SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended April 1, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _______ to ________
Commission File No. 33-87392
HCI DIRECT, INC.
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-0782950
- ---------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3369 Progress Drive
Bensalem, Pennsylvania 19020
- --------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 244-1777
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--------------- ---------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 15, 2000
- ---------------------------- ---------------------------
Voting 1,331,574
Class A, non-voting 75,652
<PAGE>
INDEX PAGE
- ----- ----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
April 1, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
Three month periods ended April 1, 2000 and
March 27, 1999 4
Condensed Consolidated Statements of Cash Flows
Three month periods ended April 1, 2000 and
March 27, 1999 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
PART II - OTHER INFORMATION 13-14
- ---------------------------
SIGNATURES 15
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
- ----------------------------------------------------
<TABLE>
HCI DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
APRIL 1, 2000 AND DECEMBER 31, 1999
(Dollars in thousands, except share and per share data)
<CAPTION>
April 1, December 31,
2000 1999
----------- ------------
ASSETS (Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ......................................................... $ -- $ --
Accounts receivable, less an allowance for doubtful accounts of
$5,936 and $6,048 in 2000 and 1999, respectively ................................. 45,114 49,625
Inventories ....................................................................... 15,788 14,248
Prepaid customer acquisition costs ................................................ 513 6,548
Prepaid and other current assets .................................................. 5,078 4,649
----------- -----------
Total current assets ........................................................... 66,493 75,070
PROPERTY AND EQUIPMENT, net ............................................................ 15,777 16,467
DEFERRED CUSTOMER ACQUISITION COSTS .................................................... 64,830 56,203
DEFERRED DEBT ISSUANCE COSTS, less accumulated amortization of
$8,590 and $8,227 in 2000 and 1999, respectively .................................. 3,053 3,337
GOODWILL, less accumulated amortization of $217 and $185 in 2000 and 1999, respectively 3,577 3,609
OTHER ASSETS ........................................................................... 941 926
----------- -----------
TOTAL .................................................................................. $ 154,671 $ 155,612
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Borrowings under line of credit ................................................... $ 18,833 $ 13,750
Current portion of long-term debt ................................................. 14,867 13,117
Current portion of capital lease obligations ...................................... 1,505 1,526
Bank overdrafts ................................................................... 4,691 33
Accounts payable .................................................................. 13,718 15,061
Accrued expenses and other current liabilities .................................... 7,343 8,342
Accrued interest .................................................................. 2,302 4,625
Accrued coupon redemption costs ................................................... 4,026 4,166
Deferred income taxes ............................................................. 11,909 12,379
Income taxes payable .............................................................. 354 358
----------- -----------
Total current liabilities .................................................... 79,548 73,357
LONG-TERM DEBT, Less current portion ................................................... 103,644 108,566
CAPITAL LEASE OBLIGATIONS, Less current portion ........................................ 4,025 4,399
ACCRUED COUPON REDEMPTION COSTS ........................................................ 325 336
DEFERRED INCOME TAXES .................................................................. 15,157 15,753
----------- -----------
Total liabilities ............................................................ 202,699 202,411
----------- -----------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.01 par value, 12,000,000 shares authorized:
4,000,000 shares designated as pay-in-kind preferred stock, stated at liquidation
value of $10 per share; 25% cumulative, (liquidation preference of $136,400 and
$127,885 in 2000 and 1999, respectively), 3,811,901 shares issued
in 2000 and 1999, 3,803,186 shares outstanding in 2000 and 1999 ................. 38,119 38,119
Common stock, voting, $.01 par value: 60,000,000 shares authorized,
1,350,174 shares issued in 2000 and 1999, 1,331,574 shares outstanding in
2000 and 1999 ................................................................... 13 13
Common stock, Class A, non-voting, $.01 par value:
1,000,000 shares authorized, 75,652 shares issued and outstanding ............... 1 1
Additional paid-in capital ........................................................ 19,119 19,120
Compensatory stock options outstanding ............................................ 20,943 20,943
Accumulated deficit ............................................................... (124,013) (122,722)
Restricted stock .................................................................. (134) (197)
----------- -----------
(45,952) (44,723)
Treasury stock, at cost, 27,315 shares in 2000 and 1999 (8,715 preferred shares
and 18,600 common shares) ....................................................... (2,076) (2,076)
----------- -----------
Net stockholders' deficiency ................................................. (48,028) (46,799)
----------- -----------
TOTAL .................................................................................. $ 154,671 $ 155,612
=========== ===========
<FN>
See notes to condensed consolidated financial statements.
</FN>
3
</TABLE>
<PAGE>
<TABLE>
HCI DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTH PERIODS ENDED APRIL 1, 2000 AND MARCH 27, 1999
(Dollars in thousands)
(Unaudited)
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
NET REVENUES ................................................ $ 63,206 $ 57,145
-------- --------
COSTS AND EXPENSES:
Cost of sales .......................................... 32,106 29,141
Administrative and general expenses .................... 3,617 3,906
Provision for doubtful accounts ........................ 7,464 4,745
Marketing costs ........................................ 15,533 10,912
Coupon redemption costs ................................ 729 1,087
Depreciation and amortization .......................... 874 864
Other expenses ......................................... 580 256
-------- --------
OPERATING INCOME ........................................... 2,303 6,234
Interest income ........................................ 5 9
Interest expense ....................................... 4,390 4,062
-------- --------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION FOR INCOME TAXES... (2,082) 2,181
(BENEFIT) PROVISION FOR INCOME TAXES ....................... (791) 829
-------- --------
NET (LOSS) INCOME .......................................... $ (1,291) $ 1,352
======== ========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
4
<PAGE>
<TABLE>
HCI DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTH PERIODS ENDED APRIL 1, 2000 AND MARCH 27, 1999
(Dollars in thousands)
(Unaudited)
<CAPTION>
2000 1999
-------- --------
OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) income .................................................. $ (1,291) $ 1,352
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization ................................... 874 864
Amortization of debt issue costs and discounts .................. 441 430
Other ........................................................... 67 63
Amortization of deferred customer acquisition costs ............. 13,739 9,697
(Increase) decrease in operating assets:
Accounts receivable ....................................... 4,511 (5,242)
Inventories ............................................... (1,540) 223
Payments for deferred customer acquisition costs .......... (22,366) (13,831)
Prepaid and other current assets .......................... 5,606 (32)
Other assets .............................................. (70) 61
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other liabilities... (11) (3,055)
Deferred income taxes ..................................... (1,066) 828
Accrued coupon redemption costs ........................... (151) 2
-------- --------
Net cash used in operating activities ............... (1,257) (8,640)
-------- --------
INVESTING ACTIVITIES:
Acquisitions of property and equipment ............................. (126) (229)
Proceeds from sale of property and equipment ....................... 24 --
-------- --------
Net cash used in investing activities ............... (102) (229)
-------- --------
FINANCING ACTIVITIES:
Net borrowings under line of credit ................................ 5,083 9,350
Payments on bank and other financing ............................... (3,250) (29)
Payments on capital leases ......................................... (395) (452)
Debt issuance costs ................................................ (79) --
-------- --------
Net cash provided by financing activities ........... 1,359 8,869
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............................. -- --
Cash and cash equivalents at beginning of year ..................... -- --
-------- --------
Cash and cash equivalents at end of period ......................... $ -- $ --
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ........................................................ $ 6,247 $ 6,123
======== ========
Income taxes .................................................... $ 275 $ 1
======== ========
<FN>
See notes to condensed consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
HCI DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(Unaudited)
NOTE 1. Condensed Consolidated Financial Statements
In the opinion of management, the accompanying condensed consolidated financial
statements of HCI Direct, Inc. and subsidiaries, which are unaudited except for
the Consolidated Balance Sheet as of December 31, 1999, which is derived from
audited financial statements, include all normal and recurring adjustments
necessary to present fairly the Company's financial position as of April 1, 2000
and the results of operations and cash flows for the three month periods ended
April 1, 2000 and March 27, 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K as filed with the Securities and Exchange Commission on March 30, 2000.
NOTE 2. Inventories
April 1, December 31,
2000 1999
-------- ------------
Raw materials.................................... $ 792 $ 859
Work-in-process.................................. 3,307 2,984
Finished goods................................... 8,633 7,658
Promotional and packing material................. 3,056 2,747
-------- ---------
$ 15,788 $ 14,248
======== =========
NOTE 3. Commitments and Contingencies
The Company has continuing obligations with certain members of management
pursuant to previously signed employment agreements.
The Company has agreed to pay Kelso an annual fee of $263 each year for
financial advisory services and to reimburse Kelso for out-of-pocket expenses
incurred. Non-officer directors of the Company, other than those directors who
are affiliated with Kelso, will be paid an annual retainer of $20. In addition,
all out-of-pocket expenses of non-officer directors, including those directors
who are affiliated with Kelso, related to meetings attended, will be reimbursed
by the Company. Non-officer directors, including those directors affiliated with
Kelso, will receive no additional compensation for their services as directors
of the Company except as described above.
The Company is involved in, or has been involved in, litigation arising in the
normal course of its business. The Company cannot predict the timing or outcome
of these claims and proceedings. Currently, except as discussed below, the
Company is not involved in any litigation which is expected to have a material
effect on the financial position of the business or the results of operations
and cash flows of the Company.
From time to time, the Company has received inquiries from the Federal Trade
Commission ("FTC"), various state regulatory authorities, self-regulatory
agencies and trade associations concerning aspects of the Company's promotional
materials, including whether the terms of the Company's promotional offers are
sufficiently disclosed in these materials.
6
<PAGE>
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 the Company must follow in conducting its mail order business.
The consent injunction permanently enjoins the Company from violating various
FTC and Postal Service laws and regulations. As a result of these inquiries, in
1984 the Company adopted revised promotional materials. The Company believes but
cannot assure that these modifications and its 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, the Company reached an agreement with an 11-state group that imposes
specific disclosure requirements on the Company's promotional materials and
specifies rules the Company must follow in its promotional materials and in
conducting its mail order business. The modifications the Company made to its
solicitation materials had a material adverse effect on its U.S. response rates
in 1997 and 1998. The Company does not believe that these modifications will
have a further significant negative impact on its response rates in the future,
although the Company cannot guarantee that this will be the case. In addition,
while the Company believes the modifications to its promotional materials meet
the concerns expressed by the 11-state group and comply with the terms of that
agreement, the Company cannot assure that these modifications will be deemed to
be in compliance with the 11-state agreement.
Under the terms of the 11-state agreement, the Company paid $0.3 million in
administrative expenses and fees during 1997. The agreement also required that
the Company pay refunds to customers under certain circumstances for a six-month
period. These refunds were not material to the Company's business, financial
condition or results of operations.
Beginning in early 1999, the Company introduced a new promotional offer in North
America whereby the customer has the opportunity to receive one free pair of
hosiery when the customer responds to the Company's initial solicitation. Under
this offer, if the customer does not elect to cancel future shipments, the
customer automatically becomes a participant in the Company's continuity
program. While the Company believes that this new promotional offer complies
with the terms of its agreement with the 11-state group, the Company cannot
assure this. Accordingly, there may be some additional modifications that the
Company may need to make to its promotional materials to fully satisfy the terms
of the agreement.
In 1997 and 1998, the Company received inquiries from the Direct Marketing
Association and the National Advertising Division of the Better Business Bureau
concerning whether the terms of its promotional offers are sufficiently
disclosed in its promotional materials. These inquiries were resolved without
any future modifications to the Company's promotional materials.
The Company received formal inquiries from 2 states which were not part of the
11-state group. The Company had reached an agreement in principle with one of
the two states. However, the state never finalized this agreement and the
Company has not heard from the state in over a year. The Company is in
discussions with the other state and is seeking to settle the inquiry. The
Company does not believe that the amount of any settlement of either inquiry
will be significant. While the Company believes that it will be able to resolve
these inquiries and other future inquiries, it cannot assure this, nor can it
assure that these or other regulators or trade associations will not require or
seek to impose additional changes to the Company's promotional materials or
billing practices. In addition, the Company cannot assure that these additional
changes to its materials or billing practices, if any, will not be significant
or will not have a material adverse effect on its 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 the Company's management believes
that its promotional materials are in substantial compliance with applicable
laws and regulations, the Company cannot give any assurance in that regard nor
can it assure that additional laws or regulations will not be passed which could
have a material adverse effect on the Company's ability to rent customer lists
from third parties, or on its future response rates, business, financial
condition or results of operations.
7
<PAGE>
On January 6, 2000, the Internal Revenue Service issued notice of a Tax
Deficiency for the years ended December 31, 1993 and 1994 of $638,909 and
$2,336,346, respectively plus accrued interest of $410,666 for 1993 and
$1,200,939 for 1994. The total assessment for both tax and interest for these
years is $4,586,860. The deficiency being assessed is for a corporate-owned life
insurance (COLI) plan. This plan was discontinued when the Company was sold in
1994 and the policies were transferred to the former owner at that time. As part
of the acquisition agreement, the former owner is responsible for any tax
deficiencies related to the COLI and the monies being assessed by the Internal
Revenue Service are currently being held in an escrow account.
NOTE 4. Note Payable to Bank
The Company has a revolving credit facility which provides for maximum
borrowings of $24,000. 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 1% or 2% over the Eurodollar rate.
Effective March 30, 2000, the Company amended its Credit Agreement to extend the
Incremental Revolving Loan of $4,000 through the life of the Credit Agreement.
This loan can be made from time to time after the existing revolving credit
facility equals $20,000. Also, the Company amended certain financial ratios as
defined in the agreement for 2000 and subsequent years and increased the Euro
and Base Rate margin .50%.
At April 1, 2000, there were outstanding borrowings of $18,833 at a weighted
average interest rate of 8.5%. In addition, there were outstanding letters of
credit of approximately $767 resulting in $4,400 available to borrow.
NOTE 5. Operating Segments
The Company organizes its business units into two geographic segments: North
America and International. Segment information for the three month period ended
April 1, 2000 and March 27, 1999 is as follows:
Three Month Period Ended April 1, 2000
--------------------------------------
North
America International Total
------- ------------- -----
Revenues from external customers..... $49,368 $13,838 $63,206
Intersegment revenues................ 907 -- 907
Segment profit (EBITDA) (1).......... 5,398 (2,216) 3,182
Segment assets....................... 127,227 27,444 154,671
Three Month Period Ended March 27, 1999
---------------------------------------
North
America International Total
------- ------------- -----
Revenues from external customers..... $45,838 $11,307 $57,145
Intersegment revenues................ 1,441 -- 1,441
Segment profit (EBITDA) (1).......... 8,332 (1,225) 7,107
Segment assets....................... 115,144 23,021 138,165
- ----------
(1) Earnings before interest, taxes, depreciation and amortization (EBITDA)
represents income before provision for income taxes of $(2,082) and
$2,181 for the three month period ended April 1, 2000 and March 27, 1999,
respectively, excluding interest expense of $4,390 and $4,062 for the
three month period ended April 1, 2000 and March 27, 1999, respectively,
and depreciation and amortization of $874 and $864 for the three month
period ended April 1, 2000 and March 27, 1999, 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.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Month Periods Ended April 1, 2000 and March 27, 1999
- --------------------------------------------------------------------------------
The following discussion should be read in conjunction with the audited
Consolidated Financial Statements of HCI Direct, Inc. and Subsidiaries, and the
respective Notes thereto, filed with the registrants' Annual Report on Form 10-K
for the fiscal year ended December 31, 1999. As used within Item 2 and 3, the
term "Company" refers to HCI Direct, Inc. and its wholly-owned subsidiaries.
The information herein contains forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 that involve a number of
risks and uncertainties. A number of factors could cause actual results,
performance, achievements of the Company, or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward looking statements. These factors include, but are not
limited to, the significant indebtedness of the Company and in the Company's
specific market areas: changes in prevailing interest rates and the availability
of and terms of financing to fund the cash needs of the Company; inflation;
changes in costs of goods and services; economic conditions in general and in
the Company's specific market areas; demographic changes; changes in or failure
to comply with federal, state and/or local government regulations; liability and
other claims asserted against the Company; changes in operating strategy or
development plans; labor disturbances; changes in the Company's acquisition and
capital expenditure plans; and other factors referenced in Item 7A, Quantitative
and Qualitative Disclosures About Market Risk, in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999. In addition, such forward
looking statements are necessarily dependent upon assumptions, estimates and
dates that may be incorrect or imprecise and involve known and unknown risks,
uncertainties and other factors. Accordingly, any forward looking statements
included herein do not purport to be predictions of future events or
circumstances and may not be realized. Forward looking statements can be
identified by among other things, the use of forward-looking terminology such as
"believes", "expects", "may", "will", "should", "seeks", "pro forma",
"anticipates", "intends" or the negative of any thereof, or other variations
thereon or comparable terminology, or by discussions of strategy or intentions.
Given these uncertainties, readers are cautioned not to place undue reliance on
such forward looking statements. The Company disclaims any obligations to update
any such factors or to publicly announce the results of any revisions to any of
the forward looking statements contained herein to reflect future events or
developments.
Results of Operations
- ---------------------
The following table sets forth certain income statement data for the Company
expressed as a percentage of net revenues:
Three Month Periods Ended
-------------------------
April 1, March 27,
2000 1999
-------- ---------
Net revenues................................... 100.0% 100.0%
Cost of sales......................... 50.8 51.0
Administrative and general expenses... 5.7 6.8
Provision for doubtful accounts....... 11.8 8.3
Marketing costs....................... 24.6 19.1
Coupon redemption costs............... 1.1 1.9
Depreciation and amortization......... 1.4 1.5
----- -----
Subtotal......................... 95.4 88.6
----- -----
Income before interest-net, other expenses
and provision for income taxes.............. 4.6% 11.4%
===== =====
9
<PAGE>
The Company's sales increased in the first quarter of 2000 compared to last
year. Revenues have increased 10.6% from approximately $57 million in 1999 to
$63 million in 2000. The number of first shipments are up 475 thousand (16.4%)
and the number of total shipments are up 697 thousand (11.5%) over last year.
The Internet generated 70 thousand first shipments in 2000.
A new Ultra Shaper style was introduced in 2000 which has had a favorable
response from customers.
Three Month Period Ended April 1, 2000 Compared to Three Month Period Ended
March 27, 1999
- ---------------------------------------------------------------------------
Net revenues for the first quarter of 2000 were $63.2 million, an increase of
10.6% over 1999 first quarter net revenues of $57.1 million. North America
contributed $3.5 million of the increase and International the balance made up
mostly by the United Kingdom.
Cost of sales increased from $29.1 million in 1999 to $32.1 million in 2000, an
increase of 10.2%. As a percentage of net revenues, cost of sales decreased to
50.8% in 2000 from 51.0% in 1999.
Provision for doubtful accounts increased to $7.5 million in 2000 from $4.7
million in 1999, an increase of 57.3%. This increase was primarily due to the
change to the offer in the United States where the first shipment is totally
free and the second shipment is three pair at full price. This offer generates
more back end shipments, but it initially generates higher bad debts. As a
percentage of net revenues, bad debts were 11.8% for 2000 compared to 8.3% for
1999.
Marketing costs increased 42.3% to $15.5 million in 2000 from $10.9 million in
1999. The increase is due to a greater number and volume of mailing campaigns in
1999 versus 1998 where the amortization of these deferred costs are being
recorded over a 42-month period and increased costs incurred in 2000 of $3.6
million. France, the Internet and Little Silkies were not in operations in the
first quarter of 1999 resulting in $0.7 million. As a percentage of net
revenues, marketing costs were 24.6% in 2000 versus 19.1% in 1999.
Operating income of $2.3 million in 2000 decreased 63.1% from $6.2 million in
1999. This decrease was primarily the result of increased revenue offset by
provision for doubtful accounts and marketing costs. As a percentage of net
revenues, operating income was 3.6% in 2000 versus 10.9% in 1999.
Liquidity and Capital Resources
- -------------------------------
The Company's cash requirements arise principally from the need to finance new
customer acquisitions, capital expenditures, debt repayment and other working
capital requirements. The Company expects to finance these cash requirements
from its Revolving Credit Facility.
The decrease in working capital of $14.8 million from the end of 1999 is caused
by increased marketing mailings in the first quarter of 2000 which increased
borrowings under line of credit and accounts payable.
Net cash used in operating activities was $1.3 million for the first quarter of
2000 as compared to $8.6 million in 1999. This change was primarily due to lower
net income, increases in accounts payable and accrued expenses, decreases in
receivables and increases in the payments for customer acquisition costs offset
by an increase in the amortization of customer acquisition costs.
Net cash used in investing activities to acquire assets was $0.1 million in the
first quarter of 2000 compared to $0.2 million in 1999.
Net cash provided by financing activities was $1.4 million and $8.9 million for
the first quarter of 2000 and 1999, respectively. There was $4.3 million reduced
net borrowing on the credit line in 2000 as compared to 1999 as well as $3.3
million in repayment made on bank debt.
10
<PAGE>
The Recapitalization
As a result of the substantial indebtedness incurred in connection with a
Recapitalization, in October 1994, the Company has significant debt service
obligations. At April 1, 2000, the outstanding amount of the Company's
indebtedness (other than trade payables and accrued expenses) is $142.9 million,
including $69.1 million of senior secured debt and $69.1 million of senior
subordinated debt (represented by the Notes). Since consummation of the
Recapitalization, the Company's ongoing cash requirements through the end of
fiscal 2000 will consist primarily of interest payments and required
amortization payments under the Credit Agreement, interest payments on the
Notes, payments of capital lease obligations, front end marketing expenditures,
working capital, capital expenditures and taxes. The required amortization
payments under the Credit Agreement will be: $13.0 million in 2000, $20.0
million in 2001 and $19.0 million in 2002. Other than upon a change of control
(as defined) or as a result of certain asset sales, the Company will not be
required to make any principal payments in respect of the Notes until maturity,
August 2002.
The Company's primary source of liquidity will be cash flow from operations and
funds available to it under a revolving credit facility. The revolving credit
facility provides for maximum borrowings of $24.0 million, $4.4 million of which
was available at April 1, 2000.
Legal Proceedings
- -----------------
As discussed further in Part II, Item 1--Legal Proceedings, from time to time,
the Company has received inquiries from the Federal Trade Commission ("FTC"),
various state regulatory authorities, self-regulatory agencies and trade
associations concerning aspects of the Company's promotional materials,
including whether the terms of the Company's 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 the Company must follow in conducting its mail order business.
The consent injunction permanently enjoins the Company from violating various
FTC and Postal Service laws and regulations. As a result of these inquiries, in
1984 the Company adopted revised promotional materials. The Company believes but
cannot assure that these modifications and its 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, the Company reached an agreement with an 11-state group that imposes
specific disclosure requirements on the Company's promotional materials and
specifies rules the Company must follow in its promotional materials and in
conducting its mail order business. The modifications the Company made to its
solicitation materials had a material adverse effect on its U.S. response rates
in 1997 and 1998. The Company does not believe that these modifications will
have a further significant negative impact on its response rates in the future,
although the Company cannot guarantee that this will be the case. In addition,
while the Company believes the modifications to its promotional materials meet
the concerns expressed by the 11-state group and comply with the terms of that
agreement, the Company cannot assure that these modifications will be deemed to
be in compliance with the 11-state agreement.
Under the terms of the 11-state agreement, the Company paid $0.3 million in
administrative expenses and fees during 1997. The agreement also required that
the Company pay refunds to customers under certain circumstances for a six-month
period. These refunds were not material to the Company's business, financial
condition or results of operations.
Beginning in early 1999, the Company 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 the Company's initial solicitation. Under this
offer, if the customer does not elect to cancel future shipments, she
automatically becomes a participant in the Company's continuity program. While
the Company believes that this new promotional offer complies with the terms of
its agreement with the 11-state group, the Company cannot assure this.
Accordingly, there may be some additional modifications that the Company may
need to make to its promotional materials to fully satisfy the terms of the
agreement.
11
<PAGE>
In 1997 and 1998, the Company received inquiries from the Direct Marketing
Association and the National Advertising Division of the Better Business Bureau
concerning whether the terms of its promotional offers are sufficiently
disclosed in its promotional materials. These inquiries were resolved without
any further modifications to the Company's promotional materials.
The Company received formal inquiries from 2 states which were not part of the
11-state group. The Company had reached an agreement in principle with one of
the two states. However, the state never finalized this agreement and the
Company has not heard from the state in over a year. The Company is in
discussions with the other state and is seeking to settle the inquiry. The
Company does not believe that the amount of any settlement of either inquiry
will be significant. While the Company believes that it will be able to resolve
these inquiries and other future inquiries, it cannot assure this, nor can it
assure that these or other regulators or trade associations will not require or
seek to impose additional changes to the Company's promotional materials or
billing practices. In addition, the Company cannot assure that these additional
changes to its materials or billing practices, if any, will not be significant
or will not have a material adverse effect on its 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 the Company's management believes
that its promotional materials are in substantial compliance with applicable
laws and regulations, the Company cannot give any assurance in that regard nor
can it assure that additional laws or regulations will not be passed which could
have a material adverse effect on the Company's ability to rent customer lists
from third parties, or on its future response rates, business, financial
condition or results of operations.
Inflation
- ---------
Over the past three years, which has been a period of low inflation, the Company
has been able to increase sales volume to compensate for increases in operating
expenses. The Company has historically been able to increase its selling prices
as the cost of sales and related operating expenses have increased and,
therefore, inflation has not had a significant effect on operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The market risk of the Company's financial instruments as of April 1, 2000 has
not significantly changed since December 31, 1999. The market risk profile on
December 31, 1999, is disclosed in the Company's 1999 Annual Report on Form
10-K.
12
<PAGE>
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
- --------------------------
The Company is involved in, or has been involved in, litigation arising in the
normal course of its business. The Company cannot predict the timing or outcome
of these claims and proceedings. Currently, except as discussed below, the
Company is not involved in any litigation which is expected to have a material
effect on the financial position of the business or the results of operations
and cash flows of the Company.
From time to time, the Company has received inquiries from the Federal Trade
Commission ("FTC"), various state regulatory authorities, self-regulatory
agencies and trade associations concerning aspects of the Company's promotional
materials, including whether the terms of the Company's 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 the Company must follow in conducting its mail order business.
The consent injunction permanently enjoins the Company from violating various
FTC and Postal Service laws and regulations. As a result of these inquiries, in
1984 the Company adopted revised promotional materials. The Company believes but
cannot assure that these modifications and its 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, the Company reached an agreement with an 11-state group that imposes
specific disclosure requirements on the Company's promotional materials and
specifies rules the Company must follow in its promotional materials and in
conducting its mail order business. The modifications the Company made to its
solicitation materials had a material adverse effect on its U.S. response rates
in 1997 and 1998. The Company does not believe that these modifications will
have a further significant negative impact on its response rates in the future,
although the Company cannot guarantee that this will be the case. In addition,
while the Company believes the modifications to its promotional materials meet
the concerns expressed by the 11-state group and comply with the terms of that
agreement, the Company cannot assure that these modifications will be deemed to
be in compliance with the 11-state agreement.
Under the terms of the 11-state agreement, the Company paid $0.3 million in
administrative expenses and fees during 1997. The agreement also required that
the Company pay refunds to customers under certain circumstances for a six-month
period. These refunds were not material to the Company's business, financial
condition or results of operations.
Beginning in early 1999, the Company introduced a new promotional offer in North
America whereby the customer has the opportunity to receive one free pair of
hosiery when the customer responds to the Company's initial solicitation. Under
this offer, if the customer does not elect to cancel future shipments, the
customer automatically becomes a participant in the Company's continuity
program. While the Company believes that this new promotional offer complies
with the terms of its agreement with the 11-state group, the Company cannot
assure this. Accordingly, there may be some additional modifications that the
Company may need to make to its promotional materials to fully satisfy the terms
of the agreement.
13
<PAGE>
In 1997 and 1998, the Company received inquiries from the Direct Marketing
Association and the National Advertising Division of the Better Business Bureau
concerning whether the terms of its promotional offers are sufficiently
disclosed in its promotional materials. These inquiries were resolved without
any further modifications to the Company's promotional materials.
The Company received formal inquiries from 2 states which were not part of the
11-state group. The Company had reached an agreement in principle with one of
the two states. However, the state never finalized this agreement and the
Company has not heard from the state in over a year. The Company is in
discussions with the other state and is seeking to settle the inquiry. The
Company does not believe that the amount of any settlement of either inquiry
will be significant. While the Company believes that it will be able to resolve
these inquiries and other future inquiries, it cannot assure this, nor can it
assure that these or other regulators or trade associations will not require or
seek to impose additional changes to the Company's promotional materials or
billing practices. In addition, the Company cannot assure that these additional
changes to its materials or billing practices, if any, will not be significant
or will not have a material adverse effect on its 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 the Company's management believes
that its promotional materials are in substantial compliance with applicable
laws and regulations, the Company cannot give any assurance in that regard nor
can it assure that additional laws or regulations will not be passed which could
have a material adverse effect on the Company's ability to rent customer lists
from third parties, or on its future response rates, business, financial
condition or results of operations.
Item 2. Change in Securities
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8K.
A. Exhibits
4.1 Amendment and Waiver to the Credit Agreement dated as of March
27, 2000 among the Company, various lending institutions and
Bankers Trust Company, as Agent.
27.0 Financial Data Schedule
B. Form 8K
No reports on Form 8K have been filed during the quarter for which this
report is filed.
14
<PAGE>
SIGNATURES
- ----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HCI DIRECT, INC.
----------------
(Registrant)
Date: May 15, 2000 /s/ MICHAEL D. ROWLEY
- ------------------- ------------------------
Michael D. Rowley
Vice President &
Chief Financial Officer
15
EXHIBIT 4.1
-----------
AMENDMENT
---------
AMENDMENT (this "Amendment"), dated as of March 27, 2000,
among HCI DIRECT, INC. (formerly known as Hosiery Corporation of America, Inc.)
a Delaware corporation (the "Borrower"), the lending institutions party to the
Credit Agreement referred to below (the "Banks") and BANKERS TRUST COMPANY, as
Agent (in such capacity, the "Agent"). Unless otherwise indicated, all
capitalized terms used herein and not otherwise defined shall have the
respective meanings provided such terms in the Credit Agreement referred to
below.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Borrower, the Banks and the Agent are parties to
a Credit Agreement, dated as of October 17, 1994 and amended and restated as of
November 20, 1997 (as amended, amended and restated, modified and/or
supplemented through but not included the Amendment Effective Date referred to
below, the "Credit Agreement"); and
WHEREAS, subject to an on the terms and conditions set forth
herein, the parties hereto wish to amend the Credit Agreement, as provided
below;
NOW, THEREFORE, it is agreed:
I. Amendments to Credit Agreement.
- ---------------------------------------
1. Section 8.11 of the Credit Agreement is hereby amended by deleting
the table appearing in said Section in its entirety and inserting in lieu of
thereof the following new table:
"Fiscal Quarter Ratio
- --------------- ---------
Fiscal quarter ended in March, 2000 0.60 to 1
Fiscal quarter ended in June, 2000 0.80 to 1
Fiscal quarter ended in September, 2000 0.85 to 1
Each fiscal quarter ended thereafter 1.15 to 1
2. Section 8.12 of the Credit Agreement is hereby amended by deleting
the table appearing in said Section in its entirety and inserting in lieu of
thereof the following new table:
"Fiscal Quarter Amount
- --------------- -----------
Fiscal quarter ended in March, 2000 $16,000,000
Fiscal quarter ended in June, 2000 $22,500,000
Fiscal quarter ended in September, 2000 $24,500,000
Each fiscal quarter ended in December, 2000 $42,000,000
<PAGE>
Fiscal quarter ended in March, 2001 $38,000,000
Fiscal quarter ended in June, 2001 $45,000,000
Fiscal quarter ended in September, 2001 $45,000,000
Each fiscal quarter ended in December, 2001 $50,000,000
3. Section 8.13 of the Credit Agreement is hereby amended by deleting
the table appearing in said Section in its entirety and inserting in lieu of
thereof the following new table:
"Fiscal Quarter Ratio
- --------------- ---------
Fiscal quarter ended in March, 2000 4.50 to 1
Fiscal quarter ended in June, 2000 3.25 to 1
Fiscal quarter ended in September, 2000 3.00 to 1
Each fiscal quarter ended in December, 2000 2.00 to 1
4. Section 10 of the Credit Agreement is hereby amended by
increasing each of the percentages specified in the definitions of Applicable
Base Rate Margin and Applicable Eurodollar Margin by 0.50%
5. The definition of "IRF Maturity Date" appearing in Section 10 of the
Credit Agreement is hereby amended by deleting the text "March 31, 2000" and
inserting "February 1, 2002" in lieu thereof.
II. Miscellaneous.
- ----------------------
1. In order to induce the Banks to enter into this Amendment, the
Borrower hereby (i) makes each of the representations, warranties and agreements
contained in Section 6 of the Credit Agreement and (ii) represents and warrants
that there exists no Default or Event of Default, in each case on the amendment
Effective Date, both before and after giving effect to this Amendment.
2. This Amendment is limited as specified and shall not constitute a
modification, acceptance or waiver of any other provision of the Credit
Agreement or any other Credit Document.
3. This Amendment may be executed in any number of counterparts and by
the different parties hereto on separate counterparts, each of which
counterparts when executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A complete set of
counterparts shall be lodged with the Borrower and the Agent.
4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OR THE PARTIES
HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW OF THE
STATE OF NEW YORK.
<PAGE>
5. This Amendment shall become effective on the date (the "Amendment
Effective Date") when (i) each of the Borrower, the Required Banks and each Bank
with an Incremental Revolving Commitment shall have signed a counterpart hereof
(whether the same or different counterparts) and shall have delivered (including
by way of facsimile transmission) the same to White & Case LLP, 1155 Avenue of
the Americas, New York, NY 10036 Attention: Jason Shames (facsimile number
212-354-8113) and (ii) the Borrower shall have paid to the Agent for
distribution to each Bank that has executed a counterpart hereof on or prior to
5:00 P.M. (New York time) on March 27,2000 an amendment fee equal to 0.125% of
the sum of (x) its Revolving commitment, if any, as in effect immediately prior
to the amendment Effective Date plus (y) the aggregate outstanding principal
amount of its Term Loans, if any, immediately prior to the Amendment Effective
Date plus (z) its Incremental Revolving Commitment, if any, as in effect on the
Amendment Effective Date.
6. From and after the Amendment Effective Date, all references to the
Credit Agreement in the Credit Agreement and the other Credit Documents shall be
deemed to be references to the Credit Agreement as modified hereby.
* * *
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
HCI DIRECT, INC.
By:_________________________
Name:
Title:
BANKERS TRUST COMPANY,
Individually and as Agent
By:_________________________
Name:
Title:
BANK POLSKA KASA OPIEKI, S.A.
By:_________________________
Name:
Title:
EUROPEAN AMERICAN BANK
By:_________________________
Name:
Title:
FIRST UNION NATIONAL BANK
By:_________________________
Name:
Title:
<PAGE>
NATIONAL WESTMINSTER BANK PLC
NEW YORK and/or NASSAU BRANCH
By:_________________________
Name:
Title:
BANK OF AMERICA, N.A.
(formerly, NationsBank, N.A.)
By:_________________________
Name:
Title:
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<CIK> 0000934383
<NAME> HCI Direct, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-01-2000
<PERIOD-END> Apr-01-2000
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 51,050
<ALLOWANCES> 5,936
<INVENTORY> 15,788
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<DEPRECIATION> 21,739
<TOTAL-ASSETS> 154,671
<CURRENT-LIABILITIES> 79,548
<BONDS> 69,761
0
38,119
<COMMON> 14
<OTHER-SE> (86,161)
<TOTAL-LIABILITY-AND-EQUITY> 154,671
<SALES> 63,206
<TOTAL-REVENUES> 63,206
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<INCOME-PRETAX> (2,082)
<INCOME-TAX> (791)
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