SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
( X ) ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1998
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the Transition Period From _______ to ________
Commission File No. 33-87392
HOSIERY CORPORATION OF AMERICA, INC.
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-0782950
- - ---------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3369 Progress Drive
Bensalem, Pennsylvania 19020
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 244-1777
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--------------- ------------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)
The aggregate market value of the voting stock held by non-affiliates of the
registrant is zero. All of the voting stock is held by affiliates and there is
no established public trading market for any class of common stock of the
Registrant.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at March 29, 1999
- - ---------------------------- -----------------------------
Voting 1,331,574
Class A, non-voting 75,652
<PAGE>
PART I
ITEM 1. BUSINESS
- - -----------------
Hosiery Corporation of America, Inc. (the "Company"), the Registrant is a
corporation organized in 1975 under the laws of the state of Delaware.
The Company is engaged in the direct mail marketing, manufacturing and
distribution of quality women's sheer hosiery products to consumers throughout
the United States. The Company has recently begun to expand its operations into
the United Kingdom and Germany. (See Note 3 to the Consolidated Financial
Statements of the Company in Item 8 hereof.) The Company markets women's sheer
hosiery through a continuous product shipment or "continuity" program. The
Company's continuity program involves mailing to customers a specially priced
introductory hosiery offer, the acceptance of which enrolls customers in the
program and results in additional shipments of hose on a regular and continuous
basis upon payment of a prior hose shipment. The Company's hosiery production
was approximately 66 million pairs in 1998, primarily marketed under the
Silkies(R) brand name. The Company's manufacturing operations supplied 80% of
all the hosiery required by the Company's continuity program during 1998.
The Company markets its hosiery products exclusively through its direct
mail marketing continuity program. The success of this program depends on
targeting likely customers and on retaining customers by delivering quality
hosiery products directly to the home on a regular basis. Drawing on its
customer list of over 75 million individuals and on certain rented customer
lists, the Company has developed sophisticated statistical, regression,
segmentation and other financial analyses to accurately target, test and acquire
first-time (and previously inactive) "front end" customers through direct mail
solicitation. The Company has designed an initial direct mail solicitation offer
which has attracted front end customers and reactivated previous customers.
In order to induce customers to participate in the Company's continuity
program, the introductory hosiery offer is priced as a "loss leader". The
introductory offer is priced at a nominal amount, $1.00 per pair plus shipping
and handling, that is substantially less than the cost of manufacturing,
processing and shipping the related hosiery.
Front end customers who continue to participate in the Company's
continuity program become part of the Company's repeat or "back end" customer
base. After responding to the front end solicitation and receiving their first
shipment, customers can elect to continue in the program, receiving either four
or six pairs of hose with each subsequent shipment. A customer who chooses to
participate in the continuity program by making regular purchases pursuant
thereto is an active back end customer. Such "active back end customers" exclude
customers receiving their first shipment. Upon payment for each shipment,
customers are sent another shipment of regularly priced hose, on average every
four to six weeks. The Company has established a consistent and predictable back
end customer base by providing customers with quality hosiery products on a
regular basis. As of December 1998, the Company had approximately 1.5 million
back end customers.
Marketing Strategy
- - ------------------
The Company has created a marketing strategy which combines direct mail
marketing techniques with its continuity program. The Company's marketing
efforts focus on targeting and acquiring front end customers, as well as
maintaining a strong relationship with continuity or back end customers through
efficient fulfillment of quality products, customer service, creative new
product introductions and unique marketing strategies. These direct mail
marketing initiatives, refined by advanced statistical and regression analyses,
have increased the size and quality of its customer base.
The Continuity Program. The Company's current initial direct mail
solicitation offers its customers the opportunity to receive one free pair of
hosiery with the purchase of two additional pairs at $1.00 per pair. The
customer is able to choose the size, style and color of hosiery for this initial
shipment.
2
<PAGE>
Upon receiving the first shipment, the customer can (i) pay for the
product and order a second shipment, (ii) pay for the product and elect not to
order a second shipment, or (iii) return the product and keep the free pair. In
1999, the company intends to change its front-end offer to most new customers so
that the offer will be one pair free without the customer having to purchase two
additional pairs at $1.00 each.
By paying for the product and ordering a second shipment of hosiery,
the customer joins the Company's continuity program and becomes a repeat or back
end customer. Upon payment for each shipment, customers are sent a subsequent
shipment of regularly priced hose, on average every four to six weeks, with some
customers electing a bi-monthly shipment option. With each shipment, customers
may change the selection of styles, colors and sizes. Back end shipments contain
either four or six pairs of hosiery which vary in price according to style. All
shipments are made on credit, but the Company's exposure to any one customer is
limited to the cost of one shipment. Customers are not required to commit to a
minimum purchase amount and can cancel the program at any time, for any reason.
Acquiring Front End Customers. Direct mail marketing has become the
Company's primary means of attracting new front end customers and reactivating
previous customers. Four major solicitations featuring the Company's specially
priced introductory offer are mailed each year (January, March, June,
September). There is no significant seasonality in the mailings.
The Company employs advanced statistical and regression analyses in
conjunction with each of its solicitation promotions. The Company utilizes its
proprietary in-house database of over 75 million customers, as well as lists
rented from other direct marketing firms, and analyzes information concerning
customer buying habits and payment records in order to determine which potential
customers are likely to purchase hosiery from the Company on a regular and
long-term basis. During each major solicitation, all chosen customer lists are
ranked by potential realizable profit. The mailing cut off is then matched to
budgeted production. This process ensures that anticipated profit is maximized
from each of the four mailings.
Retention of Back End Customers. The Company seeks to retain its
continuity or back end customers by providing high quality hosiery on a regular
basis and at competitive prices. In addition, as members of the continuity
program, customers receive gift certificates with each shipment of hosiery which
can be redeemed for a wide array of merchandise. The Company also offers a
women's wear catalog featuring branded and private label lingerie and intimate
apparel products in conjunction with outside manufacturers. Through these means
the Company believes it has been able to establish a predictable base of back
end customers without significant losses of customers over time. The Company
continually is working on developing new means of better retaining its back end
customers. Customers exit the continuity program for various reasons including
unavailability of certain styles and colors, preference for retail stores,
situational changes, too much hosiery, promotional sales at retail stores,
quality and garment fit.
Through its data processing capabilities, the Company tracks a
customer's order history from the initial order through each subsequent
purchase, whether the purchase is a hosiery product, merchandise from the
women's wear merchandise catalog, or other consumer products received through
gift redemptions. Each of the Company's customer service representatives has
on-line capabilities to retrieve customer specific queries and purchasing
history.
3
<PAGE>
Customer Testing. All aspects of the Company's direct mail marketing
program result from specific customer testing which the Company conducts
continuously. Such testing enables the Company to (i) project the profitability
of certain in-house and outside customer lists; (ii) maximize response rates to
front end solicitations; (iii) determine the profitability of the product mix
offered to back end customers; (iv) determine optimal pricing strategy; and (v)
increase payment and retention rates. Constant refinement of test programs
through creative design, offer upgrades, new hosiery products and referrals are
conducted throughout various mailings with the objective of increasing response
rates or reducing cost, without negatively impacting continuation or retention.
The time from test to application can take between three and twelve months
depending on the testing employed. Historically, the Company's actual results
have been similar to its test results.
Customer Profile. Management believes that the Company's average
customer is a working woman between age 30 and 55. The Company estimates that
its average customer buys approximately 60% of her sheer hosiery products from
the Company, and many of such customers purchase hosiery for other household
members.
Product and Development
- - -----------------------
The Company manufactures moderately priced, quality women's sheer
hosiery under the Silkies(R) brand name. The Company's product line is designed
to include the more popular product styles and colors for which most customers
have the greatest demand and, effective January 1998, includes nine styles of
sheer hosiery, in ten different colors and six sizes, as well as knee-hi's and
two opaque styles in six different colors. The Company's elastomer products
(compression garments containing spandex) include Control Top, Total Leg
Control, Sheer Charm, Opaque, Shapely Perfection, Trouser Socks, Ultra Control
Top and Ultra Total Leg Control. The Company's elastomer products currently
represent approximately 93% of its total production. The remainder of the
Company's production consists of its non-elastomer products including Panty 'n
Hose, Sheer to Waist and Knee-Hi styles. As of January 1999, the styles range in
price from $2.45 to $5.66 per pair. The Company performs extensive consumer
research and product testing to: (i) ensure product quality, (ii) service all
significant markets and (iii) convert existing compression hose customers to
higher margin, sheer compression hosiery products such as Shapely Perfection.
Data Processing and Management Information Systems
- - --------------------------------------------------
The Company has computer and data processing capabilities which are
adequate for its current level of operations. The Company has a full back up and
disaster recovery program for its data processing system which enables operation
at an outside facility within twelve hours of the onset of such need.
The Company provides data processing services, including proprietary
software programs, to its marketing operations that manage the flow of all
hosiery products from solicitation to customer fulfillment. These services
include direct mail solicitations, customer list management and customer service
operations, including order input, billing, collection, printing and tracking of
customers ordering history. Through its database capabilities, the Company is
also able to store and manage a proprietary database of customer purchasing
habits gathered from the Company's hosiery sales history in addition to customer
gift redemptions and women's wear merchandise catalogs. This historical database
of customer purchasing habits covers current and past hosiery shipments,
customers' credit statistics, buying patterns and purchasing records.
See page 14 regarding year 2000 plans.
4
<PAGE>
Manufacturing and Distribution
- - ------------------------------
The Company manages all phases of the manufacturing and fulfillment of
hosiery products, including planning, purchasing, production, packaging and
distribution. The Company's direct mail marketing program is vertically
integrated into its manufacturing and production operations, the latter
providing the Company's marketing operations with approximately 80% of the
Company's hosiery needs. By spreading the volume of yearly orders over four
major solicitation dates, manufacturing and fulfillment are able to avoid
extreme variations, and thereby ensure higher efficiency and better product
quality. Additionally, the results of the Company's direct mail marketing
program allow the Company quickly to adjust its manufacturing output
accordingly.
Production Process. Once front end and back end orders have been
received, the shipment information is communicated via computer to the Company's
facilities at Newland, North Carolina. The Company's ability to schedule its
annual output allows the Company to practice "Just In Time" inventory management
techniques. The primary raw materials utilized by the Company are nylon and
spandex yarn, dye and chemicals, and are readily available. Such raw materials
are purchased directly from suppliers who provide the Company with technical
support. Most knitting and sewing operations, including toe closing, line
seaming and gusset seaming, are located at the Company's facilities in Newland,
North Carolina. Once the hosiery products have been manufactured, they are
transported to the Company's Lancaster, South Carolina, facility where the
products are dyed, packaged and then to the Heath Springs, South Carolina,
facility where they are prepared for delivery.
Suppliers. The primary raw materials utilized in the Company's
manufacturing operations are nylon and spandex yarn, dye and chemicals. The
Company purchases a majority of its yarn under 6-month fixed-price contracts
from various domestic and international suppliers. Although the Company
generally stocks only a two to three week supply of raw materials in order to
manage inventory efficiently, the predictable nature of the Company's shipments
generally allows it to order raw materials up to a year in advance and secure an
adequate supply at prearranged costs.
Packaging and Distribution. The Company operates fully automated, high
speed packaging machines and distributes its products through the postal service
directly to the customer's home. The Company's use of standardized and fully
automated packaging allows the Company to achieve significant efficiencies. The
Company uses the postal service and has been able to control delivery costs by
passing on to its customers any increases in postal rates. However, there can be
no assurance that in the future the Company will be able to pass on increased
shipping costs to its customers. The Company also tries to minimize postal costs
through the use of pre-sorting, utilizing nine digit zip codes and co-mingling
of mail.
Capital Investment. During the past nine years, the Company has spent
approximately $31 million replacing the majority of its knitting and sewing
capacity with advanced robotics, installing automatic packaging equipment for
more timely response through efficient fulfillment, building a new dye house and
distribution facility and upgrading its computer facilities. The Company
maintains relationships with its machinery producers in order to keep up-to-date
on changing manufacturing methods. The Company's current manufacturing
operations have the capacity to produce approximately 66 million pairs annually.
Additional requirements are being outsourced in Mexico and Italy.
Growth Strategy
- - ---------------
Management believes that the Company's ability to analyze and manage a
large customer base, combined with its knowledge of customer buying profiles,
provides strong potential for future growth through the direct mail marketing
channel. The Company's strategy for additional growth primarily involves
expanding its current operations in Germany, France and the United Kingdom, and
to begin testing in Japan. The Company believes, based in part on management's
significant experience with international operations and test marketing during
1997 and 1998 in the United Kingdom, France and Germany, and the introduction of
new styles, that the international markets provide significant opportunities for
growth.
5
<PAGE>
Competition and Industry
- - ------------------------
The Company operates exclusively in the women's sheer hosiery industry,
targeting adult females as customers. Management believes that the overall
women's sheer hosiery market is declining as a result of the high cost of repeat
purchases of such products and changes in women's choices in business and
leisure wear. Despite this apparent overall market decline, the Company has been
able to increase its sales from $162.8 million in 1996 to $198.7 million in
1998.
Women's sheer hosiery is sold through a variety of distribution
channels, including discount stores, grocery and drug stores, specialty stores,
national chains and direct marketing. The Company is the only organization which
focuses solely on distributing women's sheer hosiery through a direct mail
marketing continuity program. Although several competitors have sold their
hosiery products via mail order for many years, this distribution has
concentrated on the large quantity sale of irregulars, as opposed to the
Company's direct mail marketing of high quality women's hosiery products in a
continuity program. Because the Company sells women's sheer hosiery, it competes
indirectly with major manufacturers and distributors of women's sheer hosiery
who primarily sell through the retail channel and some of whom are larger and
better capitalized than the Company, and may have greater brand recognition than
the Company.
The major United States hosiery manufacturers include Sara Lee Hosiery,
a division of Sara Lee Corporation, Kayser-Roth, a subsidiary of Mexican-based
Grupo Synkro S.A., the Company and Americal, a privately held U.S. concern. Sara
Lee Hosiery and Kayser-Roth account for more than 70% of the women's sheer
hosiery market. Over 60 other smaller manufacturers also produce women's sheer
hosiery primarily for sale under private labels. Sara Lee Hosiery is also a
significant competitor in the United Kingdom, France and Germany. Competition in
the women's sheer hosiery market is generally based on price, quality and
customer service.
In addition, the Company competes, and faces potential competition,
with other direct marketing companies. Such competitors include businesses which
engage in direct mail, catalog sales, telemarketing and other methods of sale
which compete for the attention and spending dollars of consumers in the home.
There are numerous direct marketing companies that are larger and better
capitalized than the Company and that offer more varied product assortments. The
Company believes, however, that it is the only significant direct marketing
company to focus exclusively on women's sheer hosiery.
Employees
- - ---------
As of December 31, 1998, the Company had 1,087 employees, 204 of whom
were located at its headquarters and operations center in Bensalem,
Pennsylvania, 334 of whom were located at its manufacturing facility in Newland,
North Carolina, 225 of whom were located at its manufacturing, and packaging
facility in Lancaster, South Carolina, and 283 of whom were located at its
sewing and fulfillment operations facility in Heath Springs, South Carolina.
Additionally, 41 employees are currently employed in Canada and Europe. Of the
total number of employees, 146 are salaried. The remaining 941 are non-salaried
employees, the majority of whom are paid an hourly wage plus incentive
compensation based on productivity measures. The Company's hourly workforce is
not affiliated with any unions. The Company has not experienced any work
stoppages and believes its relations with its employees are good.
Recapitalization
- - ----------------
On October 17, 1994, the Company effected the recapitalization of its
capital stock (the "Recapitalization"). As a result of the substantial
indebtedness incurred in connection with the Recapitalization, the Company has
significant debt service obligations. At December 31, 1998, the outstanding
amount of the Company's indebtedness (other than trade payables and accrued
expenses) is $139.4 million, including $65.1 million of senior secured debt and
$68.8 million of senior subordinated debt (the "Notes"). (See Items 7 and 13 and
Note 14 to Consolidated Financial Statements).
6
<PAGE>
ITEM 2. PROPERTIES
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The Company owns or leases facilities at six principal locations. The
following sets forth the general location of each, its size, whether the
facility is owned or leased and the principal function of each.
Size in Owned/
Location Square Feet Leased Function
- - --------- ----------- ------ --------
Headquarters; Administration;
Marketing; Data Processing;
Bensalem, Pennsylvania 60,000 Leased Customer Service
Newland, North Carolina 138,000 Owned Knitting; Sewing
Lancaster, South Carolina 142,000 Owned Dyeing; Packaging
Heath Springs, South
Carolina 143,000 Owned Fulfillment Operations
Liverpool, United Kingdom 15,000 Leased Headquarters; United Kingdom
Ettligen, Germany 3,000 Leased Office
Markham, Ontario Canada 6,000 Leased Office
The owned facilities are subject to mortgages and security interests granted to
secure payment of the Company's debt. See Note 10 to the Consolidated Financial
Statements of Hosiery Corporation of America, Inc. in Item 8 hereof.
ITEM 3. LEGAL PROCEEDINGS
- - ----------------------------
The Company is involved in, or has been involved in, litigation arising
in the normal course of its business. The Company 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.
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.
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<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.
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 3 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- - --------------------------------------------------------------
The Company did not submit any matter to a vote of its security holders
during the fourth quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
- - ------------------------------------------------------------
There is no established public trading market for any class of common
equity of the Company.
As of March 29, 1999, the Company had approximately 32 holders of
record of its common stock.
Dividend Policy
- - ---------------
The Company has not paid cash dividends on its common stock since 1992
and does not anticipate paying such dividends in the foreseeable future. The
Company intends to retain any future earnings for reinvestment in the Company.
In addition, the Bank Credit Agreement and the indenture pursuant to which the
Notes were issued place limitations on the Company's ability to pay dividends or
make certain other distributions in respect of its common stock. The Company is
not permitted to declare or pay any dividend or make any distribution in respect
of the Company's or any of its Restricted Subsidiaries' Equity Interests other
than dividends or distributions payable solely in shares of its Capital Stock.
Any future determination as to the payment of dividends will be subject to such
prohibitions and limitations, will be at the discretion of the Company's Board
of Directors and will depend on the Company's results of operations, financial
condition, capital requirements and other factors deemed relevant by the Board
of Directors, including the General Corporation Law of the State of Delaware
(the "DGCL") which provides that dividends are only payable out of the Company's
surplus or current net profits.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
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<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996 1995 1994(a)
---- ---- ---- ---- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Net Revenues $198,681 $178,682 $162,763 $136,299 118,560
Operating Income Before
Compensation Related to Stock
Options and Expenses Related to
Stock Offering and Acquisition (b) 38,080 35,854 36,968 31,427 21,613
Income (Loss) From Continuing
Operations Before Provision
(Benefit) for Income Taxes and
Cumulative Effect of Accounting
Change 21,519 17,835 (5,696) 12,056 17,116
Income From Continuing
Operations Before Compensation
Related to Stock Options,
Expenses Related to Stock
Offering and Acquisition,
Provision (Benefit) for Income
Taxes and Cumulative Effect of
Accounting Change (b) 21,519 17,835 18,829 12,056 17,116
Working Capital 4,555 12,455 589 5,794 3,152
Total Assets 130,039 100,600 92,600 82,860 74,860
Long-Term Debt 135,952 138,565 143,705 151,093 153,442
Other Long-Term Obligations -- -- -- -- 66
Redeemable Equity Securities 885 872 768 384 45
Stockholders' Deficiency (60,162) (72,083) (83,822) (102,920) (110,266)
Cash Dividends Declared -- -- -- -- --
- - ----------------
<FN>
(a) On October 17, 1994, the Company effected the recapitalization of its
capital stock. For discussion of the recapitalization, see Note 14 to
the Consolidated Financial Statements of Hosiery Corporation of
America, Inc. in Item 8 hereof.
(b) During 1996, the Company granted options to certain employees to
purchase up to 215,369 shares of common stock. The Company recognized
$22,938 of compensation expense related to the difference between the
estimated fair value of the stock at the date of grant and the
exercise price of such options. (See Note 18 to the Consolidated
Financial Statements of Hosiery Corporation of America, Inc. in Item 8
hereof for further discussion.) Additionally during 1996, the Company
incurred costs of $1.6 million, associated with a potential initial
public offering of equity securities and a potential acquisition,
neither of which were consummated. "Operating income" and "income
(loss) from continuing operations before provision (benefit) for
income taxes and cumulative effect of accounting change" per the
Consolidated Financial Statements of Hosiery Corporation of America,
Inc. have been adjusted in the above table to exclude these charges in
order to present comparable operating information with that of
previous years.
</FN>
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997
AND 1996
- - ----------------------------------------------------------------------------
Results of Operations
- - ---------------------
The following table sets forth certain income statement data for the
Company expressed as a percentage of net revenues.
<TABLE>
Fiscal Years Ended December 31,
-------------------------------
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net revenues........................................................... 100.0% 100.0% 100.0%
Cost of sales.................................................... 46.0 45.9 46.2
Administrative and general expenses.............................. 6.9 6.8 7.0
Provision for doubtful accounts.................................. 5.8 6.0 6.2
Marketing costs.................................................. 18.4 17.1 13.6
Coupon redemption costs.......................................... 1.9 2.1 2.5
Depreciation and amortization.................................... 1.7 1.7 1.8
----- ----- -----
Subtotal.................................................... 80.7 79.6 77.3
----- ----- -----
Operating income before interest, compensation related to
stock options, expenses related to stock offering and
acquisition, other expenses (income) and provision
(benefit) for income taxes....................................... 19.3% 20.4% 22.7%
==== ==== ====
</TABLE>
Fiscal 1998 Compared to Fiscal 1997
- - -----------------------------------
Net revenues increased by 11.2% to $198.7 million in fiscal 1998 from
$178.7 million in 1997. The increase in net revenue was attributable to North
America $13.6 million and Europe $6.4 million. The increase in Europe was
primarily attributable to increased solicitations in Germany. The increase in
North America was the result of stronger sales to existing customers and the
acquisition of Enchantress ($2.2 million). Enchantress, a Canadian Company, was
acquired in 1998. (See Note 4 to the Consolidated Financial Statements of the
Company in Item 8 hereof.)
Cost of sales increased 11.3% to $91.4 million in fiscal 1998 from
$82.1 million for fiscal 1997. As a percentage of net revenues, cost of sales
increased to 46.0% in 1998 versus 45.9% for the same period in 1997. The
absolute increase in cost of sales is related to increased shipments in the
United States, Germany and Canada.
Administrative and general expenses increased 13.0% to $13.7 million in
fiscal 1998 from $12.1 million for 1997. Included in 1998 was severance of $0.5
million compared to none in 1997. The balance of the increase was caused by
increased personnel and higher wages. As a percentage of net revenues,
administrative and general expenses were 6.9% in 1998 versus 6.8% in 1997.
Provision for doubtful accounts increased $0.7 million or 6.9% to $11.5
million in fiscal 1998 from $10.8 million for the same period of 1997. This
increase was caused by growing the business in Germany, the Canadian acquisition
and an increase in the United States offset by lower experience in the United
Kingdom. As a percentage of net revenues, bad debts were 5.8% for 1998 versus
6.0% for 1997.
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<PAGE>
Marketing costs increased 19.8% to $36.6 million from $30.5 million for
the years ended December 31, 1998 and 1997, respectively. This increase was
partially attributable to higher amortization of prior years' deferred marketing
costs in 1998 compared to 1997, related to the substantial increase (43.6%) in
solicitations in 1997 versus 1996. In 1997, 75.6 million solicitations were
mailed as compared to 52.6 million in 1996. These costs are amortized over 42
months with the greatest amortization in the first 24 months. Additionally, a
substantial portion of this increase was attributable to higher front end
solicitations, in the current year, as 16.6 million additional solicitations
were mailed in 1998 compared to 1997 (up 22.0%). As a percentage of net
revenues, marketing costs were 18.4% in 1998 versus 17.1% for 1997.
Coupon redemption costs increased slightly to $3.8 million for fiscal 1998
from $3.7 million for fiscal 1997. As a percentage of net revenues, redemption
costs were 1.9% in 1998 versus 2.1% for 1997.
Interest expense decreased to $16.6 million for fiscal 1998 from $18.1
million for 1997. This decrease in interest expense was primarily due to less
debt and lower rates. As a percentage of net revenues, interest expense was 8.4%
in 1998 versus 10.1% for 1997.
Operating income increased to $38.1 million in 1998 from $35.9 million
in 1997, an increase of 6.2%. The increase in operating income was primarily the
result of increased revenue and lower interest rates offset by higher marketing
costs. As a percentage of net revenues, operating income was 19.2% for 1998
versus 20.1% for 1997.
The Company had net income of $13.5 million in 1998 as compared to a net
income of $11.6 million in 1997. As a percentage of net revenues, net income was
6.8% in 1998 versus 6.5% for 1997.
Fiscal 1997 Compared to Fiscal 1996
- - -----------------------------------
Net revenues increased by 9.8% to $178.7 million in fiscal 1997 from
$162.8 million in fiscal 1996. The increase in net revenue attributable to
Europe of $9.4 million was due to more than double the $8.8 million in sales
reported for 1996. This increase in Europe is attributable to increased mailings
in the United Kingdom and testing in France and Germany. The balance of the
increase ($6.5 million) was generated in the United States primarily through
increased solicitation for new customers.
Cost of sales increased 9.2% to $82.1 million in fiscal 1997 from $75.2
million for fiscal 1996. As a percentage of net revenues, cost of sales declined
to 45.9% in 1997 versus 46.2% for the same period in 1996. The absolute increase
in cost of sales is related to increased shipments in the United States, United
Kingdom and the test programs in Germany and France. Manufacturing efficiencies,
approximately $2 million, helped offset the costs associated with the increased
shipments.
Administrative and general expenses increased 6.3% to $12.1 million in
fiscal 1997 from $11.4 million for the same period of 1996. Increased personnel
and higher wages account for the increase. As a percentage of net revenues,
administrative and general expenses were 6.8% in 1997 versus 7.0% in 1996.
Provision for doubtful accounts increased $0.7 million or 7.3% to $10.8
million in fiscal 1997 from $10.1 million for the same period of 1996. This
increase was caused by additional front end, second and third shipments in 1997
as compared to 1996 (up 1.1 million shipments which is 10.6% higher than 1996),
which have a higher rate of uncollectable accounts. As a percentage of net
revenues, bad debts were 6.0% for 1997 versus 6.2% for 1996.
11
<PAGE>
Marketing costs increased 38.5% to $30.5 million from $22.1 million for
the years ended December 31, 1997 and 1996, respectively. This increase was
partially attributable to higher amortization of prior years' deferred marketing
costs in 1997 compared to 1996, related to the substantial increase (21.6%) in
solicitations in 1996 versus 1995. In 1996, 52.6 million solicitations were
mailed as compared to 43.3 million in 1995. These costs are amortized over 42
months with the greatest amortization in the first 24 months. Additionally, a
substantial portion of this increase was attributable to higher front end
solicitations, in the current year, as 22.9 million additional solicitations
were mailed in 1997 compared to 1996 (up 43.6%), including the start up in the
United Kingdom. Marketing expenditures were also incurred in France and Germany
for testing. As a percentage of net revenues, marketing costs were 17.1% in 1997
versus 13.6% for 1996.
Coupon redemption costs declined to $3.7 million for fiscal 1997 from
$4.1 million for fiscal 1996. As a percentage of net revenues, redemption costs
were 2.1% in 1997 versus 2.5% for 1996. This decrease relates to the issuance of
new gift catalogs in both 1996 and 1995 that have a lower average cost per gift
to the Company, and beginning in 1996, the charging of shipping and handling to
redemption customers, which has also lowered the cost of future redemptions and,
therefore, the reserve balance for these future redemptions.
Compensation related to stock option expense was $22.9 million in 1996.
This expense represents a non-cash charge attributable to options granted by the
Board of Directors on June 28, 1996, with an exercise price below the then
market price of the Company's common stock, as part of a series of transactions
in contemplation of a potential initial public offering. No such charge was
incurred in 1997.
Expenses of $1.6 million were incurred in 1996 related to a potential
initial public offering of equity securities and a potential acquisition,
neither of which were consummated. No such charges were incurred in 1997.
Interest expense decreased to $18.1 million for fiscal 1997 from $18.5
million for 1996. This decrease in interest expense was primarily due to less
debt on the bank loan. As a percentage of net revenues, interest expense was
10.1% in 1997 versus 11.3% for 1996.
Operating income at $35.9 million for 1997 is slightly less than the
adjusted operating income of $37.0 million for 1996 (adjusted to add back stock
option compensation expense of $22.9 million and costs associated with an
initial public offering and acquisition of $1.6 million). The decrease in
operating income from 1996 to 1997 is primarily caused by the increased
marketing costs offset by higher revenue and the continued decrease in all other
costs as a percentage of net revenues. As a percentage of net revenues,
operating income, adjusted to exclude stock option compensation expense of $22.9
million and a potential public offering and acquisition of $1.6 million for
1996, was 20.1% for 1997 versus 22.7% for 1996.
The Company had net income of $11.6 million in 1997 as compared to a
net loss of $4.3 million in 1996. Net income excluding the stock option
compensation expense and a potential public offering and acquisition costs of
$15.9 million, net of tax in 1996, was $11.6 million in both 1997 and 1996. As a
percentage of net revenues, net income was 6.5% in 1997 versus 7.1% (adjusted as
previously detailed) for 1996.
Liquidity and Capital Resources
- - -------------------------------
The Company's cash requirements arise principally from the need to
finance new front end solicitations (customers), capital expenditures, debt
repayment and other working capital requirements. The Company financed these
solicitations and expects to finance future solicitations from internally
generated funds and/or its Credit Facility.
12
<PAGE>
In fiscal 1998, 1997 and 1996, capital expenditures were $3.6 million,
$2.6 million and $4.9 million, respectively. The majority of the expenditures
were for the purchase of knitting, sewing and dyeing equipment and facility
acquisition and enhancements. These expenditures were financed substantially
through the assumption of capital leases. Also, the Company expects to expend
approximately $2.5 million in 1999 for additional equipment. These capital
expenditures will be financed through internal sources or the assumption of
capital leases.
Net cash provided by operating activities was $4.6 million in 1998 as
compared to $11.2 million in 1997 and $7.4 million in 1996. The decrease from
1997 to 1998 was caused by the increase in the payments for deferred marketing
offset by higher amortization of these costs and the increase in prepaid costs
for future marketing (January 1999). The increase from 1996 to 1997 was
primarily from the change in inventory offset by the decrease in accounts
payable.
Net cash used in investing activities was $5.1 million in 1998, $0.9
million in 1997 and $2.5 million in 1996. In 1998, a Canadian hosiery company
was acquired.
During 1998, 1997 and 1996, the Company used $3.8 million, $7.9 million
and $9.9 million, respectively, in financing activities. During 1997, a new
credit agreement was reached with the Company's bank lenders which provided $65
million in term debt at a substantially lower interest rate (7.5% versus 8.8%)
an increase in its line of credit from $15 million to $20 million and a change
in the covenants relating to the credit agreement. Net payments on bank and
other financing, including capital lease obligations and excluding the
termination of the prior term debt, totaled $5.3 million, $7.3 million and $9.9
million in 1998, 1997 and 1996, respectively.
The Recapitalization and Line of Credit
- - ---------------------------------------
On October 17, 1994, the Company effected the recapitalization of its
capital stock (the "Recapitalization"). As a result of the substantial
indebtedness incurred in connection with the Recapitalization, the Company has
significant debt service obligations. In November 1997, the Company amended and
restructured its credit agreement. This change resulted in lower interest rates,
an increase in the revolving credit facility from $15 million to $20 million, a
substantial change in the timing of principal payments and changes to the debt
covenants. At December 31, 1998, the outstanding amount of the Company's
indebtedness (other than trade payables and accrued expenses) is $139.4 million,
including $65.1 million of senior secured debt and $68.8 million of senior
subordinated debt (the "Notes"). Since consummation of the Recapitalization, the
Company's ongoing cash requirements through January 2002 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 $20.0 million, $15.8 million of
which was available at December 31, 1998.
In March 1999, the Company amended its Credit Agreement to include an
Incremental Revolving Loan of $5.0 million. This loan can be made from time to
time after the existing revolving credit facility equals $20.0 million. The
Incremental Revolving Loan will be terminated when all principal and accrued
interest has been repaid, but no later than December 31, 1999.
13
<PAGE>
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.
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.
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 3 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.
14
<PAGE>
The Company has made significant progress in achieving Year 2000
compliance. It is estimated that it is approximately 98% complete and will be
totally in compliance by the end of May 1999. The company has spent
approximately $0.4 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 incur approximately $0.1 million of
future expense to complete the Year 2000 compliance project.
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.
15
<PAGE>
Accounting Statements Not Yet Adopted
- - -------------------------------------
Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. This statement establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. This statement is effective for fiscal years
beginning after June 15, 1999, although early adoption is encouraged. The
Company has not yet assessed what the impact of this statement will be on the
Company's future earnings or financial position.
Accounting for the Costs of Computer Software Developed for or Obtained
for Internal Use. In March 1998, the AICPA issued Statement of Position ("SOP")
98-1, Accounting for the Costs of Computer Software Developed for or Obtained
for Internal Use. The SOP requires the capitalization of certain costs incurred
after the date of adoption in connection with developing or obtaining software
for internal use. The Company has early adopted SOP 98-1 effective January 1,
1998. The impact of this statement was not material on the Company's earnings or
financial position as of December 31, 1998.
16
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- - --------------------------------------------------------------------
The Company uses its revolving credit facility, term loan, senior
subordinated notes and bonds to finance a significant portion of its operations.
These on-balance sheet financial instruments, to the extent they provide for
variable rates of interest, expose the Company to interest rate risk resulting
from changes in the Eurodollar Rate, Federal Funds Rate or the prime rate.
To the extent that the Company's financial instruments expose the
Company to interest rate risk and market risk, they are presented in the table
below. The table presents principal cash flows and related interest rates by
year of maturity for the Company's revolving credit facility, term loan, senior
subordinated notes and bonds in effect at December 31, 1998. Note 18 to the
consolidated financial statements should be read in conjunction with the table
below (dollar amount in thousands).
<TABLE>
<CAPTION>
Year of Maturity
Total Fair
Due Value
at at
1999 2000 2001 2002 2003 Thereafter Maturity 12/31/98
---- ---- ---- ---- ---- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate sensitive
assets:
Noninterest bearing
checking and savings
accounts $1,887 $ -- $ -- $ -- $ -- $ -- $1,887 $1,887
Average interest rate --% --% --
Interest-bearing checking
accounts, savings accounts
and money market deposit
accounts 905 905 905
Average interest rate 4.50 4.50 --
------- ------- ------- ------- ------- ----- -------- --------
$2,792 $2,792 $2,792
====== ====== ======
1.46% 1.46% --
===== =====
Interest rate sensitive
liabilities:
Noninterest bearing
checking and savings
accounts $4,189 $ -- $ -- $ -- $ -- $ -- $4,189 $4,189
Average interest rate --% --% --
Short-term and variable
rate borrowings 11,017 13,117 20,117 19,117 117 173 63,658 63,658
Average interest rate 7.39 7.00 7.00 7.00 7.05 7.10 7.00 --
Fixed-rate borrowings 68,792 68,792 72,100
Average interest rate 13.75 13.75 --
------- ------- ------- ------- ------- ----- -------- --------
$15,206 $13,117 $20,117 $87,909 $ 117 $ 173 $136,639 $139,947
======= ======= ======= ======= ======= ===== ======== ========
5.35% 7.00% 7.00% 12.28% 7.05% 7.10% 10.18% --
==== ==== ==== ===== ==== ==== =====
</TABLE>
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- - ----------------------------------------------------
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC.
Index to Financial Statements and Financial Statement Schedule
<CAPTION>
Page Number
-----------
<S> <C>
Financial Statements and Independent Auditors' Report:
Independent Auditors' Report.................................................... 19
Consolidated Balance Sheets--December 31, 1998 and 1997......................... 20
Consolidated Statements of Operations--For the years ended December 31, 1998,
1997 and 1996................................................................ 21
Consolidated Statements of Cash Flows--For the years ended December 31, 1998,
1997 and 1996................................................................ 22
Consolidated Statements of Stockholders' Deficiency--For the years
ended December 31, 1998, 1997 and 1996....................................... 24
Notes to Consolidated Financial Statements...................................... 26
Financial Statement Schedule and Independent Auditors' Report:
Independent Auditors' Report.................................................... S-1
Schedule I--Valuation and Qualifying Accounts--For the years ended
December 31, 1998, 1997 and 1996............................................. S-2
</TABLE>
Schedules other than those listed above are omitted because they are
either not applicable or not required or the information required is included in
the consolidated financial statements or notes thereto.
18
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Hosiery Corporation of America, Inc.
Bensalem, Pennsylvania
We have audited the accompanying consolidated balance sheets of Hosiery
Corporation of America, Inc. and subsidiaries (the "Company") as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' deficiency and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 5, 1999, (except for Note 23, as to which the date is
March 26, 1999)
19
<PAGE>
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(Dollars in thousands, except per share data)
<CAPTION>
1998 1997
--------- ---------
ASSETS
CURRENT ASSETS:
<S> ...................................................................................... <C> <C>
Cash and cash equivalents ........................................................... $ -- $ 4,327
Accounts receivable, less an allowance for doubtful accounts of
$1,901 and $1,448 in 1998 and 1997, respectively ................................... 32,214 24,180
Inventories ......................................................................... 20,008 15,158
Prepaid and other current assets .................................................... 3,748 2,398
--------- ---------
Total current assets ........................................................... 55,970 46,063
PROPERTY AND EQUIPMENT, net .............................................................. 17,906 17,261
DEFERRED CUSTOMER ACQUISITION COSTS ...................................................... 46,933 30,795
DEFERRED DEBT ISSUANCE COSTS, less accumulated amortization of
$6,774 and $5,316 in 1998 and 1997, respectively .................................... 4,790 6,084
GOODWILL, less accumulated amortization of $61 in 1998 ................................... 3,733 --
OTHER ASSETS ............................................................................. 707 397
--------- ---------
TOTAL .................................................................................... $ 130,039 $ 100,600
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Borrowings under line of credit ..................................................... $ 3,400 $ --
Current portion of long-term debt ................................................... 7,617 3,117
Current portion of capital lease obligations ........................................ 1,726 1,550
Bank overdrafts ..................................................................... 1,397 --
Accounts payable .................................................................... 10,321 7,120
Accrued expenses and other current liabilities ...................................... 9,389 5,366
Accrued interest .................................................................... 4,771 4,608
Accrued coupon redemption costs ..................................................... 4,679 4,568
Deferred income taxes ............................................................... 8,115 7,279
--------- ---------
Total current liabilities ...................................................... 51,415 33,608
LONG-TERM DEBT, Less current portion ..................................................... 121,433 129,307
CAPITAL LEASE OBLIGATIONS, Less current portion .......................................... 5,176 4,591
ACCRUED COUPON REDEMPTION COSTS .......................................................... 408 429
DEFERRED INCOME TAXES .................................................................... 10,884 3,876
--------- ---------
Total liabilities .............................................................. 189,316 171,811
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
REDEEMABLE EQUITY SECURITIES ............................................................. 885 872
--------- ---------
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 $101,236 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 in 1998 and 1997 ..... 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 in 1998 and 1997 ..................................... 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 .......................................................... 18,869 16,565
Compensatory stock options outstanding .............................................. 20,943 22,938
Accumulated deficit ................................................................. (134,950) (148,301)
Restricted stock .................................................................... (447) (697)
--------- ---------
(58,086) (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 ................................................... (60,162) (72,083)
--------- ---------
TOTAL .................................................................................... $ 130,039 $ 100,600
========= =========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
20
<PAGE>
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(Dollars in thousands)
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
NET REVENUES .......................................................................... $ 198,681 $ 178,682 $ 162,763
--------- --------- ---------
COSTS AND EXPENSES:
Cost of sales .................................................................... 91,352 82,119 75,184
Administrative and general expenses .............................................. 13,694 12,121 11,404
Provision for doubtful accounts .................................................. 11,536 10,791 10,057
Marketing costs .................................................................. 36,585 30,538 22,055
Coupon redemption costs .......................................................... 3,843 3,671 4,140
Depreciation and amortization .................................................... 3,405 3,059 2,996
Compensation related to stock options ............................................ -- -- 22,938
Expenses related to stock offering and acquisition ............................... -- -- 1,587
Other expenses (income) .......................................................... 186 529 (41)
--------- --------- ---------
OPERATING INCOME ..................................................................... 38,080 35,854 12,443
Interest income .................................................................. 71 90 327
Interest expense ................................................................. 16,632 18,109 18,466
--------- --------- ---------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES ................................................................. 21,519 17,835 (5,696)
PROVISION (BENEFIT) FOR INCOME TAXES ................................................. 8,055 6,242 (1,390)
--------- --------- ---------
NET INCOME (LOSS) .................................................................... $ 13,464 $ 11,593 $ (4,306)
========= ========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
21
<PAGE>
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands)
<CAPTION>
1998 1997 1996
------- ------- -------
OPERATING ACTIVITIES:
<S> ................................................................................... <C> <C> <C>
Net income (loss) .................................................................. $13,464 $11,593 $(4,306)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization ................................................... 3,405 3,059 2,996
Amortization of debt issue costs and discounts .................................. 1,701 1,844 1,852
Compensation related to stock options ........................................... -- -- 22,938
(Gain) loss on sale and abandonments of property and equipment .................. (7) 4 (3)
Amortization of restricted stock ................................................ 250 250 552
Amortization of deferred customer acquisition costs ............................. 32,134 24,489 17,994
(Increase) decrease in operating assets:
Accounts receivable ....................................................... (7,596) (1,241) (3,231)
Inventories ............................................................... (4,513) 380 (5,724)
Payments for deferred customer acquisition costs .......................... (48,272) (30,620) (23,083)
Prepaid and other current assets .......................................... (1,297) (528) (488)
Other assets .............................................................. (604) (44) 298
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other liabilities .................. 8,394 (630) 3,842
Income taxes payable ...................................................... -- -- (129)
Deferred income taxes ..................................................... 7,844 3,150 (5,043)
Accrued coupon redemption costs ........................................... (321) (542) (1,099)
------- ------- -------
Net cash provided by operating activities ........................... 4,582 11,164 7,366
------- ------- -------
INVESTING ACTIVITIES:
Acquisitions of property and equipment ............................................. (1,191) (919) (2,522)
Acquisition of business ............................................................ (3,914) -- --
Proceeds from sale of property and equipment ....................................... 20 3 39
------- ------- -------
Net cash used in investing activities ............................... (5,085) (916) (2,483)
------- ------- -------
FINANCING ACTIVITIES:
Net borrowings under line of credit ................................................ 3,400 -- --
Proceeds from bank and other financing ............................................. -- 65,000 --
Payments on bank and other financing ............................................... (3,617) (70,566) (8,391)
Payments on capital leases ......................................................... (1,663) (1,783) (1,519)
Debt issuance costs ................................................................ (164) (532) --
Proceeds from exercise of options, net of tax ...................................... 296 -- --
Purchase of treasury stock ......................................................... (2,076) -- --
------- ------- -------
Net cash used in financing activities ............................... (3,824) (7,881) (9,910)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................................. (4,327) 2,367 (5,027)
Cash and cash equivalents at beginning of year ..................................... 4,327 1,960 6,987
------- ------- -------
Cash and cash equivalents at end of year ........................................... $ -- $ 4,327 $ 1,960
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ........................................................................ $14,768 $16,310 $16,719
======= ======= =======
Income taxes .................................................................... $ 1,618 $ 3,303 $ 4,102
======= ======= =======
22
<PAGE>
<FN>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands)
(Continued)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations of $2,424, $1,999 and $2,338 were entered into for new equipment during 1998, 1997 and
1996, respectively.
In 1996, two officers of the Company were granted approximately $300 of redeemable equity securities as additional
compensation for 1996.
See notes to consolidated financial statements.
</FN>
</TABLE>
23
<PAGE>
<TABLE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(Dollars in thousands)
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------- -------------------------------------- Retained
CLASS A, Additional Earnings
PIK NON VOTING Paid-In (Accum.
Shares Amount Shares Amount Shares Amount Capital Deficit)
--------- -------- --------- ------ --------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE January 1, 1996 3,739,782 $ 37,398 1,321,522 $ 13 75,652 $ 1 $ 16,753 $(155,588)
Net loss (4,306)
Compensation under restricted
stock awards
Stock options granted
Accretion of preference value over
carrying value of redeemable
preferred stock (84)
Foreign currency translation
--------- ------- --------- ------ --------- ----- --------- ---------
BALANCE December 31, 1996 3,739,782 37,398 1,321,522 13 75,652 1 16,669 (159,894)
Net income 11,593
Compensation under restricted
stock awards
Accretion of preference value over
carrying value of redeemable
preferred stock (104)
--------- ------- --------- ------ --------- ----- --------- ---------
BALANCE December 31, 1997 3,739,782 37,398 1,321,522 13 75,652 1 16,565 (148,301)
Net income 13,464
Compensation under restricted
stock awards
Accretion of preference value over
carrying value of redeemable
preferred stock (121)
Purchase of shares for treasury (113)
Exercise of stock options, net of tax 17,344 2,291
Reclass of redeemable equity
securities 8,715 87 1,256 134
--------- -------- --------- ------- --------- ------ --------- ----------
BALANCE December 31, 1998 3,748,497 $ 37,485 1,340,122 $ 13 75,652 $ 1 $ 18,869 $(134,950)
========= ======== ========= ======= ========= ====== ========= ==========
</TABLE>
24
<PAGE>
<TABLE>
(Continued)
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(Dollars in thousands)
<CAPTION>
TREASURY STOCK
---------------------------------- Compensatory
Preferred Common Stock Foreign
Stock Stock Restricted Options Currency
Shares Shares Amount Stock Outstanding Translation Total
--------- ------ ------ ---------- ------------ ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE January 1, 1996 - - $ - $ (1,499) $ - $ 2 $(102,920)
Net loss (4,306)
Compensation under restricted
stock awards 552 552
Stock options granted 22,938 22,938
Accretion of preference value over
carrying value of redeemable
preferred stock (84)
Foreign currency translation (2) (2)
--------- ------ ------ -------- ------- ------ --------
BALANCE December 31, 1996 - - - (947) 22,938 - (83,822)
Net income 11,593
stock awards 250 250
Accretion of preference value over
carrying value of redeemable
preferred stock (104)
--------- ------ ------ -------- ------- ------ ---------
BALANCE December 31, 1997 - - - (697) 22,938 - (72,083)
Net income 13,464
Compensation under restricted
stock awards 250 250
Accretion of preference value over
carrying value of redeemable
preferred stock (121)
Purchase of shares for treasury (8,715) (18,600) (2,076) (2,189)
Exercise of stock options, net of tax (1,995) 296
Reclass of redeemable equity
securities 221
--------- ------- -------- --------- ------- ------ ---------
BALANCE December 31, 1998 (8,715) (18,600) $ (2,076) $ (447) $20,943 $ - $ (60,162)
========= ======= ======== ========= ======= ====== =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
25
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
1. ORGANIZATION
Hosiery Corporation of America, Inc. and subsidiaries is a company
incorporated in the State of Delaware and is engaged in the direct mail
marketing, manufacturing and distribution of quality women's sheer
hosiery products to consumers throughout the United States and the United
Kingdom. The Company markets women's sheer hosiery through a continuous
product shipment or "continuity" program. The Company's continuity
program involves mailing to customers a specially priced introductory
hosiery offer, the acceptance of which enrolls customers in the program
and results in additional shipments of hose on a regular and continuous
basis upon payment of a prior hose shipment. The Company's manufacturing
operations supply approximately 80% of all the hosiery required by the
Company's continuity program.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of Hosiery Corporation of America, Inc. (the
"Company") and its subsidiaries. All significant intercompany accounts
and transactions have been eliminated.
Revenue Recognition - Revenue less allowance for returns is recognized
when merchandise is shipped. The Company provides for returns at the time
of shipment based upon historical experience.
Cash and Cash Equivalents - Cash and cash equivalents consist of cash and
other short-term securities purchased with maturities of less than three
months.
Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market.
Property and Equipment - Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided on a straight-line
basis using estimated lives of 31 years for buildings, 5 to 10 years for
machinery and equipment, 5 to 7 years for furniture and fixtures and 3 to
5 years for automobiles. Leasehold improvements are amortized over the
shorter of the estimated useful life or the lease periods which are
generally 15 to 18 years.
Deferred Customer Acquisition Costs - Deferred customer acquisition costs
consist of marketing costs (postage, printed material, customer list
rentals, etc.) of the initial shipment to a customer and similar costs
associated with the resolicitation of previously canceled customers.
These costs are aggregated by promo- tional program and are amortized on
an accelerated basis based upon the estimated current year revenue in
proportion to the expected future revenue generated by these customers.
Approximately 58% of these costs are amortized in the first 12 months,
70% within 18 months, and 80% within 24 months. The loss incurred on
front end shipments to customers is charged to operations at the time of
the front end shipment.
Software Costs - Software costs, principally internally developed,
consist of the expenses associated with the development (computer time,
license, programming time) of material software projects with a long-term
benefit and are included in the consolidated balance sheet as Other
Assets. The Company amortizes these assets on a straight-line basis over
7 years.
Goodwill - Goodwill (the excess of cost over fair value of the underlying
assets at the date of acquisition) is being amortized on a straight-line
basis over 30 years.
26
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Derivative Financial Instruments - The Company enters into interest rate
caps to manage exposure to fluctuations in interest rates. Premiums paid
on caps are amortized to interest expense over the term of the cap. The
interest rate caps were fully amortized at December 31, 1997.
Deferred Debt Issuance Costs - Debt issuance costs represent costs
associated with bank borrowings and notes and are amortized using the
effective interest method over the terms of the related borrowings.
Income Taxes - The Company uses the liability method of accounting for
income taxes in accordance with SFAS No. 109, Accounting for Income
Taxes. Under the liability method, deferred income taxes are determined
based upon enacted tax laws and rates applied to the differences between
the financial statement and tax basis of assets and liabilities.
Impairment of Long-Lived Assets - Long-lived assets and certain
identifiable intangibles are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability is assessed based on the future
cash flows expected to result from the use of the asset and its eventual
disposition. If the sum of the undiscounted cash flows is less than the
carrying value of the asset, an impairment loss is recognized. Any
impairment loss, if indicated, is measured as the amount by which the
carrying amount of the asset exceeds the estimated fair value of the
asset.
Accounting for Stock-Based Compensation - As permitted by SFAS No. 123,
Accounting for Stock-Based Compensation, the Company has chosen to
measure stock-based compensation expense in accordance with the method
prescribed by Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees.
Foreign Currency Translation - Foreign entities translate monetary assets
and liabilities at year-end exchange rates while non-monetary items are
translated at historical rates. Income and expense accounts are
translated at the average rates in effect during the year, except for
depreciation and certain marketing expenses which are translated at
historical rates. Gains or losses from changes in exchange rates are
recognized in income in the year of occurrence. The effect of recording
translation adjustments in income instead of equity for the Company's
Canadian operations is not material to the financial statements.
Use of Estimates - The preparation of the Company's consolidated
financial statements in conformity with generally accepted accounting
principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
New Accounting Standards - In June 1997, the FASB issued 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. The Company adapted
SFAS No. 130 effective January 1, 1998. There was no effect of
implementing this standard as comprehensive income is the same as net
income.
27
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred
to as derivatives), and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. This statement is effective for fiscal years beginning after June
15, 1999, although early adoption is encouraged. The Company has not yet
assessed what the impact of this statement will be on the Company's
future earnings or financial position.
In March 1998, the AICPA issued Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed for or Obtained
for Internal Use. The SOP requires the capitalization of certain costs
incurred after the date of adoption in connection with developing or
obtaining software for internal use. The Company has early adopted SOP
98-1 effective January 1, 1998. The impact of this statement was not
material on the Company's earnings or financial position as of December
31, 1998.
Reclassifications - Certain reclassifications were made to the prior
year's consolidated financial statements to conform to classifications
used in the current period.
3. OPERATING SEGMENTS
The Company organizes its business units into two geographic segments:
North America and International. The President of Hosiery Corporation of
America, Inc., is responsible for North America, and the President of
Hosiery Corporation International is responsible for all International
locations. The business is basically the same in both segments in that
the bulk of the pantyhose is self-manufactured and sold directly to the
end user via mail order. The business is a continuity business, and the
goal of the program is to maintain customers in the program receiving
full-priced shipments. Since North America is the established business
(23 years) as compared to International (3 years), this explains the
difference in profitability.
28
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
3. OPERATING SEGMENTS (continued)
The segment's accounting policies are the same as those described in the
summary of significant accounting policies.
<TABLE>
<CAPTION>
1998
North America International Total
------------- ------------- -------
<S> <C> <C> <C>
Revenues from External Customers 173,580 25,101 198,681
Interest Revenue 56 15 71
Interest Expense 16,632 -- 16,632
Depreciation and Amortization 3,326 79 3,405
Segment Profit (EBITDA) (1) 40,561 995 41,556
Segment Assets 111,924 18,115 130,039
Income Tax Expense (Benefit) 7,707 348 8,055
Long-Lived Assets 26,824 312 27,136
1997
North America International Total
------------- ------------- -------
Revenues from External Customers 159,988 18,694 178,682
Interest Revenue 80 10 90
Interest Expense 18,109 -- 18,109
Depreciation and Amortization 2,980 79 3,059
Segment Profit (EBITDA) (1) 41,845 (2,842) 39,003
Segment Assets 91,297 9,303 100,600
Income Tax Expense (Benefit) 7,352 (1,110) 6,242
Long-Lived Assets 23,344 398 23,742
1996
North America International Total
------------- ------------- -------
Revenues from External Customers 153,797 8,966 162,763
Interest Revenue 322 5 327
Interest Expense 18,466 -- 18,466
Depreciation and Amortization 2,967 29 2,996
Segment Profit (EBITDA) (1) 40,459 (168) 40,291
Segment Assets 85,875 6,725 92,600
Income Tax Expense (Benefit) (1,315) (75) (1,390)
Long-Lived Assets 24,807 447 25,254
<FN>
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) represents Income (Loss) Before Provision (Benefit) For
Income Taxes of $21,519, $17,835 and ($5,696) for 1998, 1997 and
1996, respectively, excluding Interest Expense of $16,632, $18,109
and $18,466 for 1998, 1997 and 1996, respectively, Depreciation
and Amortization of $3,405, $3,059 and $2,996 for 1998, 1997 and
1996, respectively, Compensation related to Stock Options of
$22,938 in 1996 and Expenses related to Stock Offering and
Acquisition of $1,587 in 1996. EBITDA does not purport to
represent net income or net cash provided by operating activities,
as those terms are defined under generally accepted accounting
principles. Further, the Company's measure of EBITDA may not be
comparable to similarly titled measures of other companies.
</FN>
</TABLE>
29
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
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 $3,900 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 approximately $100. The excess of
the purchase price over the estimated fair value of the net assets
acquired of approximately $3,800 is amortized over a period of 30 years
using the straight-line method.
5. PROVISION FOR COUPON REDEMPTION
As part of the marketing program, the Company issues coupons to program
participants based upon the products purchased or the referral of new
customers to the Company. Customers may redeem coupons for free gifts
from a program catalog once they have collected the required number of
coupons. During 1998, customers with an average of 33 coupons redeemed
for a free gift after a collection period of approximately four years.
The estimated future costs for this program have been determined based on
historical customer redemption patterns applicable to outstanding coupons
and average gift costs.
6. INVENTORIES
1998 1997
---- ----
Raw materials....................... $ 909 $ 546
Work-in-process..................... 3,023 2,748
Finished goods...................... 13,500 9,820
Promotional and packing material.... 2,576 2,044
------- -------
$20,008 $15,158
======= =======
7. PROPERTY AND EQUIPMENT
1998 1997
---- ----
Land and buildings.................... $ 7,015 $ 7,015
Machinery and equipment............... 22,658 20,683
Furniture and fixtures................ 2,322 2,213
Leasehold improvements................ 3,781 3,735
Automobiles........................... 642 635
------- -------
36,528 34,281
Less accumulated depreciation
and amortization................. 18,621 17,020
------- -------
$17,907 $17,261
======= =======
Property and equipment includes assets acquired under capital leases,
principally machinery and equipment having a net book value of
approximately $7,252 and $6,556 as of December 31, 1998 and 1997,
respectively. Related accumulated depreciation and amortization was
$7,801 and $6,063, respectively. Depreciation and amortization expense
for capital lease assets for 1998, 1997 and 1996 was $1,738, $1,542, and
$1,529, respectively.
30
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
8. OTHER ASSETS
1998 1997
---- ----
Software, net of accumulated amortization of
approximately $6,190 and $5,881, respectively.... $444 $312
Deposits........................................... 176 14
Miscellaneous other................................ 87 71
---- ----
$707 $397
==== ====
9. OTHER EXPENSES (INCOME)
<TABLE>
<CAPTION>
Included in other expenses (income) are the following:
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Loss (gain) on foreign exchange................................. $194 $225 $(39)
Multistate group administrative expenses........................ -- 300 --
Miscellaneous expenses (income)................................. (8) 4 (2)
---- ---- ----
$186 $529 $(41)
==== ==== ====
</TABLE>
10. LINE OF CREDIT AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Amounts due under term loan agreement.................................... $ 59,500 $ 63,000
13.75% Senior Subordinated Notes due August 2002......................... 68,792 68,549
Serial bonds issued by the South Carolina Jobs-Economic Development
Authority with interest rates ranging from 5.8% to 7.1% payable
Beginning July 1993 in quarterly principal payments and
semi-annual Payments to the trustee of the Bonds. Bonds are
collateralized by a Letter of credit and a building addition in
South Carolina....................................................... 758 875
-------- --------
Total long-term debt..................................................... 129,050 132,424
Less current portion..................................................... 7,617 3,117
-------- --------
TOTAL LONG-TERM PORTION.................................................. $121,433 $129,307
======== ========
</TABLE>
31
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
10. LONG-TERM DEBT (continued)
On October 17, 1994, the Company entered into a revolving credit and term
loan agreement (the "Agreement") with a group of banks which was
restructured on November 20, 1997 and amended on March 26, 1999.
Outstanding borrowings at December 31, 1998 and 1997 are $59,500 and
$63,000, respectively. The facility is secured by substantially all of
the assets of Hosiery Corporation of America. The facility is also
subject to the continuing guarantees of the subsidiaries of Hosiery
Corporation of America. The revolving credit and term loan portions of
the facility have maximum borrowings of $20,000 and $65,000,
respectively. The revolving credit facility expires on February 1, 2002.
The Company can borrow based on a formula which comprises the sum of 80%
of accounts receivable and 50% of inventory. Interest under the revolving
credit facility is payable at the banks' prime lending rate plus 0.5%
(8.25% at December 31, 1998). There were borrowings outstanding under the
revolving credit facility at December 31, 1998 of $3,400 and $0 in 1997.
The amount available under the revolving credit facility at December 31
was $15,800 and $17,700 in 1998 and 1997, respectively. The term loan is
payable in quarterly installments ranging from $750 to $5,000, with a
final payment due February 1, 2002. Interest under the term loan is
generally payable quarterly and is charged at a premium of 0.5% over the
Base Rate or 1.5% over the Eurodollar Rate as defined in the Agreement.
The rate in effect at December 31, 1998 ranged from 6.44% to 7.25%.
Additionally, fees are charged on the average daily amount of unused
commitment and are payable quarterly. Under the terms of the Agreement,
certain restrictions are placed on additional borrowings, the purchase of
property and equipment, the payment of cash dividends and the disposition
of assets. The Company has also agreed to maintain certain financial
ratios as defined in the Agreement.
During 1994, the Company sold the 13.75% Senior Subordinated Notes, with
a principal amount of $70,000, at a discount, which discount is being
amortized using the interest method over the life of the notes at an
effective interest rate of 14.38%. Interest is payable semi-annually. The
Notes were sold in denominations of one thousand dollars, each of which
contained one share (collectively the "Shares") of the Company's Class A
Non Voting Common Stock, par value $.01 per share. The Notes and the
Shares were immediately detachable. Beginning October 1, 1997, the Notes,
or a portion thereof, are subject to redemption at the option of the
Company at specified redemption prices ranging from 100% to 112% of the
aggregate principal amounts of Notes so redeemed. Upon the occurrence of
a Change of Control, as defined, each holder of the Notes shall have the
right to require the Company to repurchase such holder's Notes at a
purchase price equal to 101% of the aggregate principal amount thereof.
Under the terms of the agreement, certain restrictions are placed on
additional borrowings, the purchase of property and equipment, the
payment of cash dividends and the disposition of assets.
In accordance with the Agreement and Notes, the Company is not permitted
to declare or pay any dividend or make any distribution in respect of the
Company's or any of its Restricted Subsidiaries' Equity Interests other
than dividends or distributions payable solely in shares of its Capital
Stock. The Company was in compliance with all debt covenants noted above
as of December 31, 1998 except minimum EBITDA and leverage ratios. On
March 26, 1999, the group of banks amended the Agreement (see Note 23)
which included revisions of certain financial covenants as of December
31, 1998. Under the amended Agreement, the Company is in compliance with
all debt covenants as of December 31, 1998.
The Company was contingently liable for outstanding letters of credit in
the amount of approximately $839 as of December 31, 1998.
Maturities of long-term debt consisted of the following as of December
31, 1998:
1999................................ $ 7,617
2000 ............................... 13,117
2001 ............................... 20,117
2002 ............................... 87,909
2003 ............................... 117
Thereafter ......................... 173
--------
$129,050
========
32
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
11. INCOME TAXES
The provision for income taxes (benefit) consists of the following:
1998 1997 1996
---- ---- ----
Federal:
Current.......................... $ 468 $2,640 $ 3,474
Deferred......................... 6,701 3,297 (5,215)
------ ------- -------
7,169 5,937 (1,741)
------ ------- -------
States:
Current.......................... (31) 451 179
Deferred......................... 728 (146) 172
------ ------ -------
697 305 351
------ ------ -------
Foreign:
Current.......................... -- -- --
Deferred......................... 189 -- --
------ ------ -------
189 -- --
------ ------ -------
$8,055 $6,242 $(1,390)
====== ====== =======
The components of net deferred tax liabilities consisted of the
following:
1998 1997
Deferred tax liabilities: -------- --------
Deferred customer acquisition costs...... $12,129 $ 9,810
Accounts receivable...................... 7,309 6,422
Prepaid assets........................... 3,642 2,107
Property and equipment................... 508 635
Other assets............................. 802 1,209
Other current assets..................... 161 227
Accrued coupon redemption costs.......... 368 289
State deferred taxes 1,885 1,019
Other.................................... 199 --
-------- --------
27,003 21,718
-------- --------
Deferred tax assets:
Accrued expenses......................... (868) (727)
Stock option............................. (7,121) (9,821)
Other.................................... (15) (15)
-------- --------
(8,004) (10,563)
-------- --------
$18,999 $11,155
======== ========
<TABLE>
<CAPTION>
The following is a reconciliation of the federal statutory rate and the
Company's effective tax rate:
1998 1997 1996
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Tax provision (benefit) at
statutory rate........................ $7,317 34.0% $6,064 34.0% $(1,937) (34.0)%
State taxes, net of federal benefit....... 460 2.1 202 1.1 232 4.1
Foreign incremental tax................... 43 0.2 -- -- -- --
Other..................................... 235 1.1 (24) (0.1) 315 5.5
------ ---- ------ ---- ------- -----
Provision (benefit) for income taxes...... $8,055 37.4% $6,242 35.0% $(1,390) (24.4)%
====== ==== ====== ==== ======= =====
</TABLE>
33
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
12. REDEEMABLE EQUITY SECURITIES
In connection with the Recapitalization, the Company issued 2,826 shares
of voting common stock, $.01 par value, to management stockholders for
cash. The Company is obligated to redeem these shares from the management
stockholders upon the death, disability or termination of employment of
the holder. The redeemable common stock was recorded at fair value on the
date of issuance, less issuance costs, totaling $45. During 1995, the
Company issued an additional 4,048 shares of voting common stock, $.01
par value, for cash under the same basic terms. The redeemable common
stock was recorded at fair value on the date of issuance, less issuance
costs, totaling $63. In connection with the issuance of redeemable common
shares in 1995, certain agreements were amended and executed in order
that 14,643 shares of preferred stock issued for cash in 1995 and 10,218
shares of preferred stock issued for cash in October 1994 would be
redeemable under the same basic terms of the redeemable common stock.
Each preferred share has a $.01 par value, a stated value at liquidation
of $10 and cumulative dividends of 25% of additional shares of PIK
preferred stock or fractions thereof. The redeemable preferred stock was
recorded at fair value on the date of issuance or amendment providing for
their redemption, less issuance costs, totaling $224. The excess of the
preference value over the carrying value is being accreted by periodic
charges to Additional Paid-In Capital over the life of the issue. The
redemption provisions expire the earlier of the fifth anniversary of the
October 17, 1994 Recapitalization or the closing of an initial public
offering for the Company's common stock.
In 1996, two officers of the Company were granted 4,434 shares of voting
common stock, $.01 par value, as additional compensation. The Company is
obligated to redeem these shares under the same basic terms as previously
issued redeemable stock. The redeemable common stock was recorded at fair
value on the date of issuance. This resulted in an increase in redeemable
equity securities of approximately $300.
13. TREASURY STOCK
Pursuant to the Recapitalization Agreement (see Note 14), the Company
repurchased from the Stockholder for approximately $199.0 million, which
includes approximately $0.9 million in post-closing adjustments, all of
its then outstanding shares of Preferred Stock (5,460 Class A shares and
9,425 Class B shares) and 17,337 shares of its then outstanding Common
Stock. These shares along with all previously acquired shares of
Preferred and Common Stock were then retired. During 1995, additional
post closing adjustments totaling $88 were made to the purchase price
relating to the retired treasury shares. During 1998, the Company
repurchased from two officers of the Company a total of 18,600 shares of
common stock and 8,715 shares of preferred stock for a total value of
$1,556.
14. RECAPITALIZATION
On July 19, 1994, an affiliate of Kelso & Company, Inc. ("Kelso"), the
Company and Joseph A. Murphy, the sole stockholder of the Company (the
"Stockholder"), entered into a Recapitalization and Stock Purchase
Agreement (the "Recapitalization Agreement"). Pursuant to the
Recapitalization Agreement, the Company repurchased from the Stockholder
(the "Repurchase") for approximately $191,200, which includes
approximately $900 in post-closing adjustments (net of $7,800 received
from the Stockholder for the purchase of certain assets (see below)), all
of its then outstanding shares of preferred stock and a substantial
portion of its then outstanding shares of common stock. On October 17,
1994, the Company effected the recapitalization of its capital stock (the
"Recapitalization"), pursuant to which certain affiliates and designees
of Kelso and certain members of operating management of the Company
(collectively, the "Investor Group"), purchased a controlling equity
interest in the Company. The Company effected the Repurchase with the
proceeds of the Financing (as defined below). Following the consummation
of the Repurchase (and after giving effect to the purchase of common
stock by the Investor Group pursuant to the Financing), the Investor
Group owned approximately 74% of the Company's common stock, with the
Stockholder retaining approximately 21% of the Company's common stock.
34
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
14. RECAPITALIZATION (continued)
The Company obtained the funds necessary to effect the Repurchase, repay
certain existing indebtedness of the Company and pay the fees and
expenses incurred in connection with the Recapitalization primarily from
the proceeds of a financing (the "Financing") which included (i)
borrowings of $80,000 under a credit agreement, consisting of $80,000 of
term loan facilities (the "Term Loan Facilities") and a $15,000 revolving
credit facility, entered into among the Company, Bankers Trust Company,
and the banks signatory thereto, (ii) gross proceeds of approximately
$69,100 from the issuance and sale of the Units (each unit consisting of
one Senior Subordinated Note and one share of Class A Common Stock),
(iii) gross proceeds of approximately $36.5 million from the sale to the
Investor Group of shares of a new class of pay-in-kind preferred stock of
the Company for cash, and (iv) gross proceeds of approximately $17,100
from the sale to the Investor Group of shares of Common Stock for cash.
The Company also utilized working capital of approximately $2,000 to pay
fees and expenses incurred in connection with the Recapitalization. In
addition, certain members of the Company's management were granted
restricted pay-in-kind preferred stock and restricted common stock of
$1,022 and $478, respectively (see Note 20).
The Recapitalization and Stock Purchase Agreement contained customary
representations, warranties and conditions. The Recapitalization and
Stock Purchase Agreement also provided that, at or prior to the
consummation of the Acquisition, the Stockholder and the Company enter
into an Escrow agreement pursuant to which, among other things, $10,000
of the aggregate purchase price paid by the Company to the Stockholder
pursuant to the Repurchase be held in escrow to provide a source of
payment to satisfy the Stockholder's indemnification obligations under
the Recapitalization and Stock Purchase Agreement.
Prior to the Recapitalization, the Company had authorized classes of
voting and non-voting common stock, with shares of voting stock issued
and outstanding. As part of the Recapitalization, such non-voting stock
was retired and such voting stock was changed and reclassified from Class
A Common Stock, par value $1.00 per share, into one share of Common
Stock, par value $.01 per share. In addition, in connection with the
Recapitalization, the Company issued and sold shares of non-voting Class
A Common Stock, a small number of which was purchased by certain
designees of Kelso, and the remainder of which was sold in the form of
Shares as part of the Units. Upon the occurrence of any Conversion Event
(as defined, e.g., any transfer of shares of Class A Common Stock to any
persons who are not affiliates of the transferor), each share of Class A
Common Stock shall be convertible into one share of the Company's Common
Stock. Subsequent to the Recapitalization, the Company effected a stock
split of its Common Stock on approximately a 62.22-to-1 basis.
On November 20, 1997, the Company amended and restructured its credit
agreement. This change resulted in lower interest rates, an increase in
the revolving credit facility from $15,000 to $20,000, a substantial
change in the timing of principal payments and changes to the debt
covenants.
35
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
15. LEASE COMMITMENTS
The Company leases premises under cancelable and noncancelable operating
leases with lease terms expiring through 2007. Future minimum payments by
year and in the aggregate under all noncancelable capital and operating
leases having initial or remaining terms of one year or more consisted of
the following at December 31, 1998:
Year ending Capital Operating
December 31, Leases Leases
------------ ------- ---------
1999........................................ $1,992 $1,929
2000........................................ 1,587 1,120
2001........................................ 1,465 1,046
2002........................................ 1,140 991
2003........................................ 643 973
Thereafter.................................. 722 3,329
------ ------
7,549 $9,388
======
Amount representing imputed
interest................................. 647
------
Present value of net minimum
lease payments........................... 6,902
Less current portion........................ 1,726
------
$5,176
======
Rental expense under all operating leases for the years ended December
31, 1998, 1997 and 1996, was approximately $2,094, $1,887 and $1,593,
respectively.
16. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with certain members
of management.
The Company has agreed to pay Kelso an annual fee of $263 each year for
financial advisory services and to reimburse Kelso for out-of-pocket
expenses incurred. Non-officer directors of the Company, other than those
directors who are affiliated with Kelso, will be paid an annual retainer
of $20. In addition, all out-of-pocket expenses of non-officer directors,
including those directors who are affiliated with Kelso, related to
meetings attended, will be reimbursed by the Company. Non-officer
directors, including those directors affiliated with Kelso, will receive
no additional compensation for their services as directors of the Company
except as described above.
The Company is involved in, or has been involved in, litigation arising
in the normal course of its business. The Company can not predict the
timing or outcome of these claims and proceedings. Currently, the Company
is not involved in any litigation which is expected to have a material
effect on the financial position of the business or the results of
operations and cash flows of the Company except as discussed below.
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.
36
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
16. COMMITMENTS AND CONTINGENCIES (continued)
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.
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 3 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.
17. PROFIT SHARING PLAN
The Company has a profit sharing plan covering all employees and those of
its subsidiaries. Eligible employees can participate as of January 1 and
July 1 after twelve months of service. Employee contributions are made on
a pretax basis under Section 401(k) of the Internal Revenue Code. The
Company's contribution is at the discretion of the Board of Directors.
The expense associated with the employer contribution was approximately
$550, $514 and $480 in 1998, 1997 and 1996. respectively.
All contributions and investments are held in a trust for the benefit of
plan participants. All employees are 100% vested in their pretax
contributions and earnings thereon, but become vested in the Company
contributions and earnings at a rate based on years of service, with full
vesting after five years.
18. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company values the financial instruments as required by SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The following
methods and assumptions were used to estimate the fair value of each
class of financial instrument:
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and
Accrued Expenses. The carrying amount of these items are a reasonable
estimate of their fair values because of the short maturity of these
instruments.
Long-term Debt including Current Maturities. The fair value of the
Company's long-term debt is based on the quoted market price on the
subordinated notes and on current interest rates that are available to
the Company for debt not quoted on an exchange. At December 31, 1998 and
1997, the Company had a carrying amount of long-term debt of $129,050 and
$132,424, respectively and an estimated fair value of $132,358 and
$139,475, respectively.
37
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
19. STOCK OPTION PLAN
On June 28, 1996, the Board of Directors approved and adopted a stock
option plan (the "Option Plan"), providing for the grant to certain
employees of the Company and its subsidiaries of options to purchase up
to 215,369 shares of Common Stock. On June 28, 1996, the Board of
Directors granted options to purchase an aggregate of 215,369 shares of
Common Stock. The exercise price with respect to 199,458 shares is $30.00
per share. The exercise price with respect to 15,911 shares will be the
price per share obtained in an initial public offering. All options
vested on the date of such grant and are only exercisable upon an initial
public offering of the Common Stock or certain change of control events.
Options expire 10 years from the date of the grant of such option,
subject to earlier termination by the Board of Directors. Compensation
expense of $22,938 was recorded in the Company's financial statements for
the year ending December 31, 1996. On July 29, 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 at the option
price of $30 per share, and simultaneously, the Company reacquired these
shares at a fair value of $107 per share.
A summary of the status of the Company's stock option plan as of December
31, 1998 and changes during the year ending on that date is presented
below:
<TABLE>
<CAPTION>
Options with Exercise Options with Exercise
Price Equal to Price Less Than the
Market Price of Market Price of
Stock on Grant Date Stock at Date of Grant
------------------------- --------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- --------- -------- ---------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1996 -0- -0-
Granted 15,911 $145.00 199,458 $30.00
Exercised -- --
Cancelled -- -- -- --
------- ------- ---------- ------
Outstanding at December 31, 1996 15,911 $145.00 199,458 $30.00
======= ======
Granted -- --
Exercised -- --
Cancelled -- -- -- --
------- ------- ---------- ------
Outstanding at December 31, 1997 15,911 $96.09 199,458 $30.00
====== ======
Granted -- --
Exercised -- 17,344
Cancelled -- -- -- --
------- ------- ------- ------
Outstanding at December 31, 1998 15,911 $106.94 182,114 $30.00
======= ======= ======= ======
Options exercisable at December 31,
1996, 1997 and 1998 -0- 17,344
=== ======
Weighted average fair value of options
Granted during 1996 $145.00 $145.00
======= =======
</TABLE>
At December 31, 1998, there were no options available for future grants
under the Option Plan.
38
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
19. STOCK OPTION PLAN (continued)
The following table summarizes information about stock options
outstanding at December 31, 1998:
Options Outstanding
--------------------------------------------
Weighted
Average Weighted
Number Remaining Average
Exercise Outstanding Contractual Exercise
Prices at 12/31/98 Life Price
-------- ----------- ----------- ---------
$ 30.00 182,114 7.5 years $ 30.00
106.94 15,911 7.5 years 106.94
-------
198,025
=======
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its plan.
Accordingly, the difference between the fair market value of the Common
Stock, which for financial reporting purposes was based on the estimated
fair value at the date of grant, and the exercise price of such options,
has been recorded as compensation expense totaling $22,938 in the
Company's financial statements for the year ending December 31, 1996. Had
compensation cost for the Company's stock option plan been determined
based on the fair value at the grant dates, consistent with the method of
SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's
net loss for the year ending December 31, 1996, would have been increased
to the pro forma amounts indicated below:
Net loss:
As reported ($4,306)
======
Pro forma ($5,321)
======
The fair value of each option granted during 1996 is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following assumptions: (i) no dividend yield, (ii) no expected volatility
as the Company's stock is not publicly traded, (iii) risk-free interest
rate of 6.46%, and (iv) expected life of 5.5 years.
39
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
20. RELATED PARTIES TRANSACTIONS
In connection with the Recapitalization, certain members of the Company's
management were granted restricted pay-in-kind preferred stock and
restricted common stock of $1,022 and $478, respectively. Compensation
associated with the grant of these shares was measured by the difference
between the aggregate price of the restricted shares and the aggregate
fair value of the shares on the measurement date. Such compensation is
being recognized ratably over the six-year period for which services must
be performed in order for these individuals to receive the shares without
restriction. The Company is recognizing compensation expense over six
years commencing October 17, 1994, which is the date the Company effected
the Recapitalization and granted the restricted shares. Compensation
expense related to these shares for the period ended December 31, 1998
and 1997 totaled $250 in each year.
In connection with the Recapitalization, on October 17, 1994, certain
designees of Kelso acquired shares of the Company's Common Stock. The
proceeds from the sale of these shares were received subsequent to
December 31, 1994.
In 1996, two officers of the Company were granted shares of common stock
as additional compensation totalling approximately $300. These shares are
included in the accompanying balance sheets as redeemable equity
securities.
Kelso provides financial advisory services to the Company for an annual
fee. Payment for these services and reimbursement of expenses totalled
$294 in 1998, $270 in 1997 and $268 in 1996.
21. PREFERRED STOCK
The PIK Preferred Stock is entitled to cumulative dividends, payable
solely in additional shares of PIK Preferred Stock, at an estimated rate
of 25% per annum when, as and if declared by the Board of Directors of
the Company. Cumulative dividends on preferred shares that have not been
declared since the Recapitalization total approximately 6.4 million
shares of preferred stock. The PIK Preferred Stock has an aggregate
liquidation preference of approximately $37.4 million plus the
liquidation preference of additional shares of PIK Preferred Stock issued
in payment of dividends on the PIK Preferred Stock and the liquidation
preference in respect of accumulated and unpaid dividends, whether or not
declared. The PIK Preferred Stock is redeemable at the option of the
Company in whole or in part at any time for a redemption price equal to
the liquidation preference thereof plus all accumulated and unpaid
dividends, whether or not declared, to the date of redemption. In
addition, the PIK Preferred Stock has no voting rights, except that the
PIK Preferred Stock is entitled to vote, as a separate class, in the
event of any merger, consolidation, or sale of all or substantially all
of the Company's assets, any amendment to the Company's Restated
Certificate of Incorporation or any authorization or issuance by the
Company of capital stock ranking senior to or pari passu with the PIK
Preferred Stock with respect to dividends or liquidation preference or
securities convertible into or exchangeable or exercisable for such
capital stock.
40
<PAGE>
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Dollars in thousands, except per share data)
22. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Summarized quarterly financial data for 1998 and 1997 are set forth below:
March June September December Total
------- -------- --------- -------- -----
1998
<S> <C> <C> <C> <C> <C>
Net Revenues......................... $43,678 $50,516 $48,042 $56,445 $198,681
Gross Profit......................... 21,942 26,309 27,506 31,572 107,329
Operating Income..................... 5,162 8,080 11,609 13,229 38,080
Net Income........................... 697 2,446 4,614 5,707 13,464
1997
Net Revenues......................... $45,274 $49,589 $39,414 $44,405 $178,682
Gross Profit......................... 22,234 25,532 22,285 26,512 96,563
Operating Income..................... 5,276 9,509 8,866 12,203 35,854
Net Income........................... 464 3,025 2,686 5,418 11,593
</TABLE>
23. SUBSEQUENT EVENTS
On March 26, 1999, the Company amended its Credit Agreement to include an
Incremental Revolving Loan of $5,000. This loan can be made from time to
time after the existing revolving credit facility equals $20,000. The
Incremental Revolving Loan will be terminated when all principal and
accrued interest has been repaid but no later than December 31, 1999.
In addition to the Incremental Revolving Loan, the Company amended
certain financial ratios as defined in the Agreement. These ratios were
effective for the December 31, 1998 quarter. (See Note 10.)
41
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The Company's executive officers and directors, as well as additional
information with respect to those persons, are set forth in the table below.
Name Age Position
- - ---- --- --------
John F. Biagini 55 Chairman and Chief Executive Officer
Darrell Edwards 40 Vice President and Director of Marketing
Arthur Hughes 57 Vice President and Chief Financial Officer
William J. Kelly 49 Senior Vice President, International Operations
Hans Lengers 53 President, U.S. Textile Corporation and Director
Philip G. Whalen 53 President and Chief Operations Officer
Frank K. Bynum, Jr. 36 Director
Michael B. Goldberg 52 Director
Joseph A. Murphy 55 Director
Directors shall be elected by a plurality of the votes cast at annual
meetings of stockholders (except in the case of vacancies on the Board of
Directors). All directors of the Company serve for the term for which they are
elected or until their successors are duly elected and qualified or until death,
retirement, resignation, or removal. All executive officers hold office at the
pleasure of the Board of Directors. See "--Stockholders Agreement" and
"--Employment Agreements."
Non-officer directors of the Company, other than those directors who
are affiliated with Kelso, will be paid on annual retainer of $20,000. In
addition, all out-of-pocket expenses of non-officer directors, including those
directors who are affiliated with Kelso, related to meetings attended will be
reimbursed by the Company. Non-officer directors, including those directors
affiliated with Kelso, will receive no additional compensation for their
services as directors of the Company except as described above. Officers of the
Company who serve as directors do not receive compensation for their services as
directors other than the compensation they receive as officers of the Company.
There are no family relationships among directors and executive
officers of the Company. For certain information regarding the stock ownership
of the Company, see "Security Ownership of Certain Beneficial Owners and
Management."
The business experience for at least the last five years of each of the
directors and executive officers is as follows:
Mr. Biagini has been the Chairman and Chief Executive Officer of the
Company since consummation of the Recapitalization. Mr. Biagini served as
President and Chief Executive Officer from June 1992 through March 1998.
Mr. Edwards has been the Vice President and Director of Marketing of
the Company since consummation of the Recapitalization. Mr. Edwards served as
Vice President and Director of Marketing since he joined the company in October
1992.
Mr. Hughes has been the Vice President and Chief Financial Officer
of the Company since August 1995. Mr. Hughes served as Vice President and
Controller of the Company from 1990 to August 1995.
42
<PAGE>
Mr. Kelly has been Senior Vice President, International Operations, of
the Company since July 1996. From December 1993 until June 1996, Mr. Kelly was
Vice President, Systems and Operations. From November 1988 until December 1993,
Mr. Kelly was Vice President, Systems and Programming.
Mr. Lengers has been the President of U.S. Textile Corporation (the
Company's wholly-owned manufacturing subsidiary) and a Director of the
Company since 1978, and is one of the founders of U.S. Textile Corporation.
Mr. Whalen has been President of the Company since April 1998. From
1985 to March 1998 he served as President of Enchantress Hosiery of Canada
which, in June 1998, became a wholly-owned subsidiary of Hosiery Corporation of
America.
Mr. Bynum has been a Director of the Company since the consummation
of the Recapitalization. Mr. Bynum has been a Vice President of Kelso from
July 1991 to April 1998 when he was named a Managing Director of Kelso.
He is a director of Cygnus Publishing, Inc., IXL Enterprises, Inc., 21st Century
Newspapers, Inc. and MJD Communications, Inc.
Mr. Goldberg has been a Director of the Company since consummation of
the Recapitalization. Mr. Goldberg has been a Managing Director of Kelso since
October 1991. Mr. Goldberg served as a Managing Director and jointly managed the
merger and acquisitions department at The First Boston Corporation from 1989 to
May 1991. Mr. Goldberg was a partner at the law firm of Skadden, Arps, Slate,
Meagher & Flom from 1980 to 1989. Mr. Goldberg is a director of Consolidated
Vision Group, Inc., Endo Pharmaceuticals, Inc. and Netspeak Corporation.
Mr. Murphy has been a Director of the Company since consummation of the
Recapitalization. Mr. Murphy joined the Company in September 1980 as Chief
Operating Officer. In December 1983, Mr. Murphy was promoted to President and
Chief Executive Officer and was simultaneously elected to the Board of
Directors. In June 1992, Mr. Murphy ceased serving as President of the Company
but continued to serve as Chairman and Chief Executive Officer, a position from
which he resigned prior to consummation of the Recapitalization.
In connection with the transactions effected by the Recapitalization
Agreement, the Company paid Kelso a fee of $2.625 million for financial advisory
services and reimbursed it for out-of-pocket expenses incurred in connection
with rendering such services. In addition, the Company has agreed to pay Kelso
an annual fee of $262,500 each year for financial advisory services and to
reimburse it for out-of-pocket expense incurred. The Company has also agreed to
indemnify Kelso against certain claims, losses, damages, liabilities and
expenses which may arise, in connection with rendering such financial advisory
services.
The Company has a Compensation Committee, which currently consists of
three directors: John Biagini, Frank Bynum and Michael Goldberg. Messrs. Bynum
and Goldberg are neither officers nor employees of the Company or any of its
affiliates.
43
<PAGE>
Stockholders Agreement
- - ----------------------
The Stockholders Agreement provides, among other things, that, (subject
to changes that may be made from and after such time with respect to the members
and size of the Board of Directors in accordance with the Company's Restated
Certificate of Incorporation and By-Laws), the Company's Board of Directors will
consist of five members, including (i) two officers of the Company designated by
Kelso from certain management stockholders of the Company, (ii) two other
individuals designated by Kelso (who may be affiliates of Kelso) and (iii) the
Stockholder. In addition, Kelso and the Stockholder agreed pursuant to the
Stockholders Agreement that (i) so long as the Stockholder and certain of his
transferees collectively own 10% or more of the outstanding Common Stock, the
Stockholder shall be a director of the Company and (ii) so long as Kelso and its
affiliates collectively are the largest stockholders of the Company and
collectively own at least 35% of the outstanding stock of the Company, Kelso
shall be entitled to elect a majority of the Board of Directors of the Company.
Under the Company's Restated Certificate of Incorporation and By-Laws, the Board
of Directors shall consist of not less than three (3) nor more than eight (8)
members, and following consummation of the Recapitalization shall be fixed from
time to time by resolution of the Board of Directors (the "Board Resolution"),
or by resolution adopted by the vote of a majority of the stockholders of the
Common Stock or by consent executed on behalf of such stockholders (the
"Stockholder Resolution"); provided, that in the event of a conflict between the
Board Resolution and the Stockholder Resolution, the Stockholder Resolution
shall govern. The Stockholders Agreement also limits transfers of Common Stock
and Class A Common Stock by certain parties thereto, and provides for certain
tag-along, drag-along and registration rights. (The Stockholders Agreement is
dated as of October 17, 1994. The original signatories thereto are the Company;
the Stockholder, Joseph A. Murphy; Kelso Investment Associates V, L.P. ("KIAV");
Kelso Equity Partners V, L.P. ("KEPV"); as well as John F. Biagini, CEO of the
Company and Hans Lengers, President of U.S. Textile Corporation.)
44
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the total compensation earned by the
Chief Executive Officer and the four most highly compensated executive officers
of the Company for the fiscal year ended December 31, 1997, as well as the total
compensation earned by such individuals for the two previous fiscal years.
SUMMARY COMPENSATION TABLE
- - --------------------------
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
--------------------- ------------
Securities All Other
Underlying Other Annual
Name Year Salary Bonus (b) Options (c) Compensation Compensation
- - ---- ---- ------ --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John F. Biagini 1998 $367,474 $350,000 -- $ 7,038(a)
Chairman of the Board & 1997 372,745 500,000 -- 7,119(a)
Chief Executive Officer 1996 352,794 400,000 94,676 7,164(a)
Hans Lengers 1998 431,919 -- 7,038(a)
President, U.S. Textile 1997 423,754 -- -- 2,230(a)
Corporation 1996 419,439 -- 47,339 1,789(a)
Robert M. Henry 1998 288,939 35,000 -- 7,038(a) $1,334,447(d)
Senior Vice President, 1997 261,146 53,700 -- --
Systems and Operations 1996 253,869 16,500 17,344 --
Arthur Hughes 1998 233,451 40,000 -- 7,038(a)
Vice President and 1997 220,615 50,000 -- 7,119(a)
Chief Financial Officer 1996 159,587 50,000 21,322 7,164(a)
William J. Kelly 1998 231,043 24,000 -- 7,038(a)
Senior Vice President, 1997 232,551 40,000 -- 7,119(a)
International Operations 1996 222,842 30,000 17,344 7,164(a)
Philip G. Whalen 1998 187,896 -- -- --
President and
Chief Operating Officer
<FN>
- - ----------------
(a) Amounts represent Company contributions to the 401(k) Plan, which is a defined contribution plan.
(b) Represents amounts awarded as cash/stock bonuses.
(c) Represents options granted to certain officers under the Company's Stock Option Plan.
(d) Includes $1,334,447 of stock option compensation, 17,344 options awarded in 1996.
Mr. Henry resigned July 15, 1998 and was granted the rights to exercise his options at the option price
of $30 per share and, simultaneously, the Company reaquired these shares at a fair
value of $107 per share. Salary includes severance paid since that date.
</FN>
</TABLE>
Long-Term Compensation
- - ----------------------
Management Stock Purchase and Restricted Stock Award Agreements
Prior to the closing of the Recapitalization, Mr. Biagini and Mr.
Lengers entered into Management Stock Purchase and Restricted Stock Award
Agreements with the Company (the "Management Stock Agreements"), pursuant to
which Mr. Biagini was granted 18,841 restricted shares of Common Stock and
68,120 restricted shares of PIK Preferred Stock, and Mr. Lengers was granted
9,421 restricted shares of Common Stock and 34,060 restricted shares of PIK
Preferred Stock in addition to the shares of Common Stock and PIK Preferred
45
<PAGE>
Stock granted to Mr. Biagini and Mr. Lengers is $1,000,000 and $500,000,
respectively. The Common Stock was sold at $16.92 per share and the PIK
Preferred Stock at $10.00 per share to the original investor group. Compensation
with respect to the grant of shares will be recognized ratably over the six-year
period for which services must be performed in order for Messrs. Biagini and
Lengers to receive the shares without restriction. No dividends will be paid on
any restricted stock. Additionally, in 1995 the management group was offered
limited opportunities to purchase stock at the same price as Messrs. Biagini and
Lengers which resulted in net proceeds to the Company of $190,000.
FISCAL YEAR-END OPTION VALUES
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1998 (#) at December 31, 1998 ($)
--------------------- ------------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable
- - ---- ------------------------- -------------------------
John F. Biagini 0/94,676 0/6,672,314
Hans Lengers 0/47,339 0/3,336,195
Arthur Hughes 0/21,322 0/1,334,447
William J. Kelly 0/17,344 0/1,334,447
There is no public market for the common stock of the Company. The
value utilized for the In-the-Money Options as of December 31, 1998 was based on
a valuation completed by an independent appraiser and reviewed by management for
reasonableness.
No options were granted during 1998.
Employment Agreements
- - ---------------------
In August 1980, Hans Lengers entered into an Employment Agreement with
the Company's manufacturing subsidiary, U.S. Textile Corporation ("U.S.
Textile"), pursuant to which he is employed as President and Chief Executive
Officer of U.S. Textile and to manage and operate its business and affairs for
his lifetime, such agreement having been amended on September 12, 1994. Mr.
Lengers is not entitled to receive compensation upon the voluntary termination
of his employment with U.S. Textile. In addition, the Company may abrogate the
terms and conditions of the Employment Agreement for good cause as defined by
the law of North Carolina, and in any event, the Employment Agreement will
terminate upon Mr. Lengers' death, adjudicated incompetency, bankruptcy or
physical or mental inability to perform his duties thereunder. The agreement
provides for a base salary of $5,000 per month and additional compensation in
the amount that 25.0% of the U.S. Textile net profits exceed such base
compensation, such that the sum of the base compensation and this additional
compensation does not exceed $250,000 per annum, adjusted each year for cost of
living increases. The Consumer Price Index for Urban Wage Earners and clerical
workers is used as the index to compute cost of living increases. The ceiling
for Mr. Lengers' salary in 1998 was $439,000. In addition, Mr. Lengers has
agreed during the time of his employment not to devote any of his time and
efforts to the affairs of any other business in direct competition with U.S.
Textile.
The aforementioned employment agreements require a successor to the
employer thereunder to assume the respective obligations of such employer under
the applicable agreement.
Compensation Committee Interlocks and Insider Participations in Compensation
Decisions
- - ----------------------------------------------------------------------------
Mr. Biagini was the Chairman and Chief Executive Officer of the Company
during the last fiscal year. Messrs. Goldberg and Bynum are both general
partners of the general partner of KIAV, general partners of KEPV and are
Managing Directors of Kelso.
46
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
- - ----------------------------------------------------------------
The following table sets forth information as of March 29, 1999 with
respect to the beneficial ownership of shares of Common Stock of all
stockholders of the Company who are known by the Company to beneficially own
more than 5% of any such class, by each director, by each executive officer of
the Company named in the summary compensation table and by all directors and
executive officers of the Company as a group, as determined in accordance with
Rule 13d-3(i) under the Securities Exchange Act of 1934, as amended. The Common
Stock set forth in the following table includes voting Common Stock and
non-voting Class A Common Stock. Except as indicated in the footnotes below, all
shares of Common Stock are voting Common Stock. Prior to the consummation of the
Recapitalization, all of the issued and outstanding shares of Common Stock and
Old Preferred Stock were owned by the Stockholder.
<TABLE>
<CAPTION>
Percentage of Shares
Name and Address Number of Shares of Common Stock
of Beneficial Owner of Common Stock Outstanding
------------------- ---------------- --------------------
<S> <C> <C>
Kelso Investment Associates V, L.P. (a)(b)....... 995,932 70.77%
Kelso Equity Partners V, L.P. (a)(b)............. 995,932 70.77%
Joseph S. Schuchert(b)........................... (d) (d)
Frank T. Nickell(b)(c)........................... (d) (d)
Thomas R. Wall, IV(b)(c)......................... (d) (d)
George E. Matelich(b)............................ (d) (d)
Michael B. Goldberg(b)(c)(e)..................... (d) (d)
David I. Wahrhaftig (b)(c)....................... (d) (d)
Frank K. Bynum, Jr.(b)(c)(e)..................... (d) (d)
Joseph A. Murphy(f).............................. 292,600 20.79%
John F. Biagini(f)(g)(h)......................... 23,681 1.68%
Hans Lengers(f)(g)(h)............................ 11,841 .84%
William J. Kelly(f)(g)........................... 188 .01%
Arthur C. Hughes(f)(g)........................... 471 .03%
All directors and executive officers of the
Company as a group(f)(g)..................... 330,914 23.52%
- - ---------------
<FN>
(a) As part of the 1994 Recapitalization, KIAV and KEPV acquired respectively
960,634 and 40,026 shares of Common Stock, representing 68.6% and 0.9%,
respectively, of the shares of Common Stock outstanding. Subsequent to the
1994 Recapitalization, KEPV transferred 4,728 shares of Common Stock to
certain family trusts of Messrs. Wall and Goldberg for which Mr. Nickell
serves as trustee. The Kelso Affiliates, due to their common control,
could be deemed to beneficially own each of the other's shares, but
disclaim such beneficial ownership.
(b) The business address for such person(s) is c/o Kelso & Company, 320 Park
Avenue, 24th Floor, New York, New York 10022.
(c) Excludes 4,728 shares of Common Stock owned by certain family trusts of Messrs.
Wall and Goldberg, which may be deemed to be beneficially owned by each of
Messrs. Wall and Goldberg, but each disclaims such beneficial ownership.
Mr. Nickell serves as trustee for these family trusts of Messrs. Wall and
Goldberg, and as such these shares may be deemed to be beneficially owned by
Mr. Nickell, but Mr. Nickell disclaims such beneficial ownership.
(d) Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig and Bynum
may be deemed to share beneficial ownership of shares of Common Stock and
PIK Preferred Stock owned of record by KIAV and KEPV, by virtue of their
status as general partners of the general partner of KIAV and general
partners of KEPV. Messrs. Schuchert, Nickell, Wall, Matelich , Goldberg,
Wahrhaftig and Bynum share investment and voting power with respect to
securities owned by the KIAV and KEPV. Messrs. Schuchert, Nickell, Wall,
Matelich, Goldberg, Wahrhaftig and Bynum disclaim beneficial ownership of
shares of Common Stock and PIK Preferred Stock owned of record by KIAV and
KEPV.
(e) Mr. Goldberg and Mr. Bynum are directors of the Company.
(f) The business address of such person(s) is Hosiery Corporation of America, Inc.,
3369 Progress Drive, Bensalem, Pennsylvania 19020.
(g) Each of such persons may hold options granted under the option plan.
Shares of Common Stock subject to such options are not reflected in the
table.
(h) In addition, prior to the closing of the Recapitalization, Messrs. Biagini
and Lengers acquired in the aggregate approximately 3.0% of the shares of
PIK Preferred Stock issued in the Recapitalization. The amounts of Common
Stock beneficially owned by Messrs. Biagini and Lengers as reflected in
the above table and PIK Preferred Stock acquired by Messrs. Biagini and
Lengers as described in the preceding sentence include grants made by the
Company prior to the consummation of the Recapitalization to Messrs.
Biagini and Lengers of an aggregate of 28,262 shares of Common Stock and
approximately 2.7% of the shares of PIK Preferred Stock, in each case
subject to certain restrictions.
</FN>
</TABLE>
47
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- - --------------------------------------------------------
Set forth below is a summary of certain agreements and arrangements
entered into by the Company and related parties in connection with the
Recapitalization.
Investor Relationships
- - ----------------------
Kelso affiliates beneficially own 70.8% of the shares of common equity
of the Company as described under "Security Ownership of Certain Beneficial
Owners and Management". The Company has agreed to indemnify Kelso and its
affiliates against certain claims, losses, damages, liabilities and expenses
which may arise in connection with the transactions contemplated by the
Recapitalization Agreement. The Company has also agreed to pay Kelso an annual
fee of $262,500 each year for financial advisory services and to reimburse it
for out-of-pocket expenses incurred, and to indemnify it against certain claims,
losses, damages, liabilities and expenses which may arise, in connection with
rendering such services. Kelso's out-of-pocket expenses in connection with its
services rendered during 1998 and 1997 were approximately $32,000 and $8,000,
respectively.
Certain Kelso affiliates are parties to a stockholders agreement. In
addition, certain affiliates of Kelso, the Company and certain investors in the
Company's stock who are designees of Kelso entered into Letter Agreements
(collectively, the "Letter Agreements"), each of which, among other things,
provides for certain restrictions on the transfer of stock by such investors.
The Company has a stockholders agreement which provides, among other things, for
certain restrictions on the transfer of the Company's stock.
The Recapitalization and Related Transactions
- - ---------------------------------------------
The Recapitalization Agreement contains customary representations,
warranties, indemnities and conditions. In addition, the Recapitalization
Agreement provides that the Stockholder, on the one hand, and Company, on the
other, will, subject to certain limitations set forth therein, indemnify each
other and their respective stockholders, subsidiaries, affiliates, officers and
directors and their respective successors and assigns, from, against and in
respect of any damages, losses, deficiencies, liabilities, costs and expenses,
incurred as a result of any (i) misrepresentations or breaches of warranties set
forth in the Recapitalization Agreement or in any certificate delivered pursuant
thereto and (ii) non-fulfillment of certain agreements or covenants set forth in
the Recapitalization Agreement. The representations and warranties and covenants
and agreements to which such indemnification relates are standard and include
representations and warranties with respect to ownership of stock,
capitalization, financial statements, absence of defaults under agreements and
violations of law and similar matters. In addition, the Recapitalization
Agreement provides for similar indemnification by the Stockholder with respect
to certain other matters, including, among other things, claims by third parties
resulting from or arising out of certain activities in connection with the
Stockholder's auction and sale of the Company and certain liabilities incurred
as a result of the operations (or relating to the assets) which were transferred
to the Stockholder prior to the Recapitalization (as described below) or arising
out of such transfer. Under the Recapitalization Agreement, such indemnification
is subject to certain baskets and deductibles and, in general, has an aggregate
limit of $15 million.
The Recapitalization Agreement also provided for the Stockholder and
the Company to enter into an Escrow Agreement pursuant to which, among other
things, $10 million of the aggregate purchase price paid by the Company to the
Stockholder pursuant to the Repurchase is held in escrow to provide a source of
payment to satisfy the Stockholder's indemnification obligations under the
Recapitalization Agreement. In addition, the Stockholder has pledged to the
Company the shares of Common Stock which were not purchased by the Company
pursuant to the Repurchase and which the Stockholder continues to own following
the consummation of the Recapitalization (such shares represent approximately
21% of the Company's Common Stock outstanding following the consummation of the
Recapitalization).
48
<PAGE>
In connection with the Recapitalization, the Company transferred to the
Stockholder certain assets consisting primarily of the stock of all of its
non-hosiery related subsidiaries, some of which are inactive businesses, certain
receivables, equipment leased to one of the non-hosiery subsidiaries, certain
life insurance policies, four owned or leased automobiles and three owned or
leased personal computers. None of the assets transferred to the Stockholder,
except the life insurance policies and loans thereon, automobiles and computers,
were used in the Company's hosiery business.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
- - -------------------------------------------------------------------------
A. The following documents are filed as a part of this Report:
(1) and (2) Financial Statements and Financial Statement Schedule--see
Index to Financial Statements and Financial Statement Schedule appearing
on Page 15.
(3) Exhibits, including those incorporated by reference. The following is
a list of exhibits filed as part of this Annual Report on Form 10-K.
Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference. For exhibits incorporated by reference,
the location of the exhibit in the previous filing is indicated.
<TABLE>
<CAPTION>
EXHIBITS INCORPORATION BY REFERENCE
-------- --------------------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation Exhibit 3.1 to Registration Statement No.
of the Company 33-87392 on Form S-1 dated May 15, 1995
3.2 Certificate of Designation, Powers, Exhibit 3.2 to Registration Statement
Preferences and Rights of Pay-in-Kind No. 33-87392 on Form S-1 Dated May 15,
Preferred Stock 1995
3.3 Amendment to the Restated Exhibit 3.3 to Registration Statement
Certificate of Incorporation of No. 33-87392 on Form S-1 dated May 15,
the Company 1995
3.4 Amendment to the Restated Exhibit 3.1 to Report 10-Q for the quarter
Certificate of Incorporation of ended September 30, 1995
the Company
3.5 By Laws of the Company Exhibit 3.4 to Registration Statement No.
33-87392 on Form S-1 dated May 15, 1995
4.1 Indenture dated as of October 17, Exhibit 4.1 to Registration Statement No.
1994 between the Company and 33-87392 on Form S-1 dated May 15, 1995
United States Trust Company of
New York, as Trustee
4.2 Credit Agreement dated as of October Exhibit 4.1 to Registration Statement No.
17, 1994, among the Company; 33-87392 on Form S-1 dated May 15, 1995
National Westminster Bank PLC, as
Co-Agent; Nations Bank of North
Carolina, N.A., as Co-Agent; Bankers
Trust Company, as Agent; and the
financial institutions listed on the
signature pages thereto
4.3 Amended and Restated Credit Exhibit 4.3 to Form 10-K dated
Agreement dated as of November 20, March 30, 1998
1997 among the Company; various
lending institutions and Bankers
Trust Company, as Agent
*4.4 Amended and Restated Credit Agreement
dated as of March 26, 1999 among the
Company; various lending institutions
and Bankers Trust Company, as Agent
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS INCORPORATION BY REFERENCE
-------- --------------------------
<S> <C> <C>
10.1 Executive Employment Agreement Exhibit 10.2 to Registration Statement No.
between Hosiery Corporation of 33-87392 on Form S-1 dated May 15, 1995
America, Inc. and Arthur C. Hughes,
dated as of August 3, 1992
10.2 Employment Agreement between U.S. Exhibit 10.3 to Registration Statement No.
Textile Corporation and Hans 33-87392 on Form S-1 dated May 15, 1995
Lengers, dated as of August 29, 1980,
and an Amendment thereto among
U.S. Textile Corporation., the
Company and Hans Lengers, dated as
of September 12, 1994
10.3 Executive Employment Agreement Exhibit 10.4 to Registration Statement No.
between the Company and Robert 33-87392 on Form S-1 dated May 15, 1995
J. Mooney, dated as of September 16,
1993
10.4 Executive Employment Agreement Exhibit 10.4 to Form 10-K dated
between the Company and Robert March 26, 1996
M. Henry, dated as of August 7, 1995
10.5 Management Stock Subscription Exhibit 10.5 to Form 10-K dated
Agreement dated August 14, 1995 March 26, 1996
10.6 Stock Option Plan Exhibit 10.3 to Form 10-Q dated
August 12, 1996
10.7 Executive Employment Agreement Exhibit 10.1 to Form 10-Q dated
between the Company and Suzanne M. November 12, 1996
Roper, dated as of July 30, 1996
10.8 Executive Employment Agreement Exhibit 10.1 to Form 10-Q dated
between the Company and Philip G. August 10, 1998
Whalen, dated as of March 16, 1998
10.9 Executive Employment Agreement Exhibit 10.1 to Form 10-Q dated
between the Company and Martin J. November 5, 1998
Pearson, dated as of June 30, 1998
*21.1 Subsidiaries of the Registrant
*27.0 Financial Data Schedule
</TABLE>
* Filed herewith.
B. Reports on Form 8-K filed during the quarter ended December 31, 1998:
None.
51
<PAGE>
SIGNATURES
- - ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 29th day of
March, 1999.
HOSIERY CORPORATION OF AMERICA, INC.
/s/ ARTHUR C. HUGHES
BY: ___________________________
Arthur C. Hughes
Vice President and Chief
Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 29th day of March, 1999.
Signatures Title
- - ---------- -----
/s/ JOHN F. BIAGINI
______________________________ Chairman of the Board, Chief Executive Officer
John F. Biagini and President (Principal Executive Officer)
______________________________ President, U.S. Textile Corporation and
Hans Lengers Director
/s/ ARTHUR C. HUGHES
______________________________ Vice President and Chief Financial Officer
Arthur C. Hughes (Principal Financial and Accounting Officer)
/s/ FRANK K. BYNUM, JR.
______________________________ Director
Frank K. Bynum, Jr.
/s/ MICHAEL B. GOLDBERG
______________________________ Director
Michael B. Goldberg
______________________________ Director
Joseph A. Murphy
By: __________________________
(Name)
Attorney-in-Fact for each of the
persons indicated
52
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Hosiery Corporation of America, Inc.
Bensalem, Pennsylvania
We have audited the consolidated financial statements of Hosiery Corporation of
America, Inc., and its subsidiaries (the "Company") as of December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998, and
have issued our report thereon dated March 5, 1999, (except for Note 23, as to
which the date is March 26, 1999); such report is included elsewhere in this
Form 10-K. Our audits also included the consolidated financial statement
schedule of the Company referred to in Item 8. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In our opinion,
such consolidated financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 5, 1999, (except for Note 23, as to which the date is
March 26, 1999)
S-1
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
HOSIERY CORPORATION OF AMERICA, INC.
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Balance at Charged to Balance at
Beginning of Costs and Amounts End of
Period Expenses Written Off Period
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Allowance for Uncollectible Accounts......... $1,448 $11,536 $11,083 $1,901
====== ======= ======= ======
YEAR ENDED DECEMBER 31, 1997
Allowance for Uncollectible Accounts......... $1,540 $10,791 $10,883 $1,448
====== ======= ======= ======
YEAR ENDED DECEMBER 31, 1996
Allowance for Uncollectible Accounts......... $1,263 $10,057 $9,780 $1,540
====== ======= ======= ======
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
EXHIBITS
--------
4.4 Amended and Restated Credit
Agreement dated as of March 26,
1999 among the Company; various
lending institutions and
Bankers Trust Company, as Agent
21.1 Subsidiaries of the Registrant
27.0 Financial Data Schedule
EXHIBIT 21.1
HOSIERY CORPORATION OF AMERICA, INC.
SUBSIDIARIES OF THE REGISTRANT
The following table lists each significant subsidiary of Hosiery
Corporation of America, Inc. and its jurisdiction of organization.
Jurisdiction of Subsidiary Organization
Jurisdiction
of
Subsidiary Organization
- - ---------- ------------
U.S. Textile Corporation (100% owned).......................... North Carolina
The Stonebury Group, Inc. (100% owned)......................... Nevada
Hosiery Corporation International, Inc. (100% owned)........... Delaware
Enchantress Hosiery of Canada (100% owned)..................... Ontario, Canada
EXHIBIT 4.4
SECOND AMENDMENT
----------------
SECOND AMENDMENT (this "Amendment"), dated as of March 26,
1999, among HOSIERY CORPORATION OF AMERICA, INC., a Delaware corporation (the
"Borrower"), the lending institutions party to the Credit Agreement referred to
below (the "Banks") and BANKERS TRUST COMPANY, as Agent (in such capacity, the
"Agent"). Unless otherwise indicated, all capitalized terms used herein and not
otherwise defined shall have the respective meanings provided such terms in the
Credit Agreement referred to below.
W I T N E S S E T H:
WHEREAS, the Borrower, the Banks and the Agent are parties to
a Credit Agreement, dated as of October 17, 1994 and amended and restated as of
November 20, 1997 (as amended, amended and restated, modified and/or
supplemented through but not including the Second Amendment Effective Date
referred to below, the "Credit Agreement"); and
WHEREAS, subject to and on the terms and conditions set forth
herein, the parties hereto wish to amend the Credit Agreement, as provided
below;
NOW, THEREFORE, it is agreed:
I. Amendments and Waivers to Credit Agreement.
1. Section 1.01 of the Credit Agreement is hereby amended by
(i) inserting the text ", the Incremental Revolving Facility" immediately after
the text "Term Facility" appearing in said Section and (ii) inserting the
following new clause (e) at the end of said Section:
"(e) Loans under the Incremental Revolving Facility (each, an
"Incremental Revolving Loan" and, collectively, the "Incremental
Revolving Loans") (i) shall be made at any time and from time to time
on and after the Second Amendment Effective Date and prior to the IRF
Maturity Date, provided that Incremental Revolving Loans may be made
only when the sum of (A) the aggregate outstanding principal amount of
Revolving Loans, plus (B) the Letter of Credit Outstanding (exclusive
of Unpaid Drawings which are repaid with the proceeds of, and
simultaneously with the incurrence of, the respective incurrence of
Revolving Loans), plus (C) the outstanding principal amount of
Swingline Loans (exclusive of Swingline Loans which are paid with the
proceeds of, and simultaneously with the incurrence of, the respective
incurrence of Revolving Loans), equals $20,000,000, (ii) except as
hereinafter provided, may, at the option of the Borrower, be incurred
and maintained as, and/or converted into, Base Rate Loans or Eurodollar
Loans, provided that all Incremental Revolving Loans made as part of
the same Borrowing shall, unless otherwise specifically provided
herein, consist of Incremental Revolving Loans of the same Type, (iii)
may be repaid and reborrowed in accordance with the provisions hereof
and (iv) shall not exceed for any Bank, after giving effect to any
<PAGE>
incurrence thereof, that aggregate principal amount which, when
combined with the aggregate outstanding principal amount of all other
Incremental Revolving Loans of such Bank, equals the Incremental
Revolving Commitment of such Bank at such time.".
2. Section 1.05 of the Credit Agreement is hereby amended by
(i) deleting the word "and" appearing at the end of clause (ii) of Section
1.05(a) and inserting a comma in lieu thereof and (ii) inserting the text "and
(iv) if Incremental Revolving Loans, by a promissory note substantially in the
form of Exhibit B-4 with blanks appropriately completed in conformity herewith
(each, an "Incremental Revolving Note" and, collectively, the "Incremental
Revolving Notes")" at the end of clause (a) of said Section.
3. Section 1.07 of the Credit Agreement is hereby amended by
inserting the text ", Incremental Revolving Commitments" immediately after the
text "Term Commitments" appearing in said Section.
4. Section 1.09 of the Credit Agreement is hereby amended by
deleting clause (iv) of said Section in its entirety and inserting the following
new clause (iv) in lieu thereof:
"(iv) no Interest Period with respect to a Borrowing of Term
Loans or Revolving Loans may be elected that would extend beyond the
Final Maturity Date and no Interest Period with respect to a Borrowing
of Incremental Revolving Loans may be elected that would extend beyond
the IRF Maturity Date;".
5. Section 3.01 of the Credit Agreement is hereby amended by
inserting the following new clause (g) at the end of said Section:
"(g) The Borrower agrees to pay to the Agent a commitment fee
(the "IRF Commitment Fee") for the account of each Non-Defaulting Bank
with an Incremental Revolving Commitment for the period from and
including the Second Amendment Effective Date to, but not including,
the date upon which the Incremental Revolving Commitment has been
terminated, computed for each day at a per annum rate equal to 1/2 of
1% multiplied by the then unutilized Incremental Revolving Commitment
of such Bank. Such IRF Commitment Fees shall be due and payable in
arrears on the last Business Day of each March, June, September and
December and on the date upon which the Incremental Revolving
Commitment is terminated.".
6. Notwithstanding anything to the contrary contained in
Section 3.02 of the Credit Agreement, (i) the Borrower may not voluntarily
terminate or partially reduce the Total Revolving Commitment at any time prior
to the IRF Termination Date and (ii) the Borrower shall have the right to
terminate or partially reduce the unutilized Total Incremental Revolving
Commitment, without premium or penalty, provided that (x) any such termination
or reduction shall be applied to proportionally and permanently reduce the
Incremental Revolving Commitment of each Bank with such a Commitment and (y) any
such termination or reduction shall be in an amount equal to at least
$1,000,000.
2
<PAGE>
7. Section 3.03 of the Credit Agreement is hereby amended by
deleting clauses (c) and (d) of said Section in their entirety and inserting in
lieu thereof the following new clauses (c), (d), (e) and (f):
"(c) The Total Incremental Revolving Commitment shall
terminate in its entirety on the earlier of (i) the IRF Maturity Date
and (ii) the date on which any Change of Control occurs.
(d) On each date on which a mandatory repayment of Term Loans
pursuant to Section 4.02(A)(c), (d), (e), (f) or (g) would be required
in the absence of Section 4.02(A)(j), the Total Incremental Revolving
Commitment shall be permanently reduced by the amount otherwise
required to be applied to repay Term Loans pursuant to said Section.
(e) On each date on and after the IRF Termination Date upon
which a mandatory repayment of Term Loans pursuant to Section
4.02(A)(c), (d), (e), (f) or (g) is required (and exceeds in amount the
aggregate principal amount of Term Loans then outstanding) or would be
required if Term Loans were then outstanding, the Total Revolving
Commitment shall be permanently reduced by the amount, if any, by which
the amount required to be applied pursuant to said Section (determined
as if an unlimited amount of Term Loans were actually outstanding)
exceeds the aggregate principal amount of Term Loans then outstanding.
(f) Each partial reduction of the Total Revolving Commitment
or the Total Incremental Revolving Commitment pursuant to this Section
3.03 shall apply proportionately to the Revolving Commitment or
Incremental Revolving Commitment, as the case may be, of each Bank with
such a Commitment.".
8. Notwithstanding anything to the contrary contained in
Section 4.01 of the Credit Agreement, the Borrower shall not be permitted to
prepay voluntarily any Term Loans or Revolving Loans pursuant to said Section at
any time prior to the IRF Termination Date, provided that at any time a new
Letter of Credit is being issued under the Credit Agreement, the Borrower may
repay Revolving Loans with the proceeds of Incremental Revolving Loans to the
extent necessary so that after giving effect to such issuance and repayment the
sum of the aggregate outstanding principal amount of Revolving Loans and of
Swingline Loans plus Letter of Credit Outstandings at such time does not exceed
the Total Revolving Commitment at such time.
9. Section 4.02(A)(a) of the Credit Agreement is hereby
amended by inserting the following new clause (iii) at the end of said Section:
"(iii) If on any date the sum of the aggregate outstanding
principal amount of Incremental Revolving Loans exceeds the Total
Incremental Revolving Commitment as then in effect, the Borrower shall
repay on such date the principal of Incremental Revolving Loans in an
aggregate amount equal to such excess.".
10. Section 4.02(A) of the Credit Agreement is hereby amended
by inserting the following new clause (j) at the end of said Section:
3
<PAGE>
(j) "Notwithstanding anything to the contrary contained in
Sections 4.02(A)(c), (d), (e), (f) and (g), no mandatory repayment of
Term Loans otherwise required to be made pursuant to said Sections
shall be required to be made prior to the IRF Maturity Date.".
11. Section 6.05(b) of the Credit Agreement is hereby
amended by deleting said Section in its entirety and inserting the following
new Section 6.05(b) in lieu thereof:
"(b) The proceeds of all Revolving Loans and Incremental
Revolving Loans may be used for the general corporate and working
capital purposes of the Borrower and its Subsidiaries.".
12. Section 8.11 of the Credit Agreement is hereby amended by
deleting the table appearing in said Section in its entirety and inserting in
lieu thereof the following new table:
"Fiscal Quarter Ratio
-------------- -----
Fiscal quarter ended in December, 1998 1.05 to 1
Fiscal quarter ended in March, 1999 1.00 to 1
Fiscal quarter ended in June, 1999 1.00 to 1
Fiscal quarter ended in September, 1999 1.00 to 1
Each fiscal quarter ended thereafter 1.15 to 1".
13. Section 8.12 of the Credit Agreement is hereby amended by
deleting the table appearing in said Section in its entirety and inserting in
lieu thereof the following new table:
"Fiscal Quarter Amount
- - --------------- ------
Fiscal quarter ended in December, 1998 $25,000,000
Fiscal quarter ended in March, 1999 $20,000,000
Fiscal quarter ended in June, 1999 $20,000,000
Fiscal quarter ended in September, 1999 $20,000,000
Fiscal quarter ended in December, 1999 $35,000,000
Fiscal quarter ended in March, 2000 $42,500,000
Fiscal quarter ended in June, 2000 $43,500,000
Fiscal quarter ended in September, 2000 $45,500,000
Fiscal quarter ended in December, 2000 $49,500,000
Fiscal quarter ended in December, 2001 $50,000,000
Fiscal quarter ended thereafter $50,000,000".
14. Section 8.13 of the Credit Agreement is hereby amended by
deleting the table appearing in said Section in its entirety and inserting in
lieu thereof the following new table:
4
<PAGE>
"Fiscal Quarter Ratio
-------------- -----
Fiscal quarter ended in December, 1998 2.85 to 1
Fiscal quarter ended in March, 1999 3.60 to 1
Fiscal quarter ended in June, 1999 3.00 to 1
Fiscal quarter ended in September, 1999 3.00 to 1
Fiscal quarter ended in December, 1999 2.25 to 1
Each fiscal quarter ended thereafter 2.00 to 1".
15. Section 10 of the Credit Agreement is modified by deleting
the definitions of "Commitment", "Facility", "Minimum Borrowing Amount" and
"Total Commitment" in their entirety and inserting the following new definitions
in appropriate alphabetical order:
"Adjusted Total Incremental Revolving Commitment" shall mean
at any time the Total Incremental Revolving Commitment less the aggregate
Incremental Revolving Commitments of all Defaulting Banks.
"Commitment" shall mean, with respect to each Bank, such
Bank's Term Commitment, Revolving Commitment and Incremental Revolving
Commitment.
"Facility" shall mean any of the credit facilities established
under this Agreement, i.e., the Term Facility, the Revolving Facility or the
Incremental Revolving Facility.
"Incremental Required Banks" shall mean Non-Defaulting Banks
whose Incremental Revolving Commitments (or, if after the Total Incremental
Revolving Commitment has been terminated, outstanding Incremental Revolving
Loans) constitute greater than 50% of the Adjusted Total Incremental Revolving
Commitment (or, if after the Total Incremental Revolving Commitment has been
terminated, the aggregate outstanding Incremental Revolving Loans of
Non-Defaulting Banks).
"Incremental Revolving Commitment" shall mean, with respect to
each Bank, the amount set forth opposite such Bank's name in Annex I hereto
directly below the column entitled "Incremental Revolving Commitment," as the
same may be reduced or terminated from time to time pursuant to Section 3.02,
3.03 and/or 9 or adjusted from time to time as a result of assignments to or
from such Bank pursuant to Section 1.13 and/or 12.04.
"Incremental Revolving Facility" shall mean the Facility
evidenced by the Incremental Revolving Commitment.
"Incremental Revolving Loan" shall have the meaning provided
in Section 1.01(e).
"Incremental Revolving Note" shall have the meaning provided
in Section 1.05(a).
"IRF Commitment Fee" shall have the meaning provided in
Section 3.01(g).
5
<PAGE>
"IRF Maturity Date" shall mean the earlier to occur of (i)
December 31, 1999 and (ii) the IRF Termination Date.
"IRF Termination Date" shall mean that date upon which the
Incremental Revolving Commitment has been terminated and all principal, accrued
interest and other amounts owing in respect of Incremental Revolving Loans have
been repaid in full.
"Minimum Borrowing Amount" shall mean (i) for Term Loans,
Revolving Loans and Incremental Revolving Loans maintained as Base Rate Loans,
$1,000,000, (ii) for Term Loans and Revolving Loans maintained as Eurodollar
Loans, $5,000,000, (iii) for Incremental Revolving Loans maintained as
Eurodollar Loans, $1,000,000 and (iv) for Swingline Loans, $100,000.
"Second Amendment" shall mean the Second Amendment to this
Agreement, dated as of March 26, 1999.
"Second Amendment Effective Date" shall have the meaning
provided in the Second Amendment.
"Total Commitment" shall mean the sum of the Total Term
Commitment, the Total Revolving Commitment and the Total Incremental Revolving
Commitment.
"Total Incremental Revolving Commitment" shall mean the sum
of the Incremental Revolving Commitments of each of the Banks.
16. Incremental Revolving Commitments (and related outstanding
obligations) shall be assignable on the same basis as Revolving Commitments (and
outstanding Revolving Loans) under Section 12.04(b) of the Credit Agreement as
if each reference to "Revolving Commitment" therein were instead a reference to
"Revolving Commitment or Incremental Revolving Commitment", provided that
assignments of Incremental Revolving Commitments may only be made to a Person
which is a Bank on the Second Amendment Effective Date.
17. Section 12 of the Credit Agreement is hereby amended
by adding the following new Section 12.17:
"12.17 Agreement for Benefit of Banks Making Incremental
Revolving Loans. To induce the Banks with Incremental Revolving
Commitments to make the Incremental Revolving Loans on the Second
Amendment Effective Date, and for the benefit of such Banks and their
successors and assigns, each Bank which executes the Second Amendment
agrees for itself, and its successors and assigns, that such Bank
(including for this purpose its successors and assigns) will not in the
future agree to any amendment, modification or waiver to this Agreement
which amends, modifies or waives the provisions of Section 1.01(e),
3.03, 4.02(A)(a)(iii), 4.02(A)(j) or the definitions of "Incremental
Required Banks", "IRF Maturity Date" or "IRF Termination Date" in any
manner adverse to the interests of any Bank holding Incremental
Revolving Loans without the consent of the Incremental Required Banks
at such time.".
6
<PAGE>
18. Notwithstanding anything to the contrary contained in the
Credit Agreement, no change, waiver, discharge or termination shall extend the
IRF Maturity Date without the consent of each Bank with an Incremental Revolving
Commitment.
19. Annex I to the Credit Agreement is hereby amended by
deleting same in its entirety and inserting in lieu thereof the new Annex I as
it appears as attached hereto.
20. The Credit Agreement is hereby further amended by
inserting a new Exhibit B-4 thereto in the form of Exhibit B-4 attached hereto.
II. Miscellaneous.
- - -------------------
1. In order to induce the Banks to enter into this Amendment,
the Borrower hereby (i) makes each of the representations, warranties and
agreements contained in Section 6 of the Credit Agreement and (ii) represents
and warrants that there exists no Default or Event of Default, in each case on
the Second Amendment Effective Date, both before and after giving effect to this
Amendment.
2. This Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement or any other Credit Document.
3. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with the Borrower and the Agent.
4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK.
5. This Amendment shall become effective on the date (the
"Second Amendment Effective Date") when each of the Borrower, the Required Banks
and each Bank providing an Incremental Revolving Commitment shall have signed a
counterpart hereof (whether the same or different counterparts) and shall have
delivered (including by way of facsimile transmission) the same to White & Case
LLP, 1155 Avenue of the Americas, New York, NY 10036 Attention: John Giambalvo
(facsimile number 212-354-8113).
6. So long as the Second Amendment Effective Date occurs, the
Borrower shall pay (i) to each Bank which has executed a counterpart hereof on
or prior to 5:00 P.M. (New York time) on the later to occur of March 26, 1999 or
the Second Amendment Effective Date, a consent fee equal to 0.10% of the sum of
(x) its Revolving Commitment as in effect immediately prior to the Second
Amendment Effective Date plus (y) the aggregate outstanding principal amount of
Term Loans immediately prior to the Second Amendment Effective Date and (ii) to
each Bank providing an Incremental Revolving Commitment which has executed a
counterpart hereof on or prior to 5:00 P.M. (New York time) on the later to
occur of March 26, 1999 or the Second Amendment Effective Date, a fee equal to
0.75% of its Incremental Revolving Commitment as in effect on the Second
Amendment Effective Date. All fees payable pursuant to the immediately preceding
sentence shall be paid to the Agent within one Business Day after the later date
specified in the immediately preceding sentence, which fees shall be distributed
by the Agent to the relevant Banks in the amounts specified in the immediately
preceding sentence.
7
<PAGE>
7. From and after the Second Amendment Effective Date, all
references to the Credit Agreement in the Credit Agreement and the other Credit
Documents shall be deemed to be references to the Credit Agreement as modified
hereby.
* * *
8
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
HOSIERY CORPORATION OF
AMERICA, INC.
By:___________________
Name:
Title:
BANKERS TRUST COMPANY,
Individually and as Agent
By:___________________
Name: Mary Kay Coyle
Title:
BANK POLSKA KASA OPIEKI, S.A.
By:____________________
Name:
Title:
EUROPEAN AMERICAN BANK
By:___________________
Name:
Title:
FIRST UNION NATIONAL BANK
By:____________________
Name:
Title:
9
<PAGE>
NATIONAL WESTMINSTER BANK PLC
NEW YORK and/or NASSAU BRANCH
By:____________________
Name:
Title:
NATIONSBANK, N.A.
By:____________________
Name:
Title:
10
<PAGE>
<TABLE>
ANNEX I
COMMITMENTS
<CAPTION>
Incremental
Term Revolving Revolving
Bank Commitment Commitment Commitment
- - ---- -------------- --------------- -------------
<S> <C> <C> <C>
Bankers Trust $30,588,235.00 $5,148,841.46 $2,235,474.00
Company
Bank Polska Kasa Opieki, S.A. $1,204,819.28
European American Bank $3,058,103.98 $764,526.00
First Union National Bank $11,470,588.00 $3,529,411.76 $1,000,000.00
National Westminster Bank Plc $11,470,588.00 $3,529,411.76
NationsBank, N.A. $11,470,588.00 $3,529,411.76 $1,000,000.00
Total: $65,000,000.00 $20,000,000.00 $5,000,000.00
============== ============== =============
</TABLE>
<PAGE>
EXHIBIT B-4
FORM OF INCREMENTAL REVOLVING NOTE
$_________ New York, New York
---------- --, ----
FOR VALUE RECEIVED, HOSIERY CORPORATION OF AMERICA, INC., a
Delaware corporation (the "Borrower"), hereby promises to pay to the order of
_______________________ (the "Bank"), in lawful money of the United States of
America in immediately available funds, at the Payment Office (as defined in the
Agreement referred to below) initially located at One Bankers Trust Plaza, 130
Liberty Street, New York, New York 10006, on the IRF Maturity Date (as defined
in the Agreement) the principal sum of _________________ DOLLARS ($_________)
or, if less, the then unpaid principal amount of all Incremental Revolving Loans
(as defined in the Agreement) made by the Bank pursuant to the Agreement.
The Borrower promises also to pay interest on the unpaid
principal amount hereof in like money at said office from the date hereof until
paid at the rates and at the times provided in Section 1.08 of the Agreement.
This Note is one of the Incremental Revolving Notes referred
to in the Credit Agreement, dated as of October 17, 1994 and amended and
restated as of November 20, 1997, among the Borrower, the lending institutions
from time to time party thereto (including the Bank), and Bankers Trust Company,
as Agent (as amended, modified or supplemented from time to time, the
"Agreement"), and is entitled to the benefits thereof and of the other Credit
Documents (as defined in the Agreement). This Note is secured pursuant to the
Security Documents (as defined in the Agreement). As provided in the Agreement,
this Note is subject to voluntary prepayment and mandatory repayment prior to
the IRF Maturity Date, in whole or in part.
In case an Event of Default (as defined in the Agreement)
shall occur and be continuing, the principal of and accrued interest on this
Note may be declared to be due and payable in the manner and with the effect
provided in the Agreement.
The Borrower hereby waives presentment, demand, protest or
notice (other than notices expressly provided for in the Agreement) of any kind
in connection with this Note.
<PAGE>
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE
GOVERNED BY THE LAW OF THE STATE OF NEW YORK.
HOSIERY CORPORATION OF
AMERICA, INC.
By:____________________
Name:
Title:
<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> Dec-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 34,115
<ALLOWANCES> 1,901
<INVENTORY> 20,008
<CURRENT-ASSETS> 55,970
<PP&E> 36,528
<DEPRECIATION> 18,622
<TOTAL-ASSETS> 130,039
<CURRENT-LIABILITIES> 51,415
<BONDS> 69,550
498
37,485
<COMMON> 14
<OTHER-SE> (97,661)
<TOTAL-LIABILITY-AND-EQUITY> 130,039
<SALES> 198,681
<TOTAL-REVENUES> 198,681
<CGS> 56,359
<TOTAL-COSTS> 91,352
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 11,536
<INTEREST-EXPENSE> 16,632
<INCOME-PRETAX> 21,519
<INCOME-TAX> 8,055
<INCOME-CONTINUING> 13,464
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,464
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
