<PAGE>
As filed with the Securities and Exchange Commission on June 28, 1999
Registration No. 333-07197
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
AMENDMENT NO. 2
to
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
--------------
HCI Direct, Inc.
(Formerly, Hosiery Corporation of America, Inc.)
(Exact Name of Registrant as Specified in Its Charter)
--------------
Delaware 2251 36-0782950
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
3369 Progress Drive
Bensalem, Pennsylvania 19020
(215) 244-9600
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------
John F. Biagini
Chief Executive Officer
Hosiery Corporation of America, Inc.
3369 Progress Drive
Bensalem, Pennsylvania 19020
(215) 244-9600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
Gregory A. Fernicola Peter J. Loughran
Skadden, Arps, Slate, Meagher & Flom Debevoise & Plimpton
LLP 875 Third Avenue
919 Third Avenue New York, New York 10022
New York, New York 10022 (212) 909-6000
(212) 735-3000
--------------
Approximate date of commencement of the proposed sale to the public: As soon
as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act"), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of each Class of Aggregate Amount of
Securities to be Registered Offering Price(1) Registration Fee(2)
- --------------------------------------------------------------------------------
<S> <C> <C>
Common stock, $.01 par value............. $184,000,000.00 $3,197.00(3)
</TABLE>
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- --------------------------------------------------------------------------------
(1) Includes common stock issuable upon exercise of the underwriters' over-
allotment option.
(2) The registration fee has been calculated in accordance with Rule 457(o)
under the Securities Act.
(3) $59,482.76 paid on June 28, 1996.
--------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act, or until the Registration Statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated June 28, 1999.
10,000,000 Shares
HCI Direct, Inc.
Common Stock
-----------
This is an initial public offering of shares of common stock of HCI Direct,
Inc. All of the 10,000,000 shares of common stock are being sold by HCI Direct.
Prior to this offering, there has been no public market for the common stock.
It is currently estimated that the initial public offering price per share will
be between $15.00 and $17.00. HCI Direct intends to list the common stock on
the New York Stock Exchange under the symbol "HCD".
See "Risk Factors" beginning on page 9 to read about factors you should
consider before buying shares of the common stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discount........................................... $ $
Proceeds, before expenses, to HCI Direct ....................... $ $
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 1,500,000 shares from HCI Direct, affiliates and designees of Kelso,
and a current stockholder at the initial public offering price less the
underwriting discount.
-----------
The underwriters expect to deliver the shares against payment in New York,
New York on , 1999.
Goldman, Sachs & Co. Bear, Stearns & Co. Inc.
BancBoston Robertson Stephens
First Union Capital Markets Corp.
-----------
Prospectus dated , 1999.
<PAGE>
[Front and back cover pages: samples of our direct mail solicitation materials
and image of our Web site]
<PAGE>
PROSPECTUS SUMMARY
This summary may not contain all the information that may be important to
you. You should read the following summary together with the more detailed
information and the consolidated financial statements and related notes
appearing elsewhere in this prospectus before making an investment decision.
The terms "HCI Direct", "our", "we" and "us" as used in this prospectus refer
to HCI Direct, Inc. and its consolidated subsidiaries, unless we indicate
otherwise or the context otherwise requires. Unless otherwise specifically
stated, the information in this prospectus does not take into account the
underwriters' exercise of the option they have been granted to purchase
additional shares in the offering. The information in this prospectus and the
accompanying consolidated financial statements have been retroactively restated
to reflect a stock split of our common stock and Class A common stock of
approximately 8.7 to 1 effected on June 24, 1999. The stock split was based on
an assumed offering price of $16.00 per share, the midpoint of the price range
on the cover page of this prospectus. If the actual price differs, the stock
split will be appropriately adjusted.
Our Business
We are a direct marketing company that uses sophisticated statistical
modeling techniques and innovative marketing strategies designed to accurately
and efficiently target and acquire profitable customers. We also apply these
techniques and strategies to retain existing customers and to increase our
sales per customer. Currently, we market and distribute women's hosiery in
North America and Europe through a continuous product shipment or "continuity"
program.
Our direct marketing program works as follows:
. To identify potential new customers, we conduct direct mail tests using
our proprietary in-house database of more than 75 million mail order
buyers, as well as customer lists rented from other direct marketing
companies. From the results of these tests, we develop statistical
models designed to accurately predict response, retention and payment
rates of potential new customers.
. Using these models, we then mail specially priced, introductory hosiery
offers to attract new customers. First time or "front end" customers are
those that request and receive an introductory shipment.
. Front end customers who elect to receive additional hosiery at full
price become repeat or "back end" customers in our continuity program.
Typically, back end customers receive shipments of hosiery every four to
six weeks. We have developed loyal back end customers by conveniently
providing quality, attractively priced hosiery marketed under our
Silkies(R) brand name. Back end customers provide the majority of our
revenues and gross profit.
We began selling women's hosiery products in the United States in 1974.
Since 1996, we have expanded our operations into Canada, the United Kingdom,
Germany and France, and expect to expand into Japan next year. We continue to
evaluate expansion into other international markets. We are also evaluating the
application of our modeling techniques and marketing strategies to new product
lines and the Internet. We currently manufacture most of our hosiery in our own
U.S. manufacturing facilities.
Our historical operating results demonstrate the success of our direct
marketing program. Our net revenues grew to $198.7 million in 1998 from $118.6
million in 1994, representing a compound annual growth rate of 13.8%. Over the
same period, our adjusted operating income grew to $38.3 million from $21.7
million, representing a compound annual growth rate of 15.2%. "Adjusted
operating income" is operating income before other (income) expenses,
compensation expense related to stock options and expenses related to a
potential stock offering and acquisition. Adjusted operating income does not
purport to represent net income or net cash provided by operating activities as
those terms are defined under generally accepted accounting principles. In
addition, we have increased our market share of U.S. sheer and opaque hosiery
retail sales from approximately 3.4% in 1994 to approximately 6.3% in 1998.
3
<PAGE>
Our senior management team is comprised of executives who have extensive
experience in direct marketing and the hosiery manufacturing industry. John F.
Biagini, our Chairman and Chief Executive Officer, Philip G. Whalen, our
President and Chief Operating Officer, and Martin J. Pearson, President of our
international operations, each has more than 20 years of domestic and
international direct marketing experience. Hans L. Lengers has been President
of our wholly owned manufacturing subsidiary since 1978.
Our Growth Strategy
We plan to capitalize on our modeling techniques and marketing strategies
to profitably grow our existing businesses and to expand into new markets and
products.
Grow Our Existing North American Business. We plan to continue to add new
customers by identifying and testing new customer lists, offer terms,
presentation formats, and creative marketing and distribution approaches. To
increase sales to and profitability from our back end customers, we intend to
continue to introduce higher priced, higher margin products, such as our Ultra
and Shaper styles. We have increased our net revenues from back end customers
in North America from $91.4 million in 1994 to $138.9 million in 1998,
representing a compound annual growth rate of 11.1% over this period.
Expand Our Existing International Business. Building on our experience in
North America, we are actively pursuing growth opportunities in the United
Kingdom, Germany and France. In January 1996, we started our international
operations in the United Kingdom. Through the end of the first quarter of 1999,
we have received orders from approximately 3.9 million U.K. customers. In 1998,
we had U.K. revenues of $18.8 million and operating income of $1.9 million. We
commenced operations in Germany in January 1998 and in France in February 1999.
Explore Other International Markets. Based on our favorable test marketing
results, we expect to commence operations in Japan next year. We continue to
evaluate and test additional international markets to identify growth
opportunities. We plan to continue targeting international markets that have
reliable mail delivery systems, accessible mailing lists, strong customer
payment rates and existing demand for hosiery.
Extend Our Product Lines. We continue to evaluate opportunities to add new
product lines within the leg wear market. For example, in July 1999, we will
introduce a new product line, Little Silkies tights, for girls aged 3 to 12. We
are also exploring other opportunities, such as marketing and distributing
men's and women's socks and licensing hosiery brands from third parties. We
plan to explore adding new product lines outside the leg wear market that may
be suitable for direct mail marketing and a continuity program. For example, we
have test marketed a continuity lingerie program which has produced encouraging
results. In addition, we are considering extending our product lines by
entering into joint ventures or brand licensing arrangements with established
manufacturers and retailers.
Establish Our Internet Channel. As a complement to our existing direct
marketing program, we launched a Web site at www.silkies.com in March 1999 on
which customers can place online orders. We have designed proprietary software
that helps us test and apply our statistical modeling techniques on our Web
site. We have developed an integrated order and re-order capability through
which we implement our continuity program online.
The information on our Web site is not part of this prospectus.
----------------
We were incorporated in Delaware in 1979. Our principal executive offices
are located at 3369 Progress Drive, Bensalem, Pennsylvania 19020. Our telephone
number is (215) 244-9600.
Silkies(R), Sheer Charm(R), Shapely Perfection(R), Silkies Ultra(R),
Sophisticated Intimates(R) and TLC(R) are registered trademarks of HCI Direct.
4
<PAGE>
The Offering
Unless otherwise specifically stated, all references in this prospectus to
"common stock" include the Class A common stock which will convert into common
stock on a one-for-one basis prior to completion of the offering.
<TABLE>
<C> <S>
Shares offered by HCI Direct.............. 10,000,000 shares
Shares outstanding after the offering(1).. 22,239,621 shares
Use of proceeds........................... We intend to use the estimated net
proceeds from the offering of
$147.6 million primarily to
repurchase preferred stock and to
repay indebtedness.
Proposed New York Stock Exchange Symbol... "HCD"
</TABLE>
- --------
(1) Excludes 2,644,316 shares of common stock issuable upon exercise of
outstanding options under our stock option plan at June 25, 1999 and
includes 62,502 shares of common stock that we will repurchase from holders
of our payment-in-kind preferred stock upon completion of the offering.
Related Transactions
We are undertaking the following transactions in connection with the
offering:
Repurchase our payment-in-kind preferred stock. We will repurchase all of
our outstanding payment-in-kind preferred stock for a price equal to the
aggregate liquidation preference at the time of the closing of the offering. As
of March 27, 1999, the aggregate liquidation preference of the payment-in-kind
preferred stock was approximately $107.4 million, including approximately $69.4
million of cumulative undeclared dividends. Approximately $0.5 million of the
payment-in-kind preferred stock is classified as redeemable equity securities
in our financial statements. In connection with this repurchase, we will also
repurchase 62,502 shares of common stock from affiliates of Kelso, designees of
Kelso, members of our management and certain other stockholders for about $1.0
million.
Tender for our senior subordinated exchange notes. We have offered to
repurchase all of our outstanding 13 3/4% senior subordinated exchange notes
through a tender offer. In connection with the tender offer, we asked
noteholders for their consent to amend the indenture that governs the notes to
eliminate covenants restricting or limiting such things as incurring debt,
selling assets, paying dividends or repurchasing stock, and making investments.
On June 24, 1999, the consent solicitation expired. As of that date, holders of
100% of the outstanding notes had tendered their notes and consented to the
proposed amendments to the indenture. These tenders and consents can no longer
be withdrawn or revoked. On June 25, 1999, we and the trustee signed a
supplemental indenture to reflect the amendments that will become operative
upon our acceptance of the tender of the notes. We expect to accept the tender
of the notes immediately prior to the closing of this offering and expect to
pay the holders of the notes approximately $80.6 million. This amount includes
a tender premium, a consent payment and accrued interest.
Enter into a new credit facility and repay our existing credit facility. We
will enter into a new credit facility and repay all outstanding indebtedness
under our existing credit facility (approximately $67.2 million as of June 24,
1999). We entered into a commitment letter with Bankers Trust Company for the
new credit facility on June 25, 1999.
Convert our non-voting Class A common stock. All of our Class A common
stock will convert into common stock on a one-for-one basis.
5
<PAGE>
Terminate the financial advisory services agreement with Kelso. In 1994, we
entered into a financial advisory services agreement with Kelso & Company.
Under this agreement, we pay Kelso an annual fee of $262,500 for financial
advisory services and reimburse Kelso for out-of-pocket costs incurred. We
expect that, prior to completion of the offering, we will terminate this
agreement by making a one-time payment of $3.2 million to Kelso.
Risk Factors
An investment in shares of our common stock involves a number of risks. You
should carefully consider the information under "Risk Factors" beginning on
page 9 and all of the information in this prospectus before making an
investment in our common stock.
6
<PAGE>
Summary Consolidated Financial And Other Data
The information below presents selected historical and pro forma financial
information for our business. You should carefully read this information
together with (1) the other information contained under the captions
"Capitalization", "Pro Forma Consolidated Financial Statements", "Selected
Consolidated Financial and Other Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and (2) the
consolidated financial statements and the related notes included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended
--------------------------------------------------------- ----------------------
March 28, March 27,
1994 1995 1996 1997 1998 1998 1999
--------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except share, per share and per customer data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net revenues........... $ 118,560 $ 136,299 $ 162,763 $ 178,682 $ 198,681 $ 43,678 $ 57,145
Cost of sales.......... 52,485 60,982 75,184 82,119 91,352 21,736 29,141
Administrative and
general expenses...... 13,616 10,200 11,404 12,121 13,694 3,457 3,906
Provision for doubtful
accounts.............. 5,643 7,788 10,057 10,791 11,536 3,128 4,745
Marketing costs........ 15,542 17,442 22,055 30,538 36,585 8,360 10,912
Coupon redemption
costs................. 6,397 5,969 4,140 3,671 3,843 1,065 1,087
Depreciation and
amortization.......... 3,141 2,493 2,996 3,059 3,405 774 864
Compensation related to
stock options......... -- -- 22,938 -- -- -- --
Expenses related to
potential stock
offering and
acquisition........... -- -- 1,587 -- -- -- --
Other (income)
expenses.............. 123 (2) (41) 529 186 (4) 256
--------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income....... $ 21,613 $ 31,427 $ 12,443 $ 35,854 $ 38,080 $ 5,162 $ 6,234
Interest expense....... 4,811 19,749 18,466 18,109 16,632 4,074 4,062
Net income (loss)...... $ 9,746 $ 7,496 $ (4,306) $ 11,593 $ 13,464 $ 697 $ 1,352
========= ========== ========== ========== ========== ========== ==========
Basic and diluted net
income (loss) per
share(1).............. $ 1.71 $ (0.28) $ (1.47) $ (0.47) $ (0.56) $ (0.40) $ (0.35)
========= ========== ========== ========== ========== ========== ==========
Basic and diluted
weighted average
shares................ 4,550,477 12,188,879 12,250,546 12,250,546 12,245,866 12,250,546 12,239,621
========= ========== ========== ========== ========== ========== ==========
Pro Forma Data(2):
Interest expense....... $ 9,882 $ 2,473
Net income............. $ 17,812 $ 2,378
========== ==========
Net income per share
Basic.................. $ 0.80 $ 0.11
========== ==========
Diluted................ $ 0.76 $ 0.10
========== ==========
Weighted average shares
Basic.................. 22,245,869 22,239,621
========== ==========
Diluted................ 23,530,098 23,566,277
========== ==========
Other Data:
Adjusted operating
income(3)............. $ 21,736 $ 31,425 $ 36,927 $ 36,383 $ 38,266 $ 5,158 $ 6,490
Number of
solicitations......... 30,557 43,267 52,632 77,126 91,571 44,194 44,660
Response rate(4)....... 12.3% 11.4% 12.5% 9.3% 7.6% 4.7% 5.9%
Total front end
shipments............. 3,753 4,951 6,596 7,194 6,956 2,340 2,829
Total back end
shipments............. 6,114 6,619 7,792 8,597 9,240 1,918 3,322
Number of active
customers(5).......... 822 964 1,199 1,316 1,350 1,419 2,050
Net revenue per active
customer(5)........... $ 144.19 $ 141.37 $ 135.75 $ 135.79 $ 147.21 $ 30.78 $ 27.88
Adjusted operating
income per active
customer(5)........... $ 26.44 $ 32.59 $ 30.80 $ 27.65 $ 28.35 $ 3.63 $ 3.17
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
As of March 27, 1999
-----------------------
Historical Pro Forma(6)
---------- ------------
(in thousands)
<S> <C> <C>
Consolidated Balance Sheet Data:
Working capital........................................ $ 3,048 $ 28,654
Total assets........................................... 138,165 136,438
Total debt............................................. 148,288 124,231
Stockholders' deficit.................................. (58,776) (27,676)
</TABLE>
- --------
(1) In determining net income (loss) per share, net income (loss) has been
reduced by undeclared preferred stock dividends from our payment-in-kind
preferred stock, all of which is to be repurchased upon the closing of the
offering, and the accretion of redeemable preferred stock to additional
paid-in capital as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended
-------------------------------------- -------------------
March 28, March 27,
1994 1995 1996 1997 1998 1998 1999
------ ------- ------- ------- ------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Undeclared preferred
stock dividends....... $1,948 $10,839 $13,602 $17,215 $20,234 $5,617 $5,648
Accretion of redeemable
preferred stock ...... -- 52 84 104 121 28 28
</TABLE>
(2) Gives effect to the offering and the related transactions as if they
occurred on the first day of the period presented. See "Pro Forma
Consolidated Financial Statements".
(3) "Adjusted operating income" is operating income before other (income)
expenses, compensation expense related to stock options and expenses
related to a potential stock offering and acquisition. Adjusted operating
income does not purport to represent net income or net cash provided by
operating activities as those terms are defined under generally accepted
accounting principles.
(4) "Response rate" is equal to the number of front end shipments divided by
the number of solicitations, without giving effect to returns. During 1997
and 1998, we modified our solicitation materials. See "Business--Government
Regulation".
(5) "Active customers" is the average number of monthly shipments during the
relevant period.
(6) Gives effect to the offering and the related transactions as if they had
occurred on March 27, 1999. See "Pro Forma Consolidated Financial
Statements".
8
<PAGE>
RISK FACTORS
An investment in our common stock is very risky. You should carefully
consider the following information about these risks and all of the information
in this prospectus before buying shares of our common stock.
Government regulation may adversely affect our business.
Our direct mail operations are currently subject to regulation by the
United States Postal Service, the Federal Trade Commission and various state,
local and foreign consumer protection and other regulatory authorities. In
general, these regulations govern the following aspects of our direct mail
operations:
. the manner in which orders may be solicited;
. the form and content of promotional materials;
. the information which must be provided to prospective customers; and
. the manner in which customers may be billed and the way outstanding
bills are collected.
From time to time, we have received inquiries from the FTC, various state
regulatory authorities, self-regulatory agencies and trade associations
concerning aspects of our promotional materials, including whether the terms of
our promotional offers are sufficiently disclosed in these materials.
As a result of a lawsuit brought by the FTC, the Federal District Court for
the Eastern District of Pennsylvania issued a consent injunction in 1984 that
specifies rules we must follow in conducting our mail order business. The
consent injunction permanently enjoins us from violating various FTC and Postal
Service laws and regulations. As a result of these inquiries, in 1984 we
adopted revised promotional materials. We believe but cannot assure you that
these modifications and our current and future promotional materials will meet
the concerns expressed by the FTC or be deemed to be in compliance with the
consent injunction.
In 1997, we reached an agreement with an 11-state group that imposes
specific disclosure requirements on our promotional materials and specifies
rules we must follow in our promotional materials and in conducting our mail
order business. The modifications we made to our promotional materials had a
material adverse effect on our U.S. response rates in 1997 and 1998. We do not
believe that these modifications will have a further significant negative
impact on our response rates in the future, although we cannot guarantee that
this will be the case. In addition, while we believe the modifications to our
promotional materials meet the concerns expressed by the 11-state group and
comply with the terms of that agreement, we cannot assure you that these
modifications will be deemed to be in compliance with the 11-state agreement.
Beginning in early 1999, we introduced a new promotional offer in North
America whereby the customer has the opportunity to receive one free pair of
hosiery when the individual responds to our initial solicitation. Under this
offer, if the customer does not elect to cancel future shipments, the
individual automatically becomes a participant in our continuity program. While
we believe that this new promotional offer complies with the terms of our
agreement with the 11-state group, we cannot assure you of this. Accordingly,
there may be some additional modifications that we may need to make to our
promotional materials to fully satisfy the terms of the agreement.
In 1997 and 1998, we received inquiries from the Direct Marketing
Association and the National Advertising Division of the Better Business Bureau
concerning whether the terms of our promotional offers are sufficiently
disclosed in our promotional materials. These inquiries were resolved without
any further modifications to our promotional materials.
9
<PAGE>
We have recently received formal inquiries from two states which were not
part of the 11-state group. We are in discussions with these states and are
seeking to resolve or settle these inquiries. We do not believe that the amount
of any settlement of either inquiry would be material. While we believe that we
will be able to resolve these inquiries and other future inquiries, we cannot
assure you in this regard, nor can we assure you that these or other regulators
or trade associations will not require or seek to impose additional changes to
our promotional materials or billing practices. In addition, we cannot assure
you that these additional changes to our materials or billing practices, if
any, will not be significant or will not have a material adverse effect on our
future response rates, business, financial condition or results of operations.
In addition, the direct mail marketing industry is subject to ongoing and
changing federal, state, local and foreign consumer protection, mail order and
other laws and regulations. Accordingly, it is possible that new or additional
laws or regulations could be passed at any time. While our management believes
that our promotional materials are in substantial compliance with applicable
laws and regulations, we cannot give you any assurance in that regard nor can
we assure you that additional laws or regulations will not be passed which
could have a material adverse affect on our ability to rent customer lists from
third parties, or on our future response rates, business, financial condition
or results of operations.
Our growth strategy poses several risks.
Our success in implementing our growth strategy will depend on numerous
factors, many of which are beyond our control, including economic, competitive
and regulatory conditions and uncertainties.
Response Rates and Customer Base. Our strategy for growth involves
expanding our North American and international operations by adding new front
end customers and increasing our sales to and profitability from our back end
customers. Our success in implementing this growth strategy will depend upon
our ability to identify sufficient numbers of potentially profitable customers
and to improve response rates and customer retention rates. Our customary
solicitation efforts have been and will continue to consist primarily of direct
mail marketing. The success of direct mail marketing solicitations is subject
to a high degree of risk and uncertainty, including the ability to target the
type of persons who are likely to become back end customers. Although we have
experience utilizing customer lists to efficiently target our direct mail
solicitations, we cannot assure you that we will achieve improved response
rates or be able to profitably add new customers. We also cannot assure you
that our solicitation efforts will result in a substantially increased number
of back end customers.
We incur significant upfront expenditures in connection with acquiring new
customers, including the costs associated with front end customer
solicitations. Front end customers are under no obligation to participate in
our continuity program and back end customers are under no obligation to
continue to participate in our continuity program. We cannot assure you that we
will be able to recoup our costs associated with soliciting new customers. Any
significant increase in attrition in back end customers could have a material
adverse effect on our business, financial condition or results of operations.
International Operations. The timing and success of our plans to expand in
both existing and new international markets will depend on our ability to
identify, attract and retain profitable customers in these markets and on other
factors, many of which are beyond our control. Economic, political,
governmental and regulatory conditions in these international markets could
adversely affect our ability to successfully enter or operate in these markets.
In addition, doing business outside the United States involves additional risks
such as:
. imposition of tariffs or increases in existing tariffs;
. foreign currency fluctuations with respect to the United States dollar;
. restrictions on the repatriation of profits;
. compliance with foreign laws and standards which may be burdensome and
may change unexpectedly;
10
<PAGE>
. tax rates in foreign countries may exceed those in the U.S. and our
foreign earnings may be subject to withholding requirements; and
. political uncertainties.
As a result, we cannot assure you that our attempts to expand our
international business will be successful.
Capacity Constraints. We have limited ability to significantly increase
production at our existing facilities. Our manufacturing facilities operated at
full capacity in 1998. In order to overcome short-term capacity constraints and
to provide longer term flexibility for sources of manufactured hosiery, we
purchase a portion of our manufactured hosiery requirements from two different
hosiery manufacturers in Mexico and Italy. Currently, we outsource
approximately 20% of our manufactured hosiery requirements and expect to
increase our reliance on outsourced products in 1999. Our international
outsourcing of manufacturing requirements may be adversely affected by:
. political instability resulting in a disruption of trade with foreign
countries in which our contractors or suppliers are located;
. foreign currency fluctuations with respect to the United States dollar;
and
. existing or potential duties, tariffs or quotas that may limit the
quantity of specific types of goods that may be imported into the
United States.
To date, we have been able to obtain hosiery that is approximately the same
cost and quality as our own manufactured hosiery. We cannot assure you,
however, that we will be able to continue to do so or that we will be able to
continue to make purchases in the quantities and at the delivery times required
to meet our demand.
In addition, we cannot assure you that we have anticipated all of the
changing demands which our expanding operations will impose on our
manufacturing and distribution facilities or that events beyond our control
will not result in delays in the delivery of products to our customers.
Extend Product Lines. Part of our growth strategy is to extend our product
lines inside and outside of the leg wear market using our direct marketing
program. We cannot assure you that our direct marketing program can be
successfully adapted to new products or that joint ventures or licensing
arrangements that are a part of our plan to implement this strategy will be
available on acceptable terms.
Internet Sales. One part of our growth strategy is to build our Internet
business. Accordingly, the satisfactory performance, reliability and
availability of our Web site, transaction-processing systems and network
infrastructure are critical to our ability to attract visitors to our Web site
and maintain adequate service for online customers. Revenues derived through
our Web site will depend on the number of potential customers who place orders
on our Web site and the volume of orders we fulfill. Any system interruptions
that result in the unavailability of our Web site or reduced order fulfillment
performance could adversely affect sales through our Web site. Rapid growth in
the use of and interest in the Internet and online computer services is a
recent phenomenon. We cannot assure you that acceptance and use of the Internet
will continue to develop or that a sufficiently broad base of consumers will
adopt, and continue to use, the Internet and online computer services as a
medium of commerce.
We operate in a competitive market.
The women's hosiery business is highly competitive. Competition in the
women's hosiery market is generally based on price, quality and customer
service. Our principal competitors in North America include Sara Lee Hosiery, a
division of Sara Lee Corporation, Kayser-Roth, a subsidiary of Golden Lady SpA
and Americal, a privately held U.S. concern. Sara Lee Hosiery and Kayser-Roth
11
<PAGE>
account for more than 70% of the U.S. hosiery market. An estimated 60 other
smaller U.S. manufacturers produce women's hosiery primarily under private
labels. Sara Lee Hosiery and Golden Lady SpA are also significant competitors
in the United Kingdom, France and Germany.
Although we focus exclusively on marketing our hosiery products through our
direct marketing continuity program, we compete with both manufacturers and
distributors of women's hosiery that primarily sell their products in retail
stores. Several competitors have sold their hosiery products by mail order for
many years. In addition, we compete with other direct marketing companies.
These competitors include businesses that engage in direct mail, catalog sales,
telemarketing, digital marketing through the Internet and other methods of sale
that compete for the attention and spending dollars of consumers.
Our competitors may be larger and better capitalized, may offer more varied
product assortments and may offer products with greater brand recognition than
us.
A decline in the women's sheer hosiery market may adversely affect our
business.
We currently operate primarily in the women's sheer hosiery market,
targeting adult females as customers. U.S. retail sales of sheer and opaque
hosiery declined approximately 5.1% annually from 1994 to 1998, and are
expected to continue to decline. We believe that this decline is a result of
the high cost of women's hosiery products and changes in women's fashions.
Although our hosiery sales have increased from 1994 to 1998, a continued
decline in the women's sheer hosiery market may result in reduced demand for
our products and may adversely affect our business, financial condition or
results of operations.
Our significant level of debt may adversely affect our financial health and our
ability to service our indebtedness.
As of March 27, 1999, after giving pro forma effect to this offering and
the related transactions, our total long-term indebtedness and stockholders'
deficit would have been $120.0 million and $27.7 million, respectively.
Our significant level of debt may have important consequences to our
operations, including the following:
. a substantial portion of our cash flow from operations must be
dedicated to the payment of the principal of and interest on our
indebtedness and will not be available for other purposes;
. our ability to obtain additional debt financing in the future for
solicitation and marketing expenditures, working capital, capital
expenditures, acquisitions or for other purposes may be limited;
. our level of indebtedness could limit our flexibility and our ability
to withstand competitive pressures, and may make us more vulnerable to
economic downturns; and
. since a portion of our debt bears interest at floating rates, we are
exposed to increases in interest rates.
We may incur additional indebtedness from time to time to finance
solicitation and marketing expenditures, working capital, capital expenditures,
acquisitions or for other purposes. Our ability to satisfy our debt service
obligations and comply with the covenants in our debt agreements will depend
upon our future performance, which may be affected by prevailing economic
conditions and financial, business and other factors. Many of these factors are
beyond our control.
The loss of a key member of our management may adversely affect our business.
Our success depends largely on the efforts and abilities of our key
management employees, in particular, John F. Biagini, our Chairman and Chief
Executive Officer, Philip G. Whalen, our President
12
<PAGE>
and Chief Operating Officer, Martin J. Pearson, President of our international
operations, and Hans L. Lengers, President of our wholly owned manufacturing
subsidiary. The loss of the services of one or more of these key personnel
could have a material adverse effect on our business, financial condition or
results of operations. We cannot guarantee that we will be able to replace
these individuals if their services become unavailable.
An increase in postal rates may adversely affect our business.
Our North American and international marketing operations, as well as
aspects of the direct marketing services industry generally, depend upon the
services provided by the United States Postal Service and comparable
international postal services. Any modification by these postal services of
their rate structures or any increase in public postal rates could have an
adverse effect on our business, financial condition or results of operations.
Postage costs represent a significant portion of our total costs. Our total
postal expenditures were approximately $30.5 million in 1997 and increased to
$35.7 million in 1998, representing approximately 17.1% and 18.0% of our net
revenues in 1997 and 1998, respectively. We cannot assure you, however, that in
the future we will be able to pass on increased postal costs to our customers
as we have in the past, in which case there could be a material adverse effect
on our business, financial condition or results of operations. In addition, we
may also be adversely affected by postal strikes.
Unanticipated Year 2000 problems may adversely affect our business.
As is the case with most other businesses, we are in the process of
evaluating and addressing the Year 2000 compliance of both our information
technology systems and our non-information technology systems. We have adopted
a five-phase Year 2000 compliance program which is currently 90% complete and
which we expect to be 100% complete by the end of July 1999. We plan to do
follow-up testing during the fourth quarter of 1999 to ensure that all
components have remained compliant.
We continue to make inquiries of our vendors whose Year 2000 compliance is
important to our ongoing business. Based on preliminary information we have
received, we believe that the only significant vendor that could adversely
affect our operations is the United States Postal Service. The Postal Service
assumes that it will be compliant, but if it is not, our business, financial
condition or results of operations could be materially adversely affected. We
currently do not have any contingency plans. However, we recognize the need to
develop contingency plans and expect to have these plans established where
applicable by the end of 1999.
Although we believe that our systems are currently Year 2000 compliant in
all material respects, unanticipated Year 2000 problems may arise which,
depending on the nature and magnitude of the problems, could adversely affect
our business, financial condition or results of operations.
Damage or disruption to our manufacturing facilities, distribution facilities
or management information systems may adversely affect our business.
If a disaster, such as a fire, were to destroy or significantly damage any
of our production or distribution facilities, we would have to obtain
alternative facilities from which to conduct our operations and replenish our
inventory or find alternate means of supply. This would result in increased
operating costs and significant delays in fulfillment of customer orders. Any
increased costs or delays in production could have a material adverse effect on
our business, financial condition or results of operations.
Our management information systems are critical to our operations. Any
failure or disruption in these systems could jeopardize our ability to manage
our existing operations and planned future growth and could adversely affect
our profitability.
13
<PAGE>
Legislation seeking to impose or collect additional sales or use taxes from us
may adversely affect our business.
We generally collect sales taxes only on sales to residents of the state in
which we are headquartered or where orders are fulfilled. Many states have
attempted to require that out-of-state direct marketing companies collect sales
and use taxes on the sale of merchandise shipped to their residents. In 1992,
the U.S. Supreme Court ruled that a state's imposition of use tax collection
obligations on an out-of-state mail order company, whose only contacts with the
state were the distribution of catalogs and other advertising materials through
the mail and subsequent delivery of purchase goods by parcel post and
interstate carriers, was unconstitutional. The Court stated that Congress could
enact legislation authorizing states to impose these obligations. In November
1995, the U.S. Supreme Court let stand a decision of New York's highest state
court requiring an out-of-state catalog company, whose reported contact with
New York included a limited number of visits by sales employees, to collect use
tax (including a retroactive assessment, plus interest) on its mail order sales
in New York. If Congress enacts legislation permitting states to impose sales
or use tax obligations on out-of-state direct marketing companies or if we are
otherwise required to collect additional sales or use taxes, these obligations
would make it more expensive to purchase our products and would increase our
administrative costs. This may have a material adverse effect on our business,
financial condition or results of operations.
In addition, although we believe we have complied with all applicable tax
laws in all material respects, we cannot assure you that state tax authorities
will not choose to conduct a nexus audit, which could give rise to a
retroactive assessment for tax liabilities. State sales tax laws typically
provide for lengthy statutes of limitations, and if we were retroactively
assessed for taxes, this could have a material adverse effect on our business,
financial condition or results of operations.
Kelso will continue to have significant control over us.
Upon completion of the offering, the Kelso funds, through Kelso Investment
Associates V, L.P., and Kelso Equity Partners V, L.P., will beneficially own
approximately 38.8% of the outstanding shares of common stock. Because of their
large percentage of ownership, these Kelso affiliates will have significant
control over our management and policies. The level of stock ownership of the
Kelso affiliates may have the effect of deterring hostile takeovers, delaying
or preventing changes in control or changes in management, or limiting the
ability of our stockholders to approve transactions that they may deem to be in
their best interests.
There has been no prior public trading market for the common stock.
Prior to the offering, there has been no public market for the common
stock. We cannot assure you that an active public market will develop for the
common stock or that, if a market does develop, the market price will equal or
exceed the initial public offering price. The initial public offering price
will be determined by our negotiations with the representatives of the
underwriters and will not necessarily be indicative of the market price of the
common stock after the offering. The prices at which the common stock will
trade after the offering will be determined by the marketplace and may be
influenced by many factors including, among others:
. our operating and financial performance;
. the depth and liquidity of the market for the common stock;
. future sales of common stock or the perception that sales could occur;
. investor perception of our business and our prospects;
. developments in the regulation of the direct marketing industry;
. our dividend policy;
14
<PAGE>
. general economic and market conditions; and
. developments relating to the risks and uncertainties described in this
"Risk Factors" section.
Future sales of common stock may adversely affect the price of our common
stock.
The Kelso affiliates and our other current stockholders will be free to
sell any and all of the shares they own after completion of the offering,
except as described in this prospectus under the caption "Shares Eligible for
Future Sale" and to the extent permitted by applicable law. We can make no
prediction as to the effect, if any, that future sales of common stock, or the
availability of common stock for future sale, will have on the market price of
our common stock prevailing from time to time. Sales of substantial amounts of
common stock or the perception that sales may occur, could adversely affect
prevailing market prices for our common stock.
HCI Direct and our directors, executive officers, the Kelso affiliates and
our other significant stockholders have agreed not to dispose of or hedge any
of their shares of common stock or securities convertible into or exchangeable
for shares of common stock for a period of 180 days after the date of this
prospectus without the prior written consent of Goldman, Sachs & Co. The Kelso
affiliates, some of their transferees and some of our other stockholders have
the right to require us to register their shares of common stock under the
Securities Act of 1933 in order to permit the public sale of their shares. Upon
the effectiveness of the registration statement, all shares covered by the
registration statement will be freely transferable.
We do not intend to pay cash dividends.
We have not paid cash dividends since 1992 and do not expect to declare or
pay any cash dividends in the near future. Our new credit facility will contain
limitations on our ability to pay cash dividends or make other distributions in
respect of our common stock. See "Dividend Policy".
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "intend," "should," "expect," "plan,"
"anticipate," "believe," "estimate," "predict," "potential" or "continue" or
the negative of such terms or other comparable terminology.
Forward-looking statements involve known and unknown risks, uncertainties
and other factors that may cause our and the women's hosiery industry's actual
results, levels of activity, performance, achievements and prospects to be
materially different from those expressed or implied by such forward-looking
statements. These risks, uncertainties and other factors include those
identified under "Risk Factors" in this prospectus.
We are under no duty to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
after the date of this prospectus. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this prospectus might not
occur.
15
<PAGE>
USE OF PROCEEDS
Our net proceeds from the offering will be approximately $147.6 million,
after deducting estimated underwriting discounts and offering expenses. The
following information assumes an initial offering price of $16.00 per share,
which is the mid-point of the range appearing on the cover page of this
prospectus.
We intend to use our net proceeds from the offering, together with
approximately $117 million of borrowings under our new credit facility, to:
. Repurchase all of our outstanding payment-in-kind preferred stock for a
repurchase price equal to the aggregate liquidation preference at the
time of the closing of the offering. As of March 27, 1999, the
aggregate liquidation preference of the payment-in-kind preferred stock
was approximately $107.4 million, including approximately $69.4 million
of cumulative undeclared dividends. Dividends on the payment-in-kind
preferred stock accumulate at a rate of 25% per annum. As a result, the
amount of cumulative undeclared dividends and the aggregate repurchase
price as of the completion of the offering will be greater than the
amounts described above. We will also repurchase 62,502 shares of
common stock from affiliates of Kelso, designees of Kelso, members of
our management and certain other stockholders for about $1.0 million;
. Repurchase our outstanding 13 3/4% senior subordinated exchange notes
due 2002 tendered in the offer to purchase we made on June 14, 1999 and
pay the holders of these notes for their consent to eliminate
restrictive covenants in the indenture that governs the notes. As of
June 24, 1999, holders of 100% of the outstanding notes tendered their
notes and consented to the proposed amendments to the indenture. These
tenders and consents cannot be withdrawn. At the expiration of the
tender offer, we expect to pay holders of the notes approximately $80.6
million, which includes a tender premium, a consent payment and accrued
interest;
. Repay $72.3 million of outstanding indebtedness and $2.1 million of
accrued interest under our existing credit facility;
. Make a payment of $3.2 million to terminate our financial advisory
services agreement with Kelso & Company; and
. Pay approximately $2.7 million in fees and expenses related to the
establishment of a new credit facility.
We have based the amount of borrowings under our new credit facility and
the amount of indebtedness to be repaid under our existing credit facility on
the outstanding borrowings of approximately $72.3 million under our existing
credit facility as of March 27, 1999. The amounts that we will borrow and repay
will depend on the actual amount of outstanding borrowings at the time of
closing of the offering and the principal amount of senior subordinated notes
that are tendered in the tender offer. As of June 24, 1999, we had $67.2
million of outstanding borrowings under our existing credit facility, and we
expect that the outstanding borrowings will be further reduced by the time the
offering is completed. As of March 27, 1999, borrowings under our existing
credit facility bore interest at a weighted average rate of 6.7% per annum and
the revolving and term loans thereunder have a final maturity in February 2002.
If we sell shares in the over-allotment option, we will use the net
proceeds that we receive to repay debt under our new credit facility. See
"Underwriting".
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<PAGE>
DIVIDEND POLICY
We have not paid cash dividends on our common stock since 1992 and do not
anticipate paying cash dividends in the foreseeable future. We intend to retain
any future earnings for reinvestment in HCI Direct. In addition, our new credit
facility will place limitations on our ability to pay dividends or make other
distributions in respect of our common stock. Any future determination as to
the payment of dividends will be restricted by these limitations, will be at
the discretion of our board of directors and will depend on our 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, which provides that dividends are only payable out of
surplus or current net profits.
17
<PAGE>
CAPITALIZATION
The following table presents our total debt and total capitalization (1) at
March 27, 1999 on an actual historical basis and (2) at March 27, 1999 as
adjusted to give pro forma effect to the sale of 10,000,000 shares of common
stock at an assumed initial public offering price of $16.00 per share (after
deducting underwriting discounts and estimated offering expenses) and the
related transactions. The following pro forma information assumes the
repurchase of all outstanding senior subordinated notes in the tender offer for
approximately 108.5% of the aggregate principal amount.
<TABLE>
<CAPTION>
March 27, 1999
-------------------
Actual Pro Forma
-------- ---------
(in thousands)
<S> <C> <C>
Total debt (including current portion):
Revolving credit facility (1)............................ $ 12,750 $ 7,052
Term loan facilities (1)................................. 59,500 110,000
Senior subordinated notes (2)............................ 68,859 --
Other debt............................................... 729 729
Capital lease obligations................................ 6,450 6,450
-------- --------
Total debt............................................. 148,288 124,231
Redeemable equity securities (3)........................... 914 --
Stockholders' deficit:
Preferred stock, $.01 par value, 12,000,000 shares
authorized; 4,000,000 shares designated as payment-in-
kind preferred stock, stated at liquidation value of $10
per share; 25% cumulative (liquidation preference of
$106.9 million at March 27, 1999), 3,748,497 shares
issued and outstanding at March 27, 1999; 0 shares
issued and outstanding pro forma(6)..................... 37,485 --
Common stock, voting, $.01 par value, 60,000,000 shares
authorized; 11,494,194 shares issued and outstanding at
March 27, 1999; 21,581,623 shares issued and 21,419,846
outstanding pro forma (4)(5)............................ 117 224
Common stock, Class A, non-voting, $.01 par value,
1,000,000 shares authorized; 657,998 issued and
outstanding at March 27, 1999; 0 shares issued and
outstanding pro forma (4)............................... 7 --
Additional paid-in capital............................... 18,730 166,614
Restricted stock (3)..................................... (384) --
Compensatory stock options outstanding................... 20,943 20,943
Accumulated deficit(6)................................... (133,598) (213,381)
Treasury stock, at cost.................................. (2,076) (2,076)
-------- --------
Total stockholders' deficit............................ (58,776) (27,676)
-------- --------
Total capitalization................................. $ 90,426 $ 96,555
======== ========
</TABLE>
- --------
(1) We intend to refinance our existing credit facility and enter into a new
credit facility in connection with the offering. Our new credit facility
will provide for borrowings of up to $135 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources". The amount of borrowings under our new
credit facility and the amount of indebtedness to be repaid under our
existing credit facility are based on the outstanding borrowings of
approximately $72.3 million under our existing credit facility as of March
27, 1999. The amounts to be borrowed and repaid will depend on the actual
amount of outstanding borrowings at the time of closing of the offering and
the principal amount of senior subordinated notes that are tendered in the
tender offer. As of June 24, 1999, we had $67.2 million of outstanding
borrowings under our existing credit facility, and we expect that the
outstanding borrowings will be further reduced by the time the offering is
completed.
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<PAGE>
(2) Assumes all noteholders tender for an aggregate purchase price of $76.0
million, including a premium of approximately $6.0 million (but not
including accrued interest of approximately $4.6 million). See "Use of
Proceeds".
(3) Upon closing of an initial public offering, the redemption obligations with
respect to the redeemable equity securities expire and the restrictions on
the restricted stock lapse. Accordingly, the pro forma information reflects
the reclassification of redeemable equity securities as common and
preferred stock and the acceleration of the recognition of approximately
$0.4 million of compensation expense with respect to the restricted stock.
See note 12 to Consolidated Financial Statements.
(4) All outstanding Class A common stock will convert into common stock on a
one-for-one basis prior to completion of the offering.
(5) We will repurchase 62,502 shares of common stock for about $1.0 million.
(6) Assumes redemption of the payment-in-kind preferred stock at a liquidation
value of $106.9 million at March 27, 1999.
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<PAGE>
DILUTION
The net tangible book value (deficit) of HCI Direct as of March 27, 1999
was approximately $(61.6) million, or $(5.03) per share of common stock. Net
tangible book value per share represents the amount of total tangible assets
less total liabilities, divided by the number of shares of common stock
outstanding as of March 27, 1999. After giving effect to the offering (assuming
an initial public offering price of $16.00 per share, which is the mid-point of
the range appearing on the cover page of this prospectus) and the related
transactions and after deducting underwriting discounts and estimated offering
expenses payable by us, the pro forma net tangible book value (deficit) as of
March 27, 1999 would have been approximately $(31.4) million or $(1.41) per
share. This represents an immediate increase in pro forma net tangible book
value of $3.62 per share to existing stockholders and an immediate dilution of
$17.41 per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $16.00
Net tangible book value (deficit) per share at March 27,
1999........................................................ (5.03)
Increase in pro forma net tangible book value per share
attributable to new investors............................... 3.62
Pro forma net tangible book value (deficit) per share after
offering...................................................... (1.41)
------
Dilution in net tangible book value per share to purchasers of
common stock in the offering.................................. $17.41
======
</TABLE>
The following table summarizes, on a pro forma basis, as of March 27, 1999,
the differences between the number of shares of common stock purchased from HCI
Direct, the aggregate cash consideration paid and the average price per share
paid by existing stockholders and new investors purchasing shares of common
stock in this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 12,239,621 55.0% $ 21,104,000 11.7% $ 1.72
New investors............. 10,000,000 45.0 160,000,000 88.3 16.00
---------- ----- ------------ -----
Total................... 22,239,621 100.0% $181,104,000 100.0%
========== ===== ============ =====
</TABLE>
The foregoing table assumes no exercise of any stock options outstanding at
March 27, 1999 and no exercise of the underwriters' over-allotment option. As
of March 27, 1999, there were outstanding options to purchase an aggregate of
1,722,361 shares of common stock. To the extent that any of these options are
exercised, there will be further dilution to the new investors.
20
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following Unaudited Pro Forma Consolidated Financial Statements have
been derived by the application of pro forma adjustments to our historical
consolidated financial statements included elsewhere in this prospectus. The
pro forma consolidated statements of operations for the fiscal year ending
December 31, 1998 and three months ended March 27, 1999 give effect to the
offering and related transactions as if these transactions were consummated as
of January 1, 1998. The pro forma consolidated balance sheet gives effect to
the offering and the related transactions as if these transactions had occurred
as of March 27, 1999. The adjustments are described in the accompanying notes.
The Unaudited Pro Forma Consolidated Financial Statements should not be
considered indicative of actual results that would have been achieved had the
offering and the related transactions been consummated on the dates indicated
and are not intended to indicate balance sheet data or results of operations as
of any future date or for any future period.
You should read the following Unaudited Pro Forma Consolidated Financial
Statements together with our historical financial statements and the related
notes included elsewhere in this prospectus.
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<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF MARCH 27, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments(a) Pro Forma
---------- -------------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ -- $ -- $ --
Accounts receivable, net................. 37,456 -- 37,456
Inventories.............................. 19,785 -- 19,785
Prepaid and other current assets......... 3,780 -- 3,780
--------- -------- ---------
Total current assets.................... 61,021 -- 61,021
Property and equipment, net .............. 17,327 -- 17,327
Deferred customer acquisition costs....... 51,067 -- 51,067
Deferred debt issuance costs, net......... 4,427 (1,727) 2,700
Goodwill, net............................. 3,702 -- 3,702
Other assets.............................. 621 -- 621
--------- -------- ---------
Total assets.............................. $ 138,165 $ (1,727) $ 136,438
========= ======== =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Borrowings under line of credit ......... $ 12,750 $(12,750) $ --
Current portion of long-term debt ....... 7,617 (5,000) 2,617
Current portion of capital lease
obligations............................. 1,575 -- 1,575
Bank overdrafts.......................... 1,909 -- 1,909
Accounts payable ........................ 8,086 -- 8,086
Accrued expenses and other current
liabilities ............................ 10,573 (5,752) 4,821
Accrued interest ........................ 2,255 (2,104) 151
Accrued coupon redemption costs ......... 4,681 -- 4,681
Deferred income taxes ................... 8,527 -- 8,527
--------- -------- ---------
Total current liabilities .............. 57,973 (25,606) 32,367
Long-term liabilities:
Long-term debt, net of current portion... 121,471 (6,307) 115,164
Capital lease obligations, net of current
portion................................. 4,875 -- 4,875
Accrued coupon redemption costs.......... 408 -- 408
Deferred income taxes.................... 11,300 -- 11,300
--------- -------- ---------
Total liabilities ...................... 196,027 (31,913) 164,114
Redeemable equity securities............. 914 (914) --
Stockholders' deficit:
Preferred stock.......................... 37,485 (37,485) --
Common stock, voting..................... 117 107 224
Common stock, non-voting................. 7 (7) --
Additional paid-in capital............... 18,730 147,884 166,614
Compensatory stock options outstanding... 20,943 -- 20,943
Accumulated deficit...................... (133,598) (79,783) (213,381)
Restricted stock......................... (384) 384 --
--------- -------- ---------
(56,700) 31,100 (25,600)
Treasury stock........................... (2,076) -- (2,076)
--------- -------- ---------
Net stockholders' deficit................ (58,776) 31,100 (27,676)
--------- -------- ---------
Total liabilities and stockholders'
deficit.................................. $ 138,165 $ (1,727) $ 136,438
========= ======== =========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Balance Sheet.
22
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(dollars in thousands)
The pro forma financial data have been derived by the application of pro
forma adjustments to our historical financial statements as of the date noted.
(a) Pro forma adjustments to the Pro Forma Consolidated Balance Sheet are
summarized in the following table (dollars in thousands) and are described
in the notes that follow:
<TABLE>
<CAPTION>
Repurchase
Conversion of Class A of Payment
Public Stock and in Kind Subordinated
Offering of Repurchase and Preferred Notes and
Common Stock Reclassification of Stock and Existing Transaction
and New Redeemable Common Credit Fees and Total Net
Borrowings (1) Equity Securities (2) Stock (3) Facility (4) Expenses (5) Adjustment
-------------- --------------------- ---------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $277,052 $(530) $(107,884) $(150,338) $(18,300) $ --
Deferred debt issuance
costs.................. -- -- -- (4,427) 2,700 (1,727)
Accrued interest........ -- -- -- (2,104) -- (2,104)
Line of credit.......... -- -- -- (12,750) -- (12,750)
Term loan-short-term.... -- -- -- (5,000) -- (5,000)
Term loan-long-term..... 117,052 -- -- (54,500) -- 62,552
Subordinated notes...... -- -- -- (68,859) -- (68,859)
Accrued expenses and
other current
liabilities............ -- -- -- (4,390) (1,362) (5,752)
Redeemable equity
securities............. -- (914) -- -- -- (914)
Preferred stock......... -- -- (37,485) -- -- (37,485)
Common stock voting..... 100 7 -- -- -- 107
Common stock, non-
voting................. -- (7) -- -- -- (7)
Additional paid in
capital................ 159,900 384 -- -- (12,400) 147,884
Accumulated deficit..... -- -- (70,399) (7,162) (2,222) (79,783)
Restricted stock........ -- -- -- -- 384 384
</TABLE>
- --------
(1)Sources and uses of cash for the transactions are as follows:
<TABLE>
<CAPTION>
(In thousands)
<S> <C>
Sources
Gross proceeds of the offering................................. $160,000
Borrowings under the new credit facility....................... 117,052
--------
Total.......................................................... $277,052
========
Uses
Underwriting discounts, commissions and offering costs......... $ 12,400
Payment made to terminate financial advisory service
arrangements.................................................. 3,200
Fees paid to establish new credit facility..................... 2,700
Repurchase of redeemable preferred stock....................... 530
Repurchase of payment-in-kind preferred stock.................. 106,884
Repayment of senior subordinated notes, including unamortized
discount of $1.1 million...................................... 70,000
Premium paid on redemption of senior subordinated notes........ 5,984
Repayment of existing credit facility.......................... 72,250
Payment of accrued interest.................................... 2,104
Repurchase of common stock..................................... 1,000
--------
Total.......................................................... $277,052
========
</TABLE>
(2) The adjustments represent the conversion of Class A non-voting stock into
common stock on a one-for-one basis, the repurchase of redeemable preferred
stock, and the reclassification of redeemable common stock to permanent
equity.
(3) The adjustments represent the repurchase of the outstanding payment-in-kind
preferred stock for an aggregate repurchase price of $106.9 million,
including approximately $69.4 million of cumulative undeclared dividends.
In connection with repurchase of the payment-in-kind preferred stock,
62,502 shares of common stock will be repurchased from affiliates of Kelso,
members of management and certain other stockholders for $1.0 million.
(4) The adjustments represent the repayment of existing indebtedness and
related accrued interest including a debt retirement premium of
approximately $6.0 million ($3.7 million after related tax effect) and
unamortized bond discount of $1.1 million ($0.7 million after related tax
effect), and assumes all note holders tender their senior subordinated
notes in the tender offer. These premiums, discounts and unamortized
deferred loan costs of $4.4 million ($2.7 million after related tax effect)
related to existing indebtedness will be written off as an extraordinary
charge upon early repayment of the existing indebtedness.
(5) The adjustments represent payments of $3.2 million ($2.0 million after
related tax effect) to terminate a financial advisory services agreement,
$0.4 million ($0.2 million after related tax effect) related to the
immediate vesting of restricted stock, $10.4 million for estimated
underwriting fees and discounts, $2.0 million of other costs associated
with the offering of common stock, and $2.7 million of estimated fees and
expenses related to the establishment of a new credit facility. The portion
of fees and expenses attributable to the new credit facility will be
recorded as debt issuance costs and will be amortized over the expected
life of the new credit facility.
23
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
For the Twelve Months Ended For the Three Months Ended
December 31, 1998 March 27, 1999
------------------------------------ ------------------------------------
Pro Forma Pro Forma
Historical Adjustments Pro Forma Historical Adjustments Pro Forma
---------- ----------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues............ $198,681 $ -- $198,681 $57,145 $ -- $ 57,145
Costs and Expenses:
Cost of sales.......... 91,352 -- 91,352 29,141 -- 29,141
Administrative and
general expenses...... 13,694 (263)(a) 13,431 3,906 (66)(a) 3,840
Provision for doubtful
accounts.............. 11,536 -- 11,536 4,745 -- 4,745
Marketing costs........ 36,585 -- 36,585 10,912 -- 10,912
Coupon redemption
costs.................. 3,843 -- 3,843 1,087 -- 1,087
Depreciation and
amortization.......... 3,405 -- 3,405 864 -- 864
Other expenses......... 186 -- 186 256 -- 256
---------- ------ ---------- ---------- ------- ----------
160,601 (263) 160,338 50,911 (66) 50,845
---------- ------ ---------- ---------- ------- ----------
Operating Income........ 38,080 263 38,343 6,234 66 6,300
Interest income........ 71 -- 71 9 -- 9
Interest expense....... 16,632 (6,750)(b) 9,882 4,062 (1,589)(b) 2,473
---------- ------ ---------- ---------- ------- ----------
Income before income tax
provision.............. 21,519 7,013 28,532 2,181 1,655 3,836
Provision for income
taxes.................. 8,055 2,665 (c) 10,720 829 629 (c) 1,458
---------- ------ ---------- ---------- ------- ----------
Net income.............. $ 13,464 $4,348 $ 17,812 $ 1,352 $ 1,026 $ 2,378
========== ====== ========== ========== ======= ==========
Pro forma net income
per share
Basic.................. $ (0.56) $ 0.80 $ (0.35) $ 0.11
========== ========== ========== ==========
Diluted................ $ (0.56) $ 0.76 $ (0.35) $ 0.10
========== ========== ========== ==========
Shares used to compute
earnings per share
Basic.................. 12,245,866 22,245,869 12,239,621 22,239,621
========== ========== ========== ==========
Diluted................ 12,245,866 23,530,098 12,239,621 23,566,277
========== ========== ========== ==========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statements of Operations.
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The pro forma financial data have been derived by the application of pro
forma adjustments to our historical financial statements for the periods noted.
The transactions will have no impact on the historical basis of our assets and
liabilities.
The pro forma adjustments to the Consolidated Statements of Operations
exclude (1) the payment made to terminate financial advisory service
arrangements provided to the Company by Kelso of $3.2 million ($2.0 million
after related tax effect); (2) the premium paid of $6.0 million ($3.7 million
after related tax effect) and $1.1 million of unamortized discount ($0.7
million after related tax effect) associated with the repayment of the senior
subordinated notes; (3) the write-off of deferred debt issuance costs of $4.4
million ($2.7 million after related tax effect) as a result of the refinancing
of the existing bank credit agreement; and (4) compensation expense of $0.4
million ($0.2 million after related tax effect) related to the immediate
vesting of restricted stock. These amounts represent non-recurring expenses
which will be recorded in the historical results of operations for the period
including the transactions.
(a) The administrative and general expenses adjustments reflects the
elimination of the arrangements with Kelso to provide financial advisory
services.
(b) The pro forma adjustments to interest expenses reflect the following:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, 1998 March 27, 1999
----------------- ------------------
(dollars in thousands)
<S> <C> <C>
Interest expense on term loan (1)... $ 8,514 $ 2,129
Commitment fee (2).................. 90 23
Amortization of debt issuance
costs(3)........................... 540 135
Less: historical interest expense
on debt repaid (4)................ (15,894) (3,876)
-------- --------
Total adjustment................. $ (6,750) $ (1,589)
======== ========
</TABLE>
(1) Represents interest on the new credit facility using an
assumed interest rate of LIBOR plus 2.25% (7.27%).
(2) Represents a 0.5% commitment fee on the unused portion of
the $25 million revolving credit facility.
(3) Represents amortization of deferred financing costs of
$2.7 million over the term of the new credit facility
(4) Represents the elimination of historical interest expense
on approximately $141.7 million of long-term debt at a
weighted average interest rate of 11.25%.
A 0.125% increase or decrease in the assumed weighted average
interest rate applicable to the new credit facility would
change the pro forma interest expense and income before taxes
by $0.2 million for the year ended December 31, 1998 and $0.04
million for the three months ended March 27, 1999.
(c) The tax effect of pro forma adjustments to income before income taxes is
based on the estimated applicable statutory tax rates of 38%.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected information below presents consolidated historical financial
information and other data for the periods indicated. The consolidated balance
sheet data as of December 31, 1997 and 1998 and the consolidated statements of
operations data for each of the three years ended December 31, 1998 have been
derived from the consolidated financial statements audited by Deloitte & Touche
LLP, independent accountants. The consolidated statement of operations data and
consolidated balance sheet data for the three months ended and as of March 28,
1998 and March 27, 1999 have been derived from unaudited financial statements,
which in our opinion contain all adjustments, consisting only of normal
recurring accruals, which are necessary for a fair statement of our financial
results for these periods. The information presented below is not necessarily
indicative of the results of our future operations. You should read the
following information together with the consolidated financial statements and
the related notes that are included elsewhere in this prospectus, "Pro Forma
Consolidated Financial Statements" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended
--------------------------------------------------------- ----------------------
March 28, March 27,
1994 1995 1996 1997 1998 1998 1999
--------- ---------- ---------- ---------- ---------- ---------- ----------
(in thousands, except shares, per share data and per customer data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Net revenues........... $ 118,560 $ 136,299 $ 162,763 $ 178,682 $ 198,681 $ 43,678 $ 57,145
Cost of sales.......... 52,485 60,982 75,184 82,119 91,352 21,736 29,141
Administrative and
general expenses...... 13,616 10,200 11,404 12,121 13,694 3,457 3,906
Provision for doubtful
accounts.............. 5,643 7,788 10,057 10,791 11,536 3,128 4,745
Marketing costs........ 15,542 17,442 22,055 30,538 36,585 8,360 10,912
Coupon redemption
costs................. 6,397 5,969 4,140 3,671 3,843 1,065 1,087
Depreciation and
amortization.......... 3,141 2,493 2,996 3,059 3,405 774 864
Compensation related to
stock options......... -- -- 22,938 -- -- -- --
Expenses related to
stock offering and
acquisition........... -- -- 1,587 -- -- -- --
Other (income)
expenses.............. 123 (2) (41) 529 186 (4) 256
Operating income....... 21,613 31,427 12,443 35,854 38,080 5,162 6,234
Interest income........ 314 378 327 90 71 37 9
Interest expense(1).... 4,811 19,749 18,466 18,109 16,632 4,074 4,062
Income (loss) from
continuing operations
before provision
(benefit) for income
taxes and cumulative
effect of accounting
change................ 17,116 12,056 (5,696) 17,835 21,519 1,125 2,181
Provision (benefit) for
income taxes.......... 6,648 4,560 (1,390) 6,242 8,055 428 829
Income (loss) from
continuing operations
before cumulative
effect of accounting
change................ 10,468 7,496 (4,306) 11,593 13,464 697 1,352
Discontinued
operations(2)......... (559) -- -- -- -- -- --
Cumulative effect of
accounting change..... (163) -- -- -- -- -- --
Net income (loss)...... $ 9,746 $ 7,496 $ (4,306) $ 11,593 $ 13,464 $ 697 $ 1,352
========= ========== ========== ========== ========== ========== ==========
Basic and diluted net
income (loss) per
share (3)............. $ 1.71 $ (0.28) $ (1.47) $ (0.47) $ (0.56) $ (0.40) $ (0.35)
========= ========== ========== ========== ========== ========== ==========
Basic and diluted
weighted average
shares................ 4,550,477 12,188,879 12,250,546 12,250,546 12,245,866 12,250,546 12,239,621
========= ========== ========== ========== ========== ========== ==========
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended
------------------------------------------------------- -------------------------
March 28, March 27,
1994 1995 1996 1997 1998 1998 1999
---------- ---------- --------- --------- --------- -------------------------
(in thousands, except shares, per share data and per customer data)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data:
Adjusted operating
income(4)............. $ 21,736 $ 31,425 $ 36,927 $ 36,383 $ 38,266 $ 5,158 $ 6,490
Number of
solicitations......... 30,557 43,267 52,632 77,126 91,571 44,194 44,660
Response rate(5)....... 12.3% 11.4% 12.5% 9.3% 7.6% 4.7% 5.9%
Total front end
shipments............. 3,753 4,951 6,596 7,194 6,956 2,340 2,829
Total back end
shipments............. 6,114 6,619 7,792 8,597 9,240 1,918 3,322
Number of active
customers(6).......... 822 964 1,199 1,316 1,350 1,419 2,050
Net revenue per active
customer(6)........... $ 144.19 $ 141.37 $ 135.75 $ 135.79 $ 147.21 $ 30.78 $ 27.88
Adjusted operating
income per active
customer(6)........... $ 26.44 $ 32.59 $ 30.80 $ 27.65 $ 28.35 $ 3.63 $ 3.17
Consolidated Balance
Sheet Data:
Working capital........ $ 3,152 $ 5,794 $ 589 $ 12,455 $ 4,555 $ 8,422 $ 3,048
Total assets........... 74,860 82,860 92,600 100,600 130,039 101,280 138,165
Total debt(1).......... 153,442 151,093 143,705 138,565 139,352 136,938 148,288
Other long-term
obligations........... 66 -- -- -- -- -- --
Redeemable equity
securities............ 45 384 768 872 885 901 914
Stockholders'
deficit(1)............ (110,266) (102,920) (83,822) (72,083) (60,162) (71,352) (58,776)
</TABLE>
- --------
(1) As part of the recapitalization completed in October 1994, we incurred
substantial indebtedness, the net proceeds of which were used to finance,
in part, the repurchase of common and preferred stock from Joseph A.
Murphy, a significant stockholder, for aggregate net consideration of
approximately $191.2 million. Accordingly, as a result of the 1994
recapitalization, interest expense and total debt significantly increased
and a significant stockholders' deficit was created. See "Certain
Relationships and Related Transactions--The 1994 Recapitalization and
Related Transactions" below.
(2) Represents the loss from discontinued operations and the loss on disposal
of discontinued operations (net of tax) related to the decision to dispose
of our Book, Bag and Overseas Divisions.
(3) In determining net income (loss) per share, net income (loss) has been
reduced by undeclared preferred stock dividends from our payment-in-kind
preferred stock, all of which is to be repurchased upon the closing of the
offering, and the accretion of redeemable preferred stock to additional
paid-in capital as follows:
<TABLE>
<CAPTION>
Year Ended December 31, Three Months Ended
-------------------------------------- -------------------
March 28, March 27,
1994 1995 1996 1997 1998 1998 1999
------ ------- ------- ------- ------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Undeclared preferred
stock dividends....... $1,948 $10,839 $13,602 $17,215 $20,234 $5,617 $5,648
Accretion of redeemable
preferred stock ...... -- 52 84 104 121 28 28
</TABLE>
(4) "Adjusted operating income" is defined as operating income before other
(income) expenses, compensation related to stock options and expenses
related to a potential stock offering and acquisition. Adjusted operating
income does not purport to represent net income or net cash provided by
operating activities as those terms are defined under generally accepted
accounting principles.
(5) "Response rate" is equal to the number of front end shipments divided by
the number of solicitations, without giving effect to returns. During 1997
and 1998, we modified our solicitation materials. See "Business--Government
Regulation".
(6) "Active customers" is the average number of monthly shipments during the
relevant period.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We sell women's hosiery exclusively through our direct mail marketing
continuity program. Our sales are a mix of front end shipments and back end
shipments to customers in the continuity program. With our direct mail
marketing continuity program, we solicit front end customers through initial
offers of specially priced hosiery. We incur significant marketing costs and a
loss on the initial offer in connection with the solicitation of front end
customers. Back end customers who continue in the continuity program and make
repeat purchases at regular prices generate the substantial majority of our net
revenues and operating income.
The following table presents information relating to our front end and back
end shipments for 1996 through 1998:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
Number of front end shipments (in millions)................... 6.6 7.2 7.0
Number of back end shipments (in millions).................... 7.8 8.6 9.2
Front end shipments as a percentage of total shipments........ 45.8% 45.6% 42.9%
Back end shipments as a percentage of total shipments......... 54.2% 54.4% 57.1%
</TABLE>
Our results in any period are generally affected by the number of
solicitations made, response rates, retention rates, net revenues per shipment
and other variables, including the number of mailings and the dates on which
such mailings are made. Accordingly, period-to-period comparability of our
results will be affected by changes in such variables. We have structured our
front end solicitation mailings so that they occur at times when we believe
response rates will be maximized. Two mailings occur in our first fiscal
quarter, one in each of the second and third fiscal quarters, and none in the
fourth fiscal quarter. As a result, we experience higher costs in the first six
months than in the second six months of the year, with highest costs in the
first fiscal quarter. See "--Quarterly Financial Data".
Net revenues include hosiery shipments, net of returns, to front end and
back end customers, as well as catalog sales of lingerie and intimate apparel
products, mailing list rentals, insert fees, computer services and bulk sales
to a former Canadian subsidiary. Cost of sales represents raw materials,
manufacturing, packaging and delivery and related postage costs. As described
in "Business--Marketing", we recently introduced a "one free pair" offer in
North America. While we expect that the new offer will increase profitability
and the number of back end customers per mailing, it is also likely to result
in higher returns and bad debt expense.
We record a provision for doubtful accounts for each shipment of hosiery.
At the end of each accounting period, we make an adjustment to reflect the
actual collection of accounts receivable and the estimated recovery of the
accounts receivable. The level of bad debt expense associated with front end
shipments and initial back end shipments of hosiery has been significantly
greater than with later back end shipments. The provision for doubtful accounts
therefore is likely to be higher in periods in which front end shipments
represent a larger portion of total shipments. The provision for doubtful
accounts is also likely to be higher under our recently introduced one free
pair offer.
Administrative and general expenses represent order processing, purchasing,
legal, accounting and corporate costs. We incur costs in connection with
obtaining new customers and regaining old customers who had previously
discontinued their participation in our continuity program. These costs are
included in cost of sales and marketing costs. The economic benefits derived
from a portion of those expenditures included in marketing costs extend to
future periods as customers make repeat purchases. As a result, we defer a
portion of certain marketing costs spent in the current period to
28
<PAGE>
future periods. These marketing costs are aggregated in each period, and
amortized on an accelerated basis based upon the estimated current year revenue
in proportion to the expected future revenue generated by these customers.
Marketing costs include both the costs that are expended currently and the
amortization of costs which were capitalized in prior periods.
We offer long-term back end customers in North America certificates which
can be redeemed for gifts. We record a provision for coupon redemption based on
historical customer redemption patterns applicable to outstanding coupons and
average gift costs. In the past, we have managed these costs by updating the
redemption catalogs with new products and by increasing the number of coupons
required to redeem gifts in order to offset our increased product cost.
Results of Operations
The following table contains specific income statement data, expressed as a
percentage of net revenues:
<TABLE>
<CAPTION>
Year Ended
December 31, Three Months Ended
-------------------- -------------------
March 28, March 27,
1996 1997 1998 1998 1999
----- ----- ----- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues......................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................... 46.2 45.9 46.0 49.8 51.0
Administrative and general
expenses.......................... 7.0 6.8 6.9 7.9 6.8
Provision for doubtful accounts.... 6.2 6.0 5.8 7.2 8.3
Marketing costs.................... 13.6 17.1 18.4 19.1 19.1
Coupon redemption costs............ 2.5 2.1 1.9 2.4 1.9
Depreciation and amortization...... 1.8 1.7 1.7 1.8 1.5
----- ----- ----- ----- -----
Subtotal......................... 77.3 79.6 80.7 88.2 88.6
----- ----- ----- ----- -----
Adjusted operating income(1)......... 22.7% 20.4% 19.3% 11.8% 11.4%
===== ===== ===== ===== =====
Operating income..................... 7.6% 20.1% 19.2% 11.8% 10.9%
===== ===== ===== ===== =====
Net income (loss).................... (2.7)% 6.5% 6.8% 1.6% 2.4%
===== ===== ===== ===== =====
</TABLE>
- --------
(1) See footnote 4 to "Selected Consolidated Financial and Other Data".
Three Month Period Ended March 27, 1999 Compared to the Three Month Period
Ended March 28, 1998
Net revenues increased by 30.8% to $57.1 million in the first quarter of
1999 from $43.7 million for the same period in 1998. Driving this increase in
net revenues were higher response rates, which improved from 5.3% in the first
quarter of 1998 to 6.4% for the same period in 1999. Additionally, as a result
of improvements to our marketing program in the United States, combined with
growth in the United Kingdom and Germany, back end shipments increased
substantially in the first quarter of 1999 to 3.3 million shipments from 1.9
million shipments for the same period in 1998. North America accounted for $7.3
million of the increase in net revenues in 1999 over 1998, and Europe accounted
for $6.2 million.
Cost of sales increased by 34.1% to $29.1 million in the first quarter of
1999 from $21.7 million for the same period in 1998. This increase was due
primarily to increased costs associated with the higher number of first and
second shipments to new customers. These initial shipments have lower margins
than subsequent shipments due to higher returns. As a percentage of net
revenues, cost of sales was 51.0% in the first quarter of 1999 compared to
49.8% for the same period in 1998.
Administrative and general expenses increased by 13.0% to $3.9 million in
the first quarter of 1999 from $3.5 million in the same period of 1998. This
increase was due primarily to increased
29
<PAGE>
personnel costs. As a percentage of net revenues, administrative and general
expenses were 6.8% in the first quarter of 1999 compared to 7.9% for the same
period in 1998.
Provision for doubtful accounts increased by 51.7% to $4.7 million in the
first quarter of 1999 from $3.1 million in the same period in 1998. This
increase is attributable primarily to changes in our front end offer. The
increase was also attributable to the higher number of first and second
shipments to new customers. These shipments typically have a higher incidence
of bad debts than shipments to back end customers beyond the third shipment. We
record the estimated bad debts at the time of shipment. As a percentage of net
revenues, bad debts were 8.3% in the first quarter of 1999 compared to 7.2% for
the same period in 1998.
Marketing costs increased by 29.8% to $10.9 million in the first quarter of
1999 from $8.4 million for the same period in 1998. This increase was due
primarily to higher spending relating to solicitations in 1999 of $1.7 million
and a $2.4 million increase in amortization expense relating to deferred
customer acquisition costs. As a percentage of net revenues, marketing costs
were 19.1% in each of the first quarters of 1999 and 1998.
Income before taxes increased to $2.2 million in the first quarter of 1999
from $1.1 million for the same period in 1998. The increase was primarily
caused by increased revenues offset by higher expenses in all profit and loss
categories incurred to generate the increased revenues. As a percentage of net
revenues, income before taxes was 3.8% in the first quarter of 1999 compared to
2.6% in the first quarter of 1998.
Net income increased to $1.4 million in the first quarter of 1999 compared
to $0.7 million for the same period in 1998. The increase was due primarily to
the increase in pretax income of $1.1 million, offset by an increased provision
for taxes of $0.4 million. As a percentage of net revenues, net income was 2.4%
in the first quarter of 1999 compared to 1.6% in the first quarter of 1998.
1998 Compared to 1997
Net revenues increased by 11.2% to $198.7 million in 1998 from $178.7
million in 1997. The increase in net revenues was attributable to a $13.6
million increase in North American net revenues, representing an increase of
8.5%, and an increase of $6.4 million in international net revenues,
representing an increase of 34.3%. The increase in net revenues in North
America was the result of stronger sales to existing customers and the
acquisition of Enchantress, a Canadian hosiery company, which accounted for
$2.2 million of the increase in 1998. The increase in international net
revenues was primarily attributable to increased front end solicitations in
Germany.
Cost of sales increased by 11.3% to $91.4 million in 1998 from $82.1
million for 1997. As a percentage of net revenues, cost of sales increased to
46.0% in 1998 versus 45.9% in 1997. The absolute increase in cost of sales was
related to increased shipments in the United States, Germany and Canada.
Administrative and general expenses increased by 13.0% to $13.7 million in
1998 from $12.1 million for 1997. Included in 1998 was severance of $0.5
million compared to none in 1997. The balance of the increase was caused by
increased personnel and higher wages. As a percentage of net revenues,
administrative and general expenses were 6.9% in 1998 versus 6.8% in 1997.
Provision for doubtful accounts increased $0.7 million or 6.9% to $11.5
million in 1998 from $10.8 million in 1997. This increase was caused by growing
the business in Germany, the Canadian acquisition and an increase in the United
States offset by lower bad debt experience in the United Kingdom. As a
percentage of net revenues, bad debts were 5.8% for 1998 versus 6.0% for 1997.
30
<PAGE>
Marketing costs increased by 19.8% to $36.6 million from $30.5 million for
1998 and 1997. A substantial portion of this increase was attributable to a
18.7% increase in front end solicitations as 14.4 million additional
solicitations were mailed in 1998 compared to 1997. In addition, this increase
was partially attributable to higher amortization of prior years' deferred
marketing costs in 1998 compared to 1997. These deferred marketing costs were
related to a 43.6% increase in solicitations in 1997 versus 1996. In 1997, 75.6
million solicitations were mailed as compared to 52.6 million in 1996. These
costs are amortized over 42 months with the greatest amortization in the first
24 months. As a percentage of net revenues, marketing costs were 18.4% in 1998
versus 17.1% in 1997.
Coupon redemption costs increased slightly to $3.8 million for 1998 from
$3.7 million for 1997. As a percentage of net revenues, redemption costs were
1.9% in 1998 versus 2.1% for 1997.
Interest expense decreased to $16.6 million for 1998 from $18.1 million for
1997. This decrease in interest expense was primarily due to less debt and
lower rates. As a percentage of net revenues, interest expense was 8.4% in 1998
versus 10.1% for 1997.
Operating income increased by 6.2% to $38.1 million in 1998 from $35.9
million in 1997. The increase in operating income was primarily the result of
increased revenue and lower interest rates offset by higher marketing costs. As
a percentage of net revenues, operating income was 19.2% for 1998 versus 20.1%
for 1997.
We had net income of $13.5 million in 1998 as compared to net income of
$11.6 million in 1997. As a percentage of net revenues, net income was 6.8% in
1998 versus 6.5% for 1997.
1997 Compared to 1996
Net revenues increased by 9.8% to $178.7 million in 1997 from $162.8
million in 1996. Net revenues from our international operations increased to
$18.7 million in 1997 from $9.0 million in 1996, representing an increase of
108.5%. This increase in international net revenues was attributable to
increased shipments in the United Kingdom and testing in France and Germany.
The balance of the increase in net revenues, $6.2 million, was generated in the
United States primarily through increased shipments for new customers.
Cost of sales increased by 9.2% to $82.1 million in 1997 from $75.2 million
for 1996. As a percentage of net revenues, cost of sales declined to 45.9% in
1997 versus 46.2% in 1996. The absolute increase in cost of sales was related
to increased shipments in the United States, United Kingdom and the test
programs in Germany and France. Manufacturing efficiencies helped offset the
costs associated with the increased shipments.
Administrative and general expenses increased by 6.3% to $12.1 million in
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 by 7.3% to $10.8 million in 1997
from $10.1 million in 1996. This increase was caused by additional first,
second and third shipments in 1997, which were up 1.1 million shipments or
10.6% higher than in 1996. These shipments typically have higher rates of
uncollectible accounts than shipments to back end customers beyond the third
shipment. As a percentage of net revenues, bad debts were 6.0% for 1997 versus
6.2% for 1996.
Marketing costs increased by 38.5% to $30.5 million from $22.1 million for
1997 and 1996. A substantial portion of this increase was attributable to
higher front end solicitations, including the start
31
<PAGE>
up in the United Kingdom, as an additional 22.9 million solicitations were
mailed in 1997 compared to 1996, representing an increase of 43.6%. Marketing
expenditures were also incurred for testing in France and Germany. In addition,
this increase was partially attributable to higher amortization of prior years'
deferred marketing costs in 1997 compared to 1996. These deferred marketing
costs were related to the 21.6% increase 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. As a percentage of net revenues, marketing costs were
17.1% in 1997 versus 13.6% in 1996.
Coupon redemption costs declined to $3.7 million for 1997 from $4.1 million
for 1996. As a percentage of net revenues, redemption costs were 2.1% in 1997
versus 2.5% for 1996. This decrease related to the issuance of new gift
catalogs in both 1996 and 1995 that have a lower average cost per gift. In
1996, we began to charge shipping and handling costs to redemption customers.
This has also lowered the cost of future redemptions and our 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
our board of directors on June 28, 1996, with an exercise price below the then
market price of our common stock, as part of a series of transactions in
contemplation of a potential initial public offering. We did not incur a stock
option compensation charge in 1997.
Expenses of $1.6 million were incurred in 1996 related to a potential stock
offering and an acquisition. Neither of these transactions was consummated and
no related charges were incurred in 1997.
Interest expense decreased to $18.1 million for 1997 from $18.5 million for
1996. This decrease in interest expense was primarily due to less debt
outstanding under the credit facility. As a percentage of net revenues,
interest expense was 10.1% in 1997 versus 11.3% for 1996.
Operating income of $35.9 million for 1997 was slightly less than the
adjusted operating income of $37.0 million for 1996. The decrease in operating
income from 1996 to 1997 was 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, adjusted operating
income, was 20.1% for 1997 versus 22.7% for 1996.
We had net income of $11.6 million in 1997 as compared to a net loss of
$4.3 million in 1996. Net income as adjusted was $11.6 million in both 1997 and
1996. As a percentage of net revenues, net income was 6.5% in 1997 versus 7.1%
(adjusted as previously detailed) for 1996.
For comparability, we have adjusted 1996 operating income and net income to
exclude stock option compensation expenses of $22.9 million and costs
associated with a potential stock offering and acquisition of $1.6 million.
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<PAGE>
Quarterly Financial Data
The following table presents summarized quarterly financial data for 1998
and 1997:
<TABLE>
<CAPTION>
March June September December
----- ----- --------- --------
(in millions)
<S> <C> <C> <C> <C>
1998
Net Revenues.................................. $43.7 $50.5 $48.0 $56.4
Gross Profit.................................. 21.9 26.3 27.5 31.6
Operating Income.............................. 5.2 8.1 11.6 13.2
Net Income.................................... 0.7 2.4 4.6 5.7
1997
Net Revenues.................................. $45.3 $49.6 $39.4 $44.4
Gross Profit.................................. 22.2 25.3 22.3 26.5
Operating Income.............................. 5.3 9.5 8.9 12.2
Net Income.................................... 0.5 3.0 2.7 5.4
</TABLE>
Liquidity and Capital Resources
Our cash requirements arise principally from the need to finance new front
end solicitations of customers, capital expenditures, debt repayment and other
working capital requirements. We financed these requirements and expect to
finance future requirements from internally generated funds and/or our credit
facility.
Three Month Period Ended March 27, 1999 Compared to the Three Month Period
Ended March 28, 1998
Working capital decreased by $1.5 million from December 31, 1998. The
decrease was caused by two mailings in the first quarter of 1999 which
increased borrowings under our credit facility, partially offset by an increase
in accounts receivable.
Net cash used in operating activities was $8.6 million for the first
quarter of 1999 as compared to $2.4 million in the first quarter of 1998. This
change was primarily due to higher increases in receivables, increases in the
payments for customer acquisition costs and a decrease in accounts payable and
accrued expenses, offset by an increase in amortization of customer acquisition
costs. Accounts receivable increased $5.2 million, or 16.3%, since December 31,
1998 and was $12.7 million, or 51.2%, higher than the same period in 1998.
Driving this increase was the substantial increase in net revenues, up $25.5
million, or 29.0%, over the six months ended March 27, 1999. In the month of
March 1999 compared to March 1998, revenues increased $7.7 million, or 48.1%.
Net cash used in investing activities to acquire property and equipment was
$0.2 million and $0.3 million for the three month periods ended March 27, 1999
and March 28, 1998, respectively.
Net cash provided by (used in) financing activities was $8.9 million and
$(1.7) million for the three month periods ended March 27, 1999 and March 28,
1998, respectively. In the first quarter of 1999, we had net borrowings on our
revolving credit facility of $9.4 million, while in the same period of 1998 we
had no net borrowings on our revolving credit facility. The amount available to
borrow at March 27, 1999 was $11.4 million. In the first quarter of 1999 and
for the same period of 1998, we made payments on bank and other financing
totaling $0.3 million and $1.3 million, respectively.
On March 26, 1999, our existing credit agreement was amended to revise
certain financial covenants as of December 31, 1998. Under the amended
agreement, we were in compliance with all debt covenants as of December 31,
1998.
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<PAGE>
Three Years Ended December 31, 1998
In 1998, 1997 and 1996, capital expenditures were $1.2 million, $0.9
million and $2.5 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, we expect to expend
approximately $2.5 million in 1999 for additional equipment. These capital
expenditures will be financed through internal sources or the assumption of
capital leases.
Net cash provided by operating activities was $4.6 million in 1998 as
compared to $11.2 million in 1997 and $7.4 million in 1996. The decrease from
1997 to 1998 was caused by the increase in the payments for deferred customer
acquisition costs offset by higher amortization of these costs and the increase
in prepaid costs for the January 1999 solicitation. The increase from 1996 to
1997 was primarily due to the change in inventory offset by the decrease in
accounts payable.
Net cash used in investing activities was $5.1 million in 1998, $0.9
million in 1997 and $2.5 million in 1996. The increase from 1997 to 1998 was
primarily due to the acquisition of Enchantress in 1998.
During 1998, 1997 and 1996, we used $3.8 million, $7.9 million and $9.9
million, respectively, in financing activities. During 1997, a new credit
agreement was reached with our bank lenders which provided $65 million in term
debt at a substantially lower interest rate (7.5% versus 8.8%), an increase in
our line of credit from $15 million to $20 million and a change in the
covenants relating to the credit agreement. Net payments on bank and other
financing, including capital lease obligations and excluding the termination of
the prior term debt, totaled $5.3 million, $7.3 million and $9.9 million in
1998, 1997 and 1996, respectively.
New Credit Facility
Prior to completion of the offering, we intend to enter into a new five-
year credit facility. On June 25, 1999, we entered into a commitment letter
with Bankers Trust Company regarding this new credit facility. We expect that
the new credit facility will provide for a $110 million term loan facility and
a $25 million revolving credit facility. We expect that the new credit facility
will require quarterly repayments of principal under the term loans. We expect
to have customary interest rate options to select a rate equal to a margin over
prime, federal funds or LIBOR. We expect the new credit facility to contain
customary financial and operating covenants and events of default. We expect
the borrowings under the new credit facility to be secured by most of our
assets and will be guaranteed by our principal subsidiaries.
Legal Proceedings and Government Regulation
We are involved in, or have been involved in, litigation arising in the
normal course of our business. We cannot predict the timing or outcome of these
claims and proceedings. Currently, we are not involved in any litigation which
we expect to have a material effect on our business, financial condition or
results of operations and cash flows.
Our direct mail operations are currently subject to regulation by the
United States Postal Service, the Federal Trade Commission and various state,
local and foreign consumer protection and other regulatory authorities. See
"Business--Government Regulation".
Year 2000
As in the case with most other businesses, we are in the process of
evaluating and addressing Year 2000 compliance of both our information
technology systems and our non-information technology systems. Year 2000
compliance efforts are designed to identify, address, and resolve issues that
may be created by programs written to run on microprocessors which reference
years as two digit fields rather than four. Any such programs may recognize a
date using "00" as the year 1900 rather than 2000. If this situation occurs,
the potential exists for system failure or miscalculations by computer
programs.
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<PAGE>
We have adopted a five-phase Year 2000 program consisting of Phase I--
identification and ranking of all the components of our systems, equipment and
suppliers that may be vulnerable to Year 2000 problems; Phase II--assessment of
items identified in Phase I; Phase III--remediation or replacement of non-
compliant systems and components and determination of solutions for non-
compliant suppliers; Phase IV--testing of systems and components following
remediation; and Phase V--developing contingency plans to address the most
reasonably likely worst case Year 2000 scenarios. We have completed Phases I,
II, and III. Phase IV is complete for all critical business applications. Of
the non-critical items, Phase IV is approximately 90% complete. Phase IV is
expected to be 100% complete by the end of July 1999. Phase V is expected to be
complete by the end of 1999. Follow up testing is planned for the fourth
quarter of 1999 to ensure that all components have remained compliant. We have
spent approximately $0.4 million on internal manpower costs during 1997 and
1998 related to the Year 2000 issue, representing approximately 4% of the
information systems budget. We expect to incur approximately $0.1 million of
future expense to complete the Year 2000 compliance project.
Our use of our own information technology personnel to make the business
systems Year 2000 compliant may delay some other strategic information systems
development and implementation which we would have otherwise benefitted from in
various ways and to varying extents. We do not believe that we will be at a
competitive disadvantage as a result of these delays.
We continue to make inquiries of those vendors whose Year 2000 compliance
is important to our ongoing business. Based on preliminary information we have
received, the only significant vendor that could adversely affect our
operations is the United States Postal Service. The postal service assumes that
it will be compliant, but if it is not, our business and operations could be
materially adversely affected. We currently do not have any contingency plans.
However, we recognize the need to develop contingency plans and expect to have
these plans secure where applicable by the end of fiscal 1999.
While we believe that the Year 2000 matters discussed above will not have a
material impact on our business, financial condition or results of operations,
we cannot assure you that we will not be adversely affected by these matters.
Inflation
Over the past three years, which has been a period of low inflation, we
have been able to increase sales volume to compensate for increases in
operating expenses. We have historically been able to increase our selling
prices as the cost of sales and related operating expenses have increased and,
therefore, inflation has not had a significant effect on our operations.
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<PAGE>
Quantitative and Qualitative Disclosures About Market Risk
We use our revolving credit facility, term loan, senior subordinated notes
and bonds to finance a significant portion of our operations. These on-balance
sheet financial instruments, to the extent they provide for variable rates of
interest, expose us to interest rate risk resulting from changes in the
Eurodollar Rate, Federal Funds Rate or the prime rate.
To the extent that our financial instruments expose us to interest rate
risk and market risk, they are presented in the table below. The table presents
principal cash flows and related interest rates by year of maturity for our
revolving credit facility, term loan, senior subordinated notes and bonds in
effect at December 31, 1998. You should read note 18 to our consolidated
financial statements together with the table below.
Schedule of Interest Rate Sensitive Assets and Liabilities
(dollars in thousands)
<TABLE>
<CAPTION>
Year of Maturity
----------------------------------------------------
Total Fair
Due at Value at
1999 2000 2001 2002 2003 Thereafter Maturity 12/31/98
------- ------- ------- ------- ---- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate sensitive
assets:
Noninterest bearing
checking and savings
accounts............... $ 1,887 $ -- $ -- $ -- $-- $-- $ 1,887 $ 1,887
Interest-bearing
checking accounts,
savings accounts and
money market deposit
accounts............... 905 -- -- -- -- -- 905 905
Average interest
rate................. 4.50% -- % -- % -- % -- % -- % 4.50%
------- ------- ------- ------- ---- ---- -------- --------
Total interest rate
sensitive assets....... $ 2,792 $ -- $ -- $ -- $-- $-- $ 2,792 $ 2,792
======= ======= ======= ======= ==== ==== ======== ========
Weighted average
interest rate.......... 1.46% 1.46%
======= ========
Interest rate sensitive
liabilities:
Noninterest bearing
checking and savings
accounts............... $ 4,189 $ -- $ -- $ -- $-- $-- $ 4,189 $ 4,189
Short-term and variable
rate borrowings........ 11,017 13,117 20,117 19,117 117 173 63,658 63,658
Average interest
rate................. 7.39% 7.00% 7.00% 7.00% 7.05% 7.10% 7.00%
Fixed-rate borrowings... -- -- -- 70,000 -- -- 70,000 72,100
Average interest rate... -- -- -- 13.75% -- -- 13.75%
------- ------- ------- ------- ---- ---- -------- --------
Total interest rate
sensitive liabilities.. $15,206 $13,117 $20,117 $89,117 $117 $173 $137,847 $139,947
======= ======= ======= ======= ==== ==== ======== ========
Weighted average
interest rate.......... 5.35% 7.00% 7.00% 12.30% 7.05% 7.10% 10.22%
======= ======= ======= ======= ==== ==== ========
</TABLE>
Accounting Statements Not Yet Adopted
Accounting for Derivative Instruments and Hedging Activities. In June 1998,
the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. This statement is effective for fiscal years
beginning after June 15, 1999, although early adoption is encouraged. We have
not yet assessed what the impact of this statement will be on our future
earnings or financial position.
Accounting for the Costs of Computer Software Developed for or Obtained for
Internal Use. In March 1998, the AICPA issued Statement of Position ("SOP") 98-
1, Accounting for the Costs of Computer Software Developed for or Obtained for
Internal Use. The SOP requires the capitalization of certain costs incurred
after the date of adoption in connection with developing or obtaining software
for internal use. We have early adopted SOP 98-1 effective January 1, 1998. The
impact of this statement was not material on our earnings or financial position
as of December 31, 1998.
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<PAGE>
BUSINESS
Overview
We are a direct marketing company that uses sophisticated statistical
modeling techniques and innovative marketing strategies designed to accurately
and efficiently target and acquire profitable customers. We also apply these
techniques and strategies to retain existing customers and to increase sales
per customer. Currently, we market and distribute women's hosiery in North
America and Europe through a continuous product shipment or "continuity"
program.
Our continuity program works as follows:
. To identify potential new customers, we conduct direct mail tests using
our proprietary in-house customer database of more than 75 million mail
order buyers, as well as customer lists rented from other direct
marketing companies. From these test results, we develop statistical
models designed to accurately predict response, retention and payment
rates.
. Using these models, we then mail specially priced, introductory hosiery
offers to attract new customers. First time or "front end" customers
are those that request and receive an introductory shipment.
. Front end customers who elect to receive additional hosiery at full
price become repeat or "back end" customers. Typically, back end
customers in our continuity program receive shipments of hosiery every
four to six weeks. We have developed loyal back end customers by
conveniently providing quality, attractively priced hosiery marketed
under our Silkies(R) brand name. As of December 1998, we had over 1.5
million back end customers. Back end customers provide the majority of
our revenues and gross profit.
We manufactured approximately 66 million pairs of hosiery in 1998,
primarily marketed under the Silkies(R) brand name. In addition, we have
increased our market share of U.S. sheer and opaque hosiery retail sales from
approximately 3.4% in 1994 to approximately 6.3% in 1998. Our manufacturing
operations supplied approximately 80% of all the hosiery required by our
continuity program during 1998.
We began selling women's hosiery products in the United States in 1974.
Since 1996, we have expanded our operations into Canada, the United Kingdom,
Germany and France, and expect to expand into Japan next year. We continue to
evaluate both expansion into other international markets and the application of
our modeling techniques and marketing strategies to new product lines and the
Internet.
Our senior management team is comprised of executives who have extensive
experience in direct marketing and the hosiery manufacturing industry. John F.
Biagini, our Chairman and Chief Executive Officer, Philip G. Whalen, our
President and Chief Operating Officer, and Martin J. Pearson, President of our
international operations, each has more than twenty years of domestic and
international direct marketing experience. Hans L. Lengers has been President
of our wholly owned manufacturing subsidiary since 1978.
Growth Strategy
We plan to capitalize on our modeling techniques and marketing strategies
to profitably grow our existing businesses and to expand into new markets and
products.
Grow Our Existing North American Business. We plan to continue to add new
customers by identifying and testing new customer lists, offer terms,
presentation formats, and creative marketing and distribution approaches. To
increase sales to and profitability from our back end customers, we intend to
continue to introduce higher priced, higher margin products, such as our Ultra
and Shaper styles. We have increased our net revenues from back end customers
in North America from $91.4 million in 1994 to $138.9 million in 1998,
representing a compound annual growth rate of 11.1% over this period.
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<PAGE>
Expand Our Existing International Business. Building on our experience in
North America, we are actively pursuing growth opportunities in the United
Kingdom, Germany and France. In January 1996, we started our international
operations in the United Kingdom. Through the end of the first quarter of 1999,
we have received orders from approximately 3.9 million U.K. customers. In 1998,
we had U.K. revenues of $18.8 million and operating income of $1.9 million. We
commenced operations in Germany in January 1998 and in France in February 1999.
Explore Other International Markets. Based on our favorable test marketing
results, we expect to commence operations in Japan next year. We continue to
evaluate and test additional international markets to identify growth
opportunities. We plan to continue targeting international markets that have
reliable mail delivery systems, accessible mailing lists, strong customer
payment rates and existing demand for hosiery.
Extend Our Product Lines. We continue to evaluate opportunities to add new
product lines within the leg wear market. For example, in July 1999, we will
introduce a new product line, Little Silkies tights, for girls aged 3 to 12. We
are also exploring other opportunities, such as marketing and distributing
men's and women's socks and licensing hosiery brands from third parties. We
plan to explore adding new product lines outside the leg wear market that may
be suitable for direct mail marketing and a continuity program. For example, we
have test marketed a continuity lingerie program which has produced encouraging
results. In addition, we are considering extending our product lines by
entering into joint ventures or brand licensing arrangements with established
manufacturers and retailers.
Establish Our Internet Channel. As a complement to our existing direct
marketing program, we launched a Web site at www.silkies.com in March 1999 on
which customers can place online orders. We have designed proprietary software
that helps us test and apply our statistical modeling techniques on our Web
site. We have developed an integrated order and re-order capability through
which we implement our continuity program online.
Marketing
We have created a marketing strategy that combines direct mail marketing
techniques with our continuity program. Our marketing efforts focus on
targeting and acquiring front end customers, as well as maintaining a strong
relationship with repeat or back end customers through efficient fulfillment of
quality products, excellent customer service, creative new product
introductions and unique marketing strategies. These direct mail marketing
efforts, refined by advanced statistical and regression analyses, have
increased the size and quality of our customer base.
Customer Targeting and Testing. All aspects of our direct mail marketing
program result from specific customer testing which we conduct continuously.
Through this testing, we are able to:
. project the profitability of in-house and outside customer lists;
. maximize response rates to front end solicitations;
. determine the profitability of the product mix offered to back end
customers;
. determine optimal pricing strategy; and
. increase payment and retention rates.
Constant refinement of test programs through creative design, offer
upgrades, new hosiery products and referrals are conducted through various
mailings with the objective of increasing response rates or reducing cost
without negatively impacting customer continuation or retention. The time from
test to application can take between three and twelve months depending on the
testing employed. Historically, our actual results have been similar to our
test results.
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<PAGE>
Acquiring Front End Customers. Direct mail marketing is our principal means
of attracting new front end customers and reactivating previous customers.
Given the high response rates, continuation rates and profit per order that
direct mail generates, we believe that direct mail is superior to other
traditional marketing methods for our continuity program. We mail four major
solicitations featuring our specially priced introductory offer in January,
March, June and September of each year.
We employ advanced statistical and regression analyses in conjunction with
each of our solicitation promotions. We utilize our proprietary in-house
database of more than 75 million mail order buyers, as well as lists rented
from other direct marketing firms, and analyze information concerning consumer
buying habits and payment records in order to determine which potential
customers are likely to purchase our hosiery products on a regular and long-
term basis. During each major solicitation, we rank all chosen customer lists
by potential realizable profit. We then mail to those customers who meet our
investment criteria. This process ensures that anticipated profit is maximized
from each of the four mailings.
Currently, our North American front end offers primarily consist of:
(1) the opportunity to receive one free pair of hosiery; and
(2) the opportunity to receive one free pair of hosiery plus two pairs of
hosiery priced at $1.00 each plus shipping and handling.
When the one free pair of hosiery is received from the first offer
described above, the customer may elect to keep the free pair and cancel all
future shipments. If the customer chooses not to cancel future shipments, the
customer will receive four pairs of hosiery at full price in four to six weeks.
At that time, the customer may:
(1) return the full priced hosiery and cancel future shipments;
(2) keep and pay for the full priced hosiery and cancel future shipments;
or
(3) keep and pay for the full priced hosiery and order additional
shipments.
When one free pair of hosiery is received from the second offer described
above, the customer may elect to keep the free pair, return the additional two
pairs of hosiery and cancel all future shipments. If the customer chooses to
keep all three pairs of hosiery, the customer may either:
(1) pay for two pairs of hosiery at $1.00 each plus shipping and handling
and cancel future shipments; or
(2) pay for two pairs of hosiery at $1.00 each plus shipping and handling
and order additional shipments, in which case the customer will
receive four pairs of hosiery at full price in four to six weeks.
In Europe, we make the second initial offer described above. We price our
European offers comparably to our U.S. offers.
We may change the terms of our initial offers from time to time based on
our test results. For example, in January 1999 we introduced the one free pair
offer in North America.
The Continuity Program. By receiving a second shipment of hosiery, the
customer joins our continuity program and becomes a repeat or back end
customer. Upon payment for each shipment, we send customers a subsequent
shipment of regularly priced hosiery, 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 our 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
and for any reason. We seek to retain our back end customers by providing high
quality hosiery on a timely basis and at competitive prices at the customer's
convenience. As a result, we believe that we have been able to establish a
loyal and predictable base of back end customers.
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<PAGE>
Retention of Back End Customers. Members of the continuity program receive
gift certificates with each shipment of hosiery which can be redeemed for a
wide array of merchandise. We also offer a women's wear catalog featuring
branded and private label lingerie and intimate apparel products in conjunction
with outside manufacturers. Through these means, we believe we have been able
to establish a predictable base of back end customers without significant
losses of customers over time. We continually are working on developing new
means of better retaining our 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 our data processing capabilities, we track 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
our customer service representatives has online capabilities to retrieve
customer specific queries and purchasing history.
We actively re-solicit customers who have chosen to discontinue their
participation in the continuity program. Based upon the number of previous
shipments and the circumstances regarding cancellation of previous enrollment,
we use a combination of telephone and direct mail solicitations to reactivate
these customers. In total, we made about 9.7 million resolicitation contacts in
1998. We believe that approximately 9.5% of re-solicited customers rejoin our
continuity program as the result of these efforts. We also maintain a database
of inactive customers who receive variations of the standard front end
solicitation.
Products and Development
We currently sell a broad range of moderately priced, quality women's
hosiery under the Silkies(R) brand name. Our product line focuses on what we
believe are the most popular product styles and colors. We currently produce
nine styles of sheer hosiery, in ten different colors and six sizes, as well as
knee-hi's and opaque styles. Our spandex products currently represent eight of
our eleven product lines and accounted for 93% of our total revenues in 1998.
The remainder of our product line consists of non-spandex products. As of March
27, 1999, our styles ranged in price from $2.41 to $5.66 per pair.
We perform extensive consumer research and product testing as part of our
new product development program. We periodically introduce new styles, colors
and other product features based on the results of our consumer testing. For
example, in July 1999, we will introduce a new product line, Little Silkies
tights, for girls aged 3 to 12. We are currently investigating the sale of the
following products through our continuity program: (1) premium priced hosiery
products; (2) other leg wear products such as men's and women's socks; and (3)
lingerie. We also offer a women's wear brochure featuring branded and private
label lingerie and intimate apparel products in conjunction with third party
manufacturers.
Manufacturing and Distribution
We manage all phases of the manufacturing and fulfillment of hosiery
products, including planning, purchasing, production, packaging and
distribution. Our direct mail marketing program is vertically integrated with
our manufacturing and production operations, the latter providing our marketing
operations with approximately 80% of our 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.
Production Process. Our production efficiencies result in large part from
our use of limited stock keeping units or "SKUs", standardized packaging and
long production runs for each SKU. We
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<PAGE>
currently manufacture slightly less than 600 SKUs for our U.S. and
international operations. By marketing our products under the Silkies(R) brand
name and by using the same packaging containing four languages, we have one
common package for each style, regardless of where our product will be sold.
Moreover, since we are able to forecast detailed production needs as a result
of our continuity program, we are able to schedule knitting machines to produce
the same style for extended periods of time. This reduces machine down-times,
change-overs and waste incurred in restarting machines. We schedule our
production to meet demand generated by our order volume on a weekly basis. As a
result, we are able to maintain a minimal investment in finished goods
inventory.
We utilize the following primary raw materials in the manufacture of our
products: nylon and spandex yarn, dye and chemicals. These materials are
readily available and are purchased directly from suppliers who also provide
technical support. We knit and sew our products at our facilities in Newland,
North Carolina and Heath Springs, South Carolina. We dye and package our
products at our facility in Lancaster, South Carolina.
Packaging and Distribution. We operate fully-automated, high-speed
packaging machines and distribute our products through the postal service
directly to the customer's home. We achieve efficiencies and minimize costs
through the use of standardized and fully-automated packaging. We primarily use
the national postal service in the markets in which we operate and have been
able to control delivery costs by passing on to our customers any increases in
postal rates. We minimize postal costs through the use of pre-sorting,
utilizing nine digit zip codes and co-mingling of mail. We fulfill orders from
our distribution facilities located in the U.S., Canada, the United Kingdom and
Germany.
Capital Investment. Since 1990, we have spent approximately $31.0 million
to replace the majority of our knitting and sewing machinery with advanced
robotics, to install automatic packaging equipment, to build a new dye house
and distribution facility and to upgrade our computer facilities. We maintain
relationships with our machinery producers in order to keep up-to-date on
changing manufacturing methods. Our current manufacturing operations have the
capacity to produce approximately 66 million pairs annually.
Outsourcing of Product. To provide longer term flexibility for sources of
manufactured hosiery, we purchase a portion of our manufactured hosiery
requirements from two different hosiery manufacturers in Mexico and Italy. To
date, we have been able to obtain hosiery that is the same quality as our own
product at a price approximately equal to our cost of manufacturing in the
United States. Currently, we outsource approximately 20% of our manufactured
hosiery requirements and, because our manufacturing facilities are operating at
full capacity, we expect to increase our reliance on outsourced products in the
future.
Facilities
We own or lease facilities at eight locations. The following table
represents the location of each, its size, whether the facility is owned or
leased and the principal function of each.
<TABLE>
<CAPTION>
Size in Owned/
Location Square Feet Leased Function
-------- ----------- ------ --------
<S> <C> <C> <C>
Bensalem, Pennsylvania.... 60,000 Leased Headquarters; Administration;
Marketing; Data Processing;
Customer Service
Newland, North Carolina... 138,000 Owned Knitting; Sewing
Lancaster, South
Carolina................. 142,000 Owned Dyeing; Packaging
Heath Springs, South
Carolina................. 143,000 Owned Fulfillment Operations
Liverpool, United
Kingdom.................. 15,000 Leased Office
Ettlingen, Germany........ 3,000 Leased Office
Markham, Canada........... 6,000 Leased Office
Tokyo, Japan.............. 3,000 Leased Office
</TABLE>
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<PAGE>
The owned facilities are subject to mortgages and security interests
granted to secure payment of our indebtedness.
Data Processing and Management Information Systems
We have computer and data processing capabilities which we believe are
adequate for our current and planned level of operations. We have a full back-
up and disaster recovery program for our data processing system. With this
program, we can resume operations at an outside facility within twelve hours if
needed.
We provide data processing services, including proprietary software
programs, to our 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 our database capabilities, we are also
able to store and manage a proprietary database of customer purchasing habits
gathered from our hosiery sales history in addition to customer gift
redemptions and women's wear merchandise catalogs. This database of customer
purchasing habits covers current and past hosiery shipments, customers' credit
statistics, buying patterns and purchasing records.
Our data processing center in Bensalem, Pennsylvania supports all U.S. and
international operations. Each international operation is connected to the
Bensalem location by dedicated communication lines. Customer transactions are
keypunched at each local location and transmitted to Bensalem where customer
records and accounts are maintained and updated. Data concerning shipment and
billing invoices are then transmitted from Bensalem to each location, where
shipment invoices, customer correspondence or billing invoices are printed and
dispatched. As a result of this structure, we are able to avoid the cost of
maintaining and operating data processing systems in each country in which we
operate.
Government Regulation
Our direct mail operations are currently subject to regulation by the
United States Postal Service, the Federal Trade Commission and various state,
local and foreign consumer protection and other regulatory authorities. In
general, these regulations govern the following aspects of our direct mail
operations:
. the manner in which orders may be solicited;
. the form and content of promotional materials;
. the information which must be provided to prospective customers; and
. the manner in which customers may be billed and the way outstanding bills
are collected.
From time to time, we have received inquiries from the FTC, various state
regulatory authorities, self-regulatory agencies and trade associations
concerning aspects of our promotional materials, including whether the terms of
our promotional offers are sufficiently disclosed in these materials.
As a result of a lawsuit brought by the FTC, the Federal District Court for
the Eastern District of Pennsylvania issued a consent injunction in 1984, which
specifies rules we must follow in conducting our mail order business. The
consent injunction permanently enjoins us from violating various FTC and Postal
Service laws and regulations. As a result of these inquiries, in 1984 we
adopted revised promotional materials. We believe but cannot assure you that
these modifications and our current and future promotional materials will meet
the concerns expressed by the FTC or be deemed to be in compliance with the
consent injunction.
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<PAGE>
In 1997, we reached an agreement with an 11-state group that imposes
specific disclosure requirements on our promotional materials and specifies
rules we must follow in our promotional materials and in conducting our mail
order business. The modifications we made to our solicitation materials had a
material adverse effect on our U.S. response rates in 1997 and 1998. We do not
believe that these modifications will have a further significant negative
impact on our response rates in the future, although we cannot guarantee that
this will be the case. In addition, while we believe the modifications to our
promotional materials meet the concerns expressed by the 11-state group and
comply with the terms of that agreement, we cannot assure you that these
modifications will be deemed to be in compliance with the 11-state agreement.
Under the terms of the 11-state agreement, we paid $0.3 million in
administrative expenses and fees during 1997. The agreement also required that
we pay refunds to customers under certain circumstances for a six-month period.
These refunds were not material to our business, financial condition or results
of operations.
Beginning in early 1999, we introduced a new promotional offer in North
America whereby the customer has the opportunity to receive one free pair of
hosiery when she responds to our initial solicitation. Under this offer, if the
customer does not elect to cancel future shipments, she automatically becomes a
participant in our continuity program. While we believe that this new
promotional offer complies with the terms of our agreement with the 11-state
group, we cannot assure you of this. Accordingly, there may be some additional
modifications that we may need to make to our promotional materials to fully
satisfy the terms of the agreement.
In 1997 and 1998, we received inquiries from the Direct Marketing
Association and the National Advertising Division of the Better Business Bureau
concerning whether the terms of our promotional offers are sufficiently
disclosed in our promotional materials. These inquiries were resolved without
any further modifications to our promotional materials.
We have recently received formal inquiries from two states which were not
part of the 11-state group. We are in discussions with these states and are
seeking to resolve or settle these inquiries. We do not believe that the amount
of any settlement of either inquiry would be material. While we believe that we
will be able to resolve these inquiries and other future inquiries, we cannot
assure you in this regard, nor can we assure you that these or other regulators
or trade associations will not require or seek to impose additional changes to
our promotional materials or billing practices. In addition, we cannot assure
you that these additional changes to our materials or billing practices, if
any, will not be significant or will not have a material adverse effect on our
business, financial condition or results of operations.
The direct mail marketing industry is subject to ongoing and changing
federal, state, local and foreign consumer protection, mail order and other
laws and regulations. Accordingly, it is possible that new or additional laws
or regulations could be passed at any time. While our management believes that
our promotional materials are in substantial compliance with applicable laws
and regulations, we cannot give you any assurance in that regard nor can we
assure you that additional laws or regulations will not be passed which could
have a material adverse effect on our ability to rent customer lists from third
parties, or on our future response rates, business, financial condition or
results of operations.
Employees
As of March 27, 1999, we had 1,108 employees, 193 of whom were located at
our headquarters and operations center in Bensalem, Pennsylvania, 320 of whom
were located at our manufacturing facility in Newland, North Carolina, 250 of
whom were located at our manufacturing and packaging facility in Lancaster,
South Carolina, and 300 of whom were located at our sewing
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<PAGE>
and fulfillment operations facility in Heath Springs, South Carolina.
Additionally, 45 employees are currently employed in Canada and Europe. Of the
total number of employees, 136 are salaried. The remaining 972 are non-salaried
employees, the majority of whom are paid an hourly wage plus incentive
compensation based on productivity measures. Our hourly workforce is not
affiliated with any unions. We have not experienced any work stoppages and
believe our relations with our employees are good.
Competition and Industry
We currently operate primarily in the women's sheer hosiery market,
targeting adult females as customers. U.S. retail sales of sheer and opaque
hosiery declined approximately 5.1% annually from 1994 to 1998, and are
expected to continue to decline. We believe that the overall women's hosiery
market is declining as a result of the high cost of women's hosiery products
and changes in women's fashions. Despite this overall market decline, we have
been able to increase our total net revenues to $198.7 million in 1998 from
$118.6 million in 1994.
The women's hosiery business is highly competitive. Competition in the
women's hosiery market is generally based on price, quality and customer
service. Our principal competitors in North America include Sara Lee Hosiery, a
division of Sara Lee Corporation, Kayser-Roth, a subsidiary of Golden Lady SpA
and Americal, a privately held U.S. concern. Sara Lee Hosiery and Kayser-Roth
account for more than 70% of the women's hosiery market. An estimated 60 other
smaller U.S. manufacturers produce women's hosiery primarily under private
labels. Sara Lee Hosiery and Golden Lady SpA are also significant competitors
in the United Kingdom, France and Germany.
Although we focus exclusively on marketing our hosiery products through our
direct marketing continuity program, we compete with manufacturers and
distributors of women's hosiery that primarily sell their products in retail
stores. Several competitors have sold their hosiery products by mail order for
many years. In addition, we compete with other direct marketing companies.
These competitors include businesses that engage in direct mail, catalog sales,
telemarketing, digital marketing through the Internet and other methods of sale
that compete for the attention and spending dollars of consumers.
Legal Proceedings
We are involved in, or have been involved in, litigation arising in the
normal course of our business. We cannot predict the timing or outcome of these
claims and proceedings. Currently, we are not involved in any litigation which
we expect to have a material effect on our business, financial position or
results of operations.
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<PAGE>
MANAGEMENT
Directors and Executive Officers
Our executive officers and directors, as well as additional information
with respect to those persons, are presented in the table below.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
John F. Biagini............ 55 Chairman and Chief Executive Officer
Philip G. Whalen........... 53 President and Chief Operating Officer
Martin J. Pearson.......... 52 President, International Operations
Hans L. Lengers............ 54 President, U.S. Textile Corporation and Director
Arthur C. Hughes........... 58 Vice President and Chief Financial Officer
Frank K. Bynum, Jr......... 36 Director
Michael B. Goldberg........ 52 Director
</TABLE>
Directors are 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 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.
Our non-officer directors, other than those directors who are affiliated
with Kelso, are paid an 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 are reimbursed. Non-officer
directors, including those directors affiliated with Kelso, will receive no
additional compensation for their services as directors except as described
above. Officers who serve as directors do not receive compensation for their
services as directors other than the compensation they receive as officers.
There are no family relationships among our directors and executive
officers. For information regarding our stock ownership, see "Security
Ownership of Management and Beneficial Owners of More Than 5% of Our Common
Stock".
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 our Chairman and Chief Executive Officer since
consummation of our 1994 recapitalization. Mr. Biagini served as President from
June 1992 through October 1994 and as President, Chairman and Chief Executive
Officer from October 1994 through March 1998.
Mr. Whalen has been our President and Chief Operating Officer since April
1998. From 1985 to March 1998, he served as President of Enchantress Hosiery of
Canada which became one of our wholly-owned subsidiaries in June 1998.
Mr. Pearson has been President, International Operations, since January
1999. From July 1998 to December 1998, he was Senior Vice President, Corporate
Planning. From July 1993 to December 1995, Mr. Pearson was President, Pacific
and from January 1996 to July 1997 President, Europe at Readers Digest Inc.
Mr. Lengers has been the President of U.S. Textile Corporation, our wholly-
owned manufacturing subsidiary, and a Director since 1978. Mr. Lengers is one
of the founders of U.S. Textile Corporation.
Mr. Hughes has been our Vice President and Chief Financial Officer since
August 1995. Mr. Hughes served as our Vice President and Controller from 1990
to August 1995.
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<PAGE>
Mr. Bynum has been a Director since the consummation of our 1994
recapitalization. Mr. Bynum has held various positions of increasing
responsibility with Kelso & Company since 1987, and currently serves as one of
its Managing Directors. Mr. Bynum also serves as a director of Cygnus
Publishing, Inc., iXL Enterprises, Inc., MJD Communications, Inc. and 21st
Century Newspapers, Inc.
Mr. Goldberg has been a Director of since consummation of our 1994
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. Goldberg is also a director of the Phoenix House Foundation
and the Woodrow Wilson Council.
We intend to appoint at least two additional independent directors. These
persons have not yet been identified.
Committees of the Board of Directors
We have 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 HCI Direct or any of our
subsidiaries.
The Compensation Committee is authorized and directed to review and approve
the compensation and benefits of the executive officers, to review and approve
the annual salary plans, to review management organization and development, to
review and advise management regarding the benefits, including bonuses, and
other terms and conditions of employment of other employees, to administer any
stock option plans which may be adopted and the granting of options under such
plans, and to review and recommend for the approval of the board of directors
the compensation of directors.
Prior to the completion of the offering, the board of directors will have
established an Executive Committee and an Audit Committee.
The Executive Committee will have all powers and rights necessary to
exercise the full authority of the board of directors in the management of our
business and affairs when necessary in between meetings of the board of
directors. The members of the Executive Committee have not yet been determined.
The Audit Committee will be primarily concerned with the effectiveness of
our accounting policies and practices, financial reporting and internal
controls. The Audit Committee will be authorized to:
. make recommendations to the board of directors regarding the engagement
of our independent accountants;
. review the plan, scope and results of the annual audit, the independent
accountants' letter of comments and management's response thereto, and
the scope of any non-audit services which may be performed by the
independent accountants;
. manage our policies and procedures with respect to internal accounting
and financial controls; and
. review any changes in accounting policy. The members of the Audit
Committee have not yet been determined.
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<PAGE>
Compensation Committee Interlocks and Insider Participations in Compensation
Decisions
Mr. Biagini was our Chairman, President and Chief Executive Officer during
the last fiscal year. Messrs. Goldberg and Bynum are Managing Directors of
Kelso. Messrs. Goldberg and Bynum are both limited partners of the general
partner of Kelso Investment Associates V, L.P. and general partners of Kelso
Equity Partners V, L.P. See "Certain Relationships and Related Transactions"
for a discussion of certain relationships between Kelso and us.
Executive Compensation
The following table sets forth the total compensation earned by our Chief
Executive Officer and our four most highly compensated executive officers for
the fiscal year ended December 31, 1998, as well as the total compensation
earned by the individuals for the two previous fiscal years.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
---------------------------------
Securities All Other
Underlying Other Annual
Name Year Salary Bonus (b) Options (c) Compensation Compensation
---- ---- --------- ----------------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John F. Biagini......... 1998 $ 367,474 $ 350,000 -- $7,038(a) --
Chairman of the Board 1997 372,745 500,000 -- 7,119(a) --
and Chief Executive
Officer 1996 352,794 400,000 823,463 7,164(a) --
Hans L. Lengers......... 1998 431,919 -- -- 7,038(a) --
President, U.S. Textile 1997 423,754 -- -- 2,230(a) --
Corporation 1996 419,439 -- 411,740 1,789(a) --
Robert M. Henry......... 1998 288,939 35,000 -- 7,038(a) $1,334,447(d)
Senior Vice President, 1997 261,146 53,700 -- -- --
Systems and Operations 1996 253,869 16,500 150,853 -- --
Arthur C. Hughes........ 1998 233,451 40,000 -- 7,038(a) --
Vice President and 1997 220,615 50,000 -- 7,119(a) --
Chief Financial Officer 1996 159,587 50,000 185,452 7,164(a) --
William J. Kelly........ 1998 231,043 24,000 -- 7,038(a) --
Director of
International 1997 232,551 40,000 -- 7,119(a) --
Operations 1996 222,842 30,000 150,853 7,164(a) --
Philip G. Whalen........ 1998 187,896 -- -- -- --
President and Chief
Operating Officer
</TABLE>
- --------
(a) Amounts represent contributions to our 401(k) Plan, which is a defined
contribution plan.
(b) Represents bonus amounts awarded as cash and/or restricted stock.
(c) Represents options granted to certain officers under our 1996 stock option
plan.
(d) Includes $1,334,447 of stock option compensation relating to 150,853
options awarded in 1996. Mr. Henry resigned July 15, 1998 and was granted
the right to exercise his options at an option price of $3.45 per share
and, simultaneously, we reacquired these shares at a fair value of $12.30
per share. Salary includes severance paid since that date.
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<PAGE>
Fiscal Year-end Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1998 (#) at December 31, 1998 ($)
------------------------- -------------------------
Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
<S> <C> <C>
John F. Biagini............. 0/823,463 0/6,672,314
Hans L. Lengers............. 0/411,700 0/3,336,195
Arthur C. Hughes............ 0/185,452 0/1,334,447
William J. Kelly............ 0/150,853 0/1,334,447
</TABLE>
Management Stock Purchase and Restricted Stock Award Agreements
Prior to the closing of our 1994 recapitalization, we entered into
Management Stock Purchase and Restricted Stock Award Agreements with Mr.
Biagini and Mr. Lengers, under which Mr. Biagini was granted 163,873 restricted
shares of common stock and 68,120 restricted shares of payment-in-kind
preferred stock, and Mr. Lengers was granted 81,941 restricted shares of common
stock and 34,060 restricted shares of payment-in-kind preferred stock. The
shares of common stock and payment-in-kind preferred stock granted to Mr.
Biagini and Mr. Lengers were valued at approximately $1,000,000 and $500,000,
respectively, at the time of our 1994 recapitalization. In our 1994
recapitalization, the common stock was sold at $1.95 per share and the payment-
in-kind preferred stock at $10.00 per share to an investor group. Compensation
with respect to the grant of shares is being recognized ratably over the six-
year period ending October 16, 2000. Additionally, in 1995 management was
offered limited opportunities to purchase stock at the same price as Messrs.
Biagini and Lengers, which resulted in net proceeds of $190,000.
There is currently no public market for our common stock. The value
utilized for the In-the-Money Options as of December 31, 1998 was based on a
valuation completed by an independent appraiser and reviewed by management for
reasonableness.
1999 Stock Option Plan
In contemplation of the offering, on June 24, 1999 the board of directors
and our stockholders approved and adopted a new stock option plan. You should
read the following summary of the 1999 Stock Option Plan together with the
complete text of the 1999 Stock Option Plan that is included as an exhibit to
the registration statement containing this prospectus.
The purpose of the 1999 Stock Option Plan is to promote our long term
financial interests and growth by:
. attracting and retaining executive personnel;
. motivating executive personnel by means of growth-related incentives;
. providing incentive compensation opportunities that are competitive
with those of other major corporations; and
. furthering aligning the interests of participants in the 1999 Stock
Option Plan with those of our stockholders.
Awards made under the 1999 Stock Option Plan are intended to comply with
the requirements of Rule 16b-3 under the Securities Exchange Act of 1934. In
addition, the plan is intended to provide performance-based compensation so as
to be eligible for compliance with Section 162(m) of the Internal Revenue Code
of 1986. Section 162(m) generally limits the deduction by an employer for
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<PAGE>
compensation of specific covered officers. Under Section 162(m), certain
compensation, including compensation based on the attainment of performance
goals, may be disregarded for purposes of this deduction limit if specific
requirements are met. Among the requirements for compensation to qualify for
this exception is that the material terms under which the compensation is to be
paid be disclosed to and approved by the stockholders in a separate vote prior
to the payment. Accordingly, if the 1999 Stock Option Plan is approved by our
stockholders and the other conditions of Section 162(m) relating to
performance-based compensation are satisfied, compensation paid to covered
employees under the 1999 Stock Option Plan will not fail to be deductible under
Section 162(m).
General
The 1999 Stock Option Plan provides for the granting of awards to our
selected employees, consultants and directors as the Compensation Committee of
the board of directors appointed to administer the 1999 Stock Option Plan may
select from time to time.
An aggregate of 600,000 shares of our common stock are reserved for
issuance under the 1999 Stock Option Plan. The number of shares reserved for
issuance may be adjusted from time to time as described below. These shares may
be authorized but unissued common stock or authorized and issued common stock
held in our treasury or a combination of the above. Generally, shares subject
to an award that remain unissued upon expiration or cancellation of the award
will be available for other awards under the 1999 Stock Option Plan. The total
number of shares of common stock subject to stock options and stock
appreciation rights granted to any participant in the 1999 Stock Option Plan
during any calendar year may not exceed 400,000. In the event that the
Compensation Committee determines that any recapitalization, reorganization,
spinoff, stock split, combination or other increase or reduction in the number
of issued shares of common stock affects participants' common stock such that
an adjustment is appropriate in order to prevent dilution or enlargement of the
rights of participants in the 1999 Stock Option Plan, then the Compensation
Committee may make equitable changes or adjustments as it deems necessary to
the number and kind of shares of common stock which may thereafter be issued in
connection with awards, the limit on individual awards, the number and kind of
shares of common stock subject to each outstanding award, and the exercise
price of each award.
Awards under the 1999 Stock Option Plan may be made in the form of (1)
incentive stock options; (2) non-qualified stock options (incentive and non-
qualified stock options are collectively referred to as "options"); (3) stock
appreciation rights; (4) restricted stock; and (5) unrestricted stock awards.
Administration
The 1999 Stock Option Plan will be administered by the Compensation
Committee. The Compensation Committee will, at all times, consist of two or
more persons, each of whom is an "outside director" within the meaning of
Section 162(m) and a "non-employee director" within the meaning of Rule 16b-3.
The Compensation Committee is authorized, among other things, to interpret and
implement the provisions of the 1999 Stock Option Plan, to select the persons
to whom awards will be granted, to determine the terms and conditions of such
awards and to make all other determinations deemed necessary or advisable for
the administration of the 1999 Stock Option Plan.
Awards under the 1999 Stock Option Plan
Stock Options. Options granted under the 1999 Stock Option Plan will be
exercisable at such time or times as the Compensation Committee determines. The
purchase price per share payable upon the exercise of an option will be
established by the Compensation Committee. In the case of an incentive stock
option, the option exercise price may be no less than the fair market value of
a share
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<PAGE>
of common stock on the date of grant. The option exercise price is payable by
any one of the following methods or a combination of the following, to the
extent permitted by the Compensation Committee: (1) cash; (2) by surrender of
shares of common stock having a fair market value on the date of the exercise
equal to the option exercise price; (3) a combination of cash and common stock;
or (4) in the sole discretion of the Compensation Committee, through a cashless
exercise program.
Stock Appreciation Rights. Stock appreciation rights may be granted in
connection with all or any part of, or independently of, any option granted
under the 1999 Stock Option Plan. A stock appreciation right granted
independently of any option will become exercisable as defined by the
Compensation Committee. A stock appreciation right granted in tandem with any
stock option will be exercisable only when and to the extent the option to
which it relates is exercisable. The grantee of a stock appreciation right has
the right to surrender the stock appreciation right and receive from us, in
cash and/or common stock, an amount equal to the excess of the fair market
value of a share of common stock over the exercise price of the stock
appreciation right for each share of common stock in respect of which such
stock appreciation right is being exercised.
Restricted Stock. The Compensation Committee may grant restricted shares of
common stock, in such amounts, and subject to such terms and conditions
(including the attainment of performance goals) as the Compensation Committee
may determine in its discretion. Except for restrictions on transfer and such
other restrictions as the Compensation Committee may impose, participants will
have all the rights of a stockholder with respect to the restricted stock.
Unless the Compensation Committee determines otherwise, termination of
employment during the restricted period will result in the forfeiture by the
participant of all shares still subject to restrictions.
Unrestricted Stock Rewards. Other cash awards and awards valued in whole or
in part by reference to, or otherwise based on, common stock may be granted
either alone or in addition to other awards under the 1999 Stock Option Plan.
Subject to the provisions of the 1999 Stock Option Plan, the Compensation
Committee will have the sole and complete authority to determine the persons to
whom and the time or times at which such other awards will be granted, the
number of shares of common stock to be granted pursuant to such other awards
and all other conditions of such other awards. Participants may elect to defer
all or a portion of such other awards in accordance with procedures established
by the Compensation Committee.
Other Features of the 1999 Stock Option Plan
In the event of a "change in control", the board of directors shall have
the discretion to determine the treatment of all outstanding awards under the
1999 Stock Option Plan.
The board of directors or the Compensation Committee may suspend, revise,
terminate or amend the 1999 Stock Option Plan at any time subject to any
stockholder approval required under applicable law. None of these actions may,
without the consent of a participant, reduce the participant's rights under any
outstanding award.
New 1999 Stock Option Plan Benefits
Awards under the 1999 Stock Option Plan will be granted from time to time
at the sole discretion of the Compensation Committee. As a result, it is not
possible at this time to determine the awards that will be made during 1999.
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Certain Federal Income Tax Consequences.
The following discussion is a brief summary of the principal United States
Federal income tax consequences under current Federal income tax laws relating
to awards under the 1999 Stock Option Plan. This summary is not intended to be
exhaustive and, among other things, does not describe state, local or foreign
income and other tax consequences.
Non-Qualified Stock Options. An optionee will not recognize any taxable
income upon the grant of a non-qualified stock option. We will not be entitled
to a tax deduction with respect to the grant of a non-qualified stock option.
Upon exercise of a non-qualified stock option, the excess of the fair market
value of the common stock on the exercise date over the option exercise price
will be taxable as compensation income to the optionee and will be subject to
applicable withholding taxes. We will generally be entitled to a tax deduction
at such time in the amount of such compensation income. The optionee's tax
basis for the common stock received through the exercise of a non-qualified
stock option will equal the sum of the compensation income recognized and the
exercise price.
In the event of a sale of common stock received upon the exercise of a non-
qualified stock option, any appreciation or depreciation after the exercise
date generally will be taxed as capital gain or loss.
Incentive Stock Options. An optionee will not recognize any taxable income
at the time of grant or timely exercise of an incentive stock option and we
will not be entitled to a tax deduction with respect to such grant or exercise.
Exercise of an incentive stock option may, however, give rise to taxable
compensation income subject to applicable withholding taxes, and a tax
deduction to us, if the incentive stock option is not exercised on a timely
basis (generally, while the optionee is employed by us or within 90 days after
termination of employment) or if the optionee subsequently engages in a
"disqualifying disposition," as described below.
A sale or exchange by an optionee of shares acquired upon the exercise of
an incentive stock option more than one year after the transfer of the shares
to such optionee and more than two years after the date of grant of the
incentive stock option will result in any difference between the net sale
proceeds and the exercise price being treated as long-term capital gain (or
loss) to the optionee. If such sale or exchange takes place within two years
after the date of grant of the incentive stock option or within one year from
the date of transfer of the incentive stock option shares to the optionee, such
sale or exchange will generally constitute a "disqualifying disposition" of
such shares that will have the following results: any excess of (1) the lesser
of (a) the fair market value of the shares at the time of exercise of the
incentive stock option and (b) the amount realized on such disqualifying
disposition of the shares over (2) the option exercise price of such shares,
will be ordinary income to the optionee, subject to applicable withholding
taxes, and we will be entitled to a tax deduction in the amount of such income.
Any further gain or loss after the date of exercise generally will qualify as
capital gain or loss and will not result in any deduction by us.
Restricted Stock. A grantee will not recognize any income upon the receipt
of restricted stock unless the holder elects under Section 83(b) of the
Internal Revenue Code, within thirty days of such receipt, to recognize
ordinary income in an amount equal to the fair market value of the restricted
stock at the time of receipt, less any amount paid for the shares. If the
election is made, the holder will not be allowed a deduction for amounts
subsequently required to be returned to us. If the election is not made, the
holder will generally recognize ordinary income, on the date that the
restrictions to which the restricted stock are subject are removed, in an
amount equal to the fair market value of such shares on such date, less any
amount paid for the shares. At the time the holder recognizes ordinary income,
we generally will be entitled to a deduction in the same amount.
Generally, upon a sale or other disposition of restricted stock with
respect to which the holder has recognized ordinary income (i.e., a Section
83(b) election was previously made or the restrictions
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were previously removed), the holder will recognize capital gain or loss in an
amount equal to the difference between the amount realized on such sale or
other disposition and the holder's basis in such shares.
Other Types of Awards. The grant of a stock appreciation right will not result
in income for the grantee or in a tax deduction for us. Upon the settlement of
such a right or award, the grantee will recognize ordinary income equal to the
aggregate value of the payment received, and we generally will be entitled to a
tax deduction in the same amount.
1996 Stock Option Plan
As part of a series of transactions in contemplation of a potential initial
public offering, on June 28, 1996, the board of directors approved and adopted
a stock option plan, providing for the grant to HCI Direct employees of options
to purchase up to 1,873,214 shares of common stock. On June 24, 1999, our board
of directors and our stockholders approved and adopted an amended and restated
1996 stock option plan to provide for the grant of options to purchase up to
921,956 additional shares of common stock.
On June 28, 1996, the board of directors granted options to purchase an
aggregate of 1,734,825 shares of common stock to Messrs. Biagini (754,272
shares), Lengers (377,141 shares), Kelly (150,853 shares), Edwards (150,853
shares), Hughes (150,853 shares) and Henry (150,853 shares). The exercise price
with respect to the 1,734,825 shares is $3.45 per share. These options vested
on the date of their grant and are exercisable at the earlier of ten years from
date of grant or upon an initial public offering of the common stock or certain
change of control events. 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 in our financial statements for 1996.
In addition, on June 28, 1996, the board of directors also granted options
to purchase an aggregate of 138,389 shares of common stock to Messrs. Biagini
(69,190 shares), Lengers (34,599 shares) and Hughes (34,599 shares). The
exercise price with respect to the 138,389 shares will be the initial public
offering price per share appearing on the cover page of this prospectus. These
options vested on the date of such grant and are only exercisable upon an
initial public offering of the common stock.
On June 24, 1999, the board of directors approved the grant of options to
purchase an aggregate of 921,956 shares of common stock to Messrs. Whalen
(460,978 shares) and Pearson (460,978 shares) under the 1996 Stock Option Plan.
The exercise price for Mr. Whalen's shares and 230,489 of Mr. Pearson's shares
is $15.03 per share. These options will have vested on the date of their grant
and will be exercisable at the earlier of seven years from the date of grant or
upon completion of the offering of the common stock. In addition, the remainder
of Mr. Pearson's options become exercisable upon completion of the offering and
will have an exercise price equal to the initial public offering price per
share of the common stock.
Upon completion of the offering, the vesting and exercisability criteria
with respect to all of the outstanding options will have been satisfied.
Accordingly, upon completion of the offering, there will be outstanding options
to purchase an aggregate of 2,644,316 shares of common stock, all of which will
be vested and exercisable.
Employment Agreements
In March 1998, we entered into an executive employment agreement with Mr.
Philip G. Whalen. The agreement provides for an initial base salary of
$250,000. In addition, Mr. Whalen is entitled to receive a bonus the amount of
which is based on achieving objectives defined by the Chairman of the Board and
our performance against annual corporate targets. In January 1999, Mr. Whalen
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received a bonus of $75,000 in respect of services rendered in 1998. Mr. Whalen
is also entitled to participate in all standard employee benefits, to use a
company automobile, and to participate in our option plans on terms and
conditions enjoyed by other executive officers. We or Mr. Whalen may terminate
the agreement at any time. However, if we terminate Mr. Whalen's employment
without cause, as defined in the agreement, Mr. Whalen is entitled to receive a
maximum severance payment in an amount equal to his then current annual base
salary for one year subsequent to the date of his termination.
In July 1998, we entered into an executive employment agreement with Mr.
Martin J. Pearson. The agreement provides for an initial base salary of
$200,000. In addition, Mr. Pearson is entitled to receive a bonus the amount of
which is based on achieving objectives defined by the Chairman of the Board and
our performance against annual corporate targets. Mr. Pearson is also entitled
to participate in all standard employee benefits, to use a company automobile,
and to participate in our option plans on terms and conditions enjoyed by other
executive officers. We or Mr. Pearson may terminate the agreement at any time.
However, if we terminate Mr. Pearson's employment without cause, as defined in
the agreement, Mr. Pearson is entitled to receive a maximum severance payment
equal to his then current annual base salary for six months subsequent to the
date of his termination.
In August 1980, Mr. Hans L. Lengers entered into an employment agreement
with our manufacturing subsidiary, U.S. Textile Corporation, under which he is
employed as President and Chief Executive Officer of U.S. Textile to manage and
operate its business and affairs for his lifetime. This agreement was 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, we
may abrogate the terms and conditions of the employment agreement for good
cause as defined by the law of North Carolina. The employment agreement
terminates 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 exceeds such base
compensation. However, in no event may Mr. Lengers' annual compensation exceed
$250,000, adjusted each year for cost of living increases. The Consumer Price
Index for Urban Wage Earners and Clerical Workers is used as the index to
compute cost of living increases. The ceiling for Mr. Lengers salary in 1998
was $439,000. In addition, Mr. Lengers has agreed during the time of his
employment not to devote any of his time and efforts to the affairs of any
other business in direct competition with U.S. Textile.
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SECURITY OWNERSHIP OF MANAGEMENT AND
BENEFICIAL OWNERS OF MORE THAN 5% OF OUR COMMON STOCK
The following table provides information with respect to the beneficial
ownership of shares of common stock of all stockholders who are known to
beneficially own more than 5% of our common stock, our directors, our executive
officers named in the summary compensation table and of all our directors and
executive officers as a group, as determined in accordance with Rule 13d-3
under the Securities Exchange Act of 1934 as of the date of this prospectus and
after giving effect to the offering, the related transactions and the
application of the net proceeds from the offering as described under "Use of
Proceeds". Upon completion of the offering, all of the outstanding Class A
common stock will be converted into common stock on a one for one basis.
Accordingly, the common stock referred to in the following table includes
voting common stock and non-voting Class A common stock. The underwriters may
purchase up to an additional 1,500,000 shares from HCI Direct and, under
certain circumstances, Kelso Investment Associates V, L.P., Kelso Equity
Partners V, L.P., certain affiliates and designees of Kelso, and Joseph A.
Murphy, at the initial public offering price less the underwriting discount.
The amounts in this table assume this option is not exercised. See
"Underwriting".
<TABLE>
<CAPTION>
Percentage of Shares
------------------ --------------------
Name and Address Number of Shares Before the After the
of Beneficial Owner of Common Stock(j) Offering Offering
- ------------------- ------------------ ---------- ---------
<S> <C> <C> <C>
Kelso Investment Associates V,
L.P.(a)(b)........................... 8,662,312 70.77% 38.79%
Kelso Equity Partners V, L.P.(a)(b)... 8,662,312 70.77% 38.79%
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)................ (d) (d)
Frank K. Bynum, Jr.(b)(c)(e).......... (d) (d)
Philip E. Berney(b)................... (d) (d)
Joseph A. Murphy(f)................... 2,544,945 20.79% 11.48%
John F. Biagini(f)(g)(h).............. 1,029,442 7.88% 4.47%
Hans L. Lengers(f)(g)(h).............. 514,730 4.07% 2.28%
William J. Kelly(f)(g)................ 152,488 1.23% 0.68%
Arthur C. Hughes(f)(g)................ 189,549 1.53% 0.85%
Philip G. Whalen(f)(g)................ 460,978 3.63% 2.04%
All directors and executive officers
as a group(g)(h)(i).................. 2,808,164 19.06% 11.38%
</TABLE>
- --------
(a) As part of our 1994 recapitalization, Kelso Investment Associates V, L.P.
("KIAV") and Kelso Equity Partners V, L.P. ("KEPV") acquired respectively
8,355,301 and 348,134 shares of common stock, representing 68.6% and 0.9%,
respectively, of the shares of common stock outstanding. Subsequent to our
1994 recapitalization, KEPV transferred 41,123 shares of common stock to
certain family trusts of Messrs. Wall and Goldberg for which Mr. Nickell
serves as trustee. KIAV and KEPV, 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 these persons is c/o Kelso & Company, 320 Park
Avenue, 24th Floor, New York, New York 10022.
(c) Excludes 41,123 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.
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(d) Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig, Bynum and
Berney may be deemed to share beneficial ownership of shares of common
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,
Bynum and Berney share investment and voting power with respect to
securities owned by the KIAV and KEPV. Messrs. Schuchert, Nickell, Wall,
Matelich, Goldberg, Wahrhaftig, Bynum and Berney disclaim beneficial
ownership of shares of common stock owned of record by KIAV and KEPV.
(e) Mr. Goldberg and Mr. Bynum are directors of HCI Direct.
(f) The business address of these persons is HCI Direct, Inc., 3369 Progress
Drive, Bensalem, Pennsylvania 19020.
(g) Includes stock options held by these persons in the following amounts:
<TABLE>
<S> <C>
John F. Biagini..................................... 823,463
Hans L. Lengers..................................... 411,740
William J. Kelly.................................... 150,853
Arthur C. Hughes.................................... 185,452
Philip G. Whalen.................................... 460,978
</TABLE>
All of these options are either currently exercisable or become exercisable
upon completion of this offering.
(h) The amounts of common stock beneficially owned by Messrs. Biagini and
Lengers as reflected in the above table include grants made prior to the
consummation of our 1994 recapitalization of an aggregate of 245,814 shares
of common stock, in each case subject to certain restrictions.
(i) Includes the 62,502 shares of common stock that will be repurchased upon
the closing of the offering from affiliates of Kelso, designees of Kelso,
members of our management and certain other stockholders for about $1.0
million.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The 1994 Recapitalization and Related Transactions
Recapitalization Agreement. On October 17, 1994, we effected a
recapitalization, pursuant to which an investor group consisting of affiliates
of Kelso, certain designees of Kelso not affiliated with Kelso and John F.
Biagini and Hans Lengers acquired a controlling equity interest in HCI Direct.
Under the recapitalization agreement, we repurchased from Joseph A. Murphy, for
approximately $191.2 million, all of our then outstanding shares of preferred
stock and a substantial portion of our then outstanding shares of common stock.
The investor group that effected our 1994 recapitalization currently owns
approximately 71% of our common equity, while Mr. Murphy retains approximately
21% of our common equity. As of March 27, 1999, we had a stockholders' deficit
of approximately $58.8 million, resulting in large part from the transactions
related to our 1994 recapitalization.
We obtained the funds necessary to effect our 1994 recapitalization and
repay a limited amount of our then existing indebtedness from:
. borrowings of approximately $80.0 million under our existing credit
agreement;
. gross proceeds of approximately $69.1 million from the issuance and
sale of units consisting of $70.0 million aggregate principal amount of
13 3/4% senior subordinated notes due 2002 and an aggregate of 608,839
shares of Class A common stock;
. gross proceeds of approximately $36.5 million from the sale to the
investor group of shares of a new class of payment-in-kind preferred
stock for cash;
. gross proceeds of approximately $17.1 million from the sale to the
investor group of shares of common stock for cash; and
. working capital of approximately $2.0 million.
In connection with our 1994 recapitalization, we paid Kelso a fee of
approximately $2.6 million for financial advisory services and agreed to pay
Kelso an annual fee of $262,500 for financial advisory services and reimburse
Kelso for out-of-pocket expenses incurred. Prior to completing the offering, we
expect to terminate this agreement with Kelso by making of a one-time payment
to Kelso of $3.2 million. However, the arrangements for indemnification and
reimbursement of specific expenses may survive the termination of the
arrangement. We have also agreed to indemnify Kelso against specific claims,
losses, damages, liabilities and expenses which may arise in connection with
rendering these financial advisory services.
Indemnification Arrangements. The recapitalization agreement provides that
Mr. Murphy, on the one hand, and HCI DIrect, on the other, will, with some
limitations, indemnify each other and certain of their related parties against
and in respect of any damages, losses, deficiencies, liabilities, costs and
expenses, incurred, among other things, as a result of any misrepresentations
or breaches of warranties contained in the recapitalization agreement including
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 Mr. Murphy 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 Mr. Murphy's sale of HCI Direct. The
indemnification provisions of the recapitalization agreement are subject to
baskets and deductibles and, in general, an aggregate limit of $15.0 million.
Mr. Murphy and HCI Direct also entered into an escrow agreement under which,
among other things, $10.0 million of the aggregate purchase price paid by HCI
Direct to Mr. Murphy in connection with our 1994 recapitalization was held in
escrow, subject to reduction, to provide a source of payment to satisfy Mr.
Murphy's indemnification obligations under the recapitalization agreement. As
of March 27, 1999, $6.7 million
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<PAGE>
was held in escrow, to be released to Mr. Murphy on October 17, 1999 (the fifth
anniversary of our 1994 recapitalization), subject to the amount of any pending
claims. In addition, Mr. Murphy has pledged to HCI Direct the shares of common
stock which Mr. Murphy continues to own following the consummation of our 1994
recapitalization.
Stockholders Agreement
The Kelso affiliates, Mr. Murphy and senior members of management entered
into a stockholders agreement in connection with our 1994 recapitalization.
Most provisions of the stockholders agreement will terminate when we complete
the offering. The Kelso affiliates will continue to be able to require us to
use our best efforts to register the sale of their shares under the Securities
Act. If we conduct a registered public offering of our equity securities, we
will also be required to permit the Kelso affiliates and Mr. Murphy to
participate in that offering. These rights are subject to limitations.
Acquisition of Enchantress
On June 10, 1998, we acquired substantially all of the assets and assumed
certain liabilities of Enchantress Hosiery Corporation of Canada Ltd. for
approximately $3.9 million. Mr. Whalen, our President and Chief Operating
Officer, was a former officer of Enchantress. At the time of the transaction,
Mr. Whalen indirectly held approximately 45% of the outstanding equity
interests in Enchantress.
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<PAGE>
DESCRIPTION OF OUR CAPITAL STOCK
The following description of our capital stock is not complete and is
subject in all respects to applicable Delaware law and to the provisions of our
Restated Certificate of Incorporation and our By-Laws which are included as
exhibits to the registration statement containing this prospectus.
Our authorized capital stock consists of:
. 60,000,000 shares of common stock, par value $.01 per share;
. 1,000,000 shares of Class A common stock, par value $.01 per share; and
. 12,000,000 shares of preferred stock, par value $.01 per share, which
includes 4,000,000 shares of payment-in-kind preferred stock.
On June 24, 1999, our board of directors and stockholders approved a stock
split by way of reclassification. Effective as of the same date, each share of
common stock and Class A common stock outstanding was reclassified on a basis
of approximately 8.7 shares of common stock and Class A common stock,
respectively, for each share outstanding on such date.
The board of directors is authorized, from time to time and without further
stockholder action, to issue any or all shares of authorized preferred stock in
one or more classes or series and to fix and determine the designations,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions thereon, of any class or series so
established, including voting powers, dividend rights, liquidation preferences,
redemption rights and conversion or exchange privileges. The payment-in-kind
preferred stock was designated at the time of our 1994 recapitalization.
As of the date of this prospectus, 11,581,623 shares of common stock,
657,998 shares of Class A common stock and 3,760,101 shares of payment-in-kind
preferred stock are outstanding. Prior to completion of the offering, all of
the outstanding shares of Class A common stock will be automatically converted
into shares of common stock on a one-for-one basis upon our notice to such
effect to the holders of the Class A common stock. In addition, we will
repurchase all of our outstanding payment-in-kind preferred stock upon the
closing of the offering.
As of the date of this prospectus, there are 19, 4 and 18 holders of record
of the common stock, Class A common stock and payment-in-kind preferred stock,
respectively.
Common Stock
Holders of common stock are entitled to one vote per share on all matters
to be voted on by our common stockholders. Holders of common stock do not have
cumulative voting rights, and therefore holders of a majority of the shares
voting for the election of directors can elect all of the directors. In such
event, the holders of the remaining shares will not be able to elect any
directors.
Holders of common stock are entitled to share equally such dividends as may
be declared from time to time by the board of directors out of legally
available funds, to the extent permitted by the terms of the agreements
governing our long-term debt. The Restated Certificate of Incorporation
provides, however, that if dividends are declared which are payable in shares
of common stock or Class A common stock, dividends will be payable at the same
rate on each class of stock, and the dividends payable in shares of common
stock will be payable to holders of common stock, and the dividends payable in
shares of Class A common stock will be payable to holders of Class A common
stock.
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Holders of common stock are entitled to no preemptive rights. In the event
of our liquidation, dissolution or winding up, the holders of common stock and
Class A common stock are entitled to share ratably in all assets remaining
after payment of liabilities and subject to the rights of the holders of
preferred stock.
Class A Common Stock Conversion. All of our Class A common stock will be
automatically converted into the same number of shares of common stock without
any action on the part of any holder upon notice to such effect by us to the
record holders of Class A common stock, provided that all applicable waiting
periods under the Hart-Scott-Rodino Antitrust Improvements Act shall have
expired, shall be inapplicable or shall have terminated. We will deliver this
notice prior to completion of the offering.
Preferred Stock
The preferred stock may be issued from time to time by the board of
directors as shares of one or more classes or series. Subject to the provisions
of the Restated Certificate of Incorporation and limitations prescribed by law,
the board of directors is expressly authorized to adopt resolutions to issue the
shares, to fix the number of shares constituting any series, and to provide for
voting powers, designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (including whether dividends are cumulative), dividend
rates, terms of redemption, redemption prices, conversion rights and rights upon
dissolution of the shares constituting any class or series of the preferred
stock, in each case without any further action or vote by the stockholders.
One of the effects of undesignated preferred stock may be to enable the
board of directors to render more difficult or to discourage an attempt to
obtain control of HCI Direct by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of our management. The
issuance of shares of the preferred stock pursuant to the board of directors'
authority described above may adversely affect the rights of the holders of
common stock. For example, preferred stock issued by HCI Direct may rank prior
to the common stock as to dividend rights, liquidation preference or both, may
have full or limited voting rights and may be convertible into shares of common
stock. Accordingly, the issuance of shares of preferred stock may discourage
bids for the common stock or may otherwise adversely affect the market price of
the common stock.
We have issued and outstanding 3,760,101 shares of payment-in-kind
preferred stock and 52,992 shares of payment-in-kind preferred stock classified
as redeemable equity securities in our financial statements. We have no current
plans to issue any additional shares of preferred stock of any class or series.
We intend to use approximately $115.7 million of the proceeds of the offering
and our new credit facility to redeem these shares of preferred stock.
Statutory Provisions
Delaware Takeover Statute. HCI Direct is a Delaware corporation and is
subject to Section 203 of the Delaware General Corporation Law, which prohibits
a public Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which such person became an interested stockholder unless: (1)
prior to such date, the board of directors approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder; (2) upon becoming an interested stockholder, the
stockholder then owned at least 85% of the voting stock, as defined in Section
203; or (3) subsequent to such date, the business combination is approved by
both the board of directors and by holders of at least 66 2/3% of the
corporation's outstanding voting stock, excluding shares owned by the
interested stockholder. For these purposes, the term "business combination"
includes mergers, asset sales and other similar transactions with an
"interested stockholder." An "interested stockholder" is a person who, together
with affiliates and associates, owns (or, within the prior three years, did
own) 15% or more of the corporation's voting stock.
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<PAGE>
Limitations of Liability. Our Restated Certificate of Incorporation
contains a provision that is designed to limit the director's liability to the
extent permitted by the DGCL and any amendments thereto. Specifically,
directors will not be held liable to HCI Direct or our stockholders for an act
or omission in such capacity as a director, except for liability as a result
of: (1) a breach of the duty of loyalty to us or to our stockholders; (2)
actions or omissions not in good faith or which involve intentional misconduct
or a knowing violation of law; (3) payment of an improper dividend or improper
repurchase of our stock under Section 174 of the DGCL; or (4) other
transactions from which the director will receive an improper personal benefit.
The principal effect of the limitation of liability provision is that a
stockholder is unable to prosecute an action for monetary damages against our
directors unless the stockholder can demonstrate one of the specified bases for
liability. The provision, however, does not eliminate or limit director
liability arising in connection with causes of action brought under the federal
securities laws. Our Restated Certificate of Incorporation does not eliminate
our directors' duty of care. The inclusion of this provision in our Restated
Certificate of Incorporation may, however, discourage or deter stockholders or
management from bringing a lawsuit against directors for a breach of their
fiduciary duties, even though such an action, if successful, might otherwise
have benefitted us and our stockholders. This provision should not affect the
availability of equitable remedies such as injunction or rescission based upon
a director's breach of the duty of care.
Indemnification. Our By-Laws also provide that we will indemnify our
current and past directors and officers to the fullest extent permitted by
Delaware law. We are generally required to indemnify these directors and
officers for all judgments, fines, settlements, legal fees, and other expenses
incurred in connection with pending, threatened or completed legal proceedings
because of such director's or officer's position with HCI Direct or another
entity that the director or officer serves at our request, subject to certain
conditions, and to advance funds to such directors and officers to enable them
to defend against such proceedings. To receive indemnification, the director or
officer must have acted in good faith (as defined) and in a manner reasonably
believed to be in or not opposed to our best interests.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock will be American
Stock Transfer & Trust Company.
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for our common
stock. No prediction can be made as to the effect, if any, that market sales of
shares of common stock or the availability of shares of common stock for sale
will have on the market price prevailing from time to time. Nevertheless, sale
of substantial amounts of common stock in the public market could adversely
affect the prevailing market price of the common stock and our ability to raise
equity capital in the future.
Upon completion of the offering, we will have outstanding 22,239,621 shares
of common stock (excluding 1,500,000 shares of common stock issuable upon the
exercise by the underwriters of the option granted to them to purchase
additional shares). Of these shares, the 10,000,000 shares (11,500,000 shares
if underwriters' option is exercised in full) of common stock sold in the
offering will be freely tradeable without restrictions or further registration
under the Securities Act, except for any shares purchased by an "affiliate" of
HCI Direct which will be subject to the resale limitations of Rule 144 under
the Securities Act.
HCI Direct and our executive officers and directors, the Kelso affiliates
and our other significant stockholders have agreed not to dispose of or hedge
any of their shares of common stock or securities convertible into or
exchangeable for shares of common stock, subject to certain exceptions, for a
period of 180 days after the date of this prospectus without the prior written
consent of Goldman, Sachs & Co. on behalf of the Underwriters. Following this
lock-up period, these shares are deemed "restricted securities" within the
meaning of Rule 144. These "restricted securities" may not be sold in absence
of registration under the Securities Act other than in accordance with Rule 144
or another exemption from registration. KIAV and KEPV may in the future sell or
otherwise dispose of common stock, including distributions of common stock to
their respective partners. KIAV, KEPV and their partners are entitled to
certain demand and "piggyback" registration rights. See "Certain Relationships
and Related Transactions--Stockholders Agreement". Mr. Murphy is also entitled
to certain piggyback registration rights.
In general, under Rule 144 as currently in effect, any person (or persons
whose shares are aggregated), including an affiliate, who has beneficially
owned shares for a period of at least one year (as computed under Rule 144) is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of (1) 1% of the then-outstanding shares of common stock
(approximately 222,396 shares after giving effect to the offering) and (2) the
average weekly trading volume in the common stock during the four calendar
weeks immediately preceding the date on which the notice of such sale on Form
144 is filed with the Securities and Exchange Commission. Sales under Rule 144
are also subject to certain provisions relating to notice and manner of sale
and the availability of current public information about HCI Direct. In
addition, a person (or persons whose shares are aggregated) who has not been an
affiliate of HCI Direct at any time during the 90 days immediately preceding a
sale, and who has beneficially owned the shares for at least two years (as
computed under Rule 144), would be entitled to sell such shares under Rule
144(k) without regard to the volume limitation and other conditions described
above. The foregoing summary of Rule 144 is not intended to be a complete
description thereof.
In addition, we may file one or more registration statements on Form S-8
under the Securities Act to register all shares of our common stock issuable
under the 1996 and 1999 Stock Option Plans currently and outstanding employee
stock options, and such registration statements are expected to become
effective upon filing. Shares of common stock covered by these registration
statements will thereupon be eligible for sale in the public markets except
during the lock-up period.
61
<PAGE>
LEGAL MATTERS
Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York is acting as
legal counsel to HCI Direct. Skadden, Arps, Slate, Meagher & Flom LLP
represents Kelso and its affiliates from time to time, including in connection
with their acquisition of an interest in HCI Direct. Debevoise & Plimpton, New
York, New York is acting as legal counsel to the underwriters. Debevoise &
Plimpton also represents Kelso and its affiliates from time to time.
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1997 and
for each of the three years in the period ended December 31, 1998 included in
this prospectus and the related consolidated financial statement schedule
included elsewhere in this registration statement have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the registration statement, and have been so included in
reliance upon the reports of such firm given upon their authority as experts in
accounting and auditing.
WHERE CAN YOU FIND MORE INFORMATION
We file reports and other information with the SEC. We filed with the SEC a
registration statement on Form S-1 under the Securities Act with respect to the
shares of common stock offered hereby. This prospectus does not contain all the
information set forth in the registration statement and the exhibits and
schedules filed therewith. For further information with respect to HCI Direct
and the common stock offered hereby reference is made to the registration
statement and the exhibits and schedules filed therewith. Statements contained
in this prospectus regarding the contents of any contract or any other document
to which reference is made are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or other document filed as
exhibit to the registration statement, each such statement being qualified in
all respects by such reference. A copy of the registration statement and the
exhibits and schedules filed therewith may be inspected without charge at the
public reference room maintained by the SEC in Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549, and the SEC's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the registration statement may be
obtained from such offices upon the payment of the fees prescribed by the SEC.
Information on the operation of the public reference room may be obtained by
calling the SEC at 1-800-SEC-0330. The SEC maintains a Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address of this Web site
is http://www.sec.gov.
62
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997.............. F-3
Consolidated Statements of Operations for the years ended December 31,
1998, 1997 and 1996...................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996...................................................... F-5
Consolidated Statement of Stockholders' Deficit for the years ended
December 31, 1998, 1997 and 1996......................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Condensed Consolidated Balance Sheets as of March 27, 1999 and December
31, 1998 (Unaudited)..................................................... F-26
Condensed Consolidated Statements of Operations for the three month
periods ended March 27, 1999 and March 28, 1998 (Unaudited).............. F-27
Condensed Consolidated Statements of Cash Flows for the three month
periods ended March 27, 1999 and March 28, 1998 (Unaudited).............. F-28
Notes to Condensed Consolidated Financial Statements (Unaudited).......... F-29
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
HCI Direct, Inc. (formerly, Hosiery Corporation of America, Inc.)
Bensalem, Pennsylvania
We have audited the accompanying consolidated balance sheets of HCI Direct,
Inc. (formerly, Hosiery Corporation of America, Inc.) and subsidiaries (the
"Company") as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' deficit and cash flows for each of the
three years in the period ended December 31, 1998. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company as of December 31,
1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
March 5, 1999, (except for Note 24, as to which the date is March 26, 1999
and Note 25, as to which the date is June 25, 1999)
F-2
<PAGE>
HCI DIRECT,INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ -- $ 4,327
Accounts receivable, less an allowance for doubtful
accounts of $1,901 and $1,448 in 1998 and 1997,
respectively............................................. 32,214 24,180
Inventories .............................................. 20,008 15,158
Prepaid and other current assets ......................... 3,748 2,398
-------- --------
Total current assets .................................... 55,970 46,063
PROPERTY AND EQUIPMENT, net ............................... 17,906 17,261
DEFERRED CUSTOMER ACQUISITION COSTS........................ 46,933 30,795
DEFERRED DEBT ISSUANCE COSTS, less accumulated amortization
of $6,774 and $5,316 in 1998 and 1997, respectively....... 4,790 6,084
GOODWILL, less accumulated amortization of $61 in 1998..... 3,733 --
OTHER ASSETS............................................... 707 397
-------- --------
TOTAL ..................................................... $130,039 $100,600
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Borrowings under line of credit .......................... $ 3,400 $ --
Current portion of long-term debt ........................ 7,617 3,117
Current portion of capital lease obligations.............. 1,726 1,550
Bank overdrafts........................................... 1,397 --
Accounts payable ......................................... 10,321 7,120
Accrued expenses and other current liabilities ........... 9,389 5,366
Accrued interest ......................................... 4,771 4,608
Accrued coupon redemption costs .......................... 4,679 4,568
Deferred income taxes .................................... 8,115 7,279
-------- --------
Total current liabilities ............................... 51,415 33,608
LONG-TERM DEBT, Less current portion ...................... 121,433 129,307
CAPITAL LEASE OBLIGATIONS, Less current portion............ 5,176 4,591
ACCRUED COUPON REDEMPTION COSTS ........................... 408 429
DEFERRED INCOME TAXES ..................................... 10,884 3,876
-------- --------
Total liabilities ....................................... 189,316 171,811
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES
REDEEMABLE EQUITY SECURITIES............................... 885 872
-------- --------
STOCKHOLDERS' DEFICIT:
Preferred stock, $.01 par value, 12,000,000 shares
authorized;
4,000,000 shares designated as pay-in-kind preferred
stock, stated at liquidation value of
$10 per share; 25% cumulative, (liquidation preference of
$101,236 and $79,838 in 1998
and 1997, respectively), 3,748,497 and 3,739,782 shares
issued in 1998 and 1997,
respectively, 3,739,782 shares outstanding in 1998 and
1997..................................................... 37,485 37,398
Common stock, voting, $.01 par value, 60,000,000 shares
authorized; 11,655,971 and 11,494,194 shares issued in
1998 and 1997, respectively, 11,494,194 shares
outstanding in 1998 and 1997............................. 117 115
Common stock, Class A, non-voting, $.01 par value:
1,000,000 shares authorized, 657,998 shares issued and
outstanding.............................................. 7 7
Additional paid-in capital ............................... 18,759 16,457
Compensatory stock options outstanding.................... 20,943 22,938
Accumulated deficit....................................... (134,950) (148,301)
Restricted stock ......................................... (447) (697)
-------- --------
(58,086) (72,083)
Treasury stock, at cost, 170,492 shares in 1998 (8,715
preferred shares and
161,777 common shares) .................................. (2,076) --
-------- --------
Net stockholders' deficit................................ (60,162) (72,083)
-------- --------
TOTAL...................................................... $130,039 $100,600
======== ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NET REVENUES............................ $ 198,681 $ 178,682 $ 162,763
----------- ----------- -----------
COSTS AND EXPENSES:
Cost of sales.......................... 91,352 82,119 75,184
Administrative and general expenses.... 13,694 12,121 11,404
Provision for doubtful accounts........ 11,536 10,791 10,057
Marketing costs........................ 36,585 30,538 22,055
Coupon redemption costs................ 3,843 3,671 4,140
Depreciation and amortization.......... 3,405 3,059 2,996
Compensation related to stock options.. -- -- 22,938
Expenses related to potential stock
offering and acquisition.............. -- -- 1,587
Other expenses (income)................ 186 529 (41)
----------- ----------- -----------
OPERATING INCOME........................ 38,080 35,854 12,443
Interest income........................ 71 90 327
Interest expense....................... 16,632 18,109 18,466
----------- ----------- -----------
INCOME (LOSS) BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES....................... 21,519 17,835 (5,696)
PROVISION (BENEFIT) FOR INCOME TAXES.... 8,055 6,242 (1,390)
----------- ----------- -----------
NET INCOME (LOSS)....................... $ 13,464 $ 11,593 $ (4,306)
=========== =========== ===========
NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS........................... $ (6,891) $ (5,726) $ (17,992)
=========== =========== ===========
NET LOSS PER SHARE:
Basic and Diluted...................... $ (0.56) $ (0.47) $ (1.47)
=========== =========== ===========
Weighted Average Shares (Basic and
Diluted).............................. 12,245,866 12,250,546 12,250,546
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss).................................. $13,464 $11,593 $(4,306)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization...................... 3,405 3,059 2,996
Amortization of debt issue costs and discounts..... 1,701 1,844 1,852
Compensation related to stock options.............. -- -- 22,938
(Gain) loss on sale and abandonments of property
and equipment..................................... (7) 4 (3)
Amortization of restricted stock................... 250 250 552
Amortization of deferred customer acquisition
costs............................................. 32,134 24,489 17,994
(Increase) decrease in operating assets:
Accounts receivable............................... (7,596) (1,241) (3,231)
Inventories....................................... (4,513) 380 (5,724)
Payments for deferred customer acquisition
costs............................................ (48,272) (30,620) (23,083)
Prepaid and other current assets.................. (1,297) (528) (488)
Other assets...................................... (604) (44) 298
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other
liabilities...................................... 8,394 (630) 3,842
Income taxes payable.............................. -- -- (129)
Deferred income taxes............................. 7,844 3,150 (5,043)
Accrued coupon redemption costs................... (321) (542) (1,099)
------- ------- -------
Net cash provided by operating activities........ 4,582 11,164 7,366
------- ------- -------
INVESTING ACTIVITIES:
Acquisitions of property and equipment............. (1,191) (919) (2,522)
Acquisition of business............................ (3,914) -- --
Proceeds from sale of property and equipment....... 20 3 39
------- ------- -------
Net cash used in investing activities............ (5,085) (916) (2,483)
------- ------- -------
FINANCING ACTIVITIES:
Net borrowings under line of credit................ 3,400 -- --
Proceeds from bank and other financing............. -- 65,000 --
Payments on bank and other financing............... (3,617) (70,566) (8,391)
Payments on capital leases......................... (1,663) (1,783) (1,519)
Debt issuance costs................................ (164) (532) --
Proceeds from exercise of options, net of tax...... 296 -- --
Purchase of treasury stock......................... (2,076) -- --
------- ------- -------
Net cash used in financing activities............ (3,824) (7,881) (9,910)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ (4,327) 2,367 (5,027)
Cash and cash equivalents at beginning of year..... 4,327 1,960 6,987
------- ------- -------
Cash and cash equivalents at end of year........... $ -- $ 4,327 $ 1,960
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest........................................... $14,768 $16,310 $16,719
======= ======= =======
Income taxes....................................... $ 1,618 $ 3,303 $ 4,102
======= ======= =======
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations of $2,424, $1,999 and $2,338 were entered into
for new equipment during 1998, 1997 and 1996, respectively.
In 1996, two officers of the Company were granted approximately $300 of
redeemable equity securities as additional compensation for 1996.
See notes to consolidated financial statements.
F-5
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(Dollars in thousands, except share and per share data)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK TREASURY STOCK
----------------- -------------------------------- ---------------------------
CLASS A, Retained Preferred Common
PIK NON VOTING Additional Earnings Stock Stock
----------------- -------------- Paid-in (accum. --------- --------
Shares Amount Shares Amount Shares Amount Capital Deficit) Shares Shares Amount
--------- ------- ---------- ------ ------- ------ ---------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE January
1,1996.......... 3,739,782 $37,398 11,494,194 $115 657,998 $ 7 $16,645 $(155,588) -- -- $ --
Net loss........ (4,306)
Compensation
under restricted
stock awards....
Stock options
granted.........
Accretion of
preference value
over carrying
value of
redeemable
preferred
stock........... (84)
Foreign currency
translation.....
--------- ------- ---------- ---- ------- --- ------- --------- ------ -------- -------
BALANCE
December 31,1996.. 3,739,782 37,398 11,494,194 115 657,998 7 16,561 (159,894) -- -- --
Net income...... 11,593
Compensation
under restricted
stock awards....
Accretion of
preference value
over carrying
value of
redeemable
preferred
stock........... (104)
--------- ------- ---------- ---- ------- --- ------- --------- ------ -------- -------
BALANCE December
31, 1997........ 3,739,782 37,398 11,494,194 115 657,998 7 16,457 (148,301) -- -- --
Net income...... 13,464
Compensation
under restricted
stock awards....
Accretion of
preference value
over carrying
value of
redeemable
preferred
stock........... (121)
Purchase of
shares for
treasury........ (113) (8,715) (161,777) (2,076)
Exercise of
stock options,
net of tax...... 150,853 2 2,289
Reclass of
redeemable
equity
securities...... 8,715 87 10,924 134
--------- ------- ---------- ---- ------- --- ------- --------- ------ -------- -------
BALANCE December
31, 1998........ 3,748,497 $37,485 11,655,971 $117 657,998 $ 7 $18,759 $(134,950) (8,715) (161,777) $(2,076)
========= ======= ========== ==== ======= === ======= ========= ====== ======== =======
<CAPTION>
Compensatory
Stock Foreign
Restricted Options Currency
Stock Outstanding Translation Total
---------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
BALANCE January
1,1996.......... $(1,499) $ -- $ 2 $(102,920)
Net loss........ (4,306)
Compensation
under restricted
stock awards.... 552 552
Stock options
granted......... 22,938 22,938
Accretion of
preference value
over carrying
value of
redeemable
preferred
stock........... (84)
Foreign currency
translation..... (2) (2)
---------- ------------ ----------- ----------
BALANCE
December 31,1996.. (947) 22,938 -- (83,822)
Net income...... 11,593
Compensation
under restricted
stock awards.... 250 250
Accretion of
preference value
over carrying
value of
redeemable
preferred
stock........... (104)
---------- ------------ ----------- ----------
BALANCE December
31, 1997........ (697) 22,938 -- (72,083)
Net income...... 13,464
Compensation
under restricted
stock awards.... 250 250
Accretion of
preference value
over carrying
value of
redeemable
preferred
stock........... (121)
Purchase of
shares for
treasury........ (2,189)
Exercise of
stock options,
net of tax...... (1,995) 296
Reclass of
redeemable
equity
securities...... 221
---------- ------------ ----------- ----------
BALANCE December
31, 1998........ $ (447) $20,943 $-- $ (60,162)
========== ============ =========== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
1.ORGANIZATION
HCI Direct, Inc. (formerly, Hosiery Corporation of America, Inc.) (the
"Company") and subsidiaries (See Note 25) 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 primarily throughout the United States and the United
Kingdom. The Company markets women's sheer hosiery through a continuous
product shipment or "continuity" program. The Company's continuity program
involves mailing to customers a specially priced introductory hosiery
offer, the acceptance of which enrolls customers in the program and
results in additional shipments of hose on a regular and continuous basis
upon payment of a prior hose shipment. The Company's manufacturing
operations supply approximately 80% of all the hosiery required by the
Company's continuity program.
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation--The consolidated financial statements include
the accounts of HCI Direct, Inc. (formerly, Hosiery Corporation of
America, Inc.) (See Note 25) 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 promotional program and are amortized on an
accelerated basis based upon the estimated current year revenue in
proportion to the expected future revenue generated by these customers.
Approximately 58% of these costs are amortized in the first 12 months, 70%
within 18 months, and 80% within 24 months. The loss incurred on front end
shipments to customers is charged to operations at the time of the front
end shipment.
Software Costs--Software costs, principally internally developed, consist
of the expenses associated with the development (computer time, license,
programming time) of material software projects with a long-term benefit
and are included in the consolidated balance sheet as Other Assets. The
Company amortizes these assets on a straight-line basis over 7 years.
Goodwill--Goodwill (the excess of cost over fair value of the underlying
assets at the date of acquisition) is being amortized on a straight-line
basis over 30 years.
F-7
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(continued)
Derivative Financial Instruments--The Company has entered into interest
rate caps to manage exposure to fluctuations in interest rates. Premiums
paid on caps are amortized to interest expense over the term of the cap.
The interest rate caps were fully amortized at December 31, 1997.
Deferred Debt Issuance Costs--Debt issuance costs represent costs
associated with bank borrowings and notes and are amortized using the
effective interest method over the terms of the related borrowings.
Income Taxes--The Company uses the liability method of accounting for
income taxes in accordance with SFAS No. 109, Accounting for Income Taxes.
Under the liability method, deferred income taxes are determined based
upon enacted tax laws and rates applied to the differences between the
financial statement and tax basis of assets and liabilities.
Impairment of Long-Lived Assets--Long-lived assets and certain
identifiable intangibles are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability is assessed based on the future cash
flows expected to result from the use of the asset and its eventual
disposition. If the sum of the undiscounted cash flows is less than the
carrying value of the asset, an impairment loss is recognized. Any
impairment loss, if indicated, is measured as the amount by which the
carrying amount of the asset exceeds the estimated fair value of the
asset.
Accounting for Stock-Based Compensation--As permitted by SFAS No. 123,
Accounting for Stock-Based Compensation, the Company has chosen to measure
stock-based compensation expense in accordance with the method prescribed
by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued
to Employees.
Foreign Currency Translation--Foreign entities translate monetary assets
and liabilities at year-end exchange rates while non-monetary items are
translated at historical rates. Income and expense accounts are translated
at the average rates in effect during the year, except for depreciation
and certain marketing expenses which are translated at historical rates.
Gains or losses from changes in exchange rates are recognized in income in
the year of occurrence. The effect of recording translation adjustments in
income instead of equity for the Company's Canadian operations is not
material to the financial statements.
Use of Estimates--The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
New Accounting Standards--In June 1997, the FASB issued SFAS No. 130,
Reporting Comprehensive Income. This statement establishes standards for
the reporting and display of comprehensive income and its components in a
full set of financial statements. The Company adapted SFAS No. 130
effective January 1, 1998. There was no effect of implementing this
standard as comprehensive income is the same as net income.
F-8
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(continued)
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred
to as derivatives), and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. This
statement is effective for fiscal years beginning after June 15, 1999,
although early adoption is encouraged. The Company has not yet assessed
what the impact of this statement will be on the Company's future earnings
or financial position.
In March 1998, the AICPA issued Statement of Position ("SOP") 98-1,
Accounting for the Costs of Computer Software Developed for or Obtained
for Internal Use. The SOP requires the capitalization of certain costs
incurred after the date of adoption in connection with developing or
obtaining software for internal use. The Company has early adopted SOP 98-
1 effective January 1, 1998. The impact of this statement was not material
on the Company's earnings or financial position as of December 31, 1998.
Reclassifications--Certain reclassifications were made to the prior year's
consolidated financial statements to conform to classifications used in
the current period.
3.OPERATING SEGMENTS
The Company organizes its business units into two geographic segments:
North America and International. The Company's North American business
unit is comprised of its operations in the United States and Canada. The
President of HCI Direct, Inc. (formerly, Hosiery Corporation of America,
Inc.) is responsible for the Company's operations in North America. All of
the Company's operations in other countries, including the United Kingdom,
France and Germany, comprise its International business unit. The
President of Hosiery Corporation International is responsible for all
International locations. The Company maintains similar operations in its
two business segments. The Company operates as a continuity business with
a strategy focused on maintaining customers in its continuity program
receiving full-priced shipments. Since North America has been operating as
an established business (23 years) compared to International, which has
been operating for three years, it is the larger, more mature and
profitable business unit of the Company.
F-9
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
3.OPERATING SEGMENTS--(continued)
The segment's accounting policies are the same as those described in the
summary of significant accounting policies.
<TABLE>
<CAPTION>
1998
------------------------------
North
America International Total
------- ------------- -------
<S> <C> <C> <C>
Revenues from External Customers............. 173,580 25,101 198,681
Interest Revenue............................. 56 15 71
Interest Expense............................. 16,632 -- 16,632
Depreciation and Amortization................ 3,326 79 3,405
Segment Profit (EBITDA) (1).................. 40,561 995 41,556
Segment Assets............................... 111,924 18,115 130,039
Income Tax Expense (Benefit)................. 7,707 348 8,055
Long-Lived Assets............................ 26,824 312 27,136
<CAPTION>
1997
------------------------------
North
America International Total
------- ------------- -------
<S> <C> <C> <C>
Revenues from External Customers............. 159,988 18,694 178,682
Interest Revenue............................. 80 10 90
Interest Expense............................. 18,109 -- 18,109
Depreciation and Amortization................ 2,980 79 3,059
Segment Profit (EBITDA) (1).................. 41,845 (2,842) 39,003
Segment Assets............................... 91,297 9,303 100,600
Income Tax Expense (Benefit)................. 7,352 (1,110) 6,242
Long-Lived Assets............................ 23,344 398 23,742
<CAPTION>
1996
------------------------------
North
America International Total
------- ------------- -------
<S> <C> <C> <C>
Revenues from External Customers............. 153,797 8,966 162,763
Interest Revenue............................. 322 5 327
Interest Expense............................. 18,466 -- 18,466
Depreciation and Amortization................ 2,967 29 2,996
Segment Profit (EBITDA) (1).................. 40,459 (168) 40,291
Segment Assets............................... 85,875 6,725 92,600
Income Tax Expense (Benefit)................. (1,315) (75) (1,390)
Long-Lived Assets............................ 24,807 447 25,254
</TABLE>
(1) Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) represents Income (Loss) Before Provision (Benefit) For
Income Taxes of $21,519, $17,835 and ($5,696) for 1998, 1997 and 1996,
respectively, excluding Interest Expense of $16,632, $18,109 and
$18,466 for 1998, 1997 and 1996, respectively, Depreciation and
Amortization of $3,405, $3,059 and $2,996 for 1998, 1997 and 1996,
respectively, Compensation related to Stock Options of $22,938 in 1996
and Expenses related to Stock Offering and Acquisition of $1,587 in
1996. EBITDA does not purport to represent net income or net cash
provided by operating activities, as those terms are defined under
generally accepted accounting principles. Further, the Company's
measure of EBITDA may not be comparable to similarly titled measures
of other companies.
F-10
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
4.ACQUISITION
On June 10, 1998, the Company acquired substantially all of the assets and
assumed certain liabilities of Enchantress Hosiery Corporation of Canada
Ltd. ("EHC") for approximately $3,900 which was funded through a borrowing
under the Company's revolving credit facility. EHC is engaged in the
direct mail marketing and distribution of quality sheer hosiery products
to consumers throughout Canada. The acquisition was accounted for using
the purchase method of accounting. Accordingly, a portion of the purchase
price was allocated to the net assets acquired based on estimated fair
values at date of acquisition. The fair value of assets acquired and
liabilities assumed was approximately $100. The excess of the purchase
price over the estimated fair value of the net assets acquired of
approximately $3,800 is amortized over a period of 30 years using the
straight-line method.
5.PROVISION FOR COUPON REDEMPTION
As part of the marketing program, the Company issues coupons to program
participants based upon the products purchased or the referral of new
customers to the Company. Customers may redeem coupons for free gifts from
a program catalog once they have collected the required number of coupons.
During 1998, customers with an average of 33 coupons redeemed for a free
gift after a collection period of approximately four years. The estimated
future costs for this program have been determined based on historical
customer redemption patterns applicable to outstanding coupons and average
gift costs.
6.INVENTORIES
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Raw materials............................................... $ 909 $ 546
Work-in-process............................................. 3,023 2,748
Finished goods.............................................. 13,500 9,820
Promotional and packing material............................ 2,576 2,044
------- -------
$20,008 $15,158
======= =======
7.PROPERTY AND EQUIPMENT
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Land and buildings.......................................... $ 7,124 $ 7,015
Machinery and equipment..................................... 22,658 20,683
Furniture and fixtures...................................... 2,322 2,213
Leasehold improvements...................................... 3,781 3,735
Automobiles................................................. 642 635
------- -------
36,527 34,281
Less accumulated depreciation and amortization.............. 18,621 17,020
------- -------
$17,906 $17,261
======= =======
</TABLE>
Property and equipment includes assets acquired under capital leases,
principally machinery and equipment having a net book value of
approximately $7,252 and $6,556 as of December 31, 1998 and 1997,
respectively. Related accumulated depreciation and amortization was $7,801
and $6,063, respectively. Depreciation and amortization expense for
capital lease assets for 1998, 1997 and 1996 was $1,738, $1,542, and
$1,529, respectively.
F-11
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
8.OTHER ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Software, net of accumulated amortization of
approximately $6,190 and $5,881, respectively.................... $444 $312
Deposits.......................................................... 176 14
Miscellaneous other............................................... 87 71
---- ----
$707 $397
==== ====
</TABLE>
9.OTHER EXPENSES (INCOME)
Included in other expenses (income) are the following:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Loss (gain) on foreign exchange................................... $194 $225 $(39)
Multistate group administrative expenses.......................... -- 300 --
Miscellaneous expenses (income)................................... (8) 4 (2)
---- ---- ----
$186 $529 $(41)
==== ==== ====
</TABLE>
10.LINE OF CREDIT AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Amounts due under term loan agreement............................. $ 59,500 $ 63,000
13.75% Senior Subordinated Notes due August 2002.................. 68,792 68,549
Serial bonds issued by the South Carolina Jobs-Economic
Development Authority with interest rates ranging
from 5.8% to 7.1% payable Beginning July 1993 in
quarterly principal payments and semi-annual
Payments to the trustee of the Bonds. Bonds are
collateralized by a Letter of credit and a building
addition in South Carolina....................................... 758 875
-------- --------
Total long-term debt.............................................. 129,050 132,424
Less current portion.............................................. 7,617 3,117
-------- --------
TOTAL LONG-TERM PORTION........................................... $121,433 $129,307
======== ========
</TABLE>
On October 17, 1994, the Company entered into a revolving credit and term
loan agreement (the "Agreement") with a group of banks which was
restructured on November 20, 1997 and amended on March 26, 1999.
Outstanding borrowings at December 31, 1998 and 1997 are $59,500 and
$63,000, respectively. The facility is secured by substantially all of the
assets of HCI Direct, Inc. (formerly, Hosiery Corporation of America,
Inc.). The facility is also subject to the continuing guarantees of the
subsidiaries of HCI Direct, Inc. (formerly, Hosiery Corporation of
America, Inc.). The revolving credit and term loan portions of the
facility have maximum borrowings of $20,000 and $65,000, respectively. The
revolving credit facility expires on February 1, 2002. The Company can
borrow based on a formula which comprises the sum of 80% of accounts
receivable and 50% of inventory. Interest under the revolving credit
facility is payable at the banks' prime lending rate plus 0.5% (8.25% at
December 31, 1998). There were borrowings
F-12
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
10.LONG-TERM DEBT (continued)
outstanding under the revolving credit facility at December 31, 1998 of
$3,400 and $0 in 1997. The amount available under the revolving credit
facility at December 31 was $15,800 and $17,700 in 1998 and 1997,
respectively. The term loan is payable in quarterly installments ranging
from $750 to $5,000, with a final payment due February 1, 2002. Interest
under the term loan is generally payable quarterly and is charged at a
premium of 0.5% over the Base Rate or 1.5% over the Eurodollar Rate as
defined in the Agreement. The rate in effect at December 31, 1998 ranged
from 6.44% to 7.25%. Additionally, fees are charged on the average daily
amount of unused commitment and are payable quarterly. Under the terms of
the Agreement, certain restrictions are placed on additional borrowings,
the purchase of property and equipment, the payment of cash dividends and
the disposition of assets. The Company has also agreed to maintain certain
financial ratios as defined in the Agreement.
During 1994, the Company sold the 13.75% Senior Subordinated Notes, with a
principal amount of $70,000, at a discount, which discount is being
amortized using the interest method over the life of the notes at an
effective interest rate of 14.38%. Interest is payable semi-annually. The
Notes were sold in denominations of one thousand dollars, each of which
contained one share (collectively the "Shares") of the Company's Class A
Non Voting Common Stock, par value $.01 per share. The Notes and the
Shares were immediately detachable. Beginning October 1, 1997, the Notes,
or a portion thereof, are subject to redemption at the option of the
Company at specified redemption prices ranging from 100% to 112% of the
aggregate principal amounts of Notes so redeemed. Upon the occurrence of a
Change of Control, as defined, each holder of the Notes shall have the
right to require the Company to repurchase such holder's Notes at a
purchase price equal to 101% of the aggregate principal amount thereof.
Under the terms of the agreement, certain restrictions are placed on
additional borrowings, the purchase of property and equipment, the payment
of cash dividends and the disposition of assets.
In accordance with the Agreement and Notes, the Company is not permitted
to declare or pay any dividend or make any distribution in respect of the
Company's or any of its Restricted Subsidiaries' Equity Interests other
than dividends or distributions payable solely in shares of its Capital
Stock. The Company was in compliance with all debt covenants noted above
as of December 31, 1998 except minimum EBITDA and leverage ratios. On
March 26, 1999, the group of banks amended the Agreement (see Note 24)
which included revisions of certain financial covenants as of December 31,
1998. Under the amended Agreement, the Company is in compliance with all
debt covenants as of December 31, 1998.
The Company was contingently liable for outstanding letters of credit in
the amount of approximately $839 as of December 31, 1998.
Maturities of long-term debt consisted of the following as of December 31,
1998:
<TABLE>
<S> <C>
1999................................................................ $ 7,617
2000................................................................ 13,117
2001................................................................ 20,117
2002................................................................ 87,909
2003................................................................ 117
Thereafter.......................................................... 173
--------
$129,050
========
</TABLE>
F-13
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
11.INCOME TAXES
The provision for income taxes (benefit) consists of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ -------
<S> <C> <C> <C>
Federal:
Current............................................ $ 468 $2,640 $ 3,474
Deferred........................................... 6,701 3,297 (5,215)
------ ------ -------
7,169 5,937 (1,741)
------ ------ -------
States:
Current............................................ (31) 451 179
Deferred........................................... 728 (146) 172
------ ------ -------
697 305 351
------ ------ -------
Foreign:
Current............................................ -- -- --
Deferred........................................... 189 -- --
------ ------ -------
189 -- --
------ ------ -------
$8,055 $6,242 $(1,390)
====== ====== =======
</TABLE>
The components of net deferred tax liabilities consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Deferred tax liabilities:
Deferred customer acquisition costs...................... $12,129 $ 9,810
Accounts receivable...................................... 7,309 6,422
Prepaid Assets........................................... 3,642 2,107
Property and equipment................................... 508 635
Other assets............................................. 802 1,209
Other current assets..................................... 161 227
Accrued coupon redemption costs.......................... 368 289
State deferred taxes..................................... 1,885 1,019
Other.................................................... 199 --
------- --------
27,003 21,718
------- --------
Deferred tax assets:
Accrued expenses......................................... (868) (727)
Stock option............................................. (7,121) (9,821)
Other.................................................... (15) (15)
------- --------
(8,004) (10,563)
------- --------
$18,999 $ 11,155
======= ========
</TABLE>
F-14
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
The following is a reconciliation of the federal statutory rate and the
Company's effective tax rate:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Tax provision (benefit) at
statutory rate............... $7,317 34.0% $6,064 34.0% $(1,937) (34.0)%
State taxes, net of federal
benefit...................... 460 2.1 202 1.1 232 4.1
Foreign incremental tax....... 43 0.2 -- -- -- --
Other......................... 235 1.1 (24) (0.1) 315 5.5
------ ---- ------ ---- ------- -----
Provision (benefit) for income
taxes........................ $8,055 37.4% $6,242 35.0% $(1,390) (24.4)%
====== ==== ====== ==== ======= =====
</TABLE>
12.REDEEMABLE EQUITY SECURITIES
In connection with the Recapitalization, the Company issued 24,580 shares
of voting common stock, $.01 par value, to management stockholders for
cash. The Company is obligated to redeem these shares from the management
stockholders upon the death, disability or termination of employment of
the holder. The redeemable common stock was recorded at fair value on the
date of issuance, less issuance costs, totaling $45. During 1995, the
Company issued an additional 35,208 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 38,566 shares of voting
common stock, $.01 par value, as additional compensation. The Company is
obligated to redeem these shares under the same basic terms as previously
issued redeemable stock. The redeemable common stock was recorded at fair
value on the date of issuance. This resulted in an increase in redeemable
equity securities of approximately $300.
13.TREASURY STOCK
Pursuant to the Recapitalization Agreement (see Note 14), the Company
repurchased from the Stockholder for approximately $199.0 million, which
includes approximately $0.9 million in post-closing adjustments, all of
its then outstanding shares of Preferred Stock (5,460 Class A shares and
9,425 Class B shares) and 17,337 shares of its then outstanding Common
Stock (not adjusted to reflect the 8.6976942 to 1 stock split declared and
effective on June 24, 1999). These shares along with all previously
acquired shares of Preferred and Common Stock were then retired. During
1995, additional post closing adjustments totaling $88 were made to the
purchase price relating to the retired treasury shares. During 1998, the
Company repurchased from two officers of the Company a total of 161,777
shares of common stock and 8,715 shares of preferred stock for a total
value of $1,556.
F-15
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
14.RECAPITALIZATION
On July 19, 1994, an affiliate of Kelso & Company, Inc. ("Kelso"), the
Company and Joseph A. Murphy, the sole stockholder of the Company (the
"Stockholder"), entered into a Recapitalization and Stock Purchase
Agreement (the "Recapitalization Agreement"). Pursuant to the
Recapitalization Agreement, the Company repurchased from the Stockholder
(the "Repurchase") for approximately $191,200, which includes
approximately $900 in post-closing adjustments (net of $7,800 received
from the Stockholder for the purchase of certain assets (see below)), all
of its then outstanding shares of preferred stock and a substantial
portion of its then outstanding shares of common stock. On October 17,
1994, the Company effected the recapitalization of its capital stock (the
"Recapitalization"), pursuant to which certain affiliates and designees of
Kelso and certain members of operating management of the Company
(collectively, the "Investor Group"), purchased a controlling equity
interest in the Company. The Company effected the Repurchase with the
proceeds of the Financing (as defined below). Following the consummation
of the Repurchase (and after giving effect to the purchase of common stock
by the Investor Group pursuant to the Financing), the Investor Group owned
approximately 74% of the Company's common stock, with the Stockholder
retaining approximately 21% of the Company's common stock.
The Company obtained the funds necessary to effect the Repurchase, repay
certain existing indebtedness of the Company and pay the fees and expenses
incurred in connection with the Recapitalization primarily from the
proceeds of a financing (the "Financing") which included (i) borrowings of
$80,000 under a credit agreement, consisting of $80,000 of term loan
facilities (the "Term Loan Facilities") and a $15,000 revolving credit
facility, entered into among the Company, Bankers Trust Company, and the
banks signatory thereto, (ii) gross proceeds of approximately $69,100 from
the issuance and sale of the Units (each unit consisting of one Senior
Subordinated Note and one share of Class A Common Stock), (iii) gross
proceeds of approximately $36.5 million from the sale to the Investor
Group of shares of a new class of pay-in-kind preferred stock of the
Company for cash, and (iv) gross proceeds of approximately $17,100 from
the sale to the Investor Group of shares of Common Stock for cash. The
Company also utilized working capital of approximately $2,000 to pay fees
and expenses incurred in connection with the Recapitalization. In
addition, certain members of the Company's management were granted
restricted pay-in-kind preferred stock and restricted common stock of
$1,022 and $478, respectively (see Note 21).
The Recapitalization and Stock Purchase Agreement contained customary
representations, warranties and conditions. The Recapitalization and Stock
Purchase Agreement also provided that, at or prior to the consummation of
the Acquisition, the Stockholder and the Company enter into an Escrow
agreement pursuant to which, among other things, $10,000 of the aggregate
purchase price paid by the Company to the Stockholder pursuant to the
Repurchase be held in escrow to provide a source of payment to satisfy the
Stockholder's indemnification obligations under the Recapitalization and
Stock Purchase Agreement.
Prior to the Recapitalization, the Company had authorized classes of
voting and non-voting common stock, with shares of voting stock issued and
outstanding. As part of the Recapitalization, such non-voting stock was
retired and such voting stock was changed and reclassified from Class A
Common Stock, par value $1.00 per share, into one share of
F-16
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
14.RECAPITALIZATION--(continued)
Common Stock, par value $.01 per share. In addition, in connection with
the Recapitalization, the Company issued and sold shares of non-voting
Class A Common Stock, a small number of which was purchased by certain
designees of Kelso, and the remainder of which was sold in the form of
Shares as part of the Units. Upon the occurrence of any Conversion Event
(as defined, e.g., any transfer of shares of Class A Common Stock to any
persons who are not affiliates of the transferor), each share of Class A
Common Stock shall be convertible into one share of the Company's Common
Stock. Subsequent to the Recapitalization, the Company effected a stock
split of its Common Stock on approximately a 62.22-to-1 basis.
On November 20, 1997, the Company amended and restructured its credit
agreement. This change resulted in lower interest rates, an increase in
the revolving credit facility from $15,000 to $20,000, a substantial
change in the timing of principal payments and changes to the debt
covenants.
15.LEASE COMMITMENTS
The Company leases premises under cancelable and noncancelable operating
leases with lease terms expiring through 2007. Future minimum payments by
year and in the aggregate under all noncancelable capital and operating
leases having initial or remaining terms of one year or more consisted of
the following at December 31, 1998:
<TABLE>
<CAPTION>
Capital Operating
Year ending December 31, Leases Leases
------------------------ ------- ---------
<S> <C> <C>
1999....................................................... $1,992 $1,929
2000....................................................... 1,587 1,120
2001....................................................... 1,465 1,046
2002....................................................... 1,140 991
2003....................................................... 643 973
Thereafter................................................. 722 3,329
------ ------
7,549 $9,388
======
Amount representing imputed interest....................... 647
------
Present value of net minimum lease payments................ 6,902
Less current portion....................................... 1,726
------
$5,176
======
</TABLE>
Rental expense under all operating leases for the years ended December 31,
1998, 1997 and 1996, was approximately $2,094, $1,887 and $1,593,
respectively.
F-17
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
16.COMMITMENTS AND CONTINGENCIES
The Company has entered into employment agreements with certain members of
management.
The Company has agreed to pay Kelso an annual fee of $263 each year for
financial advisory services and to reimburse Kelso for out-of-pocket
expenses incurred. Non-officer directors of the Company, other than those
directors who are affiliated with Kelso, will be paid an annual retainer
of $20. In addition, all out-of-pocket expenses of non-officer directors,
including those directors who are affiliated with Kelso, related to
meetings attended, will be reimbursed by the Company. Non-officer
directors, including those directors affiliated with Kelso, will receive
no additional compensation for their services as directors of the Company
except as described above.
The Company is involved in, or has been involved in, litigation arising in
the normal course of its business. The Company can not predict the timing
or outcome of these claims and proceedings. Currently, the Company is not
involved in any litigation which is expected to have a material effect on
the financial position of the business or the results of operations and
cash flows of the Company. The Company has been, or is involved in, the
proceedings 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.
In 1997, the Company reached an agreement with a multistate group
consisting of eleven states that sought to impose certain disclosure
requirements on the Company's promotional materials. The agreement became
effective September 1, 1997. During 1997 and 1998, the Company's
promotional materials included the majority of modifications and
clarifications required by the agreement. The modifications the Company
has made to its solicitation materials has had a material adverse effect
on its domestic response rates. Consequently, the Company feels these
modifications and clarifications will have no additional negative impact
on the Company's response rates. However, response rates are only one of
several factors that affect the Company's results of operations. Also,
there may be some additional modifications which will need to be made to
the Company's promotional materials to fully satisfy the terms of the
Company's agreement with the multistate group, and no assurances can be
given that such changes will not have a further effect on the Company's
response rate. In accordance with the agreement, the Company paid $300 in
administrative expenses and fees during 1997. The agreement also required
that refunds be made to customers under certain circumstances for a six-
month period. These refunds were not material to the Company's financial
condition or results of operations.
F-18
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
16.COMMITMENTS AND CONTINGENCIES--(continued)
State regulators, the Federal Trade Commission and trade associations from
time to time contact the Company with inquiries regarding the Company's
promotional materials. As of December 31, 1998, the Company had received
inquiries from 3 states and a trade association which were not part of the
multistate group. There can be no assurance that these or other state
regulators or trade associations will not require or seek to impose
additional changes to the Company's promotional materials or billing
practices, and no assurance can be given that such changes to our
materials or billing practices will not be significant or will not have a
material adverse effect on the Company's future financial condition or
results of operations.
17.PROFIT SHARING PLAN
The Company has a profit sharing plan covering all employees and those of
its subsidiaries. Eligible employees can participate as of January 1 and
July 1 after twelve months of service. Employee contributions are made on
a pretax basis under Section 401(k) of the Internal Revenue Code. The
Company's contribution is at the discretion of the Board of Directors. The
expense associated with the employer contribution was approximately $550,
$514 and $480 in 1998, 1997 and 1996, respectively.
All contributions and investments are held in a trust for the benefit of
plan participants. All employees are 100% vested in their pretax
contributions and earnings thereon, but become vested in the Company
contributions and earnings at a rate based on years of service, with full
vesting after five years.
18.FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company values the financial instruments as required by SFAS No. 107,
Disclosures about Fair Value of Financial Instruments. The following
methods and assumptions were used to estimate the fair value of each class
of financial instrument:
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and
Accrued Expenses. The carrying amount of these items are a reasonable
estimate of their fair values because of the short maturity of these
instruments.
Long-term Debt including Current Maturities. The fair value of the
Company's long-term debt is based on the quoted market price on the
subordinated notes and on current interest rates that are available to the
Company for debt not quoted on an exchange. At December 31, 1998 and 1997,
the Company had a carrying amount of long-term debt of $129,050 and
$132,424, respectively and an estimated fair value of $132,358 and
$139,475, respectively.
F-19
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
19.EARNINGS PER SHARE
Earnings per share for the years ended December 31, 1996, 1997 and 1998
have been computed in accordance with SFAS 128 "Earnings Per Share". The
following table sets forth the computation of basic and diluted earnings
per share (in thousands, except share and per share data):
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Numerator:
Net income (loss)................. $ 13,464 $ 11,593 ($4,306)
Undeclared preferred stock
dividends........................ (20,234) (17,215) (13,602)
Accretion of redeemable preferred
stock to additional paid-in
capital.......................... (121) (104) (84)
----------- ----------- -----------
Numerator for basic and diluted
loss per share-loss applicable to
common shareholders.............. (6,891) (5,726) (17,992)
Denominator for basic and diluted
earnings per share-weighted-average
shares............................. 12,245,866 12,250,546 12,250,546
----------- ----------- -----------
Basic and diluted loss per share.. ($.56) ($.47) ($1.47)
=========== =========== ===========
</TABLE>
Options to purchase 1,734,825 shares and 138,389 shares, of common stock at
$3.45 per share and at an exercise price per share to be determined at the
time of the Company's initial public offering, respectively, were
outstanding at December 31, 1996 and 1997 and options to purchase 1,583,972
shares and 138,389 shares of common stock at $3.45 per share and at an
exercise price per share to be determined at the time of the Company's
initial public offering, were outstanding at December 31, 1998, but were
not included in the computation of diluted earnings per share because to do
so would be antidilutive. These securities could potentially be dilutive in
the future.
20.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
1,873,214 shares of Common Stock. On June 28, 1996, the Board of Directors
granted options to purchase an aggregate of 1,873,214 shares of Common
Stock. The exercise price with respect to 1,734,825 shares is $3.45 per
share. The exercise price with respect to 138,389 shares will be the price
per share obtained in an initial public offering. All options vested on
the date of such grant and are exercisable at the earlier of ten years
from the date of grant or upon an initial public offering of the Common
Stock or certain change of control events. Options expire 10 years from
the date of the grant of such option, subject to earlier termination by
the Board of Directors. Compensation expense of $22,938 was recorded in
the Company's financial statements for the year ending December 31, 1996.
On July 29, 1998, the Company entered into an agreement with an executive
who terminated his employment with the Company (the "Agreement"). In
connection with the Agreement, the executive was granted the right to
exercise his options at the option price of $3.45 per share, and
simultaneously, the Company reacquired these shares at a fair value of
$12.30 per share.
F-20
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
20.STOCK OPTION PLAN--(continued)
A summary of the status of the Company's stock option plan as of December
31, 1998 and changes during the year ending on that date is presented
below:
<TABLE>
<CAPTION>
Options with Exercise Options with Exercise
Price Equal to Market Price Less Than the Market
Price of Stock on Grant Price of Stock at Date of
Date Grant
------------------------ --------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------- ---------------- --------- ----------------
<S> <C> <C> <C> <C>
Outstanding at January
1, 1996................ 0 0
Granted................. 138,389 (1) 1,734,825 $ 3.45
Exercised............... -- --
Cancelled............... -- -- --
------- --- --------- ------
Outstanding at December
31, 1996............... 138,389 (1) 1,734,825 $ 3.45
=== ======
Granted................. -- --
Exercised............... -- --
Cancelled............... -- -- --
------- --- --------- ------
Outstanding at December
31, 1997............... 138,389 (1) 1,734,825 $ 3.45
===
Granted................. -- --
Exercised............... -- 150,853
Cancelled............... -- -- --
------- --- --------- ------
Outstanding at December
31, 1998............... 138,389 (1) 1,583,972 $ 3.45
======= === ========= ======
Options exercisable at
December 31, 1996, 1997
and 1998............... 0 0
======= =========
Weighted average fair
value of options
Granted during 1996.... (1) $16.67
=== ======
</TABLE>
- --------
(1) Exercise price to be determined at the time of the Company's initial public
offering. At December 31, 1998, there were no options available for future
grants under the Option Plan. The following table summarizes information
about stock options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding
---------------------------------------------------------------------------------
Number Weighted Average
Exercise Outstanding Remaining Weighted Average
Prices at 12/31/98 Contractual Life Exercise Price
-------- ----------- ---------------- ----------------
<S> <C> <C> <C>
$3.45 1,583,972 7.5 years $3.45
(1) 138,389 7.5 years (1)
---------
1,722,361
=========
</TABLE>
- --------
(1) Exercise price to be determined at the time of the Company's initial public
offering.
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
F-21
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
20.STOCK OPTION PLAN--(continued)
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:
<TABLE>
<S> <C>
Net loss:
As reported........................................................ ($4,306)
=======
Pro forma.......................................................... ($5,321)
=======
</TABLE>
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.
21.RELATED PARTIES TRANSACTIONS
In connection with the Recapitalization, certain members of the Company's
management were granted restricted pay-in-kind preferred stock and
restricted common stock of $1,022 and $478, respectively. Compensation
associated with the grant of these shares was measured by the difference
between the aggregate price of the restricted shares and the aggregate
fair value of the shares on the measurement date. Such compensation is
being recognized ratably over the six-year period for which services must
be performed in order for these individuals to receive the shares without
restriction. The Company is recognizing compensation expense over six
years commencing October 17, 1994, which is the date the Company effected
the Recapitalization and granted the restricted shares. Compensation
expense related to these shares for the period ended December 31, 1998 and
1997 totaled $250 in each year.
In connection with the Recapitalization, on October 17, 1994, certain
designees of Kelso acquired shares of the Company's Common Stock. The
proceeds from the sale of these shares were received subsequent to
December 31, 1994.
In 1996, two officers of the Company were granted shares of common stock
as additional compensation totalling approximately $300. These shares are
included in the accompanying balance sheets as redeemable equity
securities.
Kelso provides financial advisory services to the Company for an annual
fee. Payment for these services and reimbursement of expenses totalled
$294 in 1998, $270 in 1997 and $268 in 1996.
F-22
<PAGE>
HCI DIRECT, INC. (FORMERLY HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
22.PREFERRED STOCK
The PIK Preferred Stock is entitled to cumulative dividends, payable
solely in additional shares of PIK Preferred Stock, at an estimated rate
of 25% per annum when, as and if declared by the Board of Directors of the
Company. Cumulative dividends on preferred shares that have not been
declared since the Recapitalization total approximately 6.4 million shares
of preferred stock. The PIK Preferred Stock has an aggregate liquidation
preference of approximately $37.4 million plus the liquidation preference
of additional shares of PIK Preferred Stock issued in payment of dividends
on the PIK Preferred Stock and the liquidation preference in respect of
accumulated and unpaid dividends, whether or not declared. The PIK
Preferred Stock is redeemable at the option of the Company in whole or in
part at any time for a redemption price equal to the liquidation
preference thereof plus all accumulated and unpaid dividends, whether or
not declared, to the date of redemption. In addition, the PIK Preferred
Stock has no voting rights, except that the PIK Preferred Stock is
entitled to vote, as a separate class, in the event of any merger,
consolidation, or sale of all or substantially all of the Company's
assets, any amendment to the Company's Restated Certificate of
Incorporation or any authorization or issuance by the Company of capital
stock ranking senior to or pari passu with the PIK Preferred Stock with
respect to dividends or liquidation preference or securities convertible
into or exchangeable or exercisable for such capital stock.
23.QUARTERLY INFORMATION (UNAUDITED)
Summarized quarterly financial data for 1998 and 1997 are set forth below:
<TABLE>
<CAPTION>
March June September December Total
------- ------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
1998
Net Revenues..................... $43,678 $50,516 $48,042 $56,445 $198,681
Gross Profit..................... 21,942 26,309 27,506 31,572 107,329
Operating Income................. 5,162 8,080 11,609 13,229 38,080
Net Income....................... 697 2,446 4,614 5,707 13,464
1997
Net Revenues..................... $45,274 $49,589 $39,414 $44,405 $178,682
Gross Profit..................... 22,234 25,532 22,285 26,512 96,563
Operating Income................. 5,276 9,509 8,866 12,203 35,854
Net Income....................... 464 3,025 2,686 5,418 11,593
</TABLE>
24.SUBSEQUENT EVENTS--CREDIT FACILITIES
On March 26, 1999, the Company amended its Credit Agreement to include an
Incremental Revolving Loan of $5,000. This loan can be made from time to
time after the existing revolving credit facility equals $20,000. The
Incremental Revolving Loan will be terminated when all principal and
accrued interest has been repaid but no later than December 31, 1999.
In addition to the Incremental Revolving Loan, the Company amended certain
financial ratios as defined in the Agreement. These ratios were effective
for the December 31, 1998 quarter. (See Note 10.)
F-23
<PAGE>
HCI DIRECT, INC. (FORMERLY HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
25. SUBSEQUENT EVENTS--CHANGE IN COMPANY NAME AND STOCK TRANSACTIONS
On June 24, 1999, the Board of Directors and Stockholders approved the
Company's filing of a Restated Certificate of Incorporation that was amended to
(i) change the name of the Company to HCI Direct, Inc., (ii) increase the
number of shares of capital stock which the Company is authorized to issue to
73 million shares, consisting of (a) 60 million shares of Common Stock, par
value $.01 per share, (b) 1 million shares of Class A Common Stock, par value
$.01 per share and (c) 12 million shares of preferred stock, par value $.01 per
share, which includes 4 million shares of payment-in-kind preferred stock, par
value $.01 per share, having the powers, preferences, and rights and
qualifications, limitations and restrictions set forth in the Company's
Restated Certificate of Incorporation. The changes in the authorized shares
have been retroactively reflected in the accompanying consolidated financial
statements.
On June 24, 1999, the Board of Directors declared an 8.6976942 to 1 stock
split, effective June 24, 1999. All Common Stock and Class A Common Stock share
and per share data have been retroactively adjusted to reflect the 8.6976942 to
1 stock split in the accompanying consolidated financial statements.
The Company is contemplating an initial public offering of approximately
10,000,000 shares of its Common Stock. In connection with this contemplated
offering, the Company entered into the following related transactions:
a) On June 14, 1999, the Company offered to repurchase all of the outstanding
13 3/4% Senior Subordinated notes through a tender offer. In connection
with the tender offer, noteholders were asked for their consent to amend
the indenture that governs the notes to eliminate covenants restricting or
limiting such things as incurring debt, selling assets, paying dividends,
repurchasing stock and making investments. On June 24, 1999, the consent
solicitation expired. As of June 24, 1999, holders of 100% of the
outstanding notes had tendered their notes and consented to the proposed
amendments to the indenture. These tenders and consents can no longer be
withdrawn or revoked. On June 25, 1999, the Company and the trustee signed
a supplemental indenture to reflect the amendments that will become
operative upon the Company's acceptance of the tender of the notes. The
Company expects to tender the notes immediately prior to the closing of the
contemplated initial public offering. Payments to holders of the notes
includes a tender premium, a consent payment and accrued interest.
b) On June 25, 1999, the Company entered into a commitment letter with
Bankers Trust Company for a new credit facility for borrowings up to
$135,000.
In connection with the contemplated offering the Company will repurchase
all of the outstanding payment-in-kind preferred stock for a price equal to the
aggregate liquidation preference at the time of closing of the offering. In
connection with this repurchase, the Company will also repurchase 62,502 shares
of Common Stock from affiliates of Kelso, designees of Kelso, management and
certain other stockholders for approximately $1,000.
F-24
<PAGE>
HCI DIRECT, INC. (FORMERLY HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except share and per share data)
On June 24, 1999, the Board of Directors approved that the Company's 1996
Stock Option Plan be amended to, among other things, increase from 1,873,214 to
2,795,169, adjusted for the Company's stock split, the number of shares of
Common Stock authorized for issuance under the plan.
On June 24, 1999, the Board of Directors approved the Company's 1999 Stock
Option Plan providing for the grant of Awards (as defined in the Plan) to
certain employees, consultants and directors of the Company of up to 600,000
shares of Common Stock under the terms and conditions set forth in the 1999
Stock Option Plan.
On June 24, 1999, the Board of Directors approved grants of options to two
officers for the purchase of 921,956 shares of Common Stock under the 1996
Stock Option Plan. Options to purchase 691,467 shares have an option exercise
price equal to $15.03 per share and options to purchase 230,489 shares have an
option exercise price equal to the per share price to the public in the
contemplated initial public offering. The Company will incur compensation
expense to the extent the offering price per share in the contemplated initial
public offering is in excess of the exercise price of these shares.
F-25
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS AS OF
MARCH 27, 1999 AND DECEMBER 31, 1998
(Dollars in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
March 27, December 31,
1999 1998
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ -- $ --
Accounts receivable, less an allowance for doubtful
accounts of $3,320 and $1,901 in 1999 and 1998,
respectively.......................................... 37,456 32,214
Inventories ........................................... 19,785 20,008
Prepaid and other current assets ...................... 3,780 3,748
-------- --------
Total current assets ................................. 61,021 55.970
PROPERTY AND EQUIPMENT, net ............................ 17,327 17,906
DEFERRED CUSTOMER ACQUISITION COSTS..................... 51,067 46,933
DEFERRED DEBT ISSUANCE COSTS, less accumulated
amortization of $7,137 and $6,774 in 1999 and 1998,
respectively........................................... 4,427 4,790
GOODWILL, less accumulated amortization of $92 and $61
in 1999 and 1998, respectively ........................ 3,702 3,733
OTHER ASSETS............................................ 621 707
-------- --------
TOTAL .................................................. $138,165 $130,039
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Borrowings under line of credit ....................... $ 12,750 $ 3,400
Current portion of long-term debt ..................... 7,617 7,617
Current portion of capital lease obligations .......... 1,575 1,726
Bank overdrafts ....................................... 1,909 1,397
Accounts payable ...................................... 8,086 10,321
Accrued expenses and other current liabilities ........ 10,573 9,389
Accrued interest ...................................... 2,255 4,771
Accrued coupon redemption costs ....................... 4,681 4,679
Deferred income taxes ................................. 8,527 8,115
-------- --------
Total current liabilities ............................ 57,973 51,415
LONG-TERM DEBT, Less current portion ................... 121,471 121,433
CAPITAL LEASE OBLIGATIONS, Less current portion ........ 4,875 5,176
ACCRUED COUPON REDEMPTION COSTS ........................ 408 408
DEFERRED INCOME TAXES .................................. 11,300 10,884
-------- --------
Total liabilities .................................... 196,027 189,316
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES
REDEEMABLE EQUITY SECURITIES............................ 914 885
-------- --------
STOCKHOLDERS' DEFICIT:
Preferred stock, $.01 par value, 12,000,000 shares
authorized;
4,000,000 shares designated as pay-in-kind preferred
stock, stated at liquidation value of $10 per share;
25% cumulative, (liquidation preference of $106,884
and $101,236 in 1999 and 1998, respectively),
3,748,497 shares issued in 1999 and 1998, 3,739,782
shares outstanding in 1999 and 1998 .................. 37,485 37,485
Common stock, voting, $.01 par value; 60,000,000 shares
authorized, 11,655,971 shares issued, 11,494,194
shares outstanding in 1999 and 1998 .................. 117 117
Common stock, Class A, non-voting, $.01 par value:
1,000,000 shares authorized, 657,998 shares issued and
outstanding........................................... 7 7
Additional paid-in capital ............................ 18,730 18,759
Compensatory stock options outstanding ................ 20,943 20,943
Accumulated deficit.................................... (133,598) (134,950)
Restricted stock ...................................... (384) (447)
-------- --------
(56,700) (58,086)
Treasury stock, at cost, 170,492 shares in 1999 and
1998 (8,715 preferred shares and 161,777 common
shares) .............................................. (2,076) (2,076)
-------- --------
Net stockholders' deficit............................. (58,776) (60,162)
-------- --------
TOTAL................................................... $138,165 $130,039
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
F-26
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC. )
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTH PERIODS ENDED MARCH 27, 1999 AND MARCH 28, 1998
(Dollars in thousands, except share and per share data)
(Unaudited)
<TABLE>
<CAPTION>
March 27, March 28,
1999 1998
----------- -----------
<S> <C> <C>
NET REVENUES......................................... $ 57,145 $ 43,678
----------- -----------
COSTS AND EXPENSES:
Cost of sales....................................... 29,141 21,736
Administrative and general expenses................. 3,906 3,457
Provision for doubtful accounts..................... 4,745 3,128
Marketing costs..................................... 10,912 8,360
Coupon redemption costs............................. 1,087 1,065
Depreciation and amortization....................... 864 774
Other expenses (income)............................. 256 (4)
----------- -----------
OPERATING INCOME..................................... 6,234 5,162
Interest income..................................... 9 37
Interest expense.................................... 4,062 4,074
----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES............. 2,181 1,125
PROVISION FOR INCOME TAXES........................... 829 428
----------- -----------
NET INCOME........................................... $ 1,352 $ 697
=========== ===========
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS........... $ (4,324) $ (4,948)
=========== ===========
NET LOSS PER SHARE:
Basic and Diluted................................... $ (0.35) $ (0.40)
=========== ===========
Weighted Average Shares (Basic and Diluted)......... 12,239,621 12,250,546
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
F-27
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS THREE MONTH PERIODS ENDED MARCH
27, 1999 AND MARCH 28, 1998
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
March 27, March 28,
1999 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 1,352 $ 697
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization............................. 864 774
Amortization of debt issue costs and discounts............ 430 412
Other..................................................... 63 59
Amortization of deferred customer acquisition costs....... 9,697 7,262
(Increase) decrease in operating assets:
Accounts receivable...................................... (5,242) (592)
Inventories.............................................. 223 (489)
Payments for deferred customer acquisition costs......... (13,831) (12,157)
Prepaid and other current assets......................... (32) 214
Other assets............................................. 61 (97)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other
liabilities............................................. (3,055) 1,208
Deferred income taxes.................................... 828 323
Accrued coupon redemption costs.......................... 2 16
------- -------
Net cash used in operating activities................... (8,640) (2,370)
------- -------
INVESTING ACTIVITIES:
Acquisitions of property and equipment.................... (229) (280)
Proceeds from sale of property and equipment.............. -- 8
------- -------
Net cash used in investing activities................... (229) (272)
------- -------
FINANCING ACTIVITIES:
Net borrowings under line of credit....................... 9,350 --
Payments on bank and other financing...................... (29) (1,279)
Payments on capital leases................................ (452) (406)
------- -------
Net cash provided by (used in) financing activities..... 8,869 (1,685)
------- -------
NET DECREASE IN CASH AND CASH EQUIVALENTS.................. -- (4,327)
Cash and cash equivalents at beginning of year............ -- 4,327
------- -------
Cash and cash equivalents at end of period................ $ -- $ --
======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.................................................. $ 6,123 $ 6,058
======= =======
Income taxes.............................................. $ 1 $ 105
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
F-28
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(Unaudited)
1.CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying condensed consolidated
financial statements of HCI Direct Inc. (formerly, Hosiery Corporation of
America, Inc.) and subsidiaries (See Note 7), which are unaudited except
for the Consolidated Balance Sheet as of December 31, 1998, which is
derived from audited financial statements, include all normal and
recurring adjustments necessary to present fairly the Company's financial
position as of March 27, 1999 and the results of operations and cash flows
for the three month periods ended March 27, 1999 and March 28, 1998.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto as of and for the year
ended December 31, 1998.
2.INVENTORIES
<TABLE>
<CAPTION>
March 27, December 31,
1999 1998
--------- ------------
<S> <C> <C>
Raw materials......................................... $ 708 $ 909
Work-in-process....................................... 2,939 3,023
Finished goods........................................ 13,588 13,500
Promotional and packing material...................... 2,550 2,576
------- -------
$19,785 $20,008
======= =======
</TABLE>
3.COMMITMENTS AND CONTINGENCIES
The Company has continuing obligations with certain members of management
pursuant to previously signed employment agreements.
The Company has agreed to pay Kelso an annual fee of $263 each year for
financial advisory services and to reimburse Kelso for out-of-pocket
expenses incurred. Non-officer directors of the Company, other than those
directors who are affiliated with Kelso, will be paid an annual retainer
of $20. In addition, all out-of-pocket expenses of non-officer directors,
including those directors who are affiliated with Kelso, related to
meetings attended, will be reimbursed by the Company. Non-officer
directors, including those directors affiliated with Kelso, will receive
no additional compensation for their services as directors of the Company
except as described above.
The Company is involved in, or has been involved in, litigation arising in
the normal course of its business. The Company cannot predict the timing
or outcome of these claims and proceedings. Currently, the Company is not
involved in any litigation which is expected to have a material effect on
the financial position of the business or the results of operations and
cash flows of the Company. The Company has been, or is involved in, the
proceedings 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
F-29
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(Unaudited)
forth specific rules with which the Company must comply in conducting its
mail order business and permanently enjoins the Company, its successors
and assigns, its officers, agents, representatives and employees, and
anyone acting in concert with the Company from violating various FTC and
Postal Service laws and regulations. The FTC had previously made inquiries
about some aspects of the Company's promotional materials prompting the
Company to adopt revised promotional materials which, the Company believes
but cannot assure, will meet the concerns expressed by the FTC.
In 1997, the Company reached an agreement with a multistate group
consisting of eleven states that sought to impose certain disclosure
requirements on the Company's promotional materials. The agreement became
effective September 1, 1997. During 1997 and 1998, the Company's
promotional materials included the majority of modifications and
clarifications required by the agreement. The modifications the Company
has made to its solicitation materials has had a material adverse effect
on its domestic response rates. Consequently, the Company feels these
modifications and clarifications will have no additional negative impact
on the Company's response rates. However, response rates are only one of
several factors that affect the Company's results of operations. Also,
there may be some additional modifications which will need to be made to
the Company's promotional materials to fully satisfy the terms of the
Company's agreement with the multistate group, and no assurances can be
given that such changes will not have a further effect on the Company's
response rate. In accordance with the agreement, the Company paid $300 in
administrative expenses and fees during 1997. The agreement also required
that refunds be made to customers under certain circumstances for a six-
month period. These refunds were not material to the Company's financial
condition or results of operations.
State regulators, the Federal Trade Commission and trade associations from
time to time contact the Company with inquiries regarding the Company's
promotional materials. There are currently inquiries outstanding from two
states which were not part of the multistate group. While the Company
believes that it will be able to resolve these inquiries, there can be no
assurance that these or other state regulators or trade associations will
not require or seek to impose additional changes to the Company's
promotional materials or billing practices, and no assurance can be given
that such changes to our materials or billing practices will not be
significant or will not have a material adverse effect on the Company's
future financial condition or results of operations.
4.NOTE PAYABLE TO BANK
The Company has a revolving credit facility which provides for maximum
borrowings of $25,000. The Company can borrow based on a formula which
comprises the sum of 80% of accounts receivable and 50% of inventory.
Interest is charged at the bank's prime lending rate plus 0.5% or 1.5%
over the Eurodollar rate. At March 27, 1999, there were outstanding
borrowings of $12.8 million at a weighted average interest rate of 7.1%.
In addition, there were outstanding letters of credit of approximately
$0.8 million resulting in $11.4 million available to borrow.
F-30
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(Unaudited)
5.EARNINGS PER SHARE
Earnings per share for the three months ended March 27, 1999 and March 28,
1998 have been computed in accordance with SFAS 128 "Earnings Per Share".
The following table sets forth the computation of basic and diluted
earnings per share (in thousands, except share and per share data):
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 27, March 28,
1999 1998
------------ ------------
<S> <C> <C>
Numerator:
Net income..................................... $ 1,352 $ 697
Undeclared preferred stock dividends........... (5,648) (5,617)
Accretion of redeemable preferred stock to
additional paid-in capital.................... (28) (28)
---------- ----------
Numerator for basic and diluted loss per share-
loss applicable to common shareholders........ (4,324) (4,948)
Denominator for basic and diluted earnings per
share-weighted-average shares................... 12,239,621 12,250,546
---------- ----------
Basic and diluted loss per share............... ($0.35) ($0.40)
========== ==========
</TABLE>
Options to purchase 1,583,972 shares and 138,389 shares of common stock at
$3.45 per share and an exercise price per share to be determined at the
time of the Company's initial public offering were outstanding at March
27, 1999 and options to purchase 1,734,825 shares and 138,389 shares of
common stock at $3.45 per share and an exercise price per share to be
determined at the time of the Company's initial public offering were
outstanding at March 28, 1998. These shares were not included in the
computation of diluted earnings per share because to do so would be
antidilutive. These securities could potentially be dilutive in the
future.
6.OPERATING SEGMENTS
The Company organizes its business units into two geographic segments:
North America and International. Segment information for the three month
periods ended March 27, 1999 and March 28, 1998 is as follows:
<TABLE>
<CAPTION>
March 27, 1999
-----------------------------
North
America International Total
------- ------------- -------
<S> <C> <C> <C>
Revenues from external customers.............. $45,838 $11,307 $57,145
Intersegment revenues......................... 1,441 -- 1,441
Segment profit (EBITDA) (1)................... 8,333 (1,226) 7,107
Segment assets................................ 115,144 23,021 138,165
<CAPTION>
March 28, 1998
-----------------------------
North
America International Total
------- ------------- -------
<S> <C> <C> <C>
Revenues from external customers.............. $38,586 $ 5,092 $43,678
Intersegment revenues......................... 1,129 -- 1,129
Segment profit (EBITDA) (1)................... 6,945 (972) 5,973
Segment assets................................ 92,338 8,942 101,280
</TABLE>
F-31
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(Unaudited)
- --------
(1) Earnings before interest, taxes, depreciation and amortization (EBITDA)
represents income before provision for income taxes of $2,181 and $1,125
for the three month period ended March 27, 1999 and March 28, 1998,
respectively, excluding interest expense of $4,062 and $4,074 for the three
month period ended March 27, 1999 and March 28, 1998, respectively, and
depreciation and amortization of $864 and $774 for the three month period
ended March 27, 1999 and March 28, 1998, respectively. EBITDA does not
purport to represent net income or net cash provided by operating
activities, as those terms are defined under generally accepted accounting
principles. Further, the Company's measure of EBITDA may not be comparable
to similarly titled measures of other companies.
7.SUBSEQUENT EVENTS--CHANGE IN COMPANY NAME AND STOCK TRANSACTIONS
On June 24, 1999, the Board of Directors and Stockholders approved the
Company's filing of a Restated Certificate of Incorporation that was
amended to (i) change the name of the Company to HCI Direct, Inc., (ii)
increase the number of shares of capital stock which the Company is
authorized to issue to 73 million shares, consisting of (a) 60 million
shares of Common Stock, par value $.01 per share, (b) 1 million shares of
Class A Common Stock, par value $.01 per share, and (c) 12 million shares
of preferred stock, par value $.01 per share, which includes 4 million
shares of payment-in-kind preferred stock, par value $.01 per share,
having the powers, preferences, and rights and qualifications, limitations
and restrictions set forth in the Company's Restated Certificate of
Incorporation. All authorized share data has been adjusted to reflect
these changes.
On June 24, 1999, the Board of Directors and Stockholders approved an
8.6976942 to 1 stock split, effective June 24, 1999. All Common Stock and
Class A Common Stock share and per share data have been adjusted to
reflect the 8.6976942 to 1 stock split.
The Company is contemplating an initial public offering of approximately
10,000,000 shares of its Common Stock. In connection with this
contemplated offering, the Company entered into the following related
transactions:
a) On June 14, 1999, the Company offered to repurchase all of the outstanding
13 3/4% Senior Subordinated notes through a tender offer. In connection
with the tender offer, noteholders were asked for their consent to amend
the indenture that governs the notes to eliminate covenants restricting or
limiting such things as incurring debt, selling assets, paying dividends,
repurchasing stock and making investments. On June 24, 1999, the consent
solicitation expired. As of June 24, 1999, holders of 100% of the
outstanding notes had tendered their notes and consented to the proposed
amendments to the indenture. These tenders and consents can no longer be
withdrawn or revoked. On June 25, 1999, the Company and the trustee signed
a supplemental indenture to reflect the amendments that will become
operative upon the Company's acceptance of the tender of the notes. The
Company expects to tender the notes immediately prior to the closing of the
contemplated initial public offering. Payments to holders of the notes
includes a tender premium, a consent payment and accrued interest.
b) On June 25, 1999, the Company entered into a commitment letter with
Bankers Trust Company for a new credit facility for borrowings up to
$135,000.
F-32
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND
SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(Unaudited)
In connection with the contemplated offering, the Company will repurchase
all of the outstanding payment-in-kind preferred stock for a price equal to the
aggregate liquidation preference at the time of closing of the offering. In
connection with this repurchase, the Company will also repurchase 62,502 shares
of Common Stock from affiliates of Kelso, designees of Kelso, management and
certain other stockholders for approximately $1,000.
On June 24, 1999, the Board of Directors approved that the Company's 1996
Stock Option Plan be amended to, among other things, increase from 1,873,214 to
2,795,169, adjusted for the Company's stock split, the number of shares of
Common Stock authorized for issuance under the plan.
On June 24, 1999, the Board of Directors approved the Company's 1999 Stock
Option Plan providing for the grant of Awards (as defined in the Plan) to
certain employees, consultants and directors of the Company of up to 600,000
shares of Common Stock under the terms and conditions set forth in the 1999
Stock Option Plan.
On June 24, 1999, the Board of Directors approved grants of options to two
officers for the purchase of 921,956 shares of Common Stock under the 1996
Stock Option Plan. Options to purchase 691,467 shares have an option exercise
price equal to $15.03 per share and options to purchase 230,489 shares have an
option exercise price equal to the per share price to the public in the
contemplated initial public offering. The Company will incur compensation
expense to the extent the offering price per share in the contemplated initial
public offering is in excess of the exercise price of these shares.
F-33
<PAGE>
UNDERWRITING
HCI Direct and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the
number of shares indicated in the following table. Goldman, Sachs & Co., Bear,
Stearns & Co. Inc., BancBoston Robertson Stephens Inc. and First Union Capital
Markets Corp. are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. ...................................
Bear, Stearns & Co. Inc. ...............................
BancBoston Robertson Stephens Inc. .....................
First Union Capital Markets Corp. ......................
----------
Total................................................. 10,000,000
==========
</TABLE>
----------------
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
1,500,000 shares from HCI Direct and a number of current stockholders to cover
such sales. If the underwriters exercise this option, they may, under certain
circumstances, purchase shares from KIAV, KEPV, certain affiliates and
designees of Kelso, and Joseph A. Murphy, as well as from HCI Direct. If shares
are not purchased from these stockholders, HCI Direct will sell all the shares
that the underwriters may elect to purchase. The underwriters may exercise the
option for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts to
be paid to the underwriters. Such amounts are shown assuming both no exercise
and full exercise of the underwriters' option to purchase 1,500,000 additional
shares.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share........................ $ $
Total............................ $ $
</TABLE>
Shares sold by the underwriters to the public are being offered at the
initial public offering price set forth on the cover page of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $ per share from
the initial public offering price. If all of the shares are not sold at the
initial offering price, the representatives may change the offering price and
the other selling terms.
HCI Direct, our directors, executive officers, the Kelso affiliates and our
other significant stockholders have agreed with the underwriters not to dispose
of or hedge any of their common stock or securities convertible into or
exchangeable for shares of common stock, subject to certain exceptions, during
the period from the date of this prospectus continuing through the date 180
days after the date of this prospectus, except with the prior written consent
of Goldman, Sachs & Co. See "Shares Eligible for Future Sale" for a discussion
of certain transfer restrictions.
U-1
<PAGE>
Prior to the offering, there has been no public market for the shares. The
initial public offering price will be negotiated among HCI Direct and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be HCI Direct's historical performance, estimates of the
business potential and earnings prospects of HCI Direct, an assessment of HCI
Direct's management and the consideration of the above factors in relation to
market valuation of companies in related businesses.
We expect the common stock to be listed on the NYSE under the symbol "HCD".
In order to meet one of the requirements for listing the common stock on the
NYSE, the underwriters have undertaken to sell lots of 100 or more shares to a
minimum of 2,000 beneficial holders.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters may impose a penalty bid. This occurs when a particular
underwriter pays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
shares may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the NYSE, in
the over the counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed 5%
of the total number of shares offered.
We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $2,000,000.
HCI Direct and the selling stockholders have agreed to indemnify the
several underwriters against certain liabilities, including liabilities under
the Securities Act.
At HCI Direct's request, the underwriters have reserved for sale at the
initial public offering price up to 5% of the shares offered by HCI Direct to
be sold to directors, officers or employees of HCI Direct. These shares may
also be sold to other persons associated with HCI Direct's directors, officers,
employees or controlling persons. The number of shares available for sale to
the general public will be reduced to the extent such shares are purchased. Any
of these reserved shares not so purchased will be offered by the underwriters
on the same basis as the other shares offered hereby.
Bear, Stearns & Co. Inc. has engaged in investment banking transactions
with HCI Direct, for which it has received customary compensation and may do so
in the future. First Union National Bank, an affiliate of First Union Capital
Markets Corp., is a lender under our existing credit facility. Bear, Stearns &
Co. Inc. will act as dealer manager for the tender offer for the senior
subordinated notes. HCI Direct will pay an advisory fee of $750,000 to Bear,
Stearns & Co. Inc. in connection with this offering.
U-2
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell only the shares offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Forward-Looking Statements............................................... 15
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 20
Pro Forma Consolidated Financial Statements (Unaudited).................. 21
Selected Consolidated Financial and Other Data........................... 26
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 28
Business................................................................. 37
Management............................................................... 45
Security Ownership of Management and Beneficial Owners of More Than 5% of
Our Common Stock........................................................ 54
Certain Relationships and Related Transactions........................... 56
Description of Our Capital Stock......................................... 58
Shares Eligible for Future Sale.......................................... 61
Legal Matters............................................................ 62
Experts.................................................................. 62
Where Can You Find More Information...................................... 62
Index to Consolidated Financial Statements............................... F-1
Underwriting............................................................. U-1
</TABLE>
-----------
Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether
or not participating in this offering, may be required to deliver a
prospectus. This is in addition to a dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to an unsold
allotment or subscription.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
10,000,000 Shares
HCI Direct, Inc.
Common Stock
-----------
[LOGO]
-----------
Goldman, Sachs & Co.
Bear, Stearns & Co. Inc.
BancBoston Robertson Stephens
First Union Capital Markets Corp.
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
The following is a list of estimated expenses in connection with the
issuance and distribution of the securities being registered:
<TABLE>
<S> <C>
SEC registration fee................................................ $59,483
Printing and engraving costs........................................ *
Legal fees and expenses............................................. *
Accounting fees and expenses........................................ *
NYSE listing fee.................................................... *
NASD filing fee..................................................... 17,750
Miscellaneous....................................................... *
-------
Total............................................................. $ *
=======
</TABLE>
- --------
*To be provided by amendment.
ITEM 14. Indemnification of Directors and Officers.
Subsection (a) of Section 145 of the General Corporation Law of the State
of Delaware (the "DGCL") empowers a corporation to indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees) judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he
acted in any of the capacities set forth above, against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with the
defense or settlement of such action or suit if he acted under similar
standards, except that no indemnification may be made in respect of any claim,
issue or matter as to which such person shall have been adjudged to be liable
to the corporation unless and only to the extent that the Court of Chancery or
the court in which action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 145 further provides that to the extent that a director or officer
of a corporation has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subsections (a) and (b) of
Section 145, or in the defense of any claim, issue or matter therein, he shall
be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith; that indemnification
provided by, or granted pursuant to, Section 145 shall not be deemed exclusive
of any other rights to which those seeking indemnification may be entitled; and
empowers the corporation to purchase and maintain insurance on behalf of any
person
II-1
<PAGE>
who is or was a director or officer of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or against
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such whether or not the corporation
would have the power to indemnify him against such liabilities under Section
145.
As permitted by the DGCL, the Restated Certificate of Incorporation of the
Company, a copy of which is filed as Exhibit 3.1 to this Registration
Statement, eliminates all liability of the Company's directors for monetary
damages for breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Company or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) pursuant to Section
174 of the DGCL or (iv) for any transaction from which the director derived an
improper personal benefit.
The By-Laws of the Company, a copy of which is filed as Exhibit 3.4 to this
Registration Statement, provides the Company with the authority to indemnify
directors, officers and agents of the Company to the full extent allowed by the
laws of the State of Delaware.
The Company maintains directors' and officers' liability insurance for the
directors and officers of the Company through Executive Risk Indemnity up to
$3,000,000 for each loss and for each policy period.
ITEM 15. Recent Sales of Unregistered Securities.
On July 15, 1998, the Company issued an aggregate of 17,344 shares of
common stock upon exercise of options awarded to Mr. Henry in 1996 for an
aggregate consideration of $520,320.
The transaction described above was exempt from the registration
requirements of the Securities Act in reliance on Section 4(2) of the
Securities Act on the basis that such transaction did not involve a public
offering.
II-2
<PAGE>
ITEM 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
2.1 Recapitalization and Stock Purchase Agreement, dated as of July 19,
1994 among the Company, Joseph A. Murphy and HCA Holdings, Inc.
(incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 33-87392).
2.2 First Amendment to Recapitalization and Stock Purchase Agreement,
dated as of October 4, 1994 (incorporated by reference to the
Company's Registration Statement on Form S-1, File No. 33-87392).
2.3 Kelso Investment Associates V, L.P. letter agreement, dated October
17, 1994 to purchase securities of the Company (incorporated by
reference to the Company's Registration Statement on Form S-1, File
No. 33-87392).
2.4 Kelso Equity Partners V, L.P. letter agreement, dated October 17, 1994
to purchase securities of the Company (incorporated by reference to
the Company's Registration Statement on Form S-1, File No. 33-87392).
2.5 Form of Stock Subscription Agreement, dated as of October 17, 1994
between the Company and certain stockholders of the Company
(incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 33-87392).
2.6 Management Stock Purchase and Restricted Stock Award Agreement, dated
as of October 17, 1994, between the Company and John F. Biagini
(incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 33-87392).
2.7 Management Stock Purchase and Restricted Stock Award Agreement, dated
as of October 17, 1994, between the Company and Hans Lengers
(incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 33-87392).
2.8 Escrow Agreement, dated as of October 17, 1994, among the Company,
Joseph A. Murphy and Midlantic Bank, N.A., as Escrow Agent
(incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 33-87392).
2.9 Pledge Agreement, dated as of October 17, 1994, between Joseph A.
Murphy, as Pledgor, and the Company, as Pledgee (incorporated by
reference to the Company's Registration Statement on Form S-1, File
No. 33-87392).
2.10 Indemnity Agreement, dated as of October 17, 1994, between Joseph A.
Murphy and the Company (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87392).
2.11 Form of Seventh Amendment to Recapitalization and Stock Purchase
Agreement, dated as of April 12, 1995, and First Amendment to Escrow
Agreement, dated as of April 12, 1995, as a part thereof (incorporated
by reference to the Company's Registration Statement on Form S-1, File
No. 33-87392).
*3.1 Form of Restated Certificate of Incorporation of the Company.
3.2 By-Laws of the Company (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87392).
4.1 Indenture, dated as of October 17, 1994, between the Company and
United States Trust Company of New York, as Trustee (incorporated by
reference to the Company's Registration Statement on Form S-1, File
No. 33-87392).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
4.2 Form of New Notes (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87392).
4.3 Exchange and Registration Rights Agreement, dated as of October 17,
1994, among the Company, Bear Stearns & Co. Inc. and BT Securities
Corporation (incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87392).
*4.4 Specimen Common Stock Certificate.
*4.5 First Supplemental Indenture, dated as of June 25, 1999, between the
Company and United States Trust Company of New York, as Trustee.
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
9.1 Stockholders' Agreement, dated as of October 17, 1994, among the
Company, Kelso Investment Associates V, L.P., Kelso Equity Partners V,
L.P., Joseph A. Murphy, John F. Biagini, Hans L. Lengers and such
other stockholders who become parties to such agreement pursuant to
such agreement (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87392).
9.2 Form of Letter Agreement between the Company and certain stockholders
of the Company dated October 17, 1994 relating to the Stockholders'
Agreement (incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87392).
10.1 Credit Agreement, dated as of October 17, 1994, among the Company,
National Westminster Bank PLC, as Co-Agent, and the financial
institutions listed on the signature pages thereto (incorporated by
reference to the Company's Registration Statement on Form S-1, File
No. 33-87392).
10.2 Employment Agreement between U.S. Textile Corp. and Hans Lengers,
dated as of August 29, 1980, and an Amendment thereto among U.S.
Textile Corp., the Company and Hans Lengers, dated as of September 12,
1994 (incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87392).
10.3 Executive Employment Agreement between the Company and Robert J.
Mooney, dated as of September 16, 1993 (incorporated by reference to
the Company's Registration Statement on Form S-1, File No. 33-87392).
10.4 Letter Agreement dated October 17, 1994 between the Company and Kelso
& Company, Inc. regarding financial advisory and other services
(incorporated by reference to the Company's Registration Statement on
Form S-1, File No. 33-87392).
10.5 Purchase Agreement, dated as of October 7, 1994 among the Company,
Bear, Stearns & Co. Inc. and BT Securities Corporation (incorporated
by reference to the Company's Registration Statement on Form S-1, File
No. 33-87392).
10.6 Mailing List Contracts (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87392).
10.7 Executive Employment Agreement between the Company and Robert M.
Henry, dated as of August 7, 1995 (incorporated by reference to the
Company's Form 10-K for the fiscal year ended December 31, 1995).
*10.8 Amended and Restated Hosiery Corporation of America, Inc. 1996 Stock
Option Plan.
*10.9 Form of Hosiery Corporation of America, Inc. 1996 Stock Option Plan
Stock Option Agreement.
*10.10 HCI Direct, Inc. 1999 Stock Option Plan.
10.11 Executive Employment Agreement between the Company and Philip G.
Whalen, dated as of March 16, 1998 (incorporated by reference to the
Company's Form 10-Q for the second quarter of 1998).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.12 Executive Employment Agreement between the Company and Martin J.
Pearson, dated as of June 30, 1998 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the third quarter of
1998).
*10.13 Form of Bank Credit Agreement dated as of , 1999.
21.1 List of Subsidiaries of the Company.
23.1 Consent of Independent Auditors, Deloitte & Touche LLP.
*23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in
Exhibit 5.1).
+24.1 Power of Attorney.
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed.
(b) Financial Statement Schedules
<TABLE>
<S> <C>
Schedule I--Valuation and Qualifying Accounts--For the years ended
December 31, 1996, 1997 and 1998...................................... S-1
</TABLE>
All other Financial Statement Schedules have been omitted because they are
not applicable or not required or the required information is included in the
Consolidated Financial Statements or notes thereto.
ITEM 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such officer, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in Bucks County,
Commonwealth of Pennsylvania, on the 25th day of June 1999.
HCI Direct, Inc.
/s/ John F. Biagini
By: __________________________________
John F. Biagini
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ John F. Biagini Chairman and Chief
- ------------------------------------ Executive Officer June 25, 1999
John F. Biagini and Director
(principal
executive officer)
Vice President and
* Chief Financial June 25, 1999
- ------------------------------------ Officer (principal
Arthur C. Hughes accounting and
financial officer)
Director
* June 25, 1999
- ------------------------------------
Michael B. Goldberg
Director
* June 25, 1999
- ------------------------------------
Frank K. Bynum, Jr.
Director
* June 25, 1999
- ------------------------------------
Hans L. Lengers
*By: /s/ John F. Biagini
- ------------------------------------
as Attorney-in-fact
</TABLE>
II-6
<PAGE>
SCHEDULE I
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance at Charged to Balance of
Beginning of Costs and Amounts End of
Period Expenses Written Off Period
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Allowance for Uncollectible
Amounts....................... $1,448 $11,536 $11,083 $1,901
====== ======= ======= ======
YEAR ENDED DECEMBER 31, 1997
Allowance for Uncollectible
Accounts...................... $1,540 $10,791 $10,883 $1,448
====== ======= ======= ======
YEAR ENDED DECEMBER 31, 1996
Allowance for Uncollectible
Accounts...................... $1,263 $10,057 $ 9,780 $1,540
====== ======= ======= ======
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description Page
------- ----------- ----
<C> <S> <C>
*1.1 Form of Underwriting Agreement.
2.1 Recapitalization and Stock Purchase Agreement, dated as of July
19, 1994 among the Company, Joseph A. Murphy and HCA Holdings,
Inc. (incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87392).
2.2 First Amendment to Recapitalization and Stock Purchase
Agreement, dated as of October 4, 1994 (incorporated by
reference to the Company's Registration Statement on Form S-1,
File No. 33-87392).
2.3 Kelso Investment Associates V, L.P. letter agreement, dated
October 17, 1994 to purchase securities of the Company
(incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87392).
2.4 Kelso Equity Partners V, L.P. letter agreement, dated October
17, 1994 to purchase securities of the Company (incorporated by
reference to the Company's Registration Statement on Form S-1,
File No. 33-87392).
2.5 Form of Stock Subscription Agreement, dated as of October 17,
1994 between the Company and certain stockholders of the
Company (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87392).
2.6 Management Stock Purchase and Restricted Stock Award Agreement,
dated as of October 17, 1994, between the Company and John F.
Biagini (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87392).
2.7 Management Stock Purchase and Restricted Stock Award Agreement,
dated as of October 17, 1994, between the Company and Hans
Lengers (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87392).
2.8 Escrow Agreement, dated as of October 17, 1994, among the
Company, Joseph A. Murphy and Midlantic Bank, N.A., as Escrow
Agent (incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87392).
2.9 Pledge Agreement, dated as of October 17, 1994, between Joseph
A. Murphy, as Pledgor, and the Company, as Pledgee
(incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87392).
2.10 Indemnity Agreement, dated as of October 17, 1994, between
Joseph A. Murphy and the Company (incorporated by reference to
the Company's Registration Statement on Form S-1, File No. 33-
87392).
2.11 Form of Seventh Amendment to Recapitalization and Stock
Purchase Agreement, dated as of April 12, 1995, and First
Amendment to Escrow Agreement, dated as of April 12, 1995, as a
part thereof (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87392).
*3.1 Form of Restated Certificate of Incorporation of the Company.
3.2 By-Laws of the Company (incorporated by reference to the
Company's Registration Statement on Form S-1, File No. 33-
87392).
4.1 Indenture, dated as of October 17, 1994, between the Company
and United States Trust Company of New York, as Trustee
(incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87392).
4.2 Form of New Notes (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87392).
4.3 Exchange and Registration Rights Agreement, dated as of October
17, 1994, among the Company, Bear Stearns & Co. Inc. and BT
Securities Corporation (incorporated by reference to the
Company's Registration Statement on Form S-1, File No. 33-
87392).
*4.4 Specimen Common Stock Certificate.
*4.5 First Supplemental Indenture, dated as of June 25, 1999,
between the Company and United States Trust Company of New
York, as Trustee.
*5.1 Opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
9.1 Stockholders' Agreement, dated as of October 17, 1994, among
the Company, Kelso Investment Associates V., L.P., Kelso Equity
Partners V., L.P., Joseph A. Murphy, John F. Biagini, Hans
Lengers and such other stockholders who become parties to such
agreement pursuant to such agreement (incorporated by reference
to the Company's Registration Statement on Form S-1, File No.
33-87392).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description Page
------- ----------- ----
<C> <S> <C>
9.2 Form of Letter Agreement between the Company and certain
stockholders of the Company dated October 17, 1994 relating to
the Stockholders' Agreement (incorporated by reference to the
Company's Registration Statement on Form S-1, File No. 33-
87392).
10.1 Credit Agreement, dated as of October 17, 1994, among the
Company, National Westminster Bank PLC, as Co-Agent, and the
financial institutions listed on the signature pages thereto
(incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87392).
10.2 Employment Agreement between U.S. Textile Corp. and Hans
Lengers, dated as of August 29, 1980, and an Amendment thereto
among U.S. Textile Corp., the Company and Hans Lengers, dated
as of September 12, 1994 (incorporated by reference to the
Company's Registration Statement on Form S-1, File No. 33-
87392).
10.3 Executive Employment Agreement between the Company and Robert
J. Mooney, dated as of September 16, 1993 (incorporated by
reference to the Company's Registration Statement on Form S-1,
File No. 33-87392).
10.4 Letter Agreement dated October 17, 1994 between the Company and
Kelso & Company, Inc. regarding financial advisory and other
services (incorporated by reference to the Company's
Registration Statement on Form S-1, File No. 33-87392).
10.5 Purchase Agreement, dated as of October 7, 1994 among the
Company, Bear, Stearns & Co. Inc. and BT Securities Corporation
(incorporated by reference to the Company's Registration
Statement on Form S-1, File No. 33-87392).
10.6 Mailing List Contracts (incorporated by reference to the
Company's Registration Statement on Form S-1, File No. 33-
87392).
10.7 Executive Employment Agreement between the Company and Robert
M. Henry, dated as of August 7, 1995 (incorporated by reference
to the Company's Form 10-K for the fiscal year ended December
31, 1995).
*10.8 Amended and Restated Hosiery Corporation of America, Inc. 1996
Stock Option Plan.
*10.9 Form of Hosiery Corporation of America, Inc. 1996 Stock Option
Plan Stock Option Agreement.
*10.10 HCI Direct, Inc. 1999 Stock Option Plan.
10.11 Executive Employment Agreement between the Company and Philip
G. Whalen, dated as of March 16, 1998 (incorporated by
reference to the Company's Form 10-Q for the second quarter of
1998).
10.12 Executive Employment Agreement between the Company and Martin
J. Pearson, dated as of June 30, 1998 (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for
the third quarter of 1998).
*10.13 Form of Bank Credit Agreement dated as of , 1999.
21.1 List of Subsidiaries of the Company.
23.1 Consent of Independent Auditors, Deloitte & Touche LLP.
*23.2 Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included
in Exhibit 5.1).
+24.1 Power of Attorney.
</TABLE>
- --------
* To be filed by amendment.
+ Previously filed.
<PAGE>
Exhibit 21.1
HCI DIRECT, INC.
SUBSIDIARIES OF THE REGISTRANT
The following table lists each significant subsidiary of HCI Direct, Inc.
and its jurisdiction of organization.
<TABLE>
<CAPTION>
Jurisdiction of
Subsidiary Organization
- ---------- ---------------
<S> <C>
U.S. Textile Corporation (100% owned)................................... North Carolina
The Stonebury Group, Inc. (100% owned).................................. Nevada
Hosiery Corporation International, Inc. (100% owned).................... Delaware
Enchantress Hosiery of Canada (100% owned).............................. Ontario, Canada
</TABLE>
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors
HCI Direct, Inc. (formerly, Hosiery Corporation of America, Inc.)
Bensalem, Pennsylvania
We consent to the use in this Amendment No. 2 to Registration Statement No.
333-07197 on Form S-1 of HCI Direct, Inc. (formerly, Hosiery Corporation of
America, Inc.) and subsidiaries (the "Company") of our report dated March 5,
1999, (except for Note 24, as to which the date is March 26, 1999 and Note 25,
as to which the date is June 25, 1999) appearing in the Prospectus, which is
part of such Registration Statement, and to the reference to us under the
headings "Selected Consolidated Financial and Other Data" and "Experts" in
such Prospectus.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the consolidated financial statement
schedule of the Company, listed in Item 16. 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
June 25, 1999
