term loan portions of the facility have maximum
borrowings of $15,000 and $80,000, respectively. The term loans are
segregated into two series, A Term Loans and B Term Loans, each
totaling $40,000. The revolving credit facility expires on October 17,
1999. The Company can borrow based on a formula which comprises the
sum of 80% of accounts receivable and 50% of inventory. Interest under
the agreement is payable at the banks' prime lending rate plus 1.75%.
There were no borrowings outstanding under this agreement at December
31, 1996 and 1995. The A Term Loans are payable in quarterly
installments ranging from $375 to $3,750, with a final payment due
October 17, 1999. The B Term Loans are payable in semi-annual
installments ranging from $200 to $10,000, with a final payment due
July 31, 2001. Interest is generally payable quarterly and is charged
at a premium ranging from 1.75% to 2.25% over the Base Rate or 2.75%
to 3.25% over the Eurodollar Rate as defined. The rate in effect at
December 31, 1996 ranged from 8.38% to 9.06%. Additionally, fees are
charged on the average daily amount of unused commitment and are
payable quarterly. Under the terms of the agreement, certain
restrictions are placed on additional borrowings, the purchase of
property and equipment, the payment of cash dividends and the
disposition of assets. The Company has also agreed to maintain certain
financial ratios as defined in the agreement.
30
<PAGE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)

10. LONG-TERM DEBT (continued)

During 1994, the Company sold the 13.75% Senior Subordinated Notes, with
a principal amount of $70,000, at a discount, which discount is being
amortized using the interest method over the life of the notes. Interest
is payable semi-annually. The Notes were sold in denominations of one
thousand dollars, each of which contained one share (collectively the
"Shares") of the Company's Class A Non Voting Common Stock, par value
$.01 per share. The Notes and the Shares were immediately detachable.
Beginning October 1, 1997, the Notes, or a portion thereof, will be
subject to redemption at the option of the Company at specified
redemption prices ranging from 100% to 112% of the aggregate principal
amounts of Notes so redeemed. Upon the occurence of a Change of Control,
as defined, each holder of the Notes shall have the right to require the
Company to repurchase such holder's Notes at a purchase price equal to
101% of the aggregate principal amount thereof. Under the terms of the
agreement, certain restrictions are placed on additional borrowings, the
purchase of property and equipment, the payment of cash dividends and the
disposition of assets.

The Company was in compliance with all debt covenants noted above as of
December 31, 1996.

The Company was contingently liable for outstanding letters of credit in
the amount of approximately $1,292 as of December 31, 1996.

On January 17, 1995, the Company purchased an interest rate cap for $149
from Bankers Trust Company. This cap protects $30,000 of the Term Loan
Debt from an increase in interest rates over 10%. The cap is based on the
LIBOR and pays the excess interest over 10%. The term of the interest
rate cap is three years.

Maturities of long-term debt consisted of the following as of
December 31, 1996:

1997 ....................$ 8,637
1998 .................... 14,301
1999 .................... 10,772
2000 .................... 16,753
2001 .................... 18,572
Thereafter .............. 68,744
--------
$137,779
========

31
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)

11. INCOME TAXES

The provision for income taxes (benefit) consists of the following:

1996 1995 1994
---- ---- ----
Federal:
Current ....................... $ 3,474 $2,432 $4,491
Deferred ...................... (5,215) 2,053 1,110
------- ------ ------
(1,741) 4,485 5,601
------- ------ ------
States:
Current ....................... 179 246 485
Deferred ...................... 172 (171) 562
-------- ------ ------
351 75 1,047
-------- ------ ------
$(1,390) $4,560 $6,648
======== ====== ======

The components of net deferred tax liabilities consisted of the
following:

1996 1995
---- ----
Deferred tax liabilities:
Deferred customer acquisition costs ..... $ 8,206 $ 6,064
Accounts receivable...................... 6,770 5,010
Property and equipment................... 349 741
Other assets............................. 713 42
Other current assets..................... 2,251 1,689
Accrued coupon redemption costs ......... 308 98
-------- -------
18,597 13,644
-------- -------
Deferred tax assets:
Accrued expenses......................... (757) (583)
Stock option............................. (9,821) --
Other.................................... (14) (13)
------- -------
(10,592) (596)
------- -------
$ 8,005 $13,048
======= =======

The following is a reconciliation of the federal statutory rate and the
Company's effective tax rate:
<TABLE>

<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Tax provision (benefit) at
statutory rate .................. $(1,937) (34.0)% $4,099 34.0% $5,820 34.0%
State taxes, net of federal benefit . 232 4.1 160 1.3 540 3.2
Other................................ 315 5.5 301 2.5 288 1.7
----- ------ ----- ----- ----- -----
Provision for income taxes........... $(1,390) (24.4)% $4,560 37.8% $6,648 38.9%
======= ===== ===== ===== ===== ====
</TABLE>

12. REDEEMABLE EQUITY SECURITIES

In connection with the Recapitalization, the Company issued 2,826 shares
of voting common stock, $.01 par value, to management stockholders for
cash. The Company is obligated to redeem these shares from the management
stockholders upon the death, disability or termination of employment of
the holder. The redeemable common stock was recorded at fair value on the
date of issuance, less issuance costs, totaling
32
<PAGE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)

12. REDEEMABLE EQUITY SECURITIES (continued)

$45. During 1995, the Company issued an additional 4,048 shares of voting
common stock, $.01 par value, for cash under the same basic terms. The
redeemable common stock was recorded at fair value on the date of
issuance, less issuance costs, totaling $63. In connection with the
issuance of redeemable common shares in 1995, certain agreements were
amended and executed in order that 14,643 shares of preferred stock
issued for cash in 1995 and 10,218 shares of preferred stock issued for
cash in October 1994 would be redeemable under the same basic terms of
the redeemable common stock. Each preferred share has a $.01 par value, a
stated value at liquidation of $10 and cumulative dividends of 25% of
additional shares of PIK preferred stock or fractions thereof. The
redeemable preferred stock was recorded at fair value on the date of
issuance or amendment providing for their redemption, less issuance
costs, totaling $224. The excess of the preference value over the
carrying value is being accreted by periodic charges to Additional
Paid-In Capital over the life of the issue. The redemption provisions
expire the earlier of the fifth anniversary of the October 17, 1994
Recapitalization or the closing of an initial public offering for the
Company's common stock.

In 1996, two officers of the Company were granted 4,434 shares of voting
common stock, $.01 par value, as additional compensation. The Company is
obligated to redeem these shares under the same basic terms as previously
issued redeemable stock. The redeemable common stock was recorded at fair
value on the date of issuance. This resulted in an increase in redeemable
equity securities of approximately $300.

13. TREASURY STOCK

Pursuant to the Recapitalization Agreement (see Note 3), the Company
repurchased from the Stockholder for approximately $199.0 million, which
includes approximately $0.9 million in post-closing adjustments, all of
its then outstanding shares of Preferred Stock (5,460 Class A shares and
9,425 Class B shares) and 17,337 shares of its then outstanding Common
Stock. These shares along with all previously acquired shares of
Preferred and Common Stock were then retired. During 1995, additional
post closing adjustments totaling $88 were made to the purchase price
relating to the retired treasury shares.

14. LEASE COMMITMENTS

The Company leases premises under cancelable and noncancelable operating
leases with lease terms expiring through 2007. Future minimum payments by
year and in the aggregate under all noncancelable capital and operating
leases having initial or remaining terms of one year or more consisted of
the following at December 31, 1996:

Year ending Capital Operating
December 31, Leases Leases
------------ ------- ---------
1997..................................... $1,854 $ 1,487
1998..................................... 1,367 1,481
1999..................................... 1,163 1,381
2000..................................... 758 950
2001..................................... 643 920
Thereafter............................... 727 4,915
----- -------
6,512 $11,134
Amount representing imputed interest .... 586 =======
-----
Present value of net minimum lease payments 5,926
Less current portion .................... 1,627
-----
$4,299
=====
Rental expense under all operating leases for the years ended December
31, 1996, 1995 and 1994, was approximately $1,593, $1,281 and $1,451,
respectively.

33
<PAGE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)

15. COMMITMENTS AND CONTINGENCIES

The Company has entered into employment agreements with certain members
of management.

The Company has agreed to pay Kelso an annual fee of $263 each year for
financial advisory services and to reimburse Kelso for out-of-pocket
expenses incurred. Non-officer directors of the Company, other than those
directors who are affiliated with Kelso, will be paid an annual retainer
of $20. In addition, all out-of-pocket expenses of non-officer directors,
including those directors who are affiliated with Kelso, related to
meetings attended, will be reimbursed by the Company. Non-officer
directors, including those directors affiliated with Kelso, will receive
no additional compensation for their services as directors of the Company
except as described above.

The Company is involved in, or has been involved in, litigation arising
in the normal course of its business. The Company can not predict the
timing or outcome of these claims and proceedings. Currently, the Company
is 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 except as discussed below.

The Company has received inquiries from thirteen 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 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.

34
<PAGE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)

16. PROFIT SHARING PLAN

The Company has a profit sharing plan covering all employees and those of
its subsidiaries. Eligible employees can participate as of January 1 and
July 1 after twelve months of service. Employee contributions are made on
a pretax basis under Section 401(k) of the Internal Revenue Code. The
Company's contribution is at the discretion of the Board of Directors.
The expense associated with the employer contribution was approximately
$480, $442 and $430 in 1996, 1995 and 1994, respectively.

All contributions and investments are held in a trust for the benefit of
plan participants. All employees are 100% vested in their pretax
contributions and earnings thereon, but become vested in the Company
contributions and earnings at a rate based on years of service, with full
vesting after five years.

17. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company values the financial instruments as required by SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The following
methods and assumptions were used to estimate the fair value of each
class of financial instrument:

Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and
Accrued Expenses. The carrying amount of these items are a reasonable
estimate of their fair values because of the short maturity of these
instruments.

Long-term Debt including Current Maturities. The fair value of
the Company's long-term debt is based on the quoted market price
on the subordinated notes and on current interest rates that are
available to the Company for debt not quoted on an exchange. At
December 31, 1996 the Company had a carrying amount of long-term
debt of $137,779 and an estimated fair value of $146,442.

18. STOCK OPTION PLAN

On June 28, 1996, the Board of Directors approved and adopted a stock
option plan (the "Option Plan"), providing for the grant to certain
employees of the Company and its subsidiaries of options to purchase up
to 215,369 shares of Common Stock. On June 28, 1996, the Board of
Directors granted options to purchase an aggregate of 215,369 shares of
Common Stock. The exercise price with respect to 199,458 shares is $30.00
per share. The exercise price with respect to 15,911 shares will be the
price per share obtained in an initial public offering. All options
vested on the date of such grant and are only exercisable upon an initial
public offering of the Common Stock or certain change of control events.
Options expire 10 years from the date of the grant of such option,
subject to earlier termination by the Board of Directors.

35
<PAGE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)

18. STOCK OPTION PLAN (continued)

A summary of the status of the Company's stock option plan as of December
31, 1996 and changes during the year ending on that date is presented
below:
<TABLE>

Options with Exercise Options with Exercise
Price Equal to Price Less Than the
Market Price of Market Price of
Stock on Grant Date Stock at Date of Grant
--------------------- ----------------------
<CAPTION>
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at beginning of year -0- -0-

Granted 15,911 $145.00 199,458 $30.00

Exercised -- --

Cancelled -- -- -- --
------ ------- ------- ------

Outstanding at end of year 15,911 $145.00 199,458 $30.00
====== ======= ======= ======

Options exercisable at year end -0- -0-
====== =======
Weighted average fair value of options
granted during the year $145.00 $145.00
======= =======
<FN>

At December 31, 1996, there were no options available for future grants
under the Option Plan.

The following table summarizes information about stock options
outstanding at December 31, 1996:
</FN>
</TABLE>

Options Outstanding
------------------------------------------------
Weighted
Average Weighted
Range of Number Remaining Average
Exercise Outstanding Contractual Exercise
Prices at 12/31/96 Life Price
-------- ----------- ----------- ---------

$ 30.00 199,458 9.5 years $ 30.00
145.00 15,911 9.5 years 145.00
--------
215,369
========
At December 31, 1996, there were no exercisable options under the Option
Plan.

The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its plan.
Accordingly, the difference between the fair market value of the Common
Stock, which for financial reporting purposes was based on the estimated
fair value at the date of grant, and the exercise price of such options,
has been recorded as compensation expense totaling $22,938

36
<PAGE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)

18. STOCK OPTION PLAN (continued)

in the Company's financial statements for the year ending December 31,
1996. Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant dates, consistent with
the method of SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company's net loss for the year ending December 31, 1996, would have
been increased to the pro forma amounts indicated below:

Net loss:

As reported ($4,306)
========
Pro forma ($5,321)
========

The fair value of each option granted during 1996 is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following assumptions: (i) no dividend yield, (ii) no expected volatility
as the Company's stock is not publically traded, (iii) risk-free interest
rate of 6.46%, and (iv) expected life of 5.5 years.

19. RELATED PARTIES TRANSACTIONS

In connection with the Recapitalization, certain members of the Company's
management were granted restricted pay-in-kind preferred stock and
restricted common stock of $1,022 and $478, respectively. Compensation
associated with the grant of these shares was measured by the difference
between the aggregate price of the restricted shares and the aggregate
fair value of the shares on the measurement date. Such compensation is
being recognized ratably over the six-year period for which services must
be performed in order for these individuals to receive the shares without
restriction. The Company is recognizing compensation expense over six
years commencing October 17, 1994, which is the date the Company effected
the Recapitalization and granted the restricted shares. Compensation
expense related to these shares for the period ended December 31, 1996
and 1995 totaled $250 in each year.

In connection with the Recapitalization, on October 17, 1994, certain
designees of Kelso acquired shares of the Company's Common Stock. The
proceeds from the sale of these shares were received subsequent to
December 31, 1994.

During 1994 and 1995, certain officers of the Company acquired shares of
both the Company's common and preferred stock. In 1996, two officers of
the Company were granted shares of common stock as additional
compensation totalling approximately $300. These shares are included in
the accompanying balance sheets as redeemable equity securities.

Kelso provides financial advisory services to the Company for an annual
fee. Payment for these services and reimbursement of expenses totalled
$268 in 1996 and $308 in 1995.

37
<PAGE>

HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Dollars in thousands, except per share data)

20. PREFERRED STOCK

The PIK Preferred Stock is entitled to cumulative dividends, payable
solely in additional shares of PIK Preferred Stock, at an estimated rate
of 25% per annum when, as and if declared by the Board of Directors of
the Company. Cumulative dividends on preferred shares that have not been
declared since the Recapitalization total approximately 2.6 million
shares of preferred stock. The PIK Preferred Stock has an aggregate
liquidation preference of approximately $37.4 million plus the
liquidation preference of additional shares of PIK Preferred Stock issued
in payment of dividends on the PIK Preferred Stock and the liquidation
preference in respect of accumulated and unpaid dividends, whether or not
declared. The PIK Preferred Stock is redeemable at the option of the
Company in whole or in part at any time for a redemption price equal to
the liquidation prefer- ence thereof plus all accumulated and unpaid
dividends, whether or not declared, to the date of redemption. In
addition, the PIK Preferred Stock has no voting rights, except that the
PIK Preferred Stock is entitled to vote, as a separate class, in the
event of any merger, consolidation, or sale of all or substantially all
of the Company's assets, any amendment to the Company's Restated
Certificate of Incorporation or any authroization or issuance by the
Company of capital stock ranking senior to or pari passu with the PIK
Preferred Stock with respect to dividends or liquidation preference or
securities convertible into or exchangeable or exercisable for such
capital stock.

21. QUARTERLY INFORMATION (UNAUDITED)

Summarized quarterly financial data for 1996 and 1995 are set forth
below:
<TABLE>

<CAPTION>
March 31 June 30 September 30 December 31 Total
-------- ------- ------------ ----------- -----
1996

<S> <C> <C> <C> <C> <C>
Net Revenues......................... $40,099 $42,623 $38,611 $41,430 $162,763
Gross Profit......................... 19,187 22,783 21,996 23,613 87,579
Operating Income (Loss).............. 6,135 (12,779) 10,208 8,879 12,443
Net Income (Loss).................... 933 (10,545) 3,486 1,820 (4,306)

1995

Net Revenues......................... $33,608 $36,526 $32,902 $33,263 $136,299
Gross Profit......................... 16,489 20,593 18,674 19,561 75,317
Operating Income..................... 5,349 9,331 7,130 9,617 31,427
Net Income........................... 175 2,789 1,504 3,028 7,496

</TABLE>
38
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The Company's executive officers and directors, as well as additional
information with respect to those persons, are set forth in the table below.

Name Age Position
- --------------- --- ------------------------------------------------
John F. Biagini 53 Chairman, Chief Executive Officer and President
Darrell Edwards 38 Vice President and Director of Marketing
Robert M. Henry 49 Senior Vice President, Systems and Operations
Arthur Hughes 55 Vice President and Chief Financial Officer
William J. Kelly 47 Senior Vice President, International Operations
Hans Lengers 51 President, U.S. Textile Corporation and Director
Robert Mooney 54 Vice President, General Counsel and Secretary
Frank K. Bynum, Jr. 34 Director
Michael B. Goldberg 50 Director
Joseph A. Murphy 53 Director

Directors shall be elected by a plurality of the votes cast at annual
meetings of stockholders (except in the case of vacancies on the Board of
Directors). All directors of the Company serve for the term for which they are
elected or until their successors are duly elected and qualified or until death,
retirement, resignation, or removal. All executive officers hold office at the
pleasure of the Board of Directors. See "--Stockholders Agreement" and
"--Employment Agreements."

Non-officer directors of the Company, other than those directors who
are affiliated with Kelso, will be paid on annual retainer of $20,000. In
addition, all out-of-pocket expenses of non-officer directors, including those
directors who are affiliated with Kelso, related to meetings attended will be
reimbursed by the Company. Non-officer directors, including those directors
affiliated with Kelso, will receive no additional compensation for their
services as directors of the Company except as described above. Officers of the
Company who serve as directors do not receive compensation for their services as
directors other than the compensation they receive as officers of the Company.

There are no family relationships among directors and executive
officers of the Company. For certain information regarding the stock ownership
of the Company, see "Security Ownership of Certain Beneficial Owners and
Management."

The business experience for at least the last five years of each of the
directors and executive officers is as follows:

Mr. Biagini has been the Chairman, Chief Executive Officer and
President of the Company since consummation of the Recapitalization. Mr.
Biagini served as President and Chief Operating Officer since June 1992.From
March 1988 to June 1992, Mr. Biagini was Vice President of Marketing of the
Company. Before joining the Company in March 1988, Mr. Biagini was President
of the Direct Marketing Division of Harlequin Enterprises from 1983 to 1988
and served in various United States and international direct mail assignments
for Reader's Digest Association from 1972 to 1983.

39
<PAGE>

Mr. Edwards has been the Vice President and Director of Marketing of
the Company since consummation of the Recapitalization. Mr. Edwards served
as Vice President and Director of Marketing since he joined the company in
October 1992. Before joining the Company in October 1992, Mr. Edwards held
various magazine marketing positions for Reader's Digest Association since
at least 1989.

Mr. Henry has been Senior Vice President, Systems and Operations, of
the Company since July 1996. From September 1995 until June 1996, Mr. Henry
was Senior Vice President, Business Development. From 1993 to 1995, he
served as Chairman, Marketing Services, for Bates Advertising U.S. From
1990 to 1993, Mr. Henry was Vice Chairman and Chief Operating Officer of
McCaffrey and McCall Advertising.

Mr. Hughes has been the Vice President and Chief Financial Officer of
the Company since August 1995. Mr. Hughes served as Vice President and
Controller of the Company from 1990 to August 1995.

Mr. Kelly has been Senior Vice President, International Operations, of
the Company since July 1996. From December 1993 until June 1996, Mr. Kelly
was Vice President, Systems and Operations. From November 1988 until
December 1993, Mr. Kelly was Vice President, Systems and Programming.

Mr. Lengers has been the President of U.S. Textile Corporation (the
Company's wholly-owned manufacturing subsidiary) and a Director of the
Company since 1978, and is one of the founders of U.S. Textile Corporation.

Mr. Mooney has been the Vice President, General Counsel and Secretary
of the Company since consummation of the Recapitalization. Mr. Mooney
served as the Vice President and General Counsel since joining the Company
in September 1988. Before joining the Company in September 1988, Mr. Mooney
served as the Company's outside counsel for several years.

Mr. Bynum has been a Director of the Company since the consummation of
the Recapitalization. Mr. Bynum has been a Vice President of Kelso since
July 1991, and was an Associate of Kelso from October 1987 to July 1991. He
is a director of URS Logistics, Inc., IXL Holdings, Inc., and Universal
Outdoor Holdings, Inc.

Mr. Goldberg has been a Director of the Company since consummation of
the Recapitalization. Mr. Goldberg has been a Managing Director of Kelso
since October 1991. Mr. Goldberg served as a Managing Director and jointly
managed the merger and acquisitions department at The First Boston
Corporation from 1989 to May 1991. Mr. Goldberg was a partner at the law
firm of Skadden, Arps, Slate, Meagher & Flom from 1980 to 1989. Mr.
Goldberg is a director of General Medical Corporation, URS Logistics, Inc.,
and Universal Outdoor Holdings, Inc.

Mr. Murphy has been a Director of the Company since consummation of
the Recapitalization. Mr. Murphy joined the Company in September 1980 as
Chief Operating Officer. In December 1983, Mr. Murphy was promoted to
President and Chief Executive Officer and was simultaneously elected to the
Board of Directors. In June 1992, Mr. Murphy ceased serving as President of
the Company but continued to serve as Chairman and Chief Executive Officer,
a position from which he resigned prior to consummation of the
Recapitalization.
40
<PAGE>

On December 22, 1993, Kelso and its chief executive officer, without
admitting or denying the findings contained therein, consented to an
administrative order in respect of Commission inquiry relating to the 1990
acquisition of a portfolio company by a Kelso affiliate. The order found that
Kelso's tender offer filing in connection with the acquisition did not comply
fully with the Commission's tender offer reporting requirements, and required
Kelso and its chief executive officer to comply with these requirements in the
future.

In connection with the transactions effected by the Recapitalization
Agreement, the Company paid Kelso a fee of $2.625 million for financial advisory
services and reimbursed it for out-of-pocket expenses incurred in connection
with rendering such services. In addition, the Company has agreed to pay Kelso
an annual fee of $262,500 each year for financial advisory services and to
reimburse it for out-of-pocket expense incurred. The Company has also agreed to
indemnify Kelso against certain claims, losses, damages, liabilities and
expenses which may arise, in connection with rendering such financial advisory
services.

The Company has a Compensation Committee, which currently consists of
three directors: John Biagini, Frank Bynum and Michael Goldberg. Messrs.
Bynum and Goldberg are neither officers nor employees of the Company or any
of its affiliates.

Stockholders Agreement

The Stockholders Agreement provides, among other things, that, (subject
to changes that may be made from and after such time with respect to the members
and size of the Board of Directors in accordance with the Company's Restated
Certificate of Incorporation and By-Laws), the Company's Board of Directors will
consist of five members, including (i) two officers of the Company designated by
Kelso from certain management stockholders of the Company, (ii) two other
individuals designated by Kelso (who may be affiliates of Kelso) and (iii) the
Stockholder. In addition, Kelso and the Stockholder agreed pursuant to the
Stockholders Agreement that (i) so long as the Stockholder and certain of his
transferees collectively own 10% or more of the outstanding Common Stock, the
Stockholder shall be a director of the Company and (ii) so long as Kelso and its
affiliates collectively are the largest stockholders of the Company and
collectively own at least 35% of the outstanding stock of the Company, Kelso
shall be entitled to elect a majority of the Board of Directors of the Company.
Under the Company's Restated Certificate of Incorporation and By-Laws, the Board
of Directors shall consist of not less than three (3) nor more than eight (8)
members, and following consummation of the Recapitalization shall be fixed from
time to time by resolution of the Board of Directors (the "Board Resolution"),
or by resolution adopted by the vote of a majority of the stockholders of the
Common Stock or by consent executed on behalf of such stockholders (the
"Stockholder Resolution"); provided, that in the event of a conflict between the
Board Resolution and the Stockholder Resolution, the Stockholder Resolution
shall govern. The Stockholders Agreement also limits transfers of Common Stock
and Class A Common Stock by certain parties thereto, and provides for certain
tag-along, drag-along and registration rights. (The Stockholders Agreement is
dated as of October 17, 1994. The original signatories thereto are the Company;
the Stockholder, Joseph A. Murphy; Kelso Investment Associates V, L.P.; Kelso
Equity Partners V, L.P.; as well as John F. Biagini, CEO of the Company and Hans
Lengers, President of U.S. Textile Corporation.)

41
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth the total compensation earned by the
Chief Executive Officer and the four most highly compensated executive officers
of the Company for the fiscal year ended December 31, 1996, as well as the total
compensation earned by such individuals for the two previous fiscal years.
<TABLE>

SUMMARY COMPENSATION TABLE
- ---------------------------
Annual Compensation Long-Term Compensation
------------------- -----------------------
<CAPTION>
Restricted Securities All
Stock Underlying Other
Name Year Salary Bonus (b) Awards (c) Options (d) Compensationn
- ---- ---- ------ --------- ---------- ----------- -------------

<S> <C> <C> <C> <C> <C> <C>
John F. Biagini 1996 $352,794 $400,000 $ -- 94,676 $ 7,164(a)
Chairman of the Board, 1995 340,622 250,000 -- -- 7,182(a)
Chief Executive Officer 1994 321,194 200,000 1,000,000 -- 12,486(a)
and President

Hans Lengers 1996 419,439 -- -- 47,339 1,789(a)
President, U.S. Textile 1995 402,663 -- -- -- 1,800(a)
Corporation 1994 391,696 -- 499,000 -- 1,882(a)

Robert M. Henry 1996 253,869 16,500 17,344 --
Senior Vice President, 1995 74,687 -- -- -- --
Systems and Operations 1994 -- -- -- -- --

William J. Kelly 1996 222,842 30,000 -- 17,344 7,164(a)
Senior Vice President, 1995 210,652 24,250 -- -- 7,182(a)
International Operations 1994 205,281 26,500 -- -- 9,779(a)

Arthur Hughes 1996 159,587 50,000 -- 21,322 7,164(a)
Vice President and 1995 133,786 34,200 -- -- 4,833(a)
Chief Financial Officer 1994 110,846 19,200 -- -- 4,412(a)

<FN>

- ----------------
(a) Amounts represent Company contributions to the 401(k) Plan, which is a defined contribution plan.
(b) Represents amounts awarded as cash/stock bonuses.
(c) Represents compensation associated with restricted stock awards for certain officers. See "Management
Stock-Purchase and Restricted Stock Award Agreements" below.
(d) Represents options granted to certain officers under the Company's
Stock Option Plan.
</FN>
</TABLE>

Long-Term Compensation

Management Stock Purchase and Restricted Stock Award Agreements

Prior to the closing of the Recapitalization, Mr. Biagini and Mr.
Lengers entered into Management Stock Purchase and Restricted Stock Award
Agreements with the Company (the "Management Stock Agreements"), pursuant to
which Mr. Biagini was granted 18,841 shares of Common Stock and 68,120 shares of
PIK Preferred Stock, and Mr. Lengers was granted 9,421 shares of Common Stock
and 34,060 shares of PIK Preferred Stock in addition to the shares of Common
Stock and PIK Preferred Stock purchased by Messrs. Biagini and Lengers. The
Common Stock was sold at $16.92 per share and the PIK Preferred Stock at $10.00
per share to the original investor group. Compensation with respect to the grant
of shares will be recognized ratably over the six-year period for which services
must be performed in order for Messrs. Biagini and Lengers to receive the shares
without restriction. No dividends will be paid on any restricted stock. The
above table displays all outstanding shares of restricted stock. Additionally,
in 1995 the management group was offered limited opportunities to purchase stock
at the same price as Messers. Biagini and Lengers which resulted in net proceeds
to the Company of $190 thousand.

42
<PAGE>

<TABLE>

OPTION GRANTS IN LAST FISCAL YEAR

Potential Realized Value
at Assumed Annual
Rates of Stock
Price Appreciation
Individual Grants for Option Term
- ---------------------------------------------------------------------------- --------------------------------------------
<CAPTION>
% of
Total
Number of Options
Securities Granted to
Underlying Employees Exercise or
Options in Base Price Expiration
Name Granted Fiscal Year ($/Share) Date 0% 5% 10%

<S> <C> <C> <C> <C> <C> <C> <C>
John F. Biagini 86,721 40.27 $ 30.00 6/28/06 $9,972,915 $17,880,979 $30,013,501
John F. Biagini 7,955 3.69 145.00 (1)

Hans Lengers 43,361 20.13 30.00 6/28/06 4,986,515 8,940,592 15,006,924
Hans Lengers 3,978 1.84 145.00 (1)

Robert M. Henry 17,344 8.05 30.00 6/28/06 1,994,560 3,576,155 6,002,631

William J. Kelly 17,344 8.05 30.00 6/28/06 1,994,560 3,576,155 6,002,631

Arthur C. Hughes 17,344 8.05 30.00 6/28/06 1,994,560 3,576,155 6,002,631
Arthur C. Hughes 3,978 1.84 145.00 (1)
<FN>

(1) Options exercisable at a price per share to be obtained in an initial
public offering. The grant date market value is assumed to be $145.00
per share based on a proposed transaction with a shareholder that was
being contemplated at the time the option was granted. There is no
current public market for these securities.
</FN>
</TABLE>

<TABLE>

FISCAL YEAR-END OPTION VALUES

<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1996 (#) at December 31, 1996 ($)
--------------------- ------------------------

Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
<S> <C> <C>
John F. Biagini 0/94,676 0/9,972,915
Hans Lengers 0/47,339 0/4,986,515
Arthur Hughes 0/21,322 0/1,994,560
William J. Kelly 0/17,344 0/1,994,560
Robert Henry 0/17,344 0/1,994,560
</TABLE>

There is no public market for the common stock of the Company. The
value utilized for the In-the-Money Options as of December 31, 1996 was based on
the grant date market value, assumed to be $145.00 per share based on a proposed
transaction with a shareholder that was being contemplated at the time the
option was granted.

43
<PAGE>
Employment Agreements

In August 1980, Hans Lengers entered into an Employment Agreement with
the Company's manufacturing subsidiary, U.S. Textile Corporation ("U.S.
Textile"), pursuant to which he is employed as President and Chief Executive
Officer of U.S. Textile and to manage and operate its business and affairs for
his lifetime, such agreement having been amended on September 12, 1994. Mr.
Lengers is not entitled to receive compensation upon the voluntary termination
of his employment with U.S. Textile. In addition, the Company may abrogate the
terms and conditions of the Employment Agreement for good cause as defined by
the law of North Carolina, and in any event, the Employment Agreement will
terminate upon Mr. Lengers' death, adjudicated incompetency, bankruptcy or
physical or mental inability to perform his duties thereunder. The agreement
provides for a base salary of $5,000 per month and additional compensation in
the amount that 25.0% of the U.S. Textile net profits exceed such base
compensation, such that the sum of the base compensation and this additional
compensation does not exceed $250,000 per annum, adjusted each year for cost of
living increases. The Consumer Price Index for Urban Wage Earners and clerical
workers is used as the index to compute cost of living increases. The ceiling
for Mr. Lengers' salary in 1996 was $419,439. In addition, Mr. Lengers has
agreed during the time of his employment not to devote any of his time and
efforts to the affairs of any other business in direct competition with U.S.
Textile.

In August 1992, Arthur C. Hughes entered into an Executive Employment
Agreement with the Company pursuant to which he is employed as Vice President
and Chief Financial Officer of the Company. The initial term of the agreement is
five years. The agreement provides for an initial base salary of $97,825 and
6.5% annual increases. In addition, Mr. Hughes is entitled to receive a bonus as
defined by the President and the Board of Directors to be calculated based on
the results of the fiscal year in particular on achieving budgeted corporate
profits (35%) and achieving management objectives that are developed each year
(65%). Mr. Hughes is also entitled to participate in all standard employee
benefits provided by the Company and to use an automobile provided by the
Company.

In September 1995, Robert M. Henry entered into an Executive Employment
Agreement with the Company pursuant to which he is employed as Senior Vice
President, Systems and Operations of the Company. The term of the agreement is
indefinite. The agreement provides for an initial base salary of $250,000. In
addition, Mr. Henry is entitled to receive a bonus the amount of which is based
on achieving objectives defined by the President and the performance of the
Company against annual corporate targets. Mr. Henry is also entitled to
participate in all standard employee benefits provided by the Company, to use an
automobile provided by the Company, and to participate in the Company's Stock
Option Plan on terms and conditions enjoyed by other executive officers.

All three aforementioned employment agreements require a successor to
the employer thereunder to assume the respective obligations of such employer
under the applicable agreement.

Compensation Committee Interlocks and Insider Participations in
Compensation Decisions

Mr. Biagini was the Chairman, President and Chief Executive Officer of the
Company during the last fiscal year. Mr. Goldberg is a Managing Director of
Kelso and Mr. Bynum is a Vice President of Kelso. Messrs. Goldberg and Bynum are
both limited partners of the general partment of KIAV and limited partners of
KEPV.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT

The following table sets forth information as of March 15, 1997 with
respect to the beneficial ownership of shares of Common Stock of all
stockholders of the Company who are known by the Company to beneficially own
more than 5% of any such class, by each director, by each executive officer
44
<PAGE>

of the Company named in the summary compensation table and by all directors and
executive officers of the Company as a group, as determined in accordance with
Rule 13d-3(i) under the Securities Exchange Act of 1934, as amended. The Common
Stock set forth in the following table includes voting Common Stock and
non-voting Class A Common Stock. Except as indicated in the footnotes below, all
shares of Common Stock are voting Common Stock. Prior to the consummation of the
Recapitalization, all of the issued and outstanding shares of Common Stock and
Old Preferred Stock were owned by the Stockholder.

<TABLE>
Percentage of Shares
Name and Address Number of Shares of Common Stock
of Beneficial Owner of Common Stock Outstanding
------------------- ---------------- -------------------
<S> <C> <C>
Kelso Investment Associates V, L.P. (a)(b)....... 995,932 70.71%
Kelso Equity Partners V, L.P. (a)(b)............. 995,932 70.71%
Joseph S. Schuchert(b)........................... (d) (d)
Frank T. Nickell(b)(c)........................... (d) (d)
George E. Matelich(b)............................ (d) (d)
Thomas R. Wall, IV(b)(c)......................... (d) (d)
Michael B. Goldberg(b)(c)(e)..................... -- --
Frank K. Bynum, Jr.(b)(e)........................ -- --
Joseph A. Murphy(f).............................. 292,600 20.77%
John F. Biagini(f)(g)(h)......................... 23,681 1.68%
Hans Lengers(f)(g)(h)............................ 11,841 .84%
William J. Kelly(f)(g)........................... 188 .01%
Robert Henry(f)(g)............................... 942 .07%
Arthur C. Hughes(f)(g)........................... 471 .03%
All directors and executive officers of the
Company as a group(f)(g)..................... 332,170 23.58%
<FN>
(a) As part of the 1994 Recapitalization, KIAV and KEPV acquired respectively
960,634 and 40,026 shares of Common Stock, representing 68.6% and 0.9%,
respectively, of the shares of Common Stock outstanding. Subsequent to the
1994 Recapitalization, KEPV transferred 4,728 shares of Common Stock to
certain family trusts of Messrs. Wall and Goldberg for which Mr. Nickell
serves as trustee. The Kelso Affiliates, due to their common control,
could be deemed to beneficially own each of the other's shares, but
disclaim such beneficial ownership.
(b) The business address for such person(s) is c/o Kelso & Company, 320
Park Avenue, 24th Floor, New York, New York 10022.
(c) Excludes 4,728 shares of Common Stock owned by certain family trusts
of Messrs. Wall and Goldberg, which may be deemed to be beneficially
owned by each of Messrs. Wall and Goldberg, but each disclaims such
beneficial ownership. Mr. Nickell serves as trustee for these family
trusts of Messrs. Wall and Goldberg, and as such these shares may be
deemed to be beneficially owned by Mr. Nickell, but Mr. Nickell
disclaims such beneficial ownership. (d) Messrs. Schuchert, Nickell,
Matelich and Wall may be deemed to share beneficial ownership of
shares of Common Stock and PIK Preferred Stock owned of record by KIAV
and KEPV, by virtue of their status as general partners of the general
partner of KIAV and general partners of KEPV. Messrs. Schuchert,
Nickell, Matelich and Wall share investment and voting power with
respect to securities owned by the KIAV and KEPV. Messrs. Schuchert,
Nickell, Matelich and Wall disclaim beneficial ownership of shares of
Common Stock and PIK Preferred Stock owned of record by KIAV and KEPV.
(e) Messrs. Goldberg and Bynum may be deemed to share beneficial ownership of
shares of Common Stock owned of record by KIAV and KEPV by viture of their
status as limited partners of the general partner of KIAV and as limited
partners of KEPV. Messrs. Goldberg and Bynum disclaim beneficial ownership
of such securities.
Mr. Goldberg and Mr. Bynum are directors of the Company.
(f) The business address of such person(s) is Hosiery Corporation of America,
Inc., 3369 Progress Drive, Bensalem, Pennsylvania 19020.
(g) Each of such persons may hold options granted under the option plan.
Shares of Common Stock subject to such options are not reflected in the
table.
(h) In addition, prior to the closing of the Recapitalization, Messrs. Biagini
and Lengers acquired in the aggregate approximately 3.0% of the shares of
PIK Preferred Stock issued in the Recapitalization. The amounts of Common
Stock beneficially owned by Messrs. Biagini and Lengers as reflected in
the above table and PIK Preferred Stock acquired by Messrs. Biagini and
Lengers as described in the preceding sentence include grants made by the
Company prior to the consummation of the Recapitalization to Messrs.
Biagini and Lengers of an aggregate of 28,262 shares of Common Stock and
approximately 2.7% of the shares of PIK Preferred Stock, in each case
subject to certain restrictions.
</FN>
</TABLE>
45
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Set forth below is a summary of certain agreements and arrangements
entered into by the Company and related parties in connection with the
Recapitalization.

Investor Relationships

Kelso affiliates beneficially own 70.7% of the shares of common equity
of the Company as described under "Security Ownership of Certain Beneficial
Owners and Management". The Company has agreed to indemnify Kelso and its
affiliates against certain claims, losses, damages, liabilities and expenses
which may arise in connection with the transactions contemplated by the
Recapitalization Agreement. The Company has also agreed to pay Kelso an annual
fee of $262,500 each year for financial advisory services and to reimburse it
for out-of-pocket expenses incurred, and to indemnify it against certain claims,
losses, damages, liabilities and expenses which may arise, in connection with
rendering such services. Kelso's out-of-pocket expenses in connection with its
services rendered during 1996 and 1995 were approximately $5,000 and $46,000,
respectively.

Certain Kelso affiliates are parties to a stockholders agreement. In
addition, certain affiliates of Kelso, the Company and certain investors in the
Company's stock who are designees of Kelso entered into Letter Agreements
(collectively, the "Letter Agreements"), each of which, among other things,
provides for certain restrictions on the transfer of stock by such investors.
The Company has a stockholders agreement which provides, among other things, for
certain restrictions on the transfer of the Company's stock.

The Recapitalization and Related Transactions

The Recapitalization Agreement contains customary representations,
warranties, indemnities and conditions. In addition, the Recapitalization
Agreement provides that the Stockholder, on the one hand, and Company, on the
other, will, subject to certain limitations set forth therein, indemnify each
other and their respective stockholders, subsidiaries, affiliates, officers and
directors and their respective successors and assigns, from, against and in
respect of any damages, losses, deficiencies, liabilities, costs and expenses,
incurred as a result of any (i) misrepresentations or breaches of warranties set
forth in the Recapitalization Agreement or in any certificate delivered pursuant
thereto and (ii) non-fulfillment of certain agreements or covenants set forth in
the Recapitalization Agreement. The representations and warranties and covenants
and agreements to which such indemnification relates are standard and include
representations and warranties with respect to ownership of stock,
capitalization, financial statements, absence of defaults under agreements and
violations of law and similar matters. In addition, the Recapitalization
Agreement provides for similar indemnification by the Stockholder with respect
to certain other matters, including, among other things, claims by third parties
resulting from or arising out of certain activities in connection with the
Stockholder's auction and sale of the Company and certain liabilities incurred
as a result of the operations (or relating to the assets) which were transferred
to the Stockholder prior to the Recapitalization (as described below) or arising
out of such transfer. Under the Recapitalization Agreement, such indemnification
is subject to certain baskets and deductibles and, in general, has an aggregate
limit of $15 million.

The Recapitalization Agreement also provided for the Stockholder and
the Company to enter into an Escrow Agreement pursuant to which, among other
things, $10 million of the aggregate purchase price paid by the Company to the
Stockholder pursuant to the Repurchase is held in escrow to provide a source of
payment to satisfy the Stockholder's indemnification obligations under the
Recapitalization Agreement. In addition, the Stockholder has pledged to the
Company the shares of Common Stock which were not purchased by the Company
pursuant to the Repurchase and which the Stockholder continues to own following
the consummation of the Recapitalization (such shares represent approximately
21% of the Company's Common Stock outstanding following the consummation of the
Recapitalization).

46
<PAGE>

In connection with the Recapitalization, the Company transferred to the
Stockholder certain assets consisting primarily of the stock of all of its
non-hosiery related subsidiaries, some of which are inactive businesses, certain
receivables, equipment leased to one of the non-hosiery subsidiaries, certain
life insurance policies, four owned or leased automobiles and three owned or
leased personal computers. None of the assets transferred to the Stockholder,
except the life insurance policies and loans thereon, automobiles and computers,
were used in the Company's hosiery business.

47
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K

A. The following documents are filed as a part of this Report:

(1) and (2) Financial Statements and Financial Statement Schedule--see
Index to Financial Statements and Financial Statement Schedule appearing on
Page 15.

(3) Exhibits, including those incorporated by reference. The following
is a list of exhibits filed as part of this Annual Report on Form
10-K. Where so indicated by footnote, exhibits which were previously
filed are incorporated by reference. For exhibits incorporated by
reference, the location of the exhibit in the previous filing is
indicated.
<TABLE>

<CAPTION>
EXHIBITS INCORPORATION BY REFERENCE

<S> <C> <C>
3.1 Restated Certificate of Incorporation Exhibit 3.1 to Registration Statement No.
of the Company 33-87392 on Form S-1 dated May 15, 1995.

3.2 Certificate of Designation, Powers, Exhibit 3.2 to Registration Statement
Preferences and Rights of Pay-in-Kind No. 33-87392 on Form S-1 Dated May 15,
Preferred Stock 1995

3.3 Amendment to the Restated Exhibit 3.3 to Registration Statement
Certificate of Incorporation of No. 33-87392 on Form S-1 dated May 15,
the Company 1995

3.4 Amendment to the Restated Exhibit 3.1 to Report 10-Q for the quarter
Certificate of Incorporation of ended September 30, 1995
the Company

3.5 By Laws of the Company Exhibit 3.4 to Registration Statement No.
33-87392 on Form S-1 dated May 15, 1995

4.1 Indenture dated as of October 17, Exhibit 4.1 to Registration Statement No.
1994 between the Company and 33-87392 on Form S-1 dated May 15, 1995
United States Trust Company of
New York, as Trustee

4.2 Credit Agreement dated as of October Exhibit 4.1 to Registration Statement No.
17, 1994, among the Company; 33-87392 on Form S-1 dated May 15, 1995
National Westminster Bank PLC, as
Co-Agent; Nations Bank of North
Carolina, N.A., as Co-Agent; Bankers
Trust Company, as Agent; and the
financial institutions listed on the
signature pages thereto

10.1 Executive Employment Agreement Exhibit 10.2 to Registration Statement No.
between Hosiery Corporation of 33-87392 on Form S-1 dated May 15, 1995
America, Inc. and Arthur C. Hughes,
dated as of August 3, 1992

48
<PAGE>

EXHIBITS INCORPORATION BY REFERENCE

10.2 Employment Agreement between U.S. Exhibit 10.3 to Registration Statement No.
Textile Corporation and Hans 33-87392 on Form S-1 dated May 15, 1995
Lengers, dated as of August 29, 1980, and an Amendment thereto
among U.S. Textile Corporation., the Company and Hans Lengers,
dated as of September 12, 1994

10.3 Executive Employment Agreement Exhibit 10.4 to Registration Statement No.
between the Company and Robert 33-87392 on Form S-1 dated May 15, 1995
J. Mooney, dated as of September 16,
1993

10.4 Executive Employment Agreement Exhibit 10.4 to Form 10-K dated
between the Company and Robert March 26, 1996
M. Henry, dated as of August 7, 1995

10.5 Management Stock Subscription Exhibit 10.5 to Form 10-K dated
Agreement dated August 14, 1995 March 26, 1996

10.6 Stock Option Plan Exhibit 10.3 to Form 10-Q dated
August 12, 1996

10.7 Executive Employment Agreement Exhibit 10.1 to Form 10-Q dated
between the Company and Suzanne M. November 12, 1996
Roper, dated as of July 30, 1996

*21.1 Subsidiaries of the Registrant

*27.0 Financial Data Schedule

</TABLE>

* Filed herewith.

B. Reports on Form 8-K filed during the quarter ended December 31, 1996:

None.

49
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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 on the 24th day of
March, 1997.

HOSIERY CORPORATION OF AMERICA, INC.
/s/ ARTHUR C. HUGHES
BY: ___________________________
Arthur C. Hughes
Vice President and Chief
Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 14th day of March, 1996.

Signatures Title

/s/ JOHN F. BIAGINI
______________________________ Chairman of the Board, Chief Executive Officer
John F. Biagini and President (Principal Executive Officer)

______________________________ President, U.S. Textile Corporation and Director
Hans Lengers

/s/ ARTHUR C. HUGHES
______________________________ Vice President and Chief Financial Officer
Arthur C. Hughes (Principal Financial and Accounting Officer)

/s/ FRANK K. BYNUM, JR.
______________________________ Director
Frank K. Bynum, Jr.

/s/ MICHAEL B. GOLDBERG
______________________________ Director
Michael B. Goldberg

______________________________ Director
Joseph A. Murphy

By: __________________________
(Name)
Attorney-in-Fact for each of the
persons indicated

50
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Hosiery Corporation of America, Inc.
Bensalem, Pennsylvania

We have audited the consolidated financial statements of Hosiery Corporation of
America, Inc., and its subsidiaries (the "Company") as of December 31, 1996 and
1995, and for each of the three years in the period ended December 31, 1996, and
have issued our report thereon dated February 28, 1997; such report is included
elsewhere in this Form 10-K. Our audits also included the consolidated financial
statement schedule of the Company referred to in Item 8. This consolidated
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.

Deloitte & Touche LLP
Philadelphia, Pennsylvania

February 28, 1997

S-1
<PAGE>

SCHEDULE I
<TABLE>

HOSIERY CORPORATION OF AMERICA, INC.
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)

<CAPTION>
Balance at Charged to Balance at
Beginning of Costs and Amounts End of
Period Expenses Written Off Period
------------- ---------- ----------- ----------
YEAR ENDED DECEMBER 31, 1996
<S> <C> <C> <C> <C>
Allowance for Uncollectible Accounts............... $1,263 $10,057 $9,780 $1,540
====== ======= ====== ======
YEAR ENDED DECEMBER 31, 1995
Allowance for Uncollectible Accounts............... $ 923 $ 7,788 $7,448 $1,263
===== ======= ====== ======
YEAR ENDED DECEMBER 31, 1994
Allowance for Uncollectible Accounts............... $1,060 $ 5,643 $5,780 $ 923
====== ======= ====== =====

</TABLE>

S-2
<PAGE>

EXHIBIT INDEX

EXHIBITS

21.1 Subsidiaries of the Registrant

EXHIBIT 21.1
HOSIERY CORPORATION OF AMERICA, INC.
SUBSIDIARIES OF THE REGISTRANT

The following table lists each significant subsidiary of Hosiery
Corporation of America, Inc. and its jurisdiction of organization.

Jurisdiction
of
Subsidiary Organization
- ---------- --------------
U.S. Textile Corporation (100% owned)...................... North Carolina
The Stonebury Group, Inc. (100% owned)..................... Nevada
Hosiery Corporation International, Inc. (100% owned)....... Delaware

<ARTICLE> 5
<CIK> 0000934383
<NAME> Hosiery Corporation of America, Inc.
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-START> Jan-01-1996
<PERIOD-END> Dec-31-1996
<CASH> 1,960
<SECURITIES> 0
<RECEIVABLES> 24,479
<ALLOWANCES> 1,540
<INVENTORY> 15,538
<CURRENT-ASSETS> 42,307
<PP&E> 32,037
<DEPRECIATION> 14,615
<TOTAL-ASSETS> 92,600
<CURRENT-LIABILITIES> 41,718
<BONDS> 69,329
360
37,398
<COMMON> 14
<OTHER-SE> (121,234)
<TOTAL-LIABILITY-AND-EQUITY> 92,600
<SALES> 162,763
<TOTAL-REVENUES> 162,763
<CGS> 51,389
<TOTAL-COSTS> 75,184
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10,057
<INTEREST-EXPENSE> 18,466
<INCOME-PRETAX> (5,696)
<INCOME-TAX> (1,390)
<INCOME-CONTINUING> (4,306)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,306)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>