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. 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 61 million pairs in 1997, primarily marketed under the Silkies(R) brand name. The Company's manufacturing operations supplied 79% of all the hosiery required by the Company's continuity program during 1997.
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 70 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 1997, the Company had approximately 1.4 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.
Upon receiving the first shipment, the customer can (i) pay for the product and order a second shipment, (ii) pay for the product and elect not to order a second shipment, or (iii) return the product and keep the free pair.
By paying for the product and ordering a second shipment of hosiery, the customer joins the Company's continuity program and becomes a repeat or back end customer. Upon payment for each shipment, customers are sent a subsequent shipment of regularly priced hose, on average every four to six weeks, with some customers electing a bi-monthly shipment option. With each shipment, customers may change the selection of styles, colors and sizes. Back end shipments contain either four or six pairs of hosiery which vary in price according to style. All shipments are made on credit, but the Company's exposure to any one customer is limited to the cost of one shipment. Customers are not required to commit to a minimum purchase amount and can cancel the program at any time, for any reason.
Acquiring Front End Customers. Direct mail marketing has become the Company's sole means of attracting new front end customers and reactivating previous customers, and has replaced less-targeted methods previously used by the Company, including co-operative advertising and package inserts. Four major solicitations featuring the Company's specially priced introductory offer are mailed each year (January, March, June, September). There is no significant seasonality in the mailings.
The Company employs advanced statistical and regression analyses in conjunction with each of its solicitation promotions. The Company utilizes its proprietary in-house database of over 70 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.
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 six styles of sheer hosiery, in ten different colors and six sizes, as well as knee-hi's and two opqaue styles in six different colors. The Company's elastomer products (compression garments containing spandex) include Control Top, Total Leg Control, Sheer Charm, Opaque and Shapely Perfection styles. The Company's elastomer products currently represent approximately 89% 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 1998, the styles range in price from $2.43 to $4.83 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 15 regarding year 2000 plans.
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 79% 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. All knitting and sewing operations, including toe closing, line seaming and gusset seaming, are located at the Company's facilities in Newland, North Carolina. Once the hosiery products have been manufactured, they are transported to the Company's Lancaster, South Carolina, facility where the products are dyed, packaged and then to the Heath Springs, South Carolina, facility where they are prepared for delivery.
Suppliers. The primary raw materials utilized in the Company's manufacturing operations are nylon and spandex yarn, dye and chemicals. The Company purchases a majority of its yarn under 6-month fixed-price contracts from various domestic and international suppliers. Although the Company generally stocks only a two to three week supply of raw materials in order to manage inventory efficiently, the predictable nature of the Company's shipments generally allows it to order raw materials up to a year in advance and secure an adequate supply at prearranged costs.
Packaging and Distribution. The Company operates fully automated, high speed packaging machines and distributes its products through the postal service directly to the customer's home. The Company's use of standardized and fully automated packaging allows the Company to achieve significant efficiencies. The Company uses the postal service and has been able to control delivery costs by passing on to its customers any increases in postal rates. However, there can be no assurance that in the future the Company will be able to pass on increased shipping costs to its customers. The Company also tries to minimize postal costs through the use of pre-sorting, utilizing nine digit zip codes and co-mingling of mail.
Capital Investment. During the past eight years, the Company has spent approximately $27 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 65 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 by acquiring front end customers through increased solicitations and improved response rates. In 1997, the Company brought in 7.2 million front end customers which has increased substantially from 1995 and 1996 where 5.0 million and 6.6 million front ends were acquired, respectively.
The basis for the continued growth in front end acquisitions will be the ability to obtain previously unavailable lists and new promotional techniques which have demonstrated improved response rates. Management anticipates that the continued increase in front end customers will continue to lead to growth in back end shipments over the next several years. The Company believes, based in part on management's significant experience with international operations and test marketing during 1997 in the United Kingdom, France and Germany, and the introduction of new styles, that the international markets provide significant opportunities for growth.
Competition and Industry
The Company operates exclusively in the women's sheer hosiery industry, targeting adult females as customers. Management believes that the overall women's sheer hosiery market may be declining as a result of the high cost of repeat purchases of such products and changes in women's choices in business and leisure wear. Despite this apparent overall market decline, the Company has been able to increase its sales from $136.3 million in 1995 to $178.7 in 1997.
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, 1997, the Company had 936 employees, 182 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, 210 of whom were located at its manufacturing, and packaging facility in Lancaster, South Carolina, and 204 of whom were located at its sewing and fulfillment operations facility in Heath Springs, South Carolina. Additionally, 6 employees are currently employed in Europe. Of the total number of employees, 132 are salaried workers. The remaining 804 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, 1997, the outstanding amount of the Company's indebtedness (other than trade payables) is $138.6 million, including $65.5 million of senior secured debt and $68.5 million of senior subordinated debt (the "Notes"). (See Items 7 and 13 and Note 3 to Consolidated Financial Statements).
ITEM 2.
ITEM 2. PROPERTIES
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in, or has been involved in, litigation arising in the normal course of its business. The Company can not predict the timing or outcome of these claims and proceedings. Currently, except as discussed below, the Company is not involved in any litigation which is expected to have a material effect on the financial position of the business or the results of operations and cash flows of the Company.
In 1984, as a result of a lawsuit brought by the Federal Trade Commission ("FTC"), the Federal District Court for the Eastern District of Pennsylvania issued a consent injunction, which sets forth specific rules with which the Company must comply in conducting its mail order business and permanently enjoins the Company, its successors and assigns, its officers, agents, representatives and employees, and anyone acting in concert with the Company from violating various FTC and Postal Service laws and regulations. The FTC had previously made inquiries about some aspects of the Company's promotional materials prompting the Company to adopt revised promotional materials which, the Company believes but cannot assure, will meet the concerns expressed by the FTC.
The Company had received inquiries from the FTC and sixteen state regulatory groups (the "States") concerning aspects of the Company's promotional materials, including whether the terms of the Company's promotional offers are sufficiently disclosed in such materials. Eleven of the States, acting as a multi-state group, sought to impose certain disclosure requirements on the Company's promotional materials.
The Company has reached an agreement with the multistate group in which the Company agreed to certain modifications and clarifications of its promotional materials. The agreement became effective as of September 1, 1997. The Company's promotional materials for all of 1997 already include the majority of the modifications and, consequently, the Company feels these modifications and clarifications will have no additional negative impact on the Company's response rates. However, there may be some additional minor modifications which will need to be made to the Company's promotional materials to fully satisfy the terms of the Company's agreement with the multistate group, and no assurances can be given that such changes will not have a further effect on the Company's response rate. In accordance with the agreement, the Company paid $300,000 in administrative expenses and fees during 1997. The agreement also requires that refunds be made to customers under certain circumstances for a six-month period. However, such refunds are not expected to be material to the Company's financial condition or results of operations.
The Company is hopeful that these modifications and clarifications will also satisfy the inquiries from the FTC and the states not part of the multistate group; however, no assurances can be given in this regard. The modifications the Company has already made to its solicitation materials has had a material adverse effect on its domestic response rates. However, response rates are only one of several factors that affect the Company's results of operations. State regulators from time to time contact the Company with inquiries regarding the Company's promotional materials and state regulators could require additional changes to the Company's promotional materials, and no assurance can be given that such changes will not be significant or will not have a material adverse effect on the Company's future financial condition or results of operations.
ITEM 4.
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 1997.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for any class of common equity of the Company.
As of March 18, 1998 the Company had approximately 33 holders of record of its common stock.
Dividend Policy
The Company has not paid cash dividends on its common stock since 1992 and does not anticipate paying such dividends in the foreseeable future. The Company intends to retain any future earnings for reinvestment in the Company. In addition, the Bank Credit Agreement and the indenture pursuant to which the Notes were issued place limitations on the Company's ability to pay dividends or make certain other distributions in respect of its common stock. Any future determination as to the payment of dividends will be subject to such prohibitions and limitations, will be at the discretion of the Company's Board of Directors and will depend on the Company's results of operations, financial condition, capital requirements and other factors deemed relevant by the Board of Directors, including the General Corporation Law of the State of Delaware (the "DGCL") which provides that dividends are only payable out of the Company's surplus or current net profits.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
- ---------------- (a)On October 17, 1994, the Company effected the recapitalization of its capital stock. For discussion of the recapitalization, see Note 3 to the Consolidated Financial Statements of Hosiery Corporation of America, Inc. in Item 8 hereof.
(b)During 1996, the Company granted options to certain employees to purchase up to 215,369 shares of common stock. The Company recognized $22,938 of compensation expense related to the difference between the estimated fair value of the stock at the date of grant and the exercise price of such options. (See Note 18 to the Consolidated Financial Statements of Hosiery Corporation of America, Inc. in Item 8 hereof for further discussion.) Additionally during 1996, the Company incurred costs of $1.6 million, associated with a potential initial public offering of equity securities and a potential acquisition, neither of which were consummated. "Operating income" and "income (loss) from continuing operations before provision (benefit) for income taxes and cumulative effect of accounting change" per the Consolidated Financial Statements of Hosiery Corporation of America, Inc. have been adjusted in the above table to exclude these charges in order to present comparable operating information with that of previous years.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Results of Operations
The following table sets forth certain income statement data for the Company expressed as a percentage of net revenues.
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.
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 consumated. 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. Excluding the stock option compensation expense and a potential public offering and acquisition costs of $15.9 million, net of tax in 1996, net income remained at $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.
Fiscal 1996 Compared to Fiscal 1995
Net revenues increased by 19.4% to $162.8 million in fiscal 1996 from $136.3 million in fiscal 1995. This increase in net revenues was the result of a combination of increased volume ($19.7 million), a portion of which relates to the Company's recent expansion into the United Kingdom, the introduction of a new style ($6.1 million) and pricing ($0.7 million). In January 1996, the Company commenced operations in the United Kingdom which, for the year ended December 31, 1996, generated $8.8 million in revenue. In addition, the Company is currently evaluating potential programs in Germany, France and Japan. The Company began to conduct tests during 1996 in Germany and France and has continued testing in 1997, as well as in Japan.
Cost of sales increased 23.3% to $75.2 million in fiscal 1996 from $61.0 million for fiscal 1995. As a percentage of net revenues, cost of sales was 46.2% in 1996 versus 44.7% for the same period in 1995. This increase was primarily due to the significant increase in first and second shipments associated with the Company's recently initiated operations in the United Kingdom, as well as the Company's efforts to increase its solicitations in the United States to acquire additional front end customers. The Company's first and second shipments result in low margins because they include the introductory offer, which is priced substantially less than the cost of manufacturing, processing and shipping the related hosiery, and because payment and continuation rates of new customers are less than those of older customers. First and second shipments increased by 2.5 million or 37.0% from 6.7 million in 1995 to 9.1 million in 1996. These additional shipments, in both the United States and the United Kingdom, reflected primarily a 9.4 million increase (21.6%) in solicitations to 52.6 million in fiscal 1996 from 43.3 million in fiscal 1995. Of the 2.5 million increase in first and second shipments, 1.2 million represent shipments within the Company's new United Kingdom program.
Administrative and general expenses increased 11.8% to $11.4 million in fiscal 1996 from $10.2 million for the same period of 1995. Increased personnel and higher wages account for the increase. As a percentage of net revenues, administrative and general expenses were 7.0% in 1996 versus 7.5% in 1995.
Provision for doubtful accounts increased $2.3 million or 29.1% to $10.1 million in fiscal 1996 from $7.8 million for the same period of 1995. This increase was caused by additional front end, second and third shipments in 1996 as compared to 1995 (up 2.7 million shipments which is 37.0% higher than 1995), which have a higher rate of uncollectable accounts. As a percentage of net revenues, bad debts were 6.2% in 1996 versus 5.7% for 1995.
Marketing costs increased 26.4% to $22.1 million from $17.4 million for the years ended December 31, 1996 and 1995, respectively. This increase was partially attributable to higher amortization of prior years' deferred marketing costs in 1996 compared to 1995, related to the substantial increase (41.6%) in solicitations in 1995 versus 1994. In 1995, 43.3 million solicitations were mailed as compared to 30.6 million in 1994. These costs are amortized over 42 months with the greatest amortization in the first 24 months. Additionally, a portion of this increase was attributable to higher front end solicitations, as 9.4 million additional solicitations were mailed in 1996 compared to 1995 (up 21.6%), including the start up in the United Kingdom. Marketing expenditures were also incurred in France and Germany for testing. As a percentage of net revenues, marketing costs were 13.6% in 1996 versus 12.8% for 1995.
Coupon redemption costs declined to $4.1 million for fiscal 1996 from $6.0 million for fiscal 1995. As a percentage of net revenues, redemption costs were 2.5% in 1996 versus 4.4% for 1995. This decrease relates to the issuance of new gift catalogs in both 1996 and 1995 that have a lower average cost per gift to the Company, and beginning in 1996, the charging of shipping and handling to redemption customers, which has also lowered the cost of future redemptions and, therefore, the reserve balance for these future redemptions. Lower redemptions account for $0.2 million of the decrease.
Compensation related to stock option expense was $22.9 million in 1996. This expense represents a non-cash charge attributable to options granted by the Board of Directors on June 28, 1996, with an exercise price below the then market price of the Company's common stock, as part of a series of transactions in contemplation of a potential initial public offering.
Expenses of $1.6 million were incurred related to a potential initial public offering of equity securities and a potential acquisition, neither of which were consumated.
Interest expense decreased to $18.5 million for fiscal 1996 from $19.7 million for 1995. This decrease in interest expense was a combination of lower rates ($0.6 million) and less debt ($0.6 million) on the bank loan. As a percentage of net revenues, interest expense was 11.3% in 1996 versus 14.5% for 1995.
Excluding stock option compensation expense of $22.9 million and the costs associated with the potential initial public offering and acquisition of $1.6 million, the Company would have had operating income of $37.0 million for fiscal 1996, a 17.6% increase over $31.4 million for 1995, and would have had pretax income of $18.8 million for 1996, a 56.2% increase over $12.1 million for fiscal 1995. These increases were primarily attributable to increased sales, lower coupon redemption costs, and lower interest costs, offset by increases in cost of sales, bad debts, marketing costs and administrative and general expenses. As a percentage of net revenues, operating income, adjusted to exclude stock option compensation expense and potential initial public offering and acquisition expense of $22.9 million and $1.6 million, respectively, was 22.7% for 1996 versus 23.1% for 1995. As a percentage of net revenues, pretax income, adjusted to exclude stock option compensation expense of $22.9 million and the potential initial public offering and acquisition expense of $1.6 million, was 11.5% for 1996 versus 8.8% for 1995.
The Company incurred a net loss of $4.3 million in 1996. Excluding the stock option compensation expense and potential initial public offering and acquisition costs of $15.9 million net of tax, net income would have increased to $11.6 million in 1996 from $7.5 million in 1995. This increase resulted from the increase in pretax income of $6.7 million, adjusted to exclude stock option compensation expense of $22.9 million and the costs associated with the potential initial public offering and acquisition of $1.6 million, offset by a $2.6 million increase in the provision for income taxes, excluding the $8.6 million tax benefit related to the stock option compensation expense and the costs associated with the potential intial public offering and acquisition. As a percentage of net revenues, net income adjusted to exclude the net impact of the stock option compensation expense and the costs of the potential initial public offering and acquisition, was 7.1% for 1996 versus 5.5% for 1995.
Liquidity and Capital Resources
The Company's cash requirements arise principally from the need to finance new front end solicitations (customers), capital expenditures, debt repayment and other working capital requirements. The Company mailed 75.6, 52.6 million, and 43.3 million solicitations during the years 1997, 1996 and 1995, respectively. The Company financed these solicitations and expects to finance future solicitations from internally generated funds and/or its Credit Facility.
In fiscal 1997, 1996 and 1995, capital expenditures were $2.6 million, $4.9 million and $3.1 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 1998 for additional equipment. These capital expenditures will be financed through internal sources or the assumption of capital leases.
Working capital increased to $12.5 million from $0.6 million at December 31, 1996, and $5.8 million at December 31, 1995. The increase from 1996 to 1997 is primarily the result of a new credit agreement with the banks that resulted in a decrease in the current portion of long-term debt for 1997 and 1998, and consequently a higher cash balance. Working capital decreased by $5.2 million from 1995 to 1996 which was primarily the result of increases in the current portion of long-term debt relating to increasing debt service requirements and accounts payable, offset by increased receivables and inventories.
Net cash provided by operating activities was $11.2 million in 1997 as compared to $7.4 million in 1996 and $8.6 million in 1995. The increase from 1996 to 1997 was primarily from the change in inventory offset by the decrease in accounts payable. The change from 1995 to 1996 was primarily due to increases in receivables, inventory and marketing costs related to the growth of the business, offset by increases in net income, excluding non-cash charges for stock option compensation, depreciation and amortization of marketing costs and accounts payable.
Net cash used in investing activities was $0.9 million in 1997, $2.5 million in 1996 and $1.0 million in 1995, and related primarily to the investment in equipment and the addition of a fulfillment facility in 1996.
During 1997, 1996 and 1995, the Company used $7.9 million, $9.9 million and $4.5 million, respectively, in financing activities. During 1997, a new credit agreement was reached with the Company's bank lenders which provided for $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 $7.3 million, $9.9 million and $4.6 million in 1997, 1996 and 1995, respectively.
The Recapitalization
On October 17, 1994, the Company effected the recapitalization of its capital stock (the "Recapitalization"). As a result of the substantial indebtedness incurred in connection with the Recapitalization, the Company has significant debt service obligations. 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, 1997, the outstanding amount of the Company's indebtedness (other than trade payables) is $138.6 million, including $65.5 million of senior secured debt and $68.5 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: $3.0 million in 1998, $7.5 million in 1999, $13.0 million in 2000, $20.0 million in 2001 and $19.5 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, $17.7 million of which was available at December 31, 1997.
Legal Proceedings
The Company is involved in, or has been involved in, litigation arising in the normal course of its business. The Company can not predict the timing or outcome of these claims and proceedings. Currently, except as discussed below, the Company is not involved in any litigation which is expected to have a material effect on the financial position of the business or the results of operations and cash flows of the Company.
In 1984, as a result of a lawsuit brought by the Federal Trade Commission ("FTC"), the Federal District Court for the Eastern District of Pennsylvania issued a consent injunction, which sets forth specific rules with which the Company must comply in conducting its mail order business and permanently enjoins the Company, its successors and assigns, its officers, agents, representatives and employees, and anyone acting in concert with the Company from violating various FTC and Postal Service laws and regulations. The FTC had previously made inquiries about some aspects of the Company's promotional materials prompting the Company to adopt revised promotional materials which, the Company believes but cannot assure, will meet the concerns expressed by the FTC.
The Company had received inquiries from the FTC and sixteen state regulatory groups (the "States") concerning aspects of the Company's promotional materials, including whether the terms of the Company's promotional offers are sufficiently disclosed in such materials. Eleven of the States, acting as a multi-state group, sought to impose certain disclosure requirements on the Company's promotional materials.
The Company has reached an agreement with the multistate group in which the Company agreed to certain modifications and clarifications of its promotional materials. The agreement became effective as of September 1, 1997. The Company's promotional materials for all of 1997 already include the majority of the modifications and, consequently, the Company feels these modifications and clarifications will have no additional negative impact on the Company's response rates. However, there may be some additional minor modifications which will need to be made to the Company's promotional materials to fully satisfy the terms of the Company's agreement with the multistate group, and no assurances can be given that such changes will not have a further effect on the Company's response rate. In accordance with the agreement, the Company paid $300,000 in administrative expenses and fees during 1997. The agreement also requires that refunds be made to customers under certain circumstances for a six-month period. However, such refunds are not expected to be material to the Company's financial condition or results of operations.
The Company is hopeful that these modifications and clarifications will also satisfy the inquiries from the FTC and the states not part of the multistate group; however, no assurances can be given in this regard. The modifications the Company has already made to its solicitation materials has had a material adverse effect on its domestic response rates. However, response rates are only one of several factors that affect the Company's results of operations. State regulators from time to time contact the Company with inquiries regarding the Company's promotional materials and state regulators could require additional changes to the Company's promotional materials, and no assurance can be given that such changes will not be significant or will not have a material adverse effect on the Company's future financial condition or results of operations.
Year 2000
During 1997, the Company began reviewing its embedded technology, computer systems and software to determine which are not "Year 2000" compliant. The Company established plans and processes for evaluating and managing the risks associated with this problem in order to ensure that all necessary modifications and/or replacements of existing embedded technology, computer systems and software are completed on a timely basis.
Some of the Company's internal Information systems personnel are and will be dedicated toward modifying systems to be Year 2000 compliant by September 1998. To date, the Company is on schedule to meet that deadline.
It is not expected that such modifications and or replacements will have a material adverse effect on the Company's consolidated financial statements. The Company's use of internal Information System's personnel to make the business system Year 2000 compliant has and will continue to delay some information systems development and implementation that would benefit 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. In the event that any of the Company's significant suppliers do not successfully achieve Year 2000 compliance on a timely basis, the Company's business or operations will not be adversely affected.
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.
Accounting Statements Not Yet Adopted
Reporting Comprehensive Income. In June 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. This statement establishes standards for the reporting and display of comprehensive income and its components in a full set of financial statements. The Company will be required to adopt the new method of reporting comprehensive income during fiscal year 1998. Management does not believe that the effect of implementing this new standard will be material to the Company's financial position or results of operations.
Disclosures about Segments of an Enterprise and Related Information. In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. This statement establishes standards for the manner in which business enterprises report information about operating segments in financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company will be required to adopt the new standards for disclosures of an enterprise and related information during fiscal year 1998. When adopted, SFAS No. 131 will not have any effect on the Company's financial position or results of operations, but may require the Company to provide expanded disclosure regarding certain operating segments. However, the Company has not yet determined the effects of SFAS No. 131 on its financial statement disclosures.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HOSIERY CORPORATION OF AMERICA, INC.
Index to Financial Statements and Financial Statement Schedule
Page Number ----------- Financial Statements and Independent Auditors' Report: Independent Auditors' Report................................ 18 Consolidated Balance Sheets--December 31, 1997 and 1996..... 19 Consolidated Statements of Operations--For the years ended December 31, 1997, 1996 and 1995................... 20 Consolidated Statements of Cash Flows--For the years ended December 31, 1997, 1996 and 1995................... 21 Consolidated Statements of Stockholders' Deficiency--For the years ended December 31, 1997, 1996 and 1995......... 23 Notes to Consolidated Financial Statements.................. 24 Financial Statement Schedule and Independent Auditors' Report: Independent Auditors' Report................................ S-1 Schedule I--Valuation and Qualifying Accounts--For the years ended December 31, 1997, 1996 and 1995............. S-2
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.
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, 1997 and 1996, and the related consolidated statements of operations, stockholders' deficiency and cash flows for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
Deloitte & Touche LLP Philadelphia, Pennsylvania
March 6, 1998
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands)
(Continued)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Capital lease obligations of $1,999, $2,338 and $2,103 were entered into for new equipment during 1997, 1996 and 1995, respectively.
In 1996, two officers of the Company were granted approximately $300 of redeemable equity securities as additional compensation for 1996.
During 1995, in connection with the issuance of redeemable common shares, certain agreements were amended and executed in order that preferred stock issued in 1995 and 1994 would be redeemable under the same basic terms of the redeemable common stock. Due to the change in terms of the preferred stock agreement, 10,218 shares issued in October 1994 with a value net of issuance costs of $97 were reclassified from preferred stock to redeemable equity securities in 1995. See notes to consolidated financial statements.
See notes to consolidated financial statements.
23a
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (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 79% 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 79% within 24 months. The loss incurred on front end shipments to customers is charged to operations at the time of the front end shipment.
Software Costs - Software costs, principally internally developed, consist of the expenses associated with the development (computer time, license, programming time) of material software projects with a long-term benefit and are included in the consolidated balance sheet as Other Assets. Such assets are amortized on a straight-line basis over a 5 to 10 year period. Effective January 1, 1994, the Company changed its estimate of the useful life of software costs for new software to 7 years to better reflect the estimated period during which such assets will remain in service.
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
Derivative Financial Instruments - The Company enters into interest rate caps to manage exposure to fluctuations in interest rates. Premiums paid on caps are amortized to interest expense over the term of the cap.
Deferred Debt Issuance Costs - Debt issuance costs represent costs associated with bank borrowings and notes and are amortized using the effective interest method over the terms of the related borrowings.
Income Taxes - The Company uses the liability method of accounting for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under the liability method, deferred income taxes are determined based upon enacted tax laws and rates applied to the differences between the financial statement and tax basis of assets and liabilities.
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.
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. This standard is effective for fiscal years beginning after December 15, 1997. Management does not believe that the effect of implementing this new standard will be material to the Company's financial position or results of operations.
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands, except per share data)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. This statement establishes standards for the manner in which business enterprises report information about operating segments in financial statements. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. This standard is effective for fiscal years beginning after December 15, 1997. When adopted, SFAS No. 131 will not have any effect on the Company's financial position or results of operations, but may require the Company to provide expanded disclosure regarding certain operating segments. However, the Company has not yet determined the effects of SFAS No. 131 on its financial statement disclosures.
Reclassifications - Certain reclassifications were made to the prior year's consolidated financial statements to conform to classifications used in the current period.
3. GEOGRAPHIC SEGMENTS
The Company organizes its business units into two geographic segments: North America and Europe. The segments' accounting policies are the same as those described in the summary of significant accounting policies.
North America Europe Total ------------- ------ -----
Net Revenues $160,490 $18,192 $178,682
Operating Income (Loss) 39,057 (3,203) 35,854
Total Assets 91,297 9,303 100,600
4. RECAPITALIZATION
On July 19, 1994, an affiliate of Kelso & Company, Inc. ("Kelso"), the Company and Joseph A. Murphy, the sole stockholder of the Company (the "Stockholder"), entered into a Recapitalization and Stock Purchase Agreement (the "Recapitalization Agreement"). Pursuant to the Recapitalization Agreement, the Company repurchased from the Stockholder (the "Repurchase") for approximately $191.2 million, which includes approximately $0.9 million in post-closing adjustments (net of $7.8 million received from the Stockholder for the purchase of certain assets (see below)), all of its then outstanding shares of preferred stock and a substantial portion of its then outstanding shares of common stock. On October 17, 1994, the Company effected the recapitalization of its capital stock (the "Recapitalization"), pursuant to which certain affiliates and designees of Kelso and certain members of operating management of the Company (collectively, the "Investor Group"), purchased a controlling equity interest in the Company. The Company effected the Repurchase with the proceeds of the Financing (as defined below). Following the consummation of the Repurchase (and after giving effect to the purchase of common stock by the Investor Group pursuant to the Financing), the Investor Group owned approximately 74% of the Company's common stock, with the Stockholder retaining approximately 21% of the Company's common stock.
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands, except per share data)
4. 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 $80.0 million under a credit agreement, consisting of $80.0 million of term loan facilities (the "Term Loan Facilities") and a $15.0 million revolving credit facility, entered into among the Company, Bankers Trust Company, and the banks signatory thereto, (ii) gross proceeds of approximately $69.1 million from the issuance and sale of the Units (each unit consisting of one Senior Subordinated Note and one share of Class A Common Stock), (iii) gross proceeds of approximately $36.5 million from the sale to the Investor Group of shares of a new class of pay-in-kind preferred stock of the Company for cash, and (iv) gross proceeds of approximately $17.1 million from the sale to the Investor Group of shares of Common Stock for cash. The Company also utilized working capital of approximately $2.0 million to pay fees and expenses incurred in connection with the Recapitalization. In addition, certain members of the Company's management were granted restricted pay-in-kind preferred stock and restricted common stock of $1,022 and $478, respectively (see Note 19).
The Recapitalization and Stock Purchase Agreement contained customary representations, warranties and conditions. The Recapitalization and Stock Purchase Agreement also provided that, at or prior to the consummation of the Acquisition, the Stockholder and the Company enter into an Escrow agreement pursuant to which, among other things, $10.0 million of the aggregate purchase price paid by the Company to the Stockholder pursuant to the Repurchase be held in escrow to provide a source of payment to satisfy the Stockholder's indemnification obligations under the Recapitalization and Stock Purchase Agreement.
Prior to the Recapitalization, the Company had authorized classes of voting and non-voting common stock, with shares of voting stock issued and outstanding. As part of the Recapitalization, such non-voting stock was retired and such voting stock was changed and reclassified from Class A Common Stock, par value $1.00 per share, into one share of Common Stock, par value $.01 per share. In addition, in connection with the Recapitalization, the Company issued and sold shares of non-voting Class A Common Stock, a small number of which was purchased by certain designees of Kelso, and the remainder of which was sold in the form of Shares as part of the Units. Upon the occurrance of any Conversion Event (as defined, e.g., any transfer of shares of Class A Common Stock to any persons who are not affiliates of the transferor), each share of Class A Common Stock shall be convertible into one share of the Company's Common Stock. Subsequent to the Recapitalization, the Company effected a stock split of its Common Stock on approximately a 62.22-to-1 basis.
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 million to $20 million, a substantial change in the timing of principal payments and changes to the debt covenants.
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 1997, customers with an average of 32 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.
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands, except per share data)
6. INVENTORIES
7. PROPERTY AND EQUIPMENT
1997 1996 ---- ----
Land and buildings........................... $ 7,015 $ 6,627 Machinery and equipment...................... 20,683 19,086 Furniture and fixtures....................... 2,213 1,937 Leasehold improvements....................... 3,735 3,759 Automobiles.................................. 635 628 ------- ------- 34,281 32,037 Less accumulated depreciation and amortization .......................... 17,020 14,615 ------- ------- $17,261 $17,422 ======= =======
Property and equipment includes assets acquired under capital leases, principally machinery and equipment having a net book value of approximately $6,566 and $6,418 as of December 31, 1997 and 1996, respectively. Related accumulated depreciation and amortization was $6,063 and $4,636, respectively. Depreciation and amortization expense for capital lease assets for 1997, 1996 and 1995 was $1,542, $1,529 and $1,077, respectively.
8. OTHER ASSETS
1997 1996 ---- ---- Software, net of accumulated amortization of approximately $5,881 and %5,638, respectively............ $312 $549 Deposits.................................... 14 9 Miscellaneous other......................... 71 89 ---- ---- $397 $647 ==== ====
9. OTHER EXPENSES (INCOME)
Included in other expenses (income) are the following:
1997 1996 1995 ---- ---- ----
Loss (gain) on foreign exchange............. $225 $ (39) $ -- Multistate group administrative expenses.... 300 -- -- Miscellaneous expenses (income)............. 4 (2) (2) ---- ----- ---- $529 $ (41) $ (2) ==== ===== ====
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands, except per share data)
10. LONG-TERM DEBT
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. Outstanding borrowings at December 31, 1997 and 1996 are $63,000 and $68,450, 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%. There were no borrowings outstanding under the revolving credit facility at December 31, 1997 and 1996. 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, 1997 ranged from 7.38% to 7.44%. 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.
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands, except per share data)
10. LONG-TERM DEBT (continued)
During 1994, the Company sold the 13.75% Senior Subordinated Notes, with a principal amount of $70,000, at a discount, which discount is being amortized using the interest method over the life of the notes 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 occurence of a Change of Control, as defined, each holder of the Notes shall have the right to require the Company to repurchase such holder's Notes at a purchase price equal to 101% of the aggregate principal amount thereof. Under the terms of the agreement, certain restrictions are placed on additional borrowings, the purchase of property and equipment, the payment of cash dividends and the disposition of assets.
The Company was in compliance with all debt covenants noted above as of December 31, 1997.
The Company was contingently liable for outstanding letters of credit in the amount of approximately $2,292 as of December 31, 1997.
On January 17, 1995, the Company purchased an interest rate cap for $149 from Bankers Trust Company. This cap protects $30,000 of the Term Loan Debt from an increase in interest rates over 10%. The cap is based on the LIBOR and pays the excess interest over 10%. The term of the interest rate cap is three years.
Maturities of long-term debt consisted of the following as of December 31, 1997:
1998................................................... $ 3,117 1999................................................... 7,617 2000................................................... 13,117 2001................................................... 20,117 2002................................................... 88,166 Thereafter............................................. 290 -------- $132,424 ========
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands, except per share data)
11. INCOME TAXES
The provision for income taxes (benefit) consists of the following:
1997 1996 1995 ---- ---- ---- Federal: Current................................ $2,640 $ 3,474 $2,432 Deferred............................... 3,297 (5,215) 2,053 ------ ------- ------ 5,937 (1,741) 4,485 ------ ------- ------ States: Current................................ 451 179 246 Deferred............................... (146) 172 (171) ------ ------- ------ 305 351 75 ------ ------- ------ $6,242 $(1,390) $4,560 ====== ======= ======
The components of net deferred tax liabilities consisted of the following:
1997 1996 ---- ---- Deferred tax liabilities: Deferred customer acquisition costs............. $ 9,810 $ 7,692 Accounts receivable............................. 6,422 6,346 Property and equipment.......................... (31) 327 Other assets.................................... 3,982 2,614 Other current assets............................ 227 165 Accrued coupon redemption costs................. 289 289 State deferred taxes............................ 1,019 1,164 ------- ------- 21,718 18,597 ------- ------- Deferred tax assets: Accrued expenses................................ (727) (757) Stock option.................................... (9,821) (9,821) Other........................................... (15) (14) ------- ------- (10,563) (10,592) ------- ------- $11,155 $ 8,005 ======= =======
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
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands, except per share data)
12. REDEEMABLE EQUITY SECURITIES (continued)
issuance costs, totaling $45. During 1995, the Company, 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 TRANSACTION
Pursuant to the Recapitalization Agreement (see Note 3), the Company repurchased from the Stockholder for approximately $199.0 million, which includes approximately $0.9 million in post-closing adjustments, all of its then outstanding shares of Preferred Stock (5,460 Class A shares and 9,425 Class B shares) and 17,337 shares of its then outstanding Common Stock. These shares along with all previously acquired shares of Preferred and Common Stock were then retired. During 1995, additional post closing adjustments totaling $88 were made to the purchase price relating to the retired treasury shares.
14. LEASE COMMITMENTS
The Company leases premises under cancelable and noncancelable operating leases with lease terms expiring through 2007. Future minimum payments by year and in the aggregate under all noncancelable capital and operating leases having initial or remaining terms of one year or more consisted of the following at December 31, 1997:
Year ending Capital Operating December 31, Leases Leases ------------ ------- --------- 1998............................................ $1,778 $1,889 1999............................................ 1,574 1,452 2000............................................ 1,169 1,034 2001............................................ 1,055 978 2002............................................ 786 973 Thereafter...................................... 370 4,301 ------ ------- 6,732 $10,627 Amount representing imputed interest............ 591 ======= ------ Present value of net minimum lease payments..... 6,141 Less current portion............................ 1,550 ------ $4,591 ======
Rental expense under all operating leases for the years ended December 31, 1997, 1996 and 1995, was approximately $1,887, $1,593 and $1,281, respectively.
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands, except per share data)
15. COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with certain members of management.
The Company has agreed to pay Kelso an annual fee of $263 each year for financial advisory services and to reimburse Kelso for out-of-pocket expenses incurred. Non-officer directors of the Company, other than those directors who are affiliated with Kelso, will be paid an annual retainer of $20. In addition, all out-of-pocket expenses of non-officer directors, including those directors who are affiliated with Kelso, related to meetings attended, will be reimbursed by the Company. Non-officer directors, including those directors affiliated with Kelso, will receive no additional compensation for their services as directors of the Company except as described above.
The Company is involved in, or has been involved in, litigation arising in the normal course of its business. The Company can not predict the timing or outcome of these claims and proceedings. Currently, the Company is not involved in any litigation which is expected to have a material effect on the financial position of the business or the results of operations and cash flows of the Company except as discussed below.
In 1984, as a result of a lawsuit brought by the Federal Trade Commission ("FTC"), the Federal District Court for the Eastern District of Pennsylvania issued a consent injunction, which sets forth specific rules with which the Company must comply in conducting its mail order business and permanently enjoins the Company, its successors and assigns, its officers, agents, representatives and employees, and anyone acting in concert with the Company from violating various FTC and Postal Service laws and regulations. The FTC had previously made inquiries about some aspects of the Company's promotional materials prompting the Company to adopt revised promotional materials which, the Company believes but cannot assure, will meet the concerns expressed by the FTC.
The Company had received inquiries from the FTC and sixteen state regulatory groups (the "States") concerning aspects of the Company's promotional materials, including whether the terms of the Company's promotional offers are sufficiently disclosed in such materials. Eleven of the States, acting as a multi-state group, sought to impose certain disclosure requirements on the Company's promotional materials.
The Company has reached an agreement with the multistate group in which the Company agreed to certain modifications and clarifications of its promotional materials. The agreement became effective as of September 1, 1997. The Company's promotional materials for all of 1997 already include the majority of the modifications and, consequently, the Company feels these modifications and clarifications will have no additional negative impact on the Company's response rates. However, there may be some additional minor modifications which will need to be made to the Company's promotional materials to fully satisfy the terms of the Company's agreement with the multistate group, and no assurances can be given that such changes will not have a further effect on the Company's response rate. In accordance with the agreement, the Company paid $300,000 in administrative expenses and fees during 1997. The agreement also requires that refunds be made to customers under certain circumstances for a six-month period. However, such refunds are not expected to be material to the Company's financial condition or results of operations.
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands, except per share data)
15. COMMITMENTS AND CONTINGENCIES (continued)
The Company is hopeful that these modifications and clarifications will also satisfy the inquiries from the FTC and the states not part of the multistate group; however, no assurances can be given in this regard. The modifications the Company has already made to its solicitation materials has had a material adverse effect on its domestic response rates. However, response rates are only one of several factors that affect the Company's results of operations. State regulators from time to time contact the Company with inquiries regarding the Company's promotional materials and state regulators could require additional changes to the Company's promotional materials, and no assurance can be given that such changes will not be significant or will not have a material adverse effect on the Company's future financial condition or results of operations.
16. PROFIT SHARING PLAN
The Company has a profit sharing plan covering all employees and those of its subsidiaries. Eligible employees can participate as of January 1 and July 1 after twelve months of service. Employee contributions are made on a pretax basis under Section 401(k) of the Internal Revenue Code. The Company's contribution is at the discretion of the Board of Directors. The expense associated with the employer contribution was approximately $514, $480 and $442 in 1997, 1996 and 1995, respectively.
All contributions and investments are held in a trust for the benefit of plan participants. All employees are 100% vested in their pretax contributions and earnings thereon, but become vested in the Company contributions and earnings at a rate based on years of service, with full vesting after five years.
17. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company values the financial instruments as required by SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The following methods and assumptions were used to estimate the fair value of each class of financial instrument:
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Accrued Expenses. The carrying amount of these items are a reasonable estimate of their fair values because of the short maturity of these instruments.
Long-term Debt including Current Maturities. The fair value of the Company's long-term debt is based on the quoted market price on the subordinated notes and on current interest rates that are available to the Company for debt not quoted on an exchange. At December 31, 1997 the Company had a carrying amount of long-term debt of $132,424 and an estimated fair value of $139,475.
18. STOCK OPTION PLAN
On June 28, 1996, the Board of Directors approved and adopted a stock option plan (the "Option Plan"), providing for the grant to certain employees of the Company and its subsidiaries of options to purchase up to 215,369 shares of Common Stock. On June 28, 1996, the Board of Directors granted options to purchase an aggregate of 215,369 shares of Common Stock. The exercise price with respect to 199,458 shares is $30.00 per share. The exercise price with respect to 15,911 shares will be the price per share obtained in an initial public offering. All options vested on the date of such grant and are only exercisable upon an initial public offering of the Common Stock or certain change of control events. Options expire 10 years from the date of the grant of such option, subject to earlier termination by the Board of Directors.
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands, except per share data)
18. STOCK OPTION PLAN (continued)
A summary of the status of the Company's stock option plan as of December 31, 1997 and changes during the year ending on that date is presented below:
Options with Options with Exercise Exercise Price Price Less Than the Equal to Market Market Price of Stock Price of Stock at Date of Grant on Grant Date ----------------- --------------------- Weighted Weighted Average Average Exercise Exercise Shares Price Shares Price ------ -------- ------ --------
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 ====== ====== ======= ======
Options exercisable at December 31, 1996 and 1997 -0- -0- ====== ======= Weighted average fair value of options granted during 1996 $145.00 $145.00 ======= =======
At December 31, 1997, there were no options available for future grants under the Option Plan.
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands, except per share data)
18. STOCK OPTION PLAN (continued)
The following table summarizes information about stock options outstanding at December 31, 1997:
Options Outstanding -------------------------------------- Weighted Average Weighted Number Remaining Average Exercise Outstanding Contractual Exercise Prices at 12/31/97 Life Price -------- ----------- ----------- --------
$ 30.00 199,458 8.5 years $ 30.00 96.09 15,911 8.5 years 96.09 ------- 215,369 =======
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.
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands, except per share data)
19. RELATED PARTIES TRANSACTIONS
In connection with the Recapitalization, certain members of the Company's management were granted restricted pay-in-kind preferred stock and restricted common stock of $1,022 and $478, respectively. Compensation associated with the grant of these shares was measured by the difference between the aggregate price of the restricted shares and the aggregate fair value of the shares on the measurement date. Such compensation is being recognized ratably over the six-year period for which services must be performed in order for these individuals to receive the shares without restriction. The Company is recognizing compensation expense over six years commencing October 17, 1994, which is the date the Company effected the Recapitalization and granted the restricted shares. Compensation expense related to these shares for the period ended December 31, 1997 and 1996 totaled $250 in each year.
In connection with the Recapitalization, on October 17, 1994, certain designees of Kelso acquired shares of the Company's Common Stock. The proceeds from the sale of these shares were received subsequent to December 31, 1994.
During 1994 and 1995, certain officers of the Company acquired shares of both the Company's common and preferred stock. In 1996, two officers of the Company were granted shares of common stock as additional compensation totalling approximately $300. These shares are included in the accompanying balance sheets as redeemable equity securities.
Kelso provides financial advisory services to the Company for an annual fee. Payment for these services and reimbursement of expenses totalled $270 in 1997, $268 in 1996 and $308 in 1995.
20. PREFERRED STOCK
The PIK Preferred Stock is entitled to cumulative dividends, payable solely in additional shares of PIK Preferred Stock, at an estimated rate of 25% per annum when, as and if declared by the Board of Directors of the Company. Cumulative dividends on preferred shares that have not been declared since the Recapitalization total approximately 4.2 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 authroization or issuance by the Company of capital stock ranking senior to or pari passu with the PIK Preferred Stock with respect to dividends or liquidation preference or securities convertible into or exchangeable or exercisable for such capital stock.
HOSIERY CORPORATION OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 (Dollars in thousands, except per share data)
21. QUARTERLY INFORMATION (UNAUDITED)
Summarized quarterly financial data for 1997 and 1996 are set forth below:
March June September December Total ----- ---- --------- -------- -----
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
Net Revenues.............. $40,099 $42,623 $38,611 $41,430 $162,763 Gross Profit.............. 19,187 22,783 21,996 23,613 87,579 Operating Income (Loss)... 6,135 (12,779) 10,208 8,879 12,443 Net Income (Loss)......... 933 (10,545) 3,486 1,820 (4,306)
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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 54 Chairman, Chief Executive Officer and President Darrell Edwards 39 Vice President and Director of Marketing Robert M. Henry 50 Senior Vice President, Systems and Operations Arthur Hughes 56 Vice President and Chief Financial Officer William J. Kelly 48 Senior Vice President, International Operations Hans Lengers 52 President, U.S. Textile Corporation and Director Frank K. Bynum, Jr. 35 Director Michael B. Goldberg 51 Director Joseph A. Murphy 54 Director
Directors shall be elected by a plurality of the votes cast at annual meetings of stockholders (except in the case of vacancies on the Board of Directors). All directors of the Company serve for the term for which they are elected or until their successors are duly elected and qualified or until death, retirement, resignation, or removal. All executive officers hold office at the pleasure of the Board of Directors. See "--Stockholders Agreement" and "--Employment Agreements."
Non-officer directors of the Company, other than those directors who are affiliated with Kelso, will be paid on annual retainer of $20,000. In addition, all out-of-pocket expenses of non-officer directors, including those directors who are affiliated with Kelso, related to meetings attended will be reimbursed by the Company. Non-officer directors, including those directors affiliated with Kelso, will receive no additional compensation for their services as directors of the Company except as described above. Officers of the Company who serve as directors do not receive compensation for their services as directors other than the compensation they receive as officers of the Company.
There are no family relationships among directors and executive officers of the Company. For certain information regarding the stock ownership of the Company, see "Security Ownership of Certain Beneficial Owners and Management."
The business experience for at least the last five years of each of the directors and executive officers is as follows:
Mr. Biagini has been the Chairman, Chief Executive Officer and President of the Company since consummation of the Recapitalization. Mr. Biagini served as President and Chief Operating Officer since June 1992. From March 1988 to June 1992, Mr. Biagini was Vice President of Marketing of the Company.
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. Henry has been Senior Vice President, Systems and Operations, of the Company since July 1996. From September 1995 until June 1996, Mr. Henry was Senior Vice President, Business Development. From 1993 to 1995, he served as Chairman, Marketing Services, for Bates Advertising U.S. From 1990 to 1993, Mr. Henry was Vice Chairman and Chief Operating Officer of McCaffrey and McCall Advertising.
Mr. Hughes has been the Vice President and Chief Financial Officer of the Company since August 1995. Mr. Hughes served as Vice President and Controller of the Company from 1990 to August 1995.
Mr. Kelly has been Senior Vice President, International Operations, of the Company since July 1996. From December 1993 until June 1996, Mr. Kelly was Vice President, Systems and Operations. From November 1988 until December 1993, Mr. Kelly was Vice President, Systems and Programming.
Mr. Lengers has been the President of U.S. Textile Corporation (the Company's wholly-owned manufacturing subsidiary) and a Director of the Company since 1978, and is one of the founders of U.S. Textile Corporation.
Mr. Bynum has been a Director of the Company since the consummation of the Recapitalization. Mr. Bynum has been a Vice President of Kelso since July 1991, and was an Associate of Kelso from October 1987 to July 1991. He is a director of Cygnus Publishing, Inc., Hillside Broadcasting of North Carolina, IXL Holdings, Inc., 21st Century Newspapers, Inc. and Universal Outdoor Holdings, Inc.
Mr. Goldberg has been a Director of the Company since consummation of the Recapitalization. Mr. Goldberg has been a Managing Director of Kelso since October 1991. Mr. Goldberg served as a Managing Director and jointly managed the merger and acquisitions department at The First Boston Corporation from 1989 to May 1991. Mr. Goldberg was a partner at the law firm of Skadden, Arps, Slate, Meagher & Flom from 1980 to 1989. Mr. Goldberg is a director of 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.
Stockholders Agreement
The Stockholders Agreement provides, among other things, that, (subject to changes that may be made from and after such time with respect to the members and size of the Board of Directors in accordance with the Company's Restated Certificate of Incorporation and By-Laws), the Company's Board of Directors will consist of five members, including (i) two officers of the Company designated by Kelso from certain management stockholders of the Company, (ii) two other individuals designated by Kelso (who may be affiliates of Kelso) and (iii) the Stockholder. In addition, Kelso and the Stockholder agreed pursuant to the Stockholders Agreement that (i) so long as the Stockholder and certain of his transferees collectively own 10% or more of the outstanding Common Stock, the Stockholder shall be a director of the Company and (ii) so long as Kelso and its affiliates collectively are the largest stockholders of the Company and collectively own at least 35% of the outstanding stock of the Company, Kelso shall be entitled to elect a majority of the Board of Directors of the Company. Under the Company's Restated Certificate of Incorporation and By-Laws, the Board of Directors shall consist of not less than three (3) nor more than eight (8) members, and following consummation of the Recapitalization shall be fixed from time to time by resolution of the Board of Directors (the "Board Resolution"), or by resolution adopted by the vote of a majority of the stockholders of the Common Stock or by consent executed on behalf of such stockholders (the "Stockholder Resolution"); provided, that in the event of a conflict between the Board Resolution and the Stockholder Resolution, the Stockholder Resolution shall govern. The Stockholders Agreement also limits transfers of Common Stock and Class A Common Stock by certain parties thereto, and provides for certain tag-along, drag-along and registration rights. (The Stockholders Agreement is dated as of October 17, 1994. The original signatories thereto are the Company; the Stockholder, Joseph A. Murphy; Kelso Investment Associates V, L.P.; Kelso Equity Partners V, L.P.; as well as John F. Biagini, CEO of the Company and Hans Lengers, President of U.S. Textile Corporation.)
ITEM 11.
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 - -------------------------- Long-Term Annual Compensation Compensation ------------------- ------------
Securities All Underlying Other Name Year Salary Bonus(b) Options(c) Compensation - ---- ---- ------ -------- ---------- ------------ John F. Biagini 1997 $372,745 $500,000 -- $ 7,119(a) Chairman of the Board, 1996 352,794 400,000 94,676 7,164(a) Chief Executive Officer 1995 340,622 250,000 -- 7,182(a) and President
Hans Lengers 1997 423,754 -- -- 2,230(a) President, U.S. Textile 1996 419,439 -- 47,339 1,789(a) Corporation 1995 402,663 -- -- 1,800(a)
Robert M. Henry 1997 261,146 53,700 -- -- Senior Vice President, 1996 253,869 16,500 17,344 -- Systems and Operations 1995 74,687 -- -- --
William J. Kelly 1997 232,551 40,000 -- 7,119(a) Senior Vice President, 1996 222,842 30,000 17,344 7,164(a) International Operations 1995 210,652 24,250 -- 7,182(a)
Arthur Hughes 1997 220,615 50,000 -- 7,119(a) Vice President and 1996 159,587 50,000 21,322 7,164(a) Chief Financial Officer 1995 133,786 34,200 -- 4,833(a)
- ---------------- (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.
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 Stock purchased by Messrs. Biagini and Lengers. The value of the restricted shares of Common Stock and PIK Preferred 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 Messers. Biagini and Lengers which resulted in net proceeds to the Company of $190,000.
FISCAL YEAR-END OPTION VALUES
Number of Securities Underlying Unexercised Value of Unexercised Options at In-the-Money Options December 31, 1997 (#) at December 31, 1997 ($) ---------------------- ------------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable - ---- ------------------------- ------------------------- John F. Biagini 0/94,676 0/5,731,391 Hans Lengers 0/47,339 0/2,865,728 Arthur Hughes 0/21,322 0/1,146,265 William J. Kelly 0/17,344 0/1,146,265 Robert Henry 0/17,344 0/1,146,265
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, 1997 was based on a valuation completed by an independent appraiser and reviewed by management for reasonableness.
No options were granted or exercised during 1997.
Employment Agreements
In August 1980, Hans Lengers entered into an Employment Agreement with the Company's manufacturing subsidiary, U.S. Textile Corporation ("U.S. Textile"), pursuant to which he is employed as President and Chief Executive Officer of U.S. Textile and to manage and operate its business and affairs for his lifetime, such agreement having been amended on September 12, 1994. Mr. Lengers is not entitled to receive compensation upon the voluntary termination of his employment with U.S. Textile. In addition, the Company may abrogate the terms and conditions of the Employment Agreement for good cause as defined by the law of North Carolina, and in any event, the Employment Agreement will terminate upon Mr. Lengers' death, adjudicated incompetency, bankruptcy or physical or mental inability to perform his duties thereunder. The agreement provides for a base salary of $5,000 per month and additional compensation in the amount that 25.0% of the U.S. Textile net profits exceed such base compensation, such that the sum of the base compensation and this additional compensation does not exceed $250,000 per annum, adjusted each year for cost of living increases. The Consumer Price Index for Urban Wage Earners and clerical workers is used as the index to compute cost of living increases. The ceiling for Mr. Lengers' salary in 1996 was $419,439. In addition, Mr. Lengers has agreed during the time of his employment not to devote any of his time and efforts to the affairs of any other business in direct competition with U.S. Textile.
In September 1995, Robert M. Henry entered into an Executive Employment Agreement with the Company pursuant to which he is employed as Senior Vice President, Systems and Operations of the Company. The term of the agreement is indefinite. The agreement provides for an initial base salary of $250,000. In addition, Mr. Henry is entitled to receive a bonus the amount of which is based on achieving objectives defined by the President and the performance of the Company against annual corporate targets. Mr. Henry is also entitled to participate in all standard employee benefits provided by the Company, to use an automobile provided by the Company, and to participate in the Company's Stock Option Plan on terms and conditions enjoyed by other executive officers.
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, President 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.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 15, 1998 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.
Number of Percentage of Shares of Shares of Name and Address of Common Common Stock Beneficial Owner Stock Outstanding - ------------------- --------- -------------
Kelso Investment Associates V, L.P. (a)(b)........ 995,932 70.71% Kelso Equity Partners V, L.P. (a)(b).............. 995,932 70.71% Joseph S. Schuchert(b)............................ (d) (d) Frank T. Nickell(b)(c)............................ (d) (d) 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 20.77% John F. Biagini(f)(g)(h).......................... 23,681 1.68% Hans Lengers(f)(g)(h)............................. 11,841 .84% William J. Kelly(f)(g)............................ 188 .01% Robert Henry(f)(g)................................ 942 .07% Arthur C. Hughes(f)(g)............................ 471 .03% All directors and executive officers of the Company as a group(f)(g).......................... 332,170 23.58% - --------------- (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.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Set forth below is a summary of certain agreements and arrangements entered into by the Company and related parties in connection with the Recapitalization.
Investor Relationships
Kelso affiliates beneficially own 70.7% of the shares of common equity of the Company as described under "Security Ownership of Certain Beneficial Owners and Management". The Company has agreed to indemnify Kelso and its affiliates against certain claims, losses, damages, liabilities and expenses which may arise in connection with the transactions contemplated by the Recapitalization Agreement. The Company has also agreed to pay Kelso an annual fee of $262,500 each year for financial advisory services and to reimburse it for out-of-pocket expenses incurred, and to indemnify it against certain claims, losses, damages, liabilities and expenses which may arise, in connection with rendering such services. Kelso's out-of-pocket expenses in connection with its services rendered during 1997 and 1996 were approximately $8,000 and $5,000, 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).
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.
PART IV
ITEM 14.
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.
EXHIBITS INCORPORATION BY REFERENCE -------- --------------------------
3.1 Restated Certificate of Exhibit 3.1 to Registration Incorporation of the Statement No. 33-87392 on Form S-1 Company dated May 15, 1995
3.2 Certificate of Exhibit 3.2 to Registration Designation, Powers, Statement No. 33-87392 on Preferences and Rights of Form S-1 Dated May 15, 1995 Pay-in-Kind Preferred Stock
3.3 Amendment to the Restated Exhibit 3.3 to Registration Certificate of Statement No. 33-87392 on Incorporation of Form S-1 dated May 15, 1995 the Company
3.4 Amendment to the Restated Exhibit 3.1 to Report 10-Q for Certificate of the quarter ended Incorporation of 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 Exhibit 4.1 to Registration October 17, 1994 between Statement No. 33-87392 the Company and United on Form S-1 dated May 15, 1995 States Trust Company of New York, as Trustee
4.2 Credit Agreement dated Exhibit 4.1 to Registration Statement as of October 17, 1994, No. 33-87392 on Form S-1 dated among the Company; 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 Agreement dated as of November 20, 1997 among the Company; various lending institutions and Bankers Trust Company, as Agent
EXHIBITS INCORPORATION BY REFERENCE -------- --------------------------
10.1 Executive Employment Exhibit 10.2 to Registration Agreement between Statement No. 33-87392 on Form Hosiery Corporation of S-1 dated May 15, 1995 America, Inc. and Arthur C. Hughes, dated as of August 3, 1992
10.2 Employment Agreement Exhibit 10.3 to Registration between U.S. Textile Statement No. 33-87392 on Form Corporation and Hans 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 Exhibit 10.4 to Registration Agreement between the Statement No. 33-87392 on Form Company and Robert J. S-1 dated May 15, 1995 Mooney, dated as of September 16, 1993
10.4 Executive Employment Exhibit 10.4 to Form 10-K dated Agreement between the March 26, 1996 Company and Robert M. Henry, dated as of August 7, 1995
10.5 Management Stock Exhibit 10.5 to Form 10-K dated Subscription March 26, 1996 Agreement dated August 14, 1995
10.6 Stock Option Plan Exhibit 10.3 to Form 10-Q dated August 12, 1996
10.7 Executive Employment Exhibit 10.1 to Form 10-Q dated Agreement between the November 12, 1996 Company and Suzanne M. Roper, dated as of July 30, 1996
*21.1 Subsidiaries of the Registrant
*27.0 Financial Data Schedule
* Filed herewith.
B. Reports on Form 8-K filed during the quarter ended December 31, 1997:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 24th day of March, 1998.
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 24th day of March, 1998.
Signatures Title - ---------- -----
/s/ JOHN F. BIAGINI ______________________________ Chairman of the Board, Chief Executive John F. Biagini Officer 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
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, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and have issued our report thereon dated March 6, 1998; 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 6, 1998
S-1
SCHEDULE I
S-2
EXHIBIT INDEX
EXHIBITS --------
4.3 Amended and Restated Credit Agreement dated as of November 20, 1997 among the Company; various lending institutions and Bankers Trust Company, as Agent
21.1 Subsidiaries of the Registrant
27.0 Financial Data Schedule