SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 26, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _______ to ________
Commission File No. 33-87392
HOSIERY CORPORATION OF AMERICA, INC.
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-0782950
- ---------------------------------- ------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3369 Progress Drive
Bensalem, Pennsylvania 19020
- --------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 244-1777
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--------------- --------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 4, 1998
- ---------------------------- -----------------------------------
Voting 1,331,574
Class A, non-voting 75,652
<PAGE>
INDEX PAGE
- ----- ----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 26, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
Three and nine month periods ended
September 26, 1998 and September 27, 1997 4
Condensed Consolidated Statements of Cash Flows
Nine month periods ended September 26, 1998 and
September 27, 1997 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-14
PART II - OTHER INFORMATION 15-16
- ---------------------------
SIGNATURES 17
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
- ----------------------------------------------------
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 26, 1998 AND DECEMBER 31, 1997
(Dollars in thousands, except per share data)
<CAPTION>
September 26, December 31,
1998 1997
------------- ------------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ......................................................... $ -- $ 4,327
Accounts receivable, less an allowance for doubtful accounts of
$1,840 and $1,448 in 1998 and 1997, respectively ................................. 28,739 24,180
Inventories ....................................................................... 18,195 15,158
Prepaid and other current assets .................................................. 2,427 2,398
----------- ----------
Total current assets ......................................................... 49,361 46,063
PROPERTY AND EQUIPMENT, net ............................................................ 17,339 17,261
DEFERRED CUSTOMER ACQUISITION COSTS .................................................... 40,120 30,795
DEFERRED DEBT ISSUANCE COSTS, less accumulated amortization of
$6,411 and $5,316 in 1998 and 1997, respectively .................................. 5,153 6,084
GOODWILL, less accumulated amortization of $30 in 1998 ................................. 3,754 --
OTHER ASSETS ........................................................................... 579 397
---------- ----------
TOTAL .................................................................................. $ 116,306 $ 100,600
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Note payable to bank .............................................................. $ 6,250 $ --
Current portion of long-term debt ................................................. 5,367 3,117
Current portion of capital lease obligations ...................................... 1,640 1,550
Bank overdrafts ................................................................... 1,086 --
Accounts payable .................................................................. 8,645 7,120
Accrued expenses and other current liabilities .................................... 6,228 5,366
Accrued interest .................................................................. 2,415 4,608
Accrued coupon redemption costs ................................................... 4,883 4,568
Deferred income taxes ............................................................. 8,514 7,279
---------- ----------
Total current liabilities .................................................... 45,028 33,608
LONG-TERM DEBT, Less current portion ................................................... 125,149 129,307
CAPITAL LEASE OBLIGATIONS, Less current portion ........................................ 4,681 4,591
ACCRUED COUPON REDEMPTION COSTS ........................................................ 378 429
DEFERRED INCOME TAXES .................................................................. 5,893 3,876
---------- ---------
Total liabilities ............................................................ 181,129 171,811
---------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
REDEEMABLE EQUITY SECURITIES ........................................................... 853 872
---------- ---------
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 $93,557 and
$79,838 in 1998 and 1997, respectively), 3,748,497 and 3,739,782 shares
issued in 1998 and 1997, respectively, 3,739,782 shares outstanding ............. 37,485 37,398
Common stock, voting, $.01 par value: 3,000,000 shares authorized, 1,340,122
and 1,321,522 shares issued in 1998 and 1997, respectively,
1,321,522 shares 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 ........................................................ 19,124 16,565
Compensatory stock options outstanding ............................................ 20,943 22,938
Accumulated deficit ............................................................... (140,657) (148,301)
Restricted stock .................................................................. (509) (697)
---------- ----------
(63,600) (72,083)
Treasury stock, at cost, 27,315 shares in 1998 (8,715 preferred shares
and 18,600 common shares) ....................................................... (2,076) --
---------- ----------
Net stockholders' deficiency ................................................. (65,676) (72,083)
---------- ----------
TOTAL .................................................................................. $ 116,306 $ 100,600
========== ==========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Three Month Periods Ended Nine Month Periods Ended
---------------------------- ----------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET REVENUES ..................................................... $ 48,042 $ 39,414 $142,236 $134,277
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of sales ............................................... 20,536 17,129 66,479 64,226
Administrative and general expenses ......................... 3,102 2,775 9,734 9,186
Provision for doubtful accounts ............................. 2,065 2,106 9,076 8,906
Marketing costs ............................................. 9,148 6,764 26,848 22,996
Coupon redemption costs ..................................... 833 884 2,874 2,578
Depreciation and amortization ............................... 941 803 2,512 2,282
Other (income) expenses ..................................... (192) 87 (138) 452
-------- -------- -------- --------
OPERATING INCOME ................................................ 11,609 8,866 24,851 23,651
Interest income ............................................. 7 8 58 44
Interest expense ............................................ 4,173 4,507 12,397 13,655
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES ........................ 7,443 4,367 12,512 10,040
PROVISION FOR INCOME TAXES ...................................... 2,829 1,681 4,755 3,865
-------- -------- -------- --------
NET INCOME ...................................................... $ 4,614 $ 2,686 $ 7,757 $ 6,175
======== ======== ======== ========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTH PERIODS ENDED SEPTEMBER 26, 1998 AND SEPTEMBER 27, 1997
(Dollars in thousands)
(Unaudited)
<CAPTION>
1998 1997
-------- --------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income ....................................................................... $ 7,757 $ 6,175
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ................................................. 2,512 2,282
Amortization of debt issue costs and discounts ................................ 1,275 1,408
Other ......................................................................... 16 185
Amortization of deferred customer acquisition costs ........................... 23,703 18,107
(Increase) decrease in operating assets:
Accounts receivable ..................................................... (4,121) (589)
Inventories ............................................................. (2,700) (177)
Payments for deferred customer acquisition costs ........................ (32,254) (24,676)
Prepaid and other current assets ........................................ 24 260
Deferred tax asset ...................................................... -- 375
Other assets ............................................................ (397) (89)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other liabilities ................ 116 (1,793)
Deferred income taxes ................................................... 3,252 2,511
Accrued coupon redemption costs ......................................... (147) (525)
-------- --------
Net cash (used in) provided by operating activities ............... (964) 3,454
-------- --------
INVESTING ACTIVITIES:
Acquisitions of property and equipment ........................................... (861) (274)
Acquisition of business .......................................................... (3,904) --
Proceeds from sale of property and equipment ..................................... 20 --
-------- --------
Net cash used in investing activities ............................. (4,745) (274)
-------- --------
FINANCING ACTIVITIES:
Net borrowings on note payable to bank ........................................... 6,250 --
Payments on bank and other financing ............................................. (2,088) (3,788)
Payments on capital leases ....................................................... (1,224) (1,352)
Proceeds from exercise of options ................................................ 520 --
Purchase of treasury stock ....................................................... (2,076) --
-------- --------
Net cash provided by (used in) financing activities ............... 1,382 (5,140)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ........................................... (4,327) (1,960)
Cash and cash equivalents at beginning of year ................................... 4,327 1,960
-------- --------
Cash and cash equivalents at end of period ....................................... $ -- $ --
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ...................................................................... $ 13,240 $ 14,340
======== ========
Income taxes .................................................................. $ 1,013 $ 13
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations of $1,404 and $1,192 were entered into for new equipment during the nine month periods
ended 1998 and 1997 respectively.
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
NOTE 1. Condensed Consolidated Financial Statements
In the opinion of management, the accompanying condensed consolidated financial
statements of Hosiery Corporation of America, Inc. and subsidiaries, which are
unaudited except for the Consolidated Balance Sheet as of December 31, 1997,
which is derived from audited financial statements, include all normal and
recurring adjustments necessary to present fairly the Company's financial
position as of September 26, 1998 and the results of operations for the three
and nine month periods ended September 26, 1998 and September 27, 1997, and cash
flows for the nine month periods ended September 26, 1998 and September 27,
1997.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K as filed with the Securities and Exchange Commission on March 30, 1998.
NOTE 2. New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income.
This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
This standard is effective for fiscal years beginning after December 15, 1997.
The Company adopted SFAS No. 130 effective January 1, 1998. There was no effect
of implementing this standard as comprehensive income is the same as net income.
In March 1998, the AICPA issued Statement of Position ("SOP") 98-1, Accounting
For the Costs of Computer Software Developed or Obtained for Internal Use. The
SOP is effective for fiscal years beginning after December 15, 1998. The SOP
will require the capitalization of certain costs incurred after the date of
adoption in connection with developing or obtaining software for internal use.
The Company has not yet assessed what the impact of the SOP will be on the
Company's future earnings or financial position.
NOTE 3. Inventories
September 26, December 31,
1998 1997
------------- ------------
Raw materials.......................... $ 524 $ 546
Work-in-process........................ 2,701 2,748
Finished goods......................... 12,201 9,820
Promotional and packing material....... 2,769 2,044
---------- ----------
$ 18,195 $ 15,158
========== ==========
6
<PAGE>
NOTE 4. Acquisition
On June 10, 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Enchantress Hosiery Corporation of Canada Ltd.
("EHC") for approximately $3.9 million which was funded through a borrowing
under the Company's revolving credit facility. EHC is engaged in the direct mail
marketing and distribution of quality sheer hosiery products to consumers
throughout Canada. The acquisition was accounted for using the purchase method
of accounting. Accordingly, a portion of the purchase price was allocated to the
net assets acquired based on estimated fair values at date of acquisition. The
fair value of assets acquired and liabilities assumed was $0.1 million. The
excess of the purchase price over the estimated fair value of the net assets
acquired of $3.8 million is amortized over a period of 30 years using the
straight-line method.
NOTE 5. Commitments and Contingencies
The Company has continuing obligations with certain members of management
pursuant to previously signed employment agreements.
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 cannot predict the timing or outcome
of these claims and proceedings. Currently, except as discussed below, the
Company is not involved in any litigation which is expected to have a material
effect on the financial position of the business or the results of operations
and cash flows of the Company.
The Company had received inquiries from the Federal Trade Commission ("FTC"),
various state regulatory groups (the "States") and a trade association
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 1997, the Company reached an agreement with a multistate group consisting of
eleven states that sought to impose certain disclosure requirements on the
Company's promotional materials. The agreement became effective September 1,
1997. During 1997 and 1998, the Company's promotional materials include the
majority of modifications and clarifications required by the agreement. The
modifications the Company has made to its solicitation materials has had a
material adverse effect on its domestic response rates. Consequently, the
Company feels these modifications and clarifications will have no additional
negative impact on the Company's response rates. However, response rates are
only one of several factors that affect the Company's results of operations.
Also, there may be some additional modifications which will need to be made to
the Company's promotional materials to fully satisfy the terms of the Company's
agreement with the multistate group, and no assurances can be given that such
changes will not have a further effect on the Company's response rate. In
accordance with the agreement, the Company paid $0.3 million in administrative
expenses and fees during 1997. The agreement also required that refunds be made
to customers under certain circumstances for a six-month period. These refunds
were not material to the Company's financial condition or results of operations.
7
<PAGE>
State regulators, the Federal Trade Commission and trade associations from time
to time contact the Company with inquiries regarding the Company's promotional
materials. The Company has recently received inquiries from 2 states and a trade
association which were not part of the multistate group. While the Company
believes that it will be able to resolve these inquiries, there can be no
assurance that these or other state regulators or trade associations will not
require or seek to impose additional changes to the Company's promotional
materials, and no assurance can be given that such changes will not be
significant or will not have a material adverse effect on the Company's future
financial condition or results of operations.
NOTE 6. Note Payable to Bank
The Company has a revolving credit facility which provides for maximum
borrowings of $20,000. The Company can borrow based on a formula which comprises
the sum of 80% of accounts receivable and 50% of inventory. Interest is charged
at the bank's prime lending rate plus 0.5% or 1.5% over the Eurodollar rate.
At September 26, 1998, there were outstanding borrowings of $6.3 million at a
weighted average interest rate of 7.5%. In addition, there were outstanding
letters of credit of approximately $1.8 million resulting in $11.9 million
available to borrow.
NOTE 7. Stock Transactions
On July 29, 1998, the Company entered into an agreement with an executive who
terminated his employment with the Company (the "Agreement"). In connection with
the Agreement, the executive was granted the right to exercise his options, to
purchase 17,344 shares of common stock at $30 per share and the Company agreed
to buy 6,485 shares of redeemable preferred stock at a liquidation value of $10
per share, and 942 shares of redeemable common stock at a fair value of $107 per
share. Simultaneously, the Company reacquired these shares of common and
preferred stock. This transaction resulted in an increase of stockholders'
deficiency of $1,419, a decrease of redeemable equity securities of $81 and cash
paid to the executive of $1,500.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three and Nine Month Periods Ended September 26, 1998
- --------------------------------------------------------------------------------
Results of Operations
- ---------------------
<TABLE>
The following table sets forth certain income statement data for the Company
expressed as a percentage of net revenues:
<CAPTION>
Three Month Periods Ended Nine Month Periods Ended
---------------------------- ----------------------------
September 26, September 27, September 26, September 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net revenues .................................. 100.0% 100.0% 100.0% 100.0%
Cost of sales ............................ 42.7 43.5 46.7 47.8
Administrative and general expenses ...... 6.5 7.1 6.8 6.9
Provision for doubtful accounts .......... 4.3 5.3 6.4 6.6
Marketing costs .......................... 19.0 17.2 18.9 17.1
Coupon redemption costs .................. 1.7 2.2 2.0 1.9
Depreciation and amortization ............ 2.0 2.0 1.8 1.7
----- ----- ----- -----
Subtotal ....................... 76.2 77.3 82.6 82.0
----- ----- ----- -----
Income before interest-net, other (income)
expenses and provision for income taxes .... 23.8% 22.7% 17.4% 18.0%
===== ===== ===== =====
</TABLE>
9
<PAGE>
Three Month Period Ended September 26, 1998 Compared to Three Month Period Ended
September 27, 1997
- --------------------------------------------------------------------------------
Net revenues increased by 21.9% in the three month period ended Septemtember 26,
1998 compared to the same period in 1997. The increase was a combination of
increased sales in the United States and Germany, plus the acquisition of the
Canadian subsidiary in June of 1998. Most of the increase is in the United
States (approximately 80%) and is accounted for by stronger existing customer
sales.
Cost of sales has increased from $17.1 million in the third quarter of 1997 to
$20.5 million for the same period in 1998. The higher sales volume accounts for
the increase. As a percentage of net revenue, cost of sales is 42.7% and 43.5%
for the third quarter of 1998 and 1997, respectively. The favorable trend is
caused primarily by greater existing customer sales in the United States, and
the introduction of new higher-margin products.
Administrative and general expenses have increased from $2.8 million in the
third quarter of 1997 to $3.1 million in the third quarter of 1998 caused by
increased personnel costs. As a percentage of net revenues, these costs were
6.5% and 7.1% for the third quarter of 1998 and 1997, respectively.
Provision for doubtful accounts remained the same at $2.1 million in the third
quarter of 1998 and 1997. As a percentage of net revenues, provision for
doubtful accounts was 4.3% in the third quarter of 1998 as compared to 5.3% in
the third quarter of 1997. Less new customers in the United States and better
payment experience in the United Kingdom account for the improvement.
Marketing costs have increased to $9.1 million in the third quarter of 1998
compared to $6.8 million in the third quarter of 1997 for an increase of $2.4
million. As a percentage of net revenues, these costs are 19.0% and 17.2% for
the third quarter of 1998 and 1997, respectively. Higher spending in 1998 and
higher amortization of prior years costs account for the increase.
Interest expense has declined in the third quarter of 1998 to $4.2 million from
$4.5 million in 1997 related to lower rates under the revised credit agreement.
Pretax income has increased to $7.4 million in the third quarter of 1998 from
$4.4 million for the same period of 1997. As a percentage of net revenue, pretax
income increased from 11.1% in 1997 to 15.5% in the third quarter of 1998.
Higher revenues, the timing of new customer shipments, favorable experience in
the provision for doubtful accounts, and lower interest expense offset by higher
marketing expense account for the increase.
Net income increased to $4.6 million in the third quarter of 1998 from $2.7
million for the same period of 1997. The increase in pretax income of $3.1
million offset by an increased provision for income taxes of $1.1 million
account for the increase.
10
<PAGE>
Nine Month Period Ended September 26, 1998 Compared to Nine Month Period Ended
September 27, 1997
- ------------------------------------------------------------------------------
Net revenues increased to $142.2 million in 1998 from $134.3 in 1997, an
increase of 5.9%. Stronger existing customer sales in the United States, the
Canadian acquisition and growth in Germany account for the increase.
Cost of sales increased $2.3 million in 1998 to $66.5 million from $64.2 million
in 1997. The increase in cost of sales is attributable to the increased revenue.
As a percentage of net revenue, cost of sales was 46.7% in the first mine months
of 1998 versus 47.8% in the first nine months of 1997. Less front-end shipments
and higher back-end shipments in the United States primarily account for the
difference.
Administrative and general expenses were $9.7 million in the first nine months
of 1998 compared to $9.2 million for the first nine months of 1997, an increase
of 6.0%. Increased personnel costs account for the difference. As a percentage
of net revenues, these costs were 6.8% and 6.9% for the first nine months of
1998 and 1997, respectively.
Provision for doubtful accounts increased to $9.1 million in the first nine
months of 1998 from $8.9 million for the same period of 1997, an increase of
1.9%. As a percentage of net revenues, the provision for doubtful accounts is
6.4% for the first nine months of 1998 compared to 6.6% for the same period in
1997.
Marketing costs increased to $26.8 million in the first nine months of 1998 from
$23.0 million for same period of 1997. Higher spending in the current year and
higher amortization of the prior years costs account for the increase. As a
percentage of net revenues, marketing costs were 18.9% and 17.1% for the first
nine months of 1998 and 1997, respectively.
Other income in 1998 is $0.1 million due to foreign currency gains. In 1997,
this was an expense of $0.5 million caused by the multistate settlement ($0.3
million) and foreign currency losses.
Interest expense has declined to $12.4 million in the first nine months of 1998
from $13.7 million for the same period in 1997. This decrease is the result of
lower rates under the revised credit agreement. As a percentage of net revenues,
interest expense was 8.7% in the first nine months of 1998 as compared to 10.2%
for the same period of 1997.
Pretax income has increased to $12.5 million in the first nine months of 1998 as
compared to $10.0 million for the same period of 1997. The increase in pretax
profits is primarily attributable to higher revenues and lower interest expense
offset by higher marketing, cost of sales and administrative and general
expenses. As a percentage of net revenues, pretax income was 8.8% in 1998 and
7.5% in 1997.
Net income increased to $7.8 million in the first nine months of 1998 from $6.2
million for the same period of 1997. The increase in pretax income of $2.5
million offset by a higher provision for income taxes of $0.9 million account
for the increase.
11
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company's cash requirements arise principally from the need to finance new
customer acquisitions, capital expenditures, debt repayment and other working
capital requirements. The Company expects to finance these cash requirements
from internally generated funds and/or its Revolving Credit Facility.
The decrease in working capital of $8.1 million is caused by six mailings in the
first nine months of 1998 and the acquisition of a Canadian subsidiary which
increased bank borrowings and other current liabilities.
Capital expenditures were $2.3 million and $1.5 million for the nine month
periods ended September 26, 1998 and September 27, 1997, respectively. A portion
of the expenditures in both 1998 and 1997 were financed through the assumption
of capital leases.
Net cash (used in) provided by operating activities was $(1.0) million for the
first nine months of 1998 as compared to $3.5 million for the first nine months
of 1997. This change is primarily due to higher spending for customer
acquisition costs and increases in accounts receivable and inventories offset by
higher amortization of customer acquisition costs.
Net cash used in investing activities was $4.7 million and $0.3 million for the
nine month periods ended September 26, 1998 and September 27, 1997,
respectively. Acquisitions of property and equipment was $0.9 million and $0.3
million in the first nine months of 1998 and 1997, respectively. In 1998, the
Company acquired a Canadian business for $3.9 million.
Net cash provided by (used in) financing activities was $1.4 million and $(5.1)
million for the nine month periods ended September 26, 1998 and September 27,
1997, respectively. In 1998, the Company had greater borrowings on its Revolving
Credit Facility. In 1998, the Company made payments on bank and other financing
and capital leases totaling $3.3 million in 1998 as compared to $5.1 million in
1997. In 1998, the Company purchased $2.1 million in treasury stock.
The Recapitalization
- --------------------
As a result of the substantial indebtedness incurred in connection with a
Recapitalization, in October 1994, the Company has significant debt service
obligations. At September 26, 1998, the outstanding amount of the Company's
indebtedness (other than trade payables) is $143.1 million, including $69.5
million of senior secured debt and $68.7 million of senior subordinated debt
(represented by the Notes). Since consummation of the Recapitalization, the
Company's ongoing cash requirements through the end of fiscal 1999 will consist
primarily of interest payments and required amortization payments under the
Credit Agreement, interest payments on the Notes, payments of capital lease
obligations, front end marketing expenditures, working capital, capital
expenditures and taxes. The required amortization payments under the Credit
Agreement will be: $3.5 million in 1998, $7.5 million in 1999, $13.0 million in
2000, $20.0 million in 2001 and $19.0 million in 2002. 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 $20.0 million, $11.9 million of
which was available at September 26, 1998.
12
<PAGE>
Legal Proceedings
- -----------------
As discussed further in Part II, Item 1--Legal Proceedings, the Company had
received inquiries from the Federal Trade Commission ("FTC"), various state
regulatory groups (the "States") and a trade association 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 1997, the Company reached an agreement with a multistate group consisting of
eleven states that sought to impose certain disclosure requirements on the
Company's promotional materials. The agreement became effective September 1,
1997. During 1997 and 1998, the Company's promotional materials include the
majority of modifications and clarifications required by the agreement. The
modifications the Company has made to its solicitation materials has had a
material adverse effect on its domestic response rates. Consequently, the
Company feels these modifications and clarifications will have no additional
negative impact on the Company's response rates. However, response rates are
only one of several factors that affect the Company's results of operations.
Also, there may be some additional modifications which will need to be made to
the Company's promotional materials to fully satisfy the terms of the Company's
agreement with the multistate group, and no assurances can be given that such
changes will not have a further effect on the Company's response rate. In
accordance with the agreement, the Company paid $0.3 million in administrative
expenses and fees during 1997. The agreement also required that refunds be made
to customers under certain circumstances for a six-month period. These refunds
were not material to the Company's financial condition or results of operations.
State regulators, the Federal Trade Commission and trade associations from time
to time contact the Company with inquiries regarding the Company's promotional
materials. The Company has recently received inquiries from 2 states and a trade
association which were not part of the multistate group. While the Company
believes that it will be able to resolve these inquiries, there can be no
assurance that these or other state regulators or trade associations will not
require or seek to impose 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.
Year 2000
- ---------
As in the case with most other businesses, the Company is in the process of
evaluating and addressing Year 2000 compliance of both its information
technology systems and its non-information technology systems (collectively
referred to as "Systems"). Such Year 2000 compliance efforts are designed to
identify, address, and resolve issues that may be created by programs written to
run on microprocessors which reference years as two digit fields rather than
four. Any such programs may recognize a date using "00" as the year 1900 rather
than 2000. If this situation occurs, the potential exists for system failure or
miscalculations by computer programs.
The Company has made significant progress in achieving Year 2000 compliance. It
is estimated that it is approximately 84% complete and will be totally in
compliance by the end of November 1998. The company has spent approximately $0.3
million on internal manpower costs during 1997 and 1998 related to the Year 2000
issue, representing approximately 4% of the information systems budget. The
Company expects to incure approximately $0.1 million of future expense to
complete the Year 2000 compliance project.
13
<PAGE>
The Company's use of its own information technology personnel to make the
business systems Year 2000 compliant may delay some other strategic information
systems development and implementation which would have otherwise benefited the
Company in various ways and to varying extents. The Company does not believe
that it will be at a competitive disadvantage as a result of these delays.
The Company continues to make inquiries of its vendors whose Year 2000
compliance is important to its ongoing business. Based on preliminary
information received by the Company, the only significant vendor that could
adversely affect operations is the United States Postal Service. The postal
service assumes that it will be compliant, but should it not do so on a timely
basis, the Company's business and operations could be materially adversely
affected. The Company currently does not have any contingency plans. However, it
recognizes the need to develop contingency plans and expects to have these plans
secure where applicable by the end of fiscal 1999.
While the Company does not believe that the Year 2000 matters discussed above
will have a material impact on its business, financial condition or results of
operations, it is uncertain whether or to what extent the Company may be
affected by such matters.
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>
<CAPTION>
PART II - OTHER INFORMATION PAGE
- --------------------------- ----
Item 1. Legal Proceedings
<S> <C>
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 Federal Trade Commission
("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 had
previously 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 had received inquiries from the FTC, various state regulatory groups
(the "States") and a trade association 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 1997, the Company reached an agreement with a multistate group consisting of
eleven states that sought to impose certain disclosure requirements on the
Company's promotional materials. The agreement became effective September 1,
1997. During 1997 and 1998, the Company's promotional materials include the
majority of modifications and clarifications required by the agreement. The
modifications the Company has made to its solicitation materials has had a
material adverse effect on its domestic response rates. Consequently, the
Company feels these modifications and clarifications will have no additional
negative impact on the Company's response rates. However, response rates are
only one of several factors that affect the Company's results of operations.
Also, there may be some additional modifications which will need to be made to
the Company's promotional materials to fully satisfy the terms of the Company's
agreement with the multistate group, and no assurances can be given that such
changes will not have a further effect on the Company's response rate. In
accordance with the agreement, the Company paid $0.3 million in administrative
expenses and fees during 1997. The agreement also required that refunds be made
to customers under certain circumstances for a six-month period. These refunds
were not material to the Company's financial condition or results of operations.
15
<PAGE>
PAGE
----
State regulators, the Federal Trade Commission and trade associations from time
to time contact the Company with inquiries regarding the Company's promotional
materials. The Company has recently received inquiries from 2 states and a trade
association which were not part of the multistate group. While the Company
believes that it will be able to resolve these inquiries, there can be no
assurance that these or other state regulators or trade associations will not
require or seek to impose additional changes to the Company's promotional
materials, and no assurance can be given that such changes will not be
significant or will not have a material adverse effect on the Company's future
financial condition or results of operations.
Item 2. Change in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8K.
A. Exhibit
10.1 Executive Employment Agreement between the Company 18-21
and Martin J. Pearson dated as of June 30, 1998
B. Form 8K
No reports on Form 8K have been filed during the quarter for which this
report is filed.
</TABLE>
16
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOSIERY CORPORATION OF AMERICA, INC.
------------------------------------
(Registrant)
/s/ ARTHUR C. HUGHES
Date: November 4, 1998 _________________________________
- ------------------------
Arthur C. Hughes
Vice President &
Chief Financial Officer
17
Exhibit 10.1
June 30, 1998
Mr. Martin J. Pearson
15 River Road, Apt. 213
Cos Cob, CT 06807
Dear Martin:
I am delighted to extend this offer to you to join the senior management team at
Hosiery Corporation of America (HCA). We intend to grow this company and expect
you to be a vital part in developing and implementing our strategic plan.
This letter summarizes the offer of employment made to you by HCA:
1. Position: Senior Vice President, Corporate Development.
2. Reporting Relationship: Report to John F. Biagini, Chairman and CEO.
3. Primary Responsibilities: Initially, you will help develop strategic
options for domestic and international growth of HCA's hosiery business
and for acquisitions of direct marketing companies in the US. These
initial efforts will require 6-8 months. Secondly, following this
review period, it is expected that you will move into a chief operating
role of one of those acquired companies or remain in a corporate role
overseeing and directing the operations of acquired companies.
4. Base Salary: Your annual base salary will be $200,000.00 to be paid in
weekly installments.
5. Bonus and Stock Option Plan: Once you assume your position following
the initial strategic investigation period, you will be able to
participate in bonus and applicable stock incentive programs which may
include the opportunity for equity investments. It is understood that
such plans may be developed either under HCA's current ownership or
under new ownership, and the availability of such plans is dependent on
considerations that cannot be foreseen at this time.
18
<PAGE>
Mr. Martin J. Pearson
June 30, 1998
Page 2
6. Benefits: You will be entitled to the employee benefits described in
the attached materials. After your first, second and third years of
employment, you shall be entitled to a three-week vacation with full
pay; and after your fourth anniversary, four weeks with full pay.
Vacation time shall be taken with due regard for work schedules and the
business interests of the Company.
7. Company Car and Other Perquisites: You will be entitled to a company
car equivalent to a (Buick LeSabre), a car phone at Company expense,
and all costs related to gas, insurance and maintenance of that car.
8. You will be entitled to the use of the Company Apartment, at no charge,
other than telephone charges, until July 31, 1999.
9. Confidentiality: During the term of your employment, you will have
access to and become familiar with substantial amounts of proprietary
and confidential information concerning the business operations of the
Company, its products, marketing systems, sales information, computer
systems and software, customer lists, financial and economic data and
various plans for future operations (all of such information being
herein referred to as the "Confidential Information"). You shall not
disclose any portion of the Confidential Information, directly or
indirectly, or use it in any way, either during the term of this
Agreement or at any later time, except as required in the course of
your employment or by law. All files, records, documents, drawings,
specifications and similar items relating to the business of the
Company, whether prepared by you or otherwise coming into your
possession, shall remain the exclusive property of the Company and
shall not be removed from the premises of the Company under any
circumstances and shall be immediately returned upon cessation of your
employment.
10. Relocation: The Company will reimburse you for all reasonable and
necessary expenses incidental to moving your household goods and
personal belongings from your current residence, including
reimbursement for legal and real estate expenses incurred in the sale
of your current residence.
19
<PAGE>
Mr. Martin J. Pearson
June 30, 1998
Page 3
11. Change in Position or Assignment: It is understood that your initial
assignment will lead to a change in position once the Company decides
on pursuing one or more of the strategic options under investigation.
At the company's election and in the event the company acquires a
controlling interest in other outside companies, and if you agree, you
will serve as the Chief Operating Officer of one such acquired company
as may be designated by the Company in lieu of serving as the
company's Senior Vice President - Corporate Development. In such case,
you shall perform your duties at the so designated company's location
and your duties shall consist of those customarily rendered by chief
operating officers of similar enterprises. Accordingly, the Company
may assign its rights and obligations under this Agreement to the so
designated company and you hereby agree to such assignment. Upon such
assignment, the company hereby guarantees the monetary performance of
the so designated company under this Agreement.
12. Severance: It is understood that the employment relationship may be
terminated with or without cause (defined below), by either party at
any time. However, should the Company terminate the employment
relationship without Cause at any time during your employment with the
Company, the company will continue to pay you your then current base
annual salary (the "Severance Salary") for six (6) months subsequent to
the date of termination (the "Continuation Period") in equal weekly or
biweekly installments less the usual deductions so long as you remain
unemployed during the Continuation Period.
As used herein, the term "Cause" shall mean your (i) willful
and repeated failure to comply with reasonable directives of
superior corporate officers; or (ii) inability to perform your
duties under this Agreement because of physical or mental
illness or injury for more than one hundred eighty (180)
consecutive days in any period of twelve (12) consecutive
calendar months; or (iii) willful misconduct resulting in
damage or loss to Company, or its related or affiliated
companies; or (iv) addition to alcohol or drugs that have not
been medically prescribed for use, which addiction shall
require medical confirmation by a licensed physician.
13. While employed at Corporate Headquarters, you will work a four-day
week; in the event you oversee the operation of an acquired business,
you will be expected to adjust your work schedule to that of the
acquired company. Only with written permission of the company will you
be allowed to provide services of a business nature directly or
indirectly to any other person or organization during your employment.
20
<PAGE>
Mr. Martin J. Pearson
June 30, 1998
Page 4
Martin, we believe you have the skills, experience and intellect that will make
you a successful player at HCA. More importantly, we share a vision for what
makes a high-growth and profitable operation. We look forward to your
contribution to this process.
This offer will expire one week from this date. Please countersign below,
confirming your start date and return this leltter to me.
If you have any questions, please feel free to contact me.
Sincerely,
Hosiery Corporation of America
John F. Biagini
JFB/lbs
I intend to start employment on July 20, 1998.
/s/ Martin J. Pearson July 6, 1998
- ----------------------------- ------------
Martin J. Pearson Date
21
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000934383
<NAME> Hosiery Corporation of America, Inc.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Sep-26-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 30,579
<ALLOWANCES> 1,840
<INVENTORY> 18,195
<CURRENT-ASSETS> 49,361
<PP&E> 35,177
<DEPRECIATION> 17,838
<TOTAL-ASSETS> 116,306
<CURRENT-LIABILITIES> 45,028
<BONDS> 69,516
466
37,485
<COMMON> 14
<OTHER-SE> (103,175)
<TOTAL-LIABILITY-AND-EQUITY> 116,306
<SALES> 142,236
<TOTAL-REVENUES> 142,236
<CGS> 41,545
<TOTAL-COSTS> 66,479
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 9,076
<INTEREST-EXPENSE> 12,397
<INCOME-PRETAX> 12,512
<INCOME-TAX> 4,755
<INCOME-CONTINUING> 7,757
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,757
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
