SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 27, 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 August 10, 1998
- ---------------------------- ------------------------------
Voting 1,332,516
Class A, non-voting 75,652
<PAGE>
INDEX PAGE
- ----- ----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
June 27, 1998 and December 31, 1997 3
Condensed Consolidated Statements of Operations
Three and six month periods ended June 27, 1998
and June 28, 1997 4
Condensed Consolidated Statements of Cash Flows
Six month periods ended June 27, 1998 and June 28, 1997 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-13
PART II - OTHER INFORMATION 14-15
- ---------------------------
SIGNATURES 16
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
- ----------------------------------------------------
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 27, 1998 AND DECEMBER 31, 1997
(Dollars in thousands, except per share data)
<CAPTION>
June 27, 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
$2,093 and $1,448 in 1998 and 1997, respectively ................................. 27,107 24,180
Inventories ....................................................................... 14,600 15,158
Prepaid and other current assets .................................................. 1,867 2,398
--------- ---------
Total current assets ......................................................... 43,574 46,063
PROPERTY AND EQUIPMENT, net ............................................................ 17,134 17,261
DEFERRED CUSTOMER ACQUISITION COSTS .................................................... 37,786 30,795
DEFERRED DEBT ISSUANCE COSTS, less accumulated amortization of
$6,048 and $5,316 in 1998 and 1997, respectively .................................. 5,516 6,084
GOODWILL ............................................................................... 3,717 --
OTHER ASSETS ........................................................................... 710 397
--------- ---------
TOTAL .................................................................................. $ 108,437 $ 100,600
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Note payable to bank .............................................................. $ 3,050 $ --
Current portion of long-term debt ................................................. 4,242 3,117
Current portion of capital lease obligations ...................................... 1,594 1,550
Bank overdrafts ................................................................... 1,592 --
Accounts payable .................................................................. 6,463 7,120
Accrued expenses and other current liabilities .................................... 5,113 5,366
Accrued interest .................................................................. 4,659 4,608
Accrued coupon redemption costs ................................................... 5,013 4,568
Deferred income taxes ............................................................. 7,901 7,279
--------- ---------
Total current liabilities .................................................... 39,627 33,608
LONG-TERM DEBT, Less current portion ................................................... 126,991 129,307
CAPITAL LEASE OBLIGATIONS, Less current portion ........................................ 4,515 4,591
ACCRUED COUPON REDEMPTION COSTS ........................................................ 411 429
DEFERRED INCOME TAXES .................................................................. 4,892 3,876
--------- ---------
Total liabilities ............................................................ 176,436 171,811
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
REDEEMABLE EQUITY SECURITIES ........................................................... 905 872
--------- ---------
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 $88,221 and $79,838 in 1998 and 1997, respectively), 3,742,012 and
3,739,782 shares issued in 1998 and 1997, respectively, 3,739,782 shares
outstanding ..................................................................... 37,420 37,398
Common stock, voting, $.01 par value: 3,000,000 shares authorized, 1,321,836
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 ........................................................ 16,538 16,565
Compensatory stock options outstanding ............................................ 22,938 22,938
Accumulated deficit ............................................................... (145,186) (148,301)
Restricted stock .................................................................. (572) (697)
--------- ---------
(68,848) (72,083)
Treasury stock, at cost, 2,544 shares in 1998 ..................................... (56) --
--------- ---------
Net stockholders' deficiency ................................................. (68,904) (72,083)
--------- ---------
TOTAL .................................................................................. $ 108,437 $ 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 Six Month Periods Ended
------------------------- -----------------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET REVENUES ........................................................... $50,516 $49,589 $94,194 $94,863
------- ------- ------- -------
COSTS AND EXPENSES:
Cost of sales ..................................................... 24,207 24,057 45,943 47,097
Administrative and general expenses ............................... 3,175 2,960 6,632 6,411
Provision for doubtful accounts ................................... 3,883 3,231 7,011 6,800
Marketing costs ................................................... 9,340 8,011 17,700 16,232
Coupon redemption costs ........................................... 976 742 2,041 1,694
Depreciation and amortization ..................................... 797 805 1,571 1,479
Other expenses .................................................... 58 274 54 365
------- ------- ------- -------
OPERATING INCOME ....................................................... 8,080 9,509 13,242 14,785
Interest income .................................................... 14 17 51 36
Interest expense ................................................... 4,150 4,608 8,224 9,148
------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES ............................... 3,944 4,918 5,069 5,673
PROVISION FOR INCOME TAXES ............................................. 1,498 1,893 1,926 2,184
------- ------- ------- -------
NET INCOME ............................................................. $ 2,446 $ 3,025 $ 3,143 $ 3,489
======= ======= ======= =======
<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
SIX MONTH PERIODS ENDED JUNE 27, 1998 AND JUNE 28, 1997
(Dollars in thousands)
(Unaudited)
<CAPTION>
1998 1997
-------- --------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income ................................................................... $ 3,143 $ 3,489
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ............................................. 1,571 1,479
Amortization of debt issue costs and discounts ............................ 850 937
Other ..................................................................... (43) 122
Amortization of deferred customer acquisition costs ....................... 15,485 12,077
(Increase) decrease in operating assets:
Accounts receivable ................................................. (2,489) (3,233)
Inventories ......................................................... 895 331
Payments for deferred customer acquisition costs .................... (22,476) (16,626)
Prepaid and other current assets .................................... 585 45
Deferred tax asset .................................................. -- 375
Other assets ........................................................ (433) (101)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other liabilities ............ 343 (64)
Deferred income taxes ............................................... 1,638 1,808
Accrued coupon redemption costs ..................................... 16 (400)
-------- --------
Net cash (used in) provided by operating activities ........... (915) 239
-------- --------
INVESTING ACTIVITIES:
Acquisitions of property and equipment ....................................... (464) (377)
Acquisition of business ...................................................... (3,837) --
Proceeds from sale of property and equipment ................................. 8 --
-------- --------
Net cash used in investing activities ......................... (4,293) (377)
-------- --------
FINANCING ACTIVITIES:
Net borrowings on note payable to bank ....................................... 3,050 2,000
Payments on bank and other financing ......................................... (1,309) (2,009)
Payments on capital leases ................................................... (804) (930)
Purchase of treasury stock ................................................... (56) --
-------- --------
Net cash provided by (used in) financing activities ........... 881 (939)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ....................................... (4,327) (1,077)
Cash and cash equivalents at beginning of year ............................... 4,327 1,960
-------- --------
Cash and cash equivalents at end of period ................................... $ -- $ 883
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest .................................................................. $ 7,273 $ 7,857
======== ========
Income taxes .............................................................. $ 288 $ --
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations of $772 and $827 were entered into for new equipment during the six 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 June 27, 1998 and the results of operations for the three and six
month periods ended June 27, 1998 and June 28, 1997, and cash flows for the six
month periods ended June 27, 1998 and June 28, 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. Inventories
June 27, December 31,
1998 1997
-------- -----------
Raw materials.................................... $ 783 $ 546
Work-in-process.................................. 2,624 2,748
Finished goods................................... 8,974 9,820
Promotional and packing material................. 2,219 2,044
------- -------
$14,600 $15,158
======= =======
NOTE 3. 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 $3.8 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 $3.7 million is amortized over a period of 30 years using the
straight-line method.
6
<PAGE>
NOTE 4. 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"),
sixteen 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. Eleven of the States, acting as a multi-state group, sought to impose
certain disclosure requirements on the Company's promotional materials.
The Company has reached an agreement with the multistate group in which the
Company agreed to certain modifications and clarifications of its promotional
materials. The agreement became effective as of September 1, 1997. The Company's
promotional materials for all of 1997 already include the majority of the
modifications and, consequently, the Company feels these modifications and
clarifications will have no additional negative impact on the Company's response
rates beyond the actual first quarter results. However, there may be some
additional minor modifications which will need to be made to the Company's
promotional materials to fully satisfy the terms of the Company's agreement with
the multistate group, and no assurances can be given that such changes will not
have a further effect on the Company's response rate. In accordance with the
agreement, the Company paid $300,000 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.
The Company is hopeful that these modifications and clarifications will also
satisfy the inquiries from the FTC, the states not part of the multistate group
and the trade association; however, no assurances can be given in this regard.
The modifications the Company has already made to its solicitation materials has
had a material adverse effect on its domestic response rates. However, response
rates are only one of several factors that affect the Company's results of
operations. State regulators and trade associations from time to time contact
the Company with inquiries regarding the Company's promotional materials and
state regulators or trade associations could 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.
7
<PAGE>
NOTE 5. 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 June 27, 1998, there were outstanding borrowings of $3,050 at an interest
rate of 9.00%. In addition, there were outstanding letters of credit of
approximately $1,968, resulting in $14,982 available to borrow.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three and Six Month Periods Ended June 27, 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 Six Month Periods Ended
------------------------- -----------------------
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues ..................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales .......................... 47.9 48.5 48.8 49.6
Administrative and general expenses .... 6.3 6.0 7.0 6.7
Provision for doubtful accounts ........ 7.7 6.5 7.4 7.2
Marketing costs ........................ 18.5 16.2 18.8 17.1
Coupon redemption costs ................ 1.9 1.5 2.2 1.8
Depreciation and amortization .......... 1.6 1.6 1.7 1.6
----- ----- ----- -----
Subtotal ..................... 83.9 80.3 85.9 84.0
----- ----- ----- -----
Income before interest-net, other expenses
and provision for income taxes ................ 16.1% 19.7% 14.1% 16.0%
===== ===== ===== =====
</TABLE>
9
<PAGE>
Three Month Period Ended June 27, 1998 Compared to Three Month Period Ended
June 28, 1997
- ---------------------------------------------------------------------------
Net revenues increased by 1.9% in the second quarter of 1998 as compared to the
same period in 1997. The increase was primarily caused by increased
solicitations to attract new customers to the program.
Cost of sales increased slightly over the prior period to $24.2 million from
$24.1 million caused by the increased revenue. However, as a percentage of
sales, cost of sales declined to 47.9% in the second quarter of 1998 from 48.5%
in the same quarter of 1997. The favorable trend in the percentage of cost of
sales is the result of better margins in the United Kingdom and Germany since
these countries now have an existing customer base from continuing hose
shipments.
Administrative and general expenses have increased to $3.2 million from $3.0
million. This increase is caused by higher personnel costs and wages. As a
percentage of net revenues, these costs were 6.3% and 6.0% for the second
quarter 1998 and 1997, respectively.
Provision for doubtful accounts has increased to $3.9 million for the second
quarter of 1998 from $3.2 million for the same period of 1997. The primary
reason for the increase is that 0.3 million incremental front end shipments were
made in the second quarter of 1998 as compared to 1997. These shipments have the
highest incidence of bad debts. As a percentage of net revenues, provision for
doubtful accounts was 7.7% in the second quarter of 1998 compared to 6.5% for
the same period of 1997.
Marketing costs have increased to $9.3 million in 1998 from $8.0 million in
1997. This increase is attributable to higher spending in the current quarter of
1998 and higher amortization of prior years costs in the second quarter of 1998
as compared to 1997. As a percentage of net revenues, marketing costs are 18.5%
in the second quarter of 1998 as compared to 16.2% for the same period of 1997.
Coupon redemption costs have increased to $1.0 million from $0.7 million in 1998
as compared to 1997. Driving this increase has been the necessity to maintain a
higher reserve level for future redemptions. As a percentage of net revenues,
redemption costs were 1.9% in 1998 as compared to 1.5% in 1997, each of which
are for the second quarter.
Interest expense has declined in the second quarter of 1998 to $4.2 million from
$4.6 million in 1997 related to lower rates under the revised credit agreement
and less borrowings outstanding.
Pretax income has decreased to $3.9 million in 1998 from $4.9 million in 1997.
As a percentage of net revenues, pretax income decreased to 7.8% in the second
quarter of 1998 from 9.9% for the same period of 1997. The decrease in pretax
profits is primarily caused by higher provision for doubtful accounts and
marketing expense offset by higher revenue and lower interest expense.
Net income decreased to $2.4 million in the second quarter of 1998 from $3.0
million for the same period in 1997. As a percentage of net revenues, net income
was 4.8% in the second quarter of 1998 as compared to 6.1% for the same period
of 1997. The decrease in pretax income of $1.0 million offset by a decreased
provision for income taxes of $0.4 million account for the decrease.
10
<PAGE>
Six Month Period Ended June 27, 1998 Compared to Six Month Period Ended
June 28, 1997
- -----------------------------------------------------------------------
Net revenues declined to $94.2 million in 1998 from $94.9 million in 1997, a
decrease of 0.7%. The decrease was caused by lower response rates in the United
States.
Cost of sales decreased to $45.9 million in 1998 from $47.1 million in 1997, a
decrease of $1.2 million or 2.5%. The improvement in cost of sales is the result
of better margins in the United Kingdom and Germany since these countries now
have an existing customer base from continuing hose shipments. As a percentage
of net revenues, cost of sales was 48.8% in the first half of 1998 versus 49.6%
in the first half of 1997.
Administrative and general expenses were $6.6 million in the first half of 1998
compared to $6.4 million for the first half of 1997, an increase of 3.4%.
Increased personnel costs account for the difference. As a percentage of net
revenues, these costs were 7.0% and 6.7% for the first half of 1998 and 1997,
respectively.
Provision for doubtful accounts increased to $7.0 million in the first half of
1998 from $6.8 million for the same period of 1997, an increase of 3.1%. Higher
rates of non payment by new customers account for the increase. As a percentage
of net revenues, the provision for doubtful accounts is 7.4% for the first half
of 1998 compared to 7.2% for the same period in 1997.
Marketing costs increased to $17.7 million in the first half of 1998 from $16.2
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 18.8% and 17.1% for the first half of 1998
and 1997, respectively.
Interest expense has declined to $8.2 milion in the first half of 1998 from $9.1
million for the same period in 1997. This decrease is the result of lower rates
under the revised credit agreement and less borrowings outstanding. As a
percentage of net revenues, interest expense was 8.7% in the first six months of
1998 as compared to 9.6% for the same period of 1997.
Pretax income has decreased to $5.1 million in the first six months of 1998 as
compared to $5.7 million for the same period of 1997. The decrease in pretax
profits is primarily attributable to higher marketing costs offset by lower
interest expense. As a percentage of net revenues, pretax income was 5.4% in
1998 and 6.0% in 1997.
Net income declined to $3.1 million in the first half of 1998 from $3.5 million
for the same period of 1997. The decrease in pretax income of $0.6 million
offset by a lower provision for income taxes of $0.3 million account for the
decrease.
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 $8.5 million is caused by five mailings in
the first half of 1998 and the acquisition of a small Canadian company which
increased bank borrowings, bank overdrafts and accrued coupon redemption costs.
Capital expenditures were $1.2 million for the six month periods ended June 27,
1998 and June 28, 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 $(0.9) million for the
first half of 1998 as compared to $0.2 million for the first half of 1997. This
change is primarily due to higher spending for customer acquisition costs offset
by higher amortization of customer acquisition costs, reductions of inventory
and receivables.
Net cash used in investing activities was $4.3 million and $0.4 million for the
six month periods ended June 27, 1998 and June 28, 1997, respectively.
Acquisitions of property and equipment was $0.5 million and $0.4 million in the
first half of 1998 and 1997, respectively. In 1998, the Company acquired a
Canadian business for $3.8 million.
Net cash provided by (used in) financing activities was $0.9 million and $(0.9)
million for the six month periods ended June 27, 1998 and June 28, 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 $2.1 million in 1998 as compared to $2.9 million in
1997.
The Recapitalization
- --------------------
As a result of the substantial indebtedness incurred in connection with a
Recapitalization, in October 1994, the Company has significant debt service
obligations. At June 27, 1998, the outstanding amount of the Company's
indebtedness (other than trade payables) is $140.4 million, including $67.1
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, $15.0 million of
which was available at June 27, 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"), sixteen 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.
Eleven of the States, acting as a multi-state group, sought to impose certain
disclosure requirements on the Company's promotional materials.
The Company has reached an agreement with the multistate group in which the
Company agreed to certain modifications and clarifications of its promotional
materials. The agreement became effective as of September 1, 1997. The Company's
promotional materials for all of 1997 already include the majority of the
modifications and, consequently, the Company feels these modifications and
clarifications will have no additional negative impact on the Company's response
rates beyond the actual first quarter results. However, there may be some
additional minor modifications which will need to be made to the Company's
promotional materials to fully satisfy the terms of the Company's agreement with
the multistate group, and no assurances can be given that such changes will not
have a further effect on the Company's response rate. In accordance with the
agreement, the Company paid $300,000 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.
The Company is hopeful that these modifications and clarifications will also
satisfy the inquiries from the FTC and the states not part of the multistate
group and the trade association; however, no assurances can be given in this
regard. The modifications the Company has already made to its solicitation
materials has had a material adverse effect on its domestic response rates.
However, response rates are only one of several factors that affect the
Company's results of operations. State regulators and trade associations from
time to time contact the Company with inquiries regarding the Company's
promotional materials and state regulators or trade associations could 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.
Inflation
- ---------
Over the past three years, which has been a period of low inflation, the Company
has been able to increase sales volume to compensate for increases in operating
expenses. The Company has historically been able to increase its selling prices
as the cost of sales and related operating expenses have increased and,
therefore, inflation has not had a significant effect on operations.
13
<PAGE>
<TABLE>
<CAPTION>
PART II - OTHER INFORMATION PAGE
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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, sixteen 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. Eleven of the States,
acting as a multi-state group, sought to impose certain disclosure requirements
on the Company's promotional materials.
The Company has reached an agreement with the multistate group in which the
Company agreed to certain modifications and clarifications of its promotional
materials. The agreement became effective as of September 1, 1997. The Company's
promotional materials for all of 1997 already include the majority of the
modifications and, consequently, the Company feels these modifications and
clarifications will have no additional negative impact on the Company's response
rates beyond the actual first quarter results. However, there may be some
additional minor modifications which will need to be made to the Company's
promotional materials to fully satisfy the terms of the Company's agreement with
the multistate group, and no assurances can be given that such changes will not
have a further effect on the Company's response rate. In accordance with the
agreement, the Company paid $300,000 in administrative expenses and fees during
1997. The agreement also requires 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.
14
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PAGE
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The Company is hopeful that these modifications and clarifications will also
satisfy the inquiries from the FTC and the states not part of the multistate
group and the trade association; however, no assurances can be given in this
regard. The modifications the Company has already made to its solicitation
materials has had a material adverse effect on its domestic response rates.
However, response rates are only one of several factors that affect the
Company's results of operations. State regulators and trade associations from
time to time contact the Company with inquiries regarding the Company's
promotional materials and state regulators or trade associations could 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 17-20
and Philip G. Whalen dated as of March 16, 1998
B. Form 8K
No reports on Form 8K have been filed during the quarter for which this
report is filed.
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15
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SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOSIERY CORPORATION OF AMERICA, INC.
------------------------------------
(Registrant)
/s/ ARTHUR C. HUGHES
Date: August 10, 1998 _________________________________
-------------------------
Arthur C. Hughes
Vice President &
Chief Financial Officer
16
EXHIBIT 10.1
CONFIDENTIAL
March 16, 1998
Mr. Philip G. Whalen
514 Quail Ridge Drive
Aurora, Ontario L4G 3G8
Canada
Dear Phil:
I am delighted to extend this offer to you to join me at HCA. I expect that your
experience and professional talents will make you a decisive and driving force
in HCA's future plans.
This letter summarizes the offer of employment to you by HCA.
1. Position: President
2. Reporting Relationship: Reports to Chairman and CEO (J. Biagini) and
has reporting to it all functions except International and U.S. Textile
Corp. The CFO will report to both of us simultaneously.
3. Primary Responsibilities: Development and implementation of HCA's North
American strategy, including necessary staffing, marketing, product
development, financial management and all other support functions
necessary to attain the Company's goals.
4. Base Salary: Your total annual base salary will be $250,000 to be paid
in equal weekly installments.
5. Bonus: you will be guaranteed a bonus of $100,000 after your first full
year of service, prorated for three-fourths in 1998. Future years bonus
awards will be based on mutually agreed targets between you and me.
17
<PAGE>
6. While you are not eligible for Kelso's current stock option plan, as part
of the executive group, you would obviously be included in new ones created
either by Kelso or other owners of the Company.
7. Benefits: You will be entitled to the employee benefits described in the
attached materials. During your first second and third years of employment,
you shall be entitled to a three-week vacation with full pay and, after the
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.
8. Company Car & Other Perquisites: You will be entitled to a company car in
the equivalent of a Cadillac DeVille, a car phone at Company expense, and
you will be reimbursed for any phone line charges incurred by you for a
home facsimile machine employed for Company purposes. The Company will be
responsible for operating costs such as insurance, gasoline and maintenance
of the vehicle.
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. Until you
relocate to the Bensalem area, the Company will reimburse you up to $15,000
per year toward the rental of housing in the Bensalem area. (This will
cease either when you relocate to the Bensalem area or when your employment
with HCA terminates.)
18
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11. 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 one (1) year 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. However, should you obtain employment during the
Continuation Period at an annual salary equal to or greater than the
Severance Salary, the Company's obligation to pay the then remaining
installments of the Severance Salary shall end. On the other hand, should
you obtain employment during the Continuation Period at a salary less than
the Severance Salary, the Company's obligation to pay the remaining
installments of the Severance Salary shall continue until the end of the
Continuation Period but at a reduced amount equal to the difference between
the Severance Salary and the lesser salary.
As used herin, 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) addiction to alcohol or drugs that have not
been medically prescribed for use, which addiction shall
require medical confirmation by a licensed physician.
In the event of a change in ownership of HCA and if the new ownership
effectively reorganizes your position in a manner to diminish your position
or role in the Company this, at your option, can be considered as a
situation of termination "without cause."
19
<PAGE>
12. 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.
Phil, I am extremely eager to have you join us. With you concentrating on the
hosiery business in North America and me overseeing overseas and any
acquisitions, I believe we can achieve our wildest dreams. I also believe we'll
work well as a team and will build a world-class operation.
This offer becomes effective April 1, 1998. Should you not have the necessary
work permits to enter the US, you will be termporarily employed by EHC, at the
same salary as outlined above, and will concentrate on establishing our North
America telemarketing programs with our Canadian vendors.
If you have any questions, please feel free to contact me.
Sincerely,
HOSIERY CORPORATION OF AMERICA
John F. Biagini
JFB/lbs
Agreed and Accepted:
/s/ Philip G. Whalen March 16, 1998
- ------------------------ ----------------
Philip G. Whalen Date
20
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<NAME> Hosiery Corporation of America, Inc.
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<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Jun-27-1998
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37,420
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