SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 27, 1999
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _______ to ________
Commission File No. 33-87392
HOSIERY CORPORATION OF AMERICA, INC.
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-0782950
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3369 Progress Drive
Bensalem, Pennsylvania 19020
- ---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 244-1777
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--------------- ---------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 6, 1999
- ------------------- --------------------------
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
March 27, 1999 and December 31, 1998 3
Condensed Consolidated Statements of Operations
Three month periods ended March 27, 1999 and March 28, 1998 4
Condensed Consolidated Statements of Cash Flows
Three month periods ended March 27, 1999 and March 28, 1998 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II - OTHER INFORMATION 13-14
- ---------------------------
SIGNATURES 15
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
- ----------------------------------------------------
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 27, 1999 AND DECEMBER 31, 1998
(Dollars in thousands, except per share data)
<CAPTION>
March 27, December 31,
1999 1998
----------- ------------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ........................................................... $ -- $ --
Accounts receivable, less an allowance for doubtful accounts of
$3,320 and $1,901 in 1999 and 1998, respectively ................................... 37,456 32,214
Inventories ......................................................................... 19,785 20,008
Prepaid and other current assets .................................................... 3,780 3,748
--------- ---------
Total current assets ........................................................... 61,021 55,970
PROPERTY AND EQUIPMENT, net .............................................................. 17,327 17,906
DEFERRED CUSTOMER ACQUISITION COSTS ...................................................... 51,067 46,933
DEFERRED DEBT ISSUANCE COSTS, less accumulated amortization of
$7,137 and $6,774 in 1999 and 1998, respectively .................................... 4,427 4,790
GOODWILL, less accumulated amortization of $92 and $61 in 1999 and 1998, respectively .... 3,702 3,733
OTHER ASSETS ............................................................................. 621 707
--------- ---------
TOTAL .................................................................................... $ 138,165 $ 130,039
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Borrowings under line of credit ..................................................... $ 12,750 $ 3,400
Current portion of long-term debt ................................................... 7,617 7,617
Current portion of capital lease obligations ........................................ 1,575 1,726
Bank overdrafts ..................................................................... 1,909 1,397
Accounts payable .................................................................... 8,086 10,321
Accrued expenses and other current liabilities ...................................... 10,573 9,389
Accrued interest .................................................................... 2,255 4,771
Accrued coupon redemption costs ..................................................... 4,681 4,679
Deferred income taxes ............................................................... 8,527 8,115
--------- ---------
Total current liabilities ...................................................... 57,973 51,415
LONG-TERM DEBT, Less current portion ..................................................... 121,471 121,433
CAPITAL LEASE OBLIGATIONS, Less current portion .......................................... 4,875 5,176
ACCRUED COUPON REDEMPTION COSTS .......................................................... 408 408
DEFERRED INCOME TAXES .................................................................... 11,300 10,884
--------- ---------
Total liabilities .............................................................. 196,027 189,316
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
REDEEMABLE EQUITY SECURITIES ............................................................. 914 885
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 $106,884 and
$101,236 in 1999 and 1998, respectively), 3,748,497 shares issued in 1999 and 1998,
3,739,782 shares outstanding in 1999 and 1998 ..................................... 37,485 37,485
Common stock, voting, $.01 par value: 3,000,000 shares authorized, 1,340,122
shares issued, 1,321,522 shares outstanding in 1999 and 1998 ...................... 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 .......................................................... 18,840 18,869
Compensatory stock options outstanding .............................................. 20,943 20,943
Accumulated deficit ................................................................. (133,598) (134,950)
Restricted stock .................................................................... (384) (447)
--------- ---------
(56,700) (58,086)
Treasury stock, at cost, 27,315 shares in 1999 and 1998 (8,715 preferred shares
and 18,600 common shares) ......................................................... (2,076) (2,076)
--------- ---------
Net stockholders' deficiency ................................................... (58,776) (60,162)
--------- ---------
TOTAL .................................................................................... $ 138,165 $ 130,039
========= =========
<FN>
See notes to condensed consolidated financial statements.
</FN>
3
</TABLE>
<PAGE>
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 27, 1999 AND MARCH 28, 1998
(Dollars in thousands)
(Unaudited)
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
NET REVENUES ..................................... $ 57,145 $ 43,678
-------- --------
COSTS AND EXPENSES:
Cost of sales ............................... 29,141 21,736
Administrative and general expenses ......... 3,906 3,457
Provision for doubtful accounts ............. 4,745 3,128
Marketing costs ............................. 10,912 8,360
Coupon redemption costs ..................... 1,087 1,065
Depreciation and amortization ............... 864 774
Other expenses (income) ..................... 256 (4)
-------- --------
OPERATING INCOME ................................ 6,234 5,162
Interest income ............................. 9 37
Interest expense ............................ 4,062 4,074
-------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES ........ 2,181 1,125
PROVISION FOR INCOME TAXES ...................... 829 428
-------- --------
NET INCOME ...................................... $ 1,352 $ 697
======== ========
<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
THREE MONTH PERIODS ENDED MARCH 27, 1999 AND MARCH 28, 1998
(Dollars in thousands)
(Unaudited)
<CAPTION>
1999 1998
-------- --------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income ....................................................... $ 1,352 $ 697
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization ................................. 864 774
Amortization of debt issue costs and discounts ................ 430 412
Other ......................................................... 63 59
Amortization of deferred customer acquisition costs ........... 9,697 7,262
(Increase) decrease in operating assets:
Accounts receivable ..................................... (5,242) (592)
Inventories ............................................. 223 (489)
Payments for deferred customer acquisition costs ........ (13,831) (12,157)
Prepaid and other current assets ........................ (32) 214
Other assets ............................................ 61 (97)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other liabilities (3,055) 1,208
Deferred income taxes ................................... 828 323
Accrued coupon redemption costs ......................... 2 16
-------- --------
Net cash used in operating activities ............. (8,640) (2,370)
-------- --------
INVESTING ACTIVITIES:
Acquisitions of property and equipment ........................... (229) (280)
Proceeds from sale of property and equipment ..................... -- 8
-------- --------
Net cash used in investing activities ............. (229) (272)
-------- --------
FINANCING ACTIVITIES:
Net borrowings under line of credit .............................. 9,350 --
Payments on bank and other financing ............................. (29) (1,279)
Payments on capital leases ....................................... (452) (406)
-------- --------
Net cash provided by (used in) financing activities 8,869 (1,685)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ........................... -- (4,327)
Cash and cash equivalents at beginning of year ................... -- 4,327
-------- --------
Cash and cash equivalents at end of period ....................... $ -- $ --
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ...................................................... $ 6,123 $ 6,058
======== ========
Income taxes .................................................. $ 1 $ 105
======== ========
<FN>
See notes to condensed consolidated financial statements.
</FN>
5
</TABLE>
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(Unaudited)
NOTE 1. Condensed Consolidated Financial Statements
In the opinion of management, the accompanying condensed consolidated financial
statements of Hosiery Corporation of America, Inc. and subsidiaries, which are
unaudited except for the Consolidated Balance Sheet as of December 31, 1998,
which is derived from audited financial statements, include all normal and
recurring adjustments necessary to present fairly the Company's financial
position as of March 27, 1999 and the results of operations and cash flows for
the three month periods ended March 27, 1999 and March 28, 1998.
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 31, 1999.
NOTE 2. Inventories
March 27, December 31,
1999 1998
---------- ------------
Raw materials..................................... $ 708 $ 909
Work-in-process................................... 2,939 3,023
Finished goods.................................... 13,588 13,500
Promotional and packing material.................. 2,550 2,576
--------- ---------
$ 19,785 $ 20,008
========= =========
NOTE 3. 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.
6
<PAGE>
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 included 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 $300 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 inquiry with the trade association was satisfactorily resolved with no
further modifications to the Company's promotional offers required.
State regulators, the Federal Trade Commission and trade associations from time
to time contact the Company with inquiries regarding the Company's promotional
materials. There are currently inquiries outstanding from 2 states 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 4. Note Payable to Bank
The Company has a revolving credit facility which provides for maximum
borrowings of $25,000. 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 March 27, 1999, there were outstanding borrowings of $12.8 million at a
weighted average interest rate of 7.1%. In addition, there were outstanding
letters of credit of approximately $0.8 million resulting in $11.4 million
available to borrow.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Month Period Ended March 27, 1999
- --------------------------------------------------------------------------------
The following discussion should be read in conjunction with the audited
Consolidated Financial Statements of Hosiery Corporation of America, Inc. and
Subsidiaries, and the respective Notes thereto, filed with the registrants'
Annual Report on Form 10-K for the fiscal year ended December 31, 1998. As used
within Item 2 and 3, the term "Company" refers to Hosiery Corporation of
America, Inc. and its wholly-owned subsidiaries.
The information herein contains forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 that involve a number of
risks and uncertainties. A number of factors could cause actual results,
performance, achievements of the Company, or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward looking statements. These factors include, but are not
limited to, the significant indebtedness of the Company and in the Company's
specific market areas: changes in prevailing interest rates and the availability
of and terms of financing to fund the cash needs of the Company; inflation;
changes in costs of goods and services; economic conditions in general and in
the Company's specific market areas; demographic changes; changes in or failure
to comply with federal, state and/or local government regulations; liability and
other claims asserted against the Company; changes in operating strategy or
development plans; labor disturbances; changes in the Company's acquisition and
capital expenditure plans; and other factors referenced in Item 7A, Quantitative
and Qualitative Disclosures About Market Risk, in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1998. In addition, such forward
looking statements are necessarily dependent upon assumptions, estimates and
dates that may be incorrect or imprecise and involve known and unknown risks,
uncertainties and other factors. Accordingly, any forward looking statements
included herin do not purport to be predictions of future events or
circumstances and may not be realized. Forward looking statements can be
identified by among other things, the use of forward-looking terminology such as
"believes", "expects", "may", "will", "should", "seeks", "pro forma",
"anticipates", "intends" or the negative of any thereof, or other variations
thereon or comparable terminology, or by discussions of strategy or intentions.
Given these uncertainties, readers are cautioned not to place undue reliance on
such forward looking statements. The Company disclaims any obligations to update
any such factors or to publicly announce the results of any revisions to any of
the forward looking statements contained herein to reflect future events or
developments.
Results of Operations
- ---------------------
The following table sets forth certain income statement data for the Company
expressed as a percentage of net revenues:
<TABLE>
<CAPTION>
Three Month Periods Ended
---------------------------
March 27, March 28,
1999 1998
--------- ---------
<S> <C> <C>
Net revenues .................................... 100.0% 100.0%
Cost of sales .......................... 51.0 49.8
Administrative and general expenses..... 6.8 7.9
Provision for doubtful accounts ........ 8.3 7.2
Marketing costs ........................ 19.1 19.1
Coupon redemption costs ................ 1.9 2.4
Depreciation and amortization .......... 1.5 1.8
----- -----
Subtotal ...................... 88.6 88.2
----- -----
Income before interest-net, other expenses
(income) and provision for income taxes ...... 11.4% 11.8%
===== =====
</TABLE>
8
<PAGE>
Three Month Period Ended March 27, 1999 Compared to Three Month Period Ended
March 28, 1998
- --------------------------------------------------------------------------------
Net revenues increased to $57.1 million in 1999 from $43.7 million in 1998, an
increase of 30.8%. The increase in revenues over the prior year is split almost
equally between the United States and International.
Cost of sales increased to $29.1 million in 1999 from $21.7 million in 1998, an
increase of 34.1%. Driving the increased revenues and cost of sales has been an
increase in first and second shipments to new customers, up 1.5 million
shipments from the prior year. These initial shipments have lower margins than
subsequent shipments due to higher returns. As a percentage of net revenues,
cost of sales is 51.0% in 1999 compared to 49.8% in 1998.
Administrative and general expenses have increased $0.4 million to $3.9 million
caused primarily by increased personnel costs. As a percentage of net revenues,
administrative and general expenses are 6.8% in 1999 compared to 7.9% in 1998.
Provision for doubtful accounts increased to $4.7 million in 1999 from $3.1
million in 1998, an increase of 51.7%. This increase is attributable to the
significant increase in first and second shipments to new customers, up 1.5
million shipments, which have a higher incidence of bad debts than existing
customers. The company records the estimated bad debts at the time of shipment.
As a percentage of net revenues, provision for doubtful accounts is 8.3% in 1999
compared to 7.2% in 1998.
Marketing costs have increased to $10.9 million in 1999 from $8.4 million in
1998. Higher spending in the current year of $1.7 million and higher
amortization of the current and prior years' customer acquisition costs of $2.4
million account for the increase, offset by an increase in Deferred Customer
Acquisition Costs. As a percentage of net revenues, marketing costs were 19.1%
in 1999 and 1998.
Income before taxes has increased to $2.2 million in 1999 from $1.1 million in
1998. The increase in pretax profits is primarily caused by increased revenue
offset by higher expenses in all profit and loss categories to generate the
increased revenue. As a percentage of net revenues, pretax income increased from
2.6% in 1998 to 3.8% in 1999.
Net income increased to $1.4 million in 1999 from $0.7 million in 1998. The
increase in pretax income of $1.1 million offset by an increased provision for
taxes of $0.4 million account for the increase. As a percentage of net revenues,
net income was 1.6% in 1998 compared to 2.4% in 1999.
9
<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 its Revolving Credit Facility.
The decrease in working capital of $1.5 million is caused by two mailings in the
first quarter which increased borrowings under line of credit. This was
partially offset by the increase in accounts receivable.
Net cash used in operating activities was $8.6 million for the first quarter of
1999 as compared to $2.4 million in the first quarter of 1998. This change is
primarily due to higher increases in receivables, increases in the payments for
customer acquisition costs and a decrease in accounts payable and accrued
expenses, offset by an increase in amortization of customer acquisition costs.
Accounts receivable has increased $5.2 million (16.3%) since December 1998 and
is $12.7 million (51.2%) higher than the comparable period of 1998. Driving this
increase has been the substantial increase in revenue, up $25.5 million (29.0%)
over the past six months, and in the month of March 1999 compared to March 1998,
revenues increased $7.7 million (48.1%).
Net cash used in investing activities to acquire property and equipment was $0.2
million and $0.3 million for the three month periods ended March 27, 1999 and
March 28, 1998, respectively.
Net cash provided by (used in) financing activities was $8.9 million and $(1.7)
million for the three month periods ended March 27, 1999 and March 28, 1998,
respectively. In 1999, the Company had net borrowings on its Revolving Credit
Facility of $9.4 million, while in 1998 it had no net borrowings. The amount
available to borrow at March 27, 1999 was $11.4 million. In 1999 and 1998, the
Company made payments on bank and other financing totaling $.03 million and $1.3
million, respectively.
The Recapitalization
As a result of the substantial indebtedness incurred in connection with a
Recapitalization, in October 1994, the Company has significant debt service
obligations. At March 27, 1999, the outstanding amount of the Company's
indebtedness (other than trade payables and accrued expenses) is $148.3 million,
including $74.3 million of senior secured debt and $68.9 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: $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 $25.0 million, $11.4 million of
which was available at March 27, 1999.
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.
10
<PAGE>
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 included 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.
The inquiry with the trade association was satisfactorily resolved with no
further modifications to the Company's promotional offers required.
State regulators, the Federal Trade Commission and trade associations from time
to time contact the Company with inquiries regarding the Company's promotional
materials. There are currently inquiries outstanding from 2 states 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 adopted a five-phase Year 2000 program consisting of Phase I -
identification and ranking of the components of the Company's systems, equipment
and suppliers that may be vulnerable to Year 2000 problems; Phase II -
assessment of items identified in Phase I; Phase III - remediation or
replacement of non-compliant systems and components and determination of
solutions for non-compliant suppliers; Phase IV - testing of systems and
components following remediation; and Phase V - developing contingency plans to
address the most reasonably likely worst case Year 2000 scenarios. The Company
has completed Phases I and II. Phases III and IV are complete for all critical
business applications. Of the non-critical items, Phases III and IV are
happening concurrently, and both phases are approximately 90% complete. Phases
III and IV are expected to be 100% complete by the end of June 1999. Phase V is
expected to be complete by the end of fiscal 1999. Follow up testing is planned
for the fourth quarter of 1999 to ensure that all components have remained
compliant.
The Company has spent approximately $0.4 million during 1997 and 1998 related to
the Year 2000 issue, representing approximately 4% of the information systems
budget. The Company expects to incur approximately $0.1 million of future
expense to complete the Year 2000 compliance project.
11
<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 at which time, the Company
will be able to fully determine its most likely worst case scenarios.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The market risk of the Company's financial instruments as of March 27, 1999, has
not significantly changed since December 31, 1998. The market risk profile on
December 31, 1998, is disclosed in the Company's 1998 Annual Report on Form
10-K.
12
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
The Company is involved in, or has been involved in, litigation arising in the
normal course of its business. The Company can not predict the timing or outcome
of these claims and proceedings. Currently, except as discussed below, the
Company is not involved in any litigation which is expected to have a material
effect on the financial position of the business or the results of operations
and cash flows of the Company.
In 1984, as a result of a lawsuit brought by the 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 included 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.
The inquiry with the trade association was satisfactorily resolved with no
further modifications to the Company's promotional offers required.
13
<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. There are currently inquiries outstanding from 2 states 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.
No reports on Form 8K have been filed during the quarter for which this
report is filed.
14
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOSIERY CORPORATION OF AMERICA, INC.
------------------------------------
(Registrant)
/s/ ARTHUR C. HUGHES
Date: May 6, 1999 __________________________________
- ------------------
Arthur C. Hughes
Vice President &
Chief Financial Officer
15
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