HCI DIRECT INC, 10-K, 2000-03-30

HCI DIRECT INC
10-K, 2000-03-30
KNITTING MILLS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934

(MARK ONE)
( X ) ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

For the Fiscal Year Ended December 31, 1999

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the Transition Period From _______ to ________

Commission File No. 33-87392

HCI DIRECT, INC.
(FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

DELAWARE 36-0782950
- ---------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

3369 Progress Drive
Bensalem, Pennsylvania 19020
- ---------------------------------------- ------------
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (215) 244-1777

Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.

Yes X No
--------------- ---------------

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. (X)

The aggregate market value of the voting stock held by non-affiliates of the
registrant is zero. All of the voting stock is held by affiliates and there is
no established public trading market for any class of common stock of the
Registrant.

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

Class Outstanding at March 30, 2000
- ---------------------------- -----------------------------------
Voting 1,331,574
Class A, non-voting 75,652

The following documents are incorporated by reference herein: (none).

<PAGE>
FORWARD-LOOKING STATEMENTS
--------------------------
This Form 10-K 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.

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 Form 10-K. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this Form 10-K might not
occur.

PART I
------
ITEM 1. BUSINESS
- -----------------

HCI Direct, Inc. (formerly, Hosiery Corporation of America, Inc.) (the
"Company"), is a corporation organized in 1975 under the laws of the state of
Delaware.

The Company is engaged in the direct mail marketing, manufacturing and
distribution of quality women's sheer hosiery products to consumers throughout
North America and the United Kingdom. The Company has recently begun to expand
its operations into France and Germany. (See Note 3 to the Consolidated
Financial Statements of the Company in Item 8 hereof.) The Company markets
women's sheer hosiery through a continuous product shipment or "continuity"
program. The Company's continuity program involves mailing to customers a free
offer or a specially priced introductory hosiery offer, the acceptance of which
enrolls customers in the program and results in additional shipments of hose on
a regular and continuous basis upon payment of a prior hose shipment. The
Company's hosiery production was approximately 57 million pairs in 1999,
primarily marketed under the Silkies(R) brand name. The Company's manufacturing
operations supplied 69% of all the hosiery required by the Company's continuity
program during 1999 with the balance being outsourced.

The Company markets its hosiery products primarily through its direct
mail marketing continuity program. The success of this program depends on
targeting likely customers and on retaining customers by delivering quality
hosiery products directly to the home on a regular basis. Drawing on its
customer list of over 82 million individuals and on certain rented customer
lists, the Company has developed sophisticated statistical, regression,
segmentation and other financial analyses to accurately target, test and acquire
first-time (and previously inactive) "front end" customers through direct mail
solicitation. The Company has designed an initial direct mail solicitation offer
which has attracted front end customers and reactivated previous customers.
During 1999, the Company established an Internet presence with a website
enabling customers to enroll on-line into the continuity program.

In order to induce customers to participate in the Company's continuity
program, the introductory hosiery offer is a "loss leader". The introductory
offer is either one pair free or one pair free plus two pair at a discounted
price plus shipping and handling.

Front end customers who continue to participate in the Company's
continuity program become part of the Company's repeat or "back end" customer
base. After responding to the front end solicitation and receiving their first
shipment, customers can elect to continue in the program, receiving either four
or six pairs of hose with each subsequent shipment. A customer who chooses to
participate in the continuity program by making regular purchases pursuant
thereto is an active back end customer. Upon payment for each shipment,
customers are sent another shipment of regularly priced hose, typically every
four to six weeks. The Company has established a consistent and predictable back
end customer base by providing customers with quality hosiery products on a
regular basis. As of December 1999, the Company had approximately 1.7 million
back end customers. Such "active back end customers" exclude customers receiving
their first shipment.

2
<PAGE>

Marketing Strategy
- ------------------

The Company has created a marketing strategy which combines direct mail
marketing techniques with its continuity program. The Company's marketing
efforts focus on targeting and acquiring front end customers, as well as
maintaining a strong relationship with continuity or back end customers through
efficient fulfillment of quality products, customer service, creative new
product introductions and unique marketing strategies. These direct mail
marketing initiatives, refined by advanced statistical and regression analyses,
have increased the size and quality of its customer base.

The Continuity Program. The Company's current initial direct mail
solicitation offers its customers either a one pair free offer or the
opportunity to receive one free pair of hosiery with the purchase of two
additional pairs at $1.00 per pair. The customer is able to choose the size and
color for this initial shipment.

For those customers that receive only the one pair free offer, the
first shipment that they must pay, to stay in the program, is the second
shipment (four pair at the regular price). Whereas the one pair free plus two
pair at $1.00 per pair customer must pay for the first shipment to stay in the
program.

By paying for the product and ordering another shipment of hosiery, the
customer joins the Company's continuity program and becomes a repeat or back end
customer. Upon payment for each shipment, customers are sent a subsequent
shipment of regularly priced hose, typically every four to six weeks, with some
customers electing a bi-monthly shipment option. With each shipment, customers
may change the selection of styles, colors and sizes. Back end shipments contain
either four or six pairs of hosiery which vary in price according to style. All
shipments are made on credit, but the Company's exposure to any one customer is
limited to the cost of one shipment. Customers are not required to commit to a
minimum purchase amount and can cancel the program at any time, for any reason.

Acquiring Front End Customers. Direct mail marketing has become the
Company's primary means of attracting new front end customers and reactivating
previous customers. Four major solicitations featuring the Company's
introductory offer are mailed each year (January, March, June, September). There
is no significant seasonality in the mailings.

The Company employs, whenever possible, advanced statistical and
regression analyses in conjunction with each of its solicitation promotions. The
Company utilizes its proprietary in-house database of over 82 million customers,
as well as lists rented from other direct marketing firms, and analyzes
information concerning customer buying habits and payment records in order to
determine which potential customers are likely to purchase hosiery from the
Company on a regular and long-term basis. During each major solicitation, all
chosen customer lists are ranked by potential realizable profit. The mailing cut
off is then matched to budgeted production. This process ensures that
anticipated profit is maximized from each of the four mailings.

Retention of Back End Customers. The Company seeks to retain its
continuity or back end customers by providing high quality hosiery on a regular
basis and at competitive prices. In addition, as members of the continuity
program, customers receive gift certificates with each shipment of hosiery which
can be redeemed for a wide array of merchandise. The Company also offers a
women's wear catalog featuring branded and private label lingerie and intimate
apparel products in conjunction with outside manufacturers. Through these means
the Company believes it has been able to establish a predictable base of back
end customers without significant losses of customers over time. Whilst
constantly developing new means of increasing the retention of back end
customers, the Company inevitably loses a proportion of these customers due to
such factors as competition (e.g. retail), fashion change, customer having too
much hosiery, quality and garment fit.

Through its data processing capabilities, the Company tracks a
customer's order history from the initial order through each subsequent
purchase, whether the purchase is a hosiery product, merchandise from the
women's wear merchandise catalog, or other consumer products received through
gift redemptions. Each of the Company's customer service representatives has
on-line capabilities to retrieve customer specific queries and purchasing
history.

3
<PAGE>

Customer Testing. All aspects of the Company's direct mail marketing
program typically result from specific customer testing which the Company
conducts continuously. Such testing enables the Company to (i) project the
profitability of certain in-house and outside customer lists; (ii) maximize
response rates to front end solicitations; (iii) determine the profitability of
the product mix offered to back end customers; (iv) determine optimal pricing
strategy; and (v) increase payment and retention rates. Constant refinement of
test programs through creative design, offer upgrades, new hosiery products and
referrals are conducted throughout various mailings with the objective of
increasing response rates or reducing cost, without negatively impacting
continuation or retention. The time from test to application can take between
three and twelve months depending on the testing employed. Historically, the
Company's actual results have generally been similar to its test results.

Customer Profile. Management believes that the Company's average
customer is a working woman between age 30 and 55. The Company estimates that
its average customer buys approximately 60% of her sheer hosiery products from
the Company, and many of such customers purchase hosiery for other household
members.

Product and Development
- -----------------------

The Company manufactures competitively priced, quality women's sheer
hosiery under the Silkies(R) brand name. The Company's product line is designed
to include the more popular product styles and colors for which most customers
have the greatest demand and, effective January 2000, includes ten styles of
sheer hosiery, in ten different colors and six sizes, as well as knee-hi's and
two opaque styles in six different colors. The Company's elastomer products
(compression garments containing spandex) include Control Top, Total Leg
Control, Sheer Charm, Opaque, Shapely Perfection, Trouser Socks, Ultra Control
Top, Ultra Total Leg Control and Ultra Shapely Perfection. The Company's
elastomer products currently represent approximately 93% of its total
production. The remainder of the Company's production consists of its
non-elastomer products including Panty 'n Hose, Sheer to Waist and Knee-Hi
styles. As of January 2000, the styles range in price from $2.47 to $5.99 per
pair. The Company performs extensive consumer research and product testing to:
(i) ensure product quality, (ii) service all significant markets and (iii)
convert existing compression hose customers to higher margin, sheer compression
hosiery products such as Shapely Perfection.

Data Processing and Management Information Systems
- --------------------------------------------------

The Company has computer and data processing capabilities which are
adequate for its current level of operations. The Company has a full back up and
disaster recovery program for its data processing and order processing systems
which enables operation at an outside facility within twelve hours of the onset
of such need.

The Company provides data processing services, including proprietary
software programs, to its marketing operations that manage the flow of all
hosiery products from solicitation to customer fulfillment. These services
include direct mail solicitations, customer list management and customer service
operations, including order input, billing, collection, printing and tracking of
customers ordering history. Through its database capabilities, the Company is
also able to store and manage a proprietary database of customer purchasing
habits gathered from the Company's hosiery sales history in addition to customer
gift redemptions and women's wear merchandise catalogs. This historical database
of customer purchasing habits covers current and past hosiery shipments,
customers' credit statistics, buying patterns and purchasing records.

Manufacturing and Distribution
- ------------------------------

The Company manages all phases of the manufacturing, outsourcing,
procurement and fulfillment of hosiery products, including planning, purchasing,
production, packaging and distribution. The Company's direct mail marketing
program is vertically integrated into its manufacturing and production
operations, the latter providing the Company's marketing operations with
approximately 69% of the Company's hosiery needs. By spreading the volume of
yearly orders over four major solicitation dates, manufacturing and fulfillment
are able to avoid extreme variations, and thereby ensure higher efficiency and
better product quality. Additionally, the results of the Company's direct mail
marketing program allow the Company quickly to adjust its manufacturing output
accordingly.

4
<PAGE>

Production Process. Once front end and back end orders have been
received, the shipment information is communicated via computer to the Company's
facilities at Newland, North Carolina. The Company's ability to schedule its
annual output allows the Company to practice "Just In Time" inventory management
techniques. The primary raw materials utilized by the Company are nylon and
spandex yarn, dye and chemicals, and are readily available. Such raw materials
are purchased directly from suppliers who provide the Company with technical
support. Most knitting and sewing operations, including toe closing, line
seaming and gusset seaming, are located at the Company's facilities in Newland,
North Carolina. Once the hosiery products have been manufactured, they are
transported to the Company's Lancaster, South Carolina, facility where the
products are dyed, packaged and then to the Heath Springs, South Carolina,
facility where they are prepared for delivery. In Europe, approximately 75% of
the product is purchased from an outside supplier in Italy with the balance
being produced in the United States.

Suppliers. The primary raw materials utilized in the Company's
manufacturing operations are nylon and spandex yarn, dye and chemicals. The
Company purchases a majority of its yarn under 6-month fixed-price contracts
from various domestic and international suppliers. Although the Company
generally stocks only a two to three week supply of raw materials in order to
manage inventory efficiently, the predictable nature of the Company's shipments
generally allows it to order raw materials up to a year in advance and secure an
adequate supply at prearranged costs, as well as purchased hosiery.

Packaging and Distribution. The Company operates fully automated, high
speed packaging machines and distributes its products through the postal service
directly to the customer's home. The Company's use of standardized and fully
automated packaging allows the Company to achieve significant efficiencies. The
Company uses the postal service and has been able to control delivery costs by
passing on to its customers any increases in postal rates. However, there can be
no assurance that in the future the Company will be able to pass on increased
shipping costs to its customers. The Company also tries to minimize postal costs
through the use of pre-sorting, utilizing nine digit zip codes and co-mingling
of mail. In Europe, the Company has recently consolidated fulfillment centers in
the United Kingdom and France to a fulfillment center in Switzerland. This
consolidation allows for greater efficiency in servicing the customers of the
United Kingdom, Germany and France.

Capital Investment. During the past ten years, the Company has spent
approximately $32 million replacing the majority of its knitting and sewing
capacity with advanced robotics, installing automatic packaging equipment for
more timely response through efficient fulfillment, building a new dye house and
distribution facility and upgrading its computer facilities. The Company
maintains relationships with its machinery producers in order to keep up-to-date
on changing manufacturing methods. The Company's current manufacturing
operations have the capacity to produce approximately 67 million pairs annually.
Additional requirements are being outsourced in Mexico and Italy.

Growth Strategy
- ---------------

Management believes that the Company's ability to analyze and manage a
large customer base, combined with its knowledge of customer buying profiles,
provides strong potential for future growth through the direct mail marketing
channel and the Internet. The Company has formed a committee to develop and
oversee the Internet strategy. The Company's strategy for additional growth
primarily involves expanding its current operations in Germany, France and the
United Kingdom, and to begin mailing in Japan. The Company believes, based in
part on management's significant experience with international operations, test
marketing during 1997 and 1998 in France and Germany, test marketing in 1998 and
1999 in Japan, and the introduction of new styles, that the international
markets provide significant opportunities for growth. Additionally, during 1999,
the Company successfully mailed and fulfilled a new program "Little Silkies"
that targets children through the age of twelve, as well as other new products.

Competition and Industry
- ------------------------

The Company operates exclusively in the women's sheer hosiery industry,
targeting adult females as customers. Management believes that the women's sheer
hosiery market is declining partly as a result of changes in women's choices in
business and leisure wear. Despite this apparent overall market decline, the
Company has been able to increase its sales from $178.7 million in 1997 to
$259.9 million in 1999.

5
<PAGE>

Women's sheer hosiery is sold through a variety of distribution
channels, including discount stores, grocery and drug stores, specialty stores,
national chains and direct marketing. The Company is the only organization which
focuses solely on distributing women's sheer hosiery through a direct mail
marketing continuity program. Although several competitors have sold their
hosiery products via mail order for many years, this distribution has
concentrated on the large quantity sale of irregulars, as opposed to the
Company's direct mail marketing of high quality women's hosiery products in a
continuity program. Because the Company sells women's sheer hosiery, it competes
indirectly with major manufacturers and distributors of women's sheer hosiery
who primarily sell through the retail channel and some of whom are larger and
better capitalized than the Company, and may have greater brand recognition than
the Company.

The major United States hosiery manufacturers include Sara Lee Hosiery,
a division of Sara Lee Corporation, Kayser-Roth, a subsidiary of Italian-based
Golden Lady, the Company and Americal, a privately held U.S. concern. Sara Lee
Hosiery and Kayser-Roth are believed to account for more than 70% of the women's
sheer hosiery market. Over 60 other smaller manufacturers also produce women's
sheer hosiery primarily for sale under private labels. Sara Lee Hosiery and
Golden Lady are also significant competitors in Europe. Competition in the
women's sheer hosiery market is generally based on price, quality and customer
service.

In addition, the Company competes, and faces potential competition,
with other direct marketing and Internet companies. Such competitors include
businesses which engage in direct mail, catalog sales, telemarketing and other
methods of sale which compete for the attention and spending dollars of
consumers in the home. There are numerous direct marketing companies that are
larger and better capitalized than the Company and that offer more varied
product assortments. The Company believes, however, that it is the only
significant direct marketing company to focus exclusively on women's sheer
hosiery.

Employees
- ---------

As of December 31, 1999, the Company had 1,077 employees, 204 of whom
were located at its headquarters and operations center in Bensalem,
Pennsylvania, 313 of whom were located at its manufacturing facility in Newland,
North Carolina, 237 of whom were located at its manufacturing, and packaging
facility in Lancaster, South Carolina, and 267 of whom were located at its
sewing and fulfillment operations facility in Heath Springs, South Carolina.
Additionally, 56 employees are currently employed in Canada and Europe. Of the
total number of employees, 167 are salaried. The remaining 910 are non-salaried
employees, the majority of whom are paid an hourly wage plus incentive
compensation based on productivity measures. The Company's hourly workforce is
not affiliated with any unions. The Company has not experienced any work
stoppages and believes its relations with its employees are good.

Recapitalization
- ----------------

6
<PAGE>

ITEM 2. PROPERTIES
- -------------------

The Company owns or leases facilities at nine principal locations. The following
sets forth the general location of each, its size, whether the facility is owned
or leased and the principal function of each.

Size in Owned/
Location Square Feet Leased Function
- ----------------------- ----------- ------ -----------------------------
Headquarters; Administration;
Marketing; Data Processing;
Bensalem, Pennsylvania 60,000 Leased Customer Service

Newland, North Carolina 138,000 Owned Knitting; Sewing

Lancaster, South
Carolina 142,000 Owned Dyeing; Packaging

Heath Springs, South Fulfillment Operations,
Carolina 143,000 Owned United States

Fulfillment Operations,
Liestal, Switzerland 69,000 Leased Europe

Liverpool, United Kingdom 15,000 Leased Headquarters; United Kingdom

Ettligen, Germany 3,000 Leased Office

Markham, Ontario Canada 6,000 Leased Office

Tokyo, Japan 600 Leased Office

The owned facilities are subject to mortgages and security interests
granted to secure payment of the Company's debt. See Note 10 to the Consolidated
Financial Statements of HCI Direct, Inc. (formerly, Hosiery Corporation of
America, Inc.) in Item 8 hereof.

ITEM 3. LEGAL PROCEEDINGS
- --------------------------

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 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.

7
<PAGE>

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 2 states. However, the state never finalized this agreement and the
Company has not heard further 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------

On October 20, 1999, a majority of the Stockholders of the Company
approved by written consent the reversal of the 8.6976942 to 1 stock split
effective June 24, 1999 (the "reverse stock split"). The reverse stock split was
previously approved by the Board of Directors on September 1, 1999. The reverse
stock split was effective on October 27, 1999 when the Restated Articles of
Incorporation of the Company were filed with the State of Delaware.

PART II
-------

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
- ------------------------------------------------------------

There is no established public trading market for any class of common
equity of the Company.

As of March 30, 2000, the Company had approximately 41 holders of
record of its common stock.

8
<PAGE>

Dividend Policy
- ---------------

The Company has not paid cash dividends on its common stock since 1992
and does not anticipate paying such dividends in the foreseeable future. The
Company intends to retain any future earnings for reinvestment in the Company.
In addition, the Bank Credit Agreement and the indenture pursuant to which the
Notes were issued place limitations on the Company's ability to pay dividends or
make certain other distributions in respect of its common stock. The Company is
not permitted to declare or pay any dividend or make any distribution in respect
of the Company's or any of its Restricted Subsidiaries' Equity Interests other
than dividends or distributions payable solely in shares of its Capital Stock.
Any future determination as to the payment of dividends will be subject to such
prohibitions and limitations, will be at the discretion of the Company's Board
of Directors and will depend on the Company's results of operations, financial
condition, capital requirements and other factors deemed relevant by the Board
of Directors, including the General Corporation Law of the State of Delaware
(the "DGCL") which provides that dividends are only payable out of the Company's
surplus or current net profits.

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA
- ----------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>

Net Revenues .................. $ 259,881 $ 198,681 $ 178,682 $ 162,763 $ 136,299

Operating Income .............. 39,890 38,080 35,854 36,968 31,427

Income (Loss) From Continuing
Operations Before Provision
(Benefit) for Income Taxes .... 20,990 21,519 17,835 (5,696) 12,056

Income From Continuing
Operations Before Compensation
Related to Stock Options,
Expenses Related to Aborted
Stock Offerings and Acquisition
and Provision (Benefit) for
Income Taxes (a) .............. 23,037 21,519 17,835 18,829 12,056

Working Capital ............... 1,713 9,215 12,455 589 5,794

Total Assets .................. 155,612 130,039 100,600 92,600 82,860

Long-Term Debt ................ 127,608 135,952 138,565 143,705 151,093

Redeemable Equity Securities .. -- 885 872 768 384

Stockholders' Deficiency ...... (46,799) (60,162) (72,083) (83,822) (102,920)

- ----------------
<FN>
(a) During 1996, the Company granted options to certain employees to purchase
up to 215,369 shares of common stock. The Company recognized $22,938 of
compensation expense related to the difference between the estimated fair
value of the stock at the date of grant and the exercise price of such
options. (See Note 20 to the Consolidated Financial Statements of HCI
Direct, Inc. (formerly, Hosiery Corporation of America, Inc.) in Item 8
hereof for further discussion.) In 1996, the Company incurred costs of $1.6
million for a potential initial public offering and a potential
acquisition, neither of which were consummated. During 1999, the Company
incurred costs of $2.0 million associated with a potential initial public
offering of equity securities which was not consummated. "Operating income"
and "income (loss) from continuing operations before provision (benefit)
for income taxes per the Consolidated Financial Statements of HCI Direct,
Inc. (formerly, Hosiery Corporation of America, Inc.) have been adjusted in
the above table to exclude these charges in order to present comparable
operating information with that of previous years.
</FN>
</TABLE>

10
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998
AND 1997
- ----------------------------------------------------------------------------

Results of Operations
- ---------------------

The following table sets forth certain income statement data for the
Company expressed as a percentage of net revenues.
<TABLE>

Fiscal Years Ended December 31,
-------------------------------
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net revenues ...................................... 100.0% 100.0% 100.0%
Cost of sales ............................... 45.3 46.0 45.9
Administrative and general expenses ......... 5.7 6.9 6.8
Provision for doubtful accounts ............. 11.0 5.8 6.0
Marketing costs ............................. 19.7 18.4 17.1
Coupon redemption costs ..................... 1.3 1.9 2.1
Depreciation and amortization ............... 1.4 1.7 1.7
----- ----- -----

Subtotal ............................... 84.4 80.7 79.6
----- ----- -----

Operating income before interest, expenses related
to aborted stock offering, other expenses and
provision for income taxes .................. 15.6% 19.3% 20.4%
===== ===== =====
</TABLE>

Fiscal 1999 Compared to Fiscal 1998
- -----------------------------------

Net revenues increased by 30.8% to $259.9 million in fiscal 1999 from
$198.7 million in 1998. North America contributed $42.2 million and Europe $19.0
million of the increase, respectively. In Europe, the UK was up $10.9 million,
Germany $6.1 million and France was reinitiated again in 1999 and contributed
$2.1 million of the increase. The increase in North America was primarily due to
a new offer that dramatically increases the number of customers who receive the
second and third shipments.

Cost of sales increased from $91.4 million in 1998 to $117.8 million in
1999, an increase of 29.0%. As a percentage of net revenues, cost of sales
declined to 45.3% in 1999 from 46.0% in 1998. The improvement in the cost of
sales percentage from year to year is primarily due to the new offer in the
United States, as this offer increased back end shipments which have a higher
margin than new customer shipments.

Administrative and general expenses increased 9.2% to $15.0 million in
1999 from $13.7 million in 1998. New start ups for the Internet, Japan, Little
Silkies and the reinitiation of France account for $0.7 million of the increase
with the balance caused primarily by higher wages and increased personnel. As a
percentage of net revenues, administrative and general expenses declined to 5.7%
in 1999 compared to 6.9% in 1998.

Provision for doubtful accounts increased to $28.6 million in 1999 from
$11.5 million in 1998, an increase of 147.5%. This increase was primarily driven
by the new offer in the United States, where the first shipment is totally free
and the second shipment is four pair at full price. This offer generates
substantially more back end shipments but is offset to a certain extent by the
cost of bad debts. North America accounted for $15.8 million of the increase
with the balance related to the growth in Europe. As a percentage of net
revenues, bad debts were 11.0% for 1999 compared to 5.8% for 1998.

<PAGE>

Marketing costs increased 39.8% to $51.1 million from $36.6 million for
the years ended December 31, 1999 and 1998, respectively. The increase in
marketing costs was due to the increased number and volume of mailing campaigns
in 1999 versus 1998 and the increased number and volume of mailing campaigns in
1998 versus 1997. These costs are deferred and amortized over a 42-month period
with the greatest amortization in the first 24 months. Expansion in the United
Kingdom and Germany plus entering France and Japan, developing an Internet
business and starting a "Little Silkies" line for young girls contributed to the
increase in marketing costs in 1999 over 1998. As a percentage of net revenues,
marketing costs were 19.7% in 1999 versus 18.4% in 1998.

Coupon redemption costs decreased to $3.3 million for 1999 from $3.8
million for 1998. As a percentage of net revenues, redemption costs were 1.3% in
1999 versus 1.9% for 1998.

Operating income increased to $39.9 million in 1999 from $38.1 million
in 1998, an increase of 4.8%. The increase in operating income was primarily the
result of increased revenue offset by higher cost of sales, provision for
doubtful accounts and marketing costs. As a percentage of net revenues,
operating income was 15.3% in 1999 versus 19.2% for 1998.

The Company had net income of $12.2 million in 1999 as compared to net
income of $13.5 million in 1998. As a percentage of net revenues, net income was
4.7% in 1999 versus 6.8% for 1998.

Fiscal 1998 Compared to Fiscal 1997
- -----------------------------------

Net revenues increased by 11.2% to $198.7 million in fiscal 1998 from
$178.7 million in 1997. The increase in net revenue was attributable to North
America $13.6 million and Europe $6.4 million. The increase in Europe was
primarily attributable to increased solicitations in Germany. The increase in
North America was the result of stronger sales to existing customers and the
acquisition of Enchantress ($2.2 million). Enchantress, a Canadian Company, was
acquired in 1998. (See Note 4 to the Consolidated Financial Statements of the
Company in Item 8 hereof.)

Cost of sales increased 11.3% to $91.4 million in fiscal 1998 from
$82.1 million for fiscal 1997. As a percentage of net revenues, cost of sales
increased to 46.0% in 1998 versus 45.9% for the same period in 1997. The
absolute increase in cost of sales is related to increased shipments in the
United States, Germany and Canada.

Administrative and general expenses increased 13.0% to $13.7 million in
fiscal 1998 from $12.1 million for 1997. Included in 1998 was severance of $0.5
million compared to none in 1997. The balance of the increase was caused by
increased personnel and higher wages. As a percentage of net revenues,
administrative and general expenses were 6.9% in 1998 versus 6.8% in 1997.

Provision for doubtful accounts increased $0.7 million or 6.9% to $11.5
million in fiscal 1998 from $10.8 million for the same period of 1997. This
increase was caused by growing the business in Germany, the Canadian acquisition
and an increase in the United States offset by lower experience in the United
Kingdom. As a percentage of net revenues, bad debts were 5.8% for 1998 versus
6.0% for 1997.

Marketing costs increased 19.8% to $36.6 million from $30.5 million for
the years ended December 31, 1998 and 1997, respectively. This increase was
partially attributable to higher amortization of prior years' deferred marketing
costs in 1998 compared to 1997, related to the substantial increase (43.6%) in
solicitations in 1997 versus 1996. In 1997, 75.6 million solicitations were
mailed as compared to 52.6 million in 1996. These costs are amortized over 42
months with the greatest amortization in the first 24 months. Additionally, a
substantial portion of this increase was attributable to higher front end
solicitations, in the current year, as 16.6 million additional solicitations
were mailed in 1998 compared to 1997 (up 22.0%). As a percentage of net
revenues, marketing costs were 18.4% in 1998 versus 17.1% for 1997.

12
<PAGE>

Coupon redemption costs increased slightly to $3.8 million for fiscal
1998 from $3.7 million for fiscal 1997. As a percentage of net revenues,
redemption costs were 1.9% in 1998 versus 2.1% for 1997.

Interest expense decreased to $16.6 million for fiscal 1998 from $18.1
million for 1997. This decrease in interest expense was primarily due to less
debt and lower rates. As a percentage of net revenues, interest expense was 8.4%
in 1998 versus 10.1% for 1997.

Operating income increased to $38.1 million in 1998 from $35.9 million
in 1997, an increase of 6.2%. The increase in operating income was primarily the
result of increased revenue and lower interest rates offset by higher marketing
costs. As a percentage of net revenues, operating income was 19.2% for 1998
versus 20.1% for 1997.

The Company had net income of $13.5 million in 1998 as compared to a
net income of $11.6 million in 1997. As a percentage of net revenues, net income
was 6.8% in 1998 versus 6.5% for 1997.

Liquidity and Capital Resources
- -------------------------------

The Company's cash requirements arise principally from the need to
finance new front end solicitations (customers), capital expenditures, debt
repayment and other working capital requirements. The Company financed these
requirements and expects to finance future requirements for 2000 (including
$13.0 million of debt repayments) from internally generated funds and/or its
Credit Facility.

In fiscal 1999, 1998 and 1997, capital expenditures were $1.9 million,
$3.6 million and $2.6 million, respectively. The majority of the expenditures
were for the purchase of knitting, sewing and dyeing equipment and facility
acquisition and enhancements. These expenditures were financed substantially
through the assumption of capital leases. Also, the Company expects to expend
approximately $2.0 million in 2000 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 $0.1 million in 1999 as
compared to $4.6 million in 1998 and $11.2 million in 1997. The decrease from
1998 to 1999 was caused by the increase in accounts receivable, lower net income
and increase in accounts payable, offset by lower inventories. The decrease from
1997 to 1998 was caused by the increase in the payments for deferred marketing
offset by higher amortization of these costs and the increase in prepaid costs
for future marketing (January 1999).

Net cash used in investing activities was $1.0 million in 1999, $5.1
million in 1998 and $0.9 million in 1997. In 1998, a Canadian hosiery company
was acquired.

Net cash provided by (used in) financing activities was $0.9 million,
($3.8) million and ($7.9) million, respectively. During 1997, a new credit
agreement was reached with the Company's bank lenders which provided $65 million
in term debt at a substantially lower interest rate (7.5% versus 8.8%) an
increase in its line of credit from $15 million to $20 million and a change in
the covenants relating to the credit agreement. In 1999, the line of credit was
increased to $25 million and the covenants were also changed. Net payments on
bank and other financing, including capital lease obligations and excluding the
termination of the prior term debt, totaled $9.4 million, $5.3 million and $7.3
million in 1999, 1998 and 1997, respectively.

13
<PAGE>

The Recapitalization and Line of Credit
- ---------------------------------------

On October 17, 1994, the Company effected the recapitalization of its
capital stock (the "Recapitalization"). As a result of the substantial
indebtedness incurred in connection with the Recapitalization, the Company has
significant debt service obligations. In November 1997, the Company amended and
restructured its credit agreement. This change resulted in lower interest rates,
an increase in the revolving credit facility from $15 million to $20 million, a
substantial change in the timing of principal payments and changes to the debt
covenants. At December 31, 1999, the outstanding amount of the Company's
indebtedness (other than trade payables and accrued expenses) is $141.4 million,
including $67.3 million of senior secured debt and $69.1 million of senior
subordinated debt (the "Notes"). Since consummation of the Recapitalization, the
Company's ongoing cash requirements through January 2002 will consist primarily
of interest payments and required amortization payments under the Credit
Agreement, interest payments on the Notes, payments of capital lease
obligations, front end marketing expenditures, working capital, capital
expenditures and taxes. The required amortization payments under the Credit
Agreement will be: $13.0 million in 2000, $20.0 million in 2001 and $19.0
million in 2002. Other than upon a change of control (as defined) or as a result
of certain asset sales, the Company will not be required to make any principal
payments in respect of the Notes until maturity, August 2002. The Company's
primary source of liquidity will be cash flow from operations and funds
available to it under a revolving credit facility. The revolving credit facility
provides for maximum borrowings of $20.0 million, $5.5 million of which was
available at December 31, 1999.

In March 1999, the Company amended its Credit Agreement to include an
Incremental Revolving Loan of $5.0 million. This loan can be made from time to
time after the existing revolving credit facility equals $20.0 million. In
December 1999, this loan was extended until March 2000 at which time $4.0
million of the Incremental Revolving Loan was extended through the life of the
Credit Agreement. At December 31, 1999 all $5.0 million was available to the
Company giving it $10,533 in total credit facilities. Additionally, certain of
the Company's covenants were waived for the December quarter and amended for
2000 and subsequent years.

Legal Proceedings
- -----------------

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.

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.

14
<PAGE>

Year 2000
- ---------

The Company adopted a five-phase Year 2000 program consisting of Phase I -
identification and ranking of the components of the Company's systems, equipment
and suppliers that may be vulnerable to Year 2000 problems; Phase II -
assessment of items identified in Phase I; Phase III - remediation or
replacement of non-compliant systems and components and determination of
solutions for non-compliant suppliers; Phase IV - testing of systems and
components following remediation; and Phase V - developing contingency plans to
address the most reasonably likely worst case Year 2000 scenarios. The Company
successfully completed all phases of its Year 2000 program and was Year 2000
compliant as of November 1999. The Company spent approximately $0.4 million on
internal manpower costs during 1997 and 1998 related to the Year 2000 issue,
representing approximately 4% of the information systems budget. The Company
spent approximately $0.1 million in 1999 to complete the project. The Company
had a limited contingency plan that addressed the possible impact of Year 2000
problems on mission critical systems but believes that the risk of such problems
has passed.

The Company's use of its own information technology personnel to make
the business systems Year 2000 compliant did delay some other strategic
information systems development and implementation which would have otherwise
benefited the Company in various ways and to varying extents. The Company does
not believe that it will be at a competitive disadvantage as a result of these
delays.

The Company's vendors are all Year 2000 compliant including the U.S.
Postal Service which is the only significant vendor which could have adversely
affected the Company's operations.

15
<PAGE>

Inflation
- ---------

Over the past three years, which has been a period of low inflation, the
Company has been able to increase sales volume to compensate for increases in
operating expenses. The Company has historically been able to increase its
selling prices as the cost of sales and related operating expenses have
increased and, therefore, inflation has not had a significant effect on
operations.

Accounting Statements Not Yet Adopted
- -------------------------------------

New Accounting Standards - In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
As issued, SFAS No. 133 was effective for fiscal years beginning after June 15,
1999. In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133. SFAS No. 137 defers the effective date of SFAS No. 133 for
one year to fiscal years beginning after June 15, 2000. The Company has not yet
assessed what the impact of the SFAS will be on the Company's future earnings or
financial position.

16
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------

The Company uses its revolving credit facility, term loan, senior
subordinated notes and bonds to finance a significant portion of its operations.
These on-balance sheet financial instruments, to the extent they provide for
variable rates of interest, expose the Company to interest rate risk resulting
from changes in the Eurodollar Rate, Federal Funds Rate or the prime rate. Also,
the Company sources hosiery at prices denominated in foreign currency and also
sells products in Canada, United Kingdom, France and Germany at prices
denominated in local currency.

To the extent that the Company's financial instruments expose the
Company to interest rate risk and market risk, they are presented in the table
below. The table presents principal cash flows and related interest rates by
year of maturity for the Company's revolving credit facility, term loan, senior
subordinated notes and bonds in effect at December 31, 1999. Note 19 to the
consolidated financial statements should be read in conjunction with the table
below (dollar amount in thousands).
<TABLE>
<CAPTION>
Year of Maturity
Total Fair
Due at Value at
2000 2001 2002 2003 2004 Thereafter Maturity 12/31/99
---- ---- ---- ---- ---- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest rate sensitive
assets:
Noninterest bearing
checking and savings
accounts $ 1,746 $ -- $ -- $ -- $ -- $ -- $ 1,746 $ 1,746
Average interest rate --% --% --

Interest-bearing checking
accounts, savings accounts
and money market deposit
accounts 890 890 890
Average interest rate 4.50 4.50 --
-------- -------- -------- -------- -------- -------- -------- --------

$ 2,636 $ 2,636 $ 2,636
======== ======== ========
1.52% 1.52% --
===== ====

Interest rate sensitive
liabilities:
Noninterest bearing
checking and savings
accounts $ 3,384 $ -- $ -- $ -- $ -- $ -- $ 3,384 $ 3,384
Average interest rate --% --% --

Short-term and variable
rate borrowings 26,867 20,117 19,117 117 117 29 66,364 66,364
Average interest rate 7.65 7.65 7.65 7.05 7.10 7.10 7.65 --

Fixed-rate borrowings 69,069 69,069 72,800
Average interest rate 13.75 13.75 --
-------- -------- -------- -------- -------- -------- -------- --------

$ 30,251 $ 20,117 $ 88,186 $ 117 $ 117 $ 29 $138,817 $142,548
======== ======== ======== ======== ======== ======== ======== ========
6.79% 7.65% 12.43% 7.05% 7.10% 7.10% 10.50% --
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>

17
<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
<TABLE>

HCI DIRECT, INC.
(FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)

Index to Financial Statements and Financial Statement Schedule
<CAPTION>

Page Number
-----------
<S> <C>
Financial Statements and Independent Auditors' Report:
Independent Auditors' Report.................................................... 19
Consolidated Balance Sheets--December 31, 1999 and 1998......................... 20
Consolidated Statements of Income--For the years ended December 31, 1999,
1998 and 1997................................................................ 21
Consolidated Statements of Cash Flows--For the years ended December 31, 1999,
1998 and 1997................................................................ 22
Consolidated Statements of Stockholders' Deficiency--For the years
ended December 31, 1999, 1998 and 1997....................................... 23
Notes to Consolidated Financial Statements...................................... 24
Financial Statement Schedule and Independent Auditors' Report:
Independent Auditors' Report.................................................... S-1
Schedule I--Valuation and Qualifying Accounts--For the years ended
December 31, 1999, 1998 and 1997............................................. S-2
</TABLE>
Schedules other than those listed above are omitted because they are
either not applicable or not required or the information required is included in
the consolidated financial statements or notes thereto.

18
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
HCI Direct, 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, 1999 and 1998, and the related consolidated
statements of income, stockholders' deficiency and cash flows for each of the
three years in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States of America. 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, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
auditing standards generally accepted in the United States of America.

Deloitte & Touche LLP
Philadelphia, Pennsylvania

March 30, 2000

19
<PAGE>
<TABLE>

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(Dollars in thousands, except share and per share data)
<CAPTION>
1999 1998
--------- ---------
ASSETS
CURRENT ASSETS:
<S> .................................................................................... <C> <C>
Cash and cash equivalents ......................................................... $ -- $ --
Accounts receivable, less an allowance for doubtful accounts of
$6,048 and $1,901 in 1999 and 1998, respectively ................................. 49,625 32,214
Inventories ....................................................................... 14,248 20,008
Prepaid customer acquisition costs ................................................ 6,548 3,989
Prepaid and other current assets .................................................. 4,649 4,419
--------- ---------
Total current assets ......................................................... 75,070 60,630
PROPERTY AND EQUIPMENT, net ............................................................ 16,467 17,906
DEFERRED CUSTOMER ACQUISITION COSTS .................................................... 56,203 42,273
DEFERRED DEBT ISSUANCE COSTS, less accumulated amortization of
$8,227 and $6,774 in 1999 and 1998, respectively .................................. 3,337 4,790
GOODWILL, less accumulated amortization of $185 and $61 in 1999 and 1998, respectively . 3,609 3,733
OTHER ASSETS ........................................................................... 926 707
--------- ---------
TOTAL .................................................................................. $ 155,612 $ 130,039
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Borrowings under line of credit ................................................... $ 13,750 $ 3,400
Current portion of long-term debt ................................................. 13,117 7,617
Current portion of capital lease obligations ...................................... 1,526 1,726
Bank overdrafts ................................................................... 33 1,397
Accounts payable .................................................................. 15,061 10,321
Accrued expenses and other current liabilities .................................... 8,342 9,389
Accrued interest .................................................................. 4,625 4,771
Accrued coupon redemption costs ................................................... 4,166 4,679
Deferred income taxes ............................................................. 12,379 8,115
Income taxes payable .............................................................. 358 --
--------- ---------
Total current liabilities .................................................... 73,357 51,415
LONG-TERM DEBT, Less current portion ................................................... 108,566 121,433
CAPITAL LEASE OBLIGATIONS, Less current portion ........................................ 4,399 5,176
ACCRUED COUPON REDEMPTION COSTS ........................................................ 336 408
DEFERRED INCOME TAXES .................................................................. 15,753 10,884
--------- ---------
Total liabilities ............................................................ 202,411 189,316
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES
REDEEMABLE EQUITY SECURITIES ........................................................... -- 885
--------- ---------
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.01 par value, 12,000,000 shares authorized:
4,000,000 shares designated as pay-in-kind preferred stock, stated at liquidation
value of $10 per share; 25% cumulative, (liquidation preference of $127,885 and
$101,236 in 1999 and 1998, respectively), 3,811,901 and 3,748,497 shares issued
in 1999 and 1998, respectively, 3,803,186 and 3,739,782 shares outstanding in
1999 and 1998, respectively ..................................................... 38,119 37,485
Common stock, voting, $.01 par value: 60,000,000 and 3,000,000 shares authorized
in 1999 and 1998, respectively, 1,350,174 and 1,340,122 shares issued in 1999 and
1998, respectively, 1,331,574 and 1,321,522 shares outstanding in 1999 and
1998, respectively .............................................................. 13 13
Common stock, Class A, non-voting, $.01 par value:
1,000,000 and 500,000 shares authorized in 1999 and 1998, respectively, 75,652
shares issued and outstanding ................................................... 1 1
Additional paid-in capital ........................................................ 19,120 18,869
Compensatory stock options outstanding ............................................ 20,943 20,943
Accumulated deficit ............................................................... (122,722) (134,950)
Restricted stock .................................................................. (197) (447)
--------- ---------
(44,723) (58,086)
Treasury stock, at cost, 27,315 shares in 1999 and 1998 (8,715 preferred shares
and 18,600 common shares) ....................................................... (2,076) (2,076)
--------- ---------
Net stockholders' deficiency ................................................. (46,799) (60,162)
--------- ---------
TOTAL .................................................................................. $ 155,612 $ 130,039
========= =========
<FN>
See notes to condensed consolidated financial statements
</FN>
</TABLE>
20

<PAGE>
<TABLE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in thousands)
<CAPTION>

1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
NET REVENUES ................................................... $259,881 $198,681 $178,682
-------- -------- --------
COSTS AND EXPENSES:
Cost of sales ............................................. 117,809 91,352 82,119
Administrative and general expenses ....................... 14,960 13,694 12,121
Provision for doubtful accounts ........................... 28,552 11,536 10,791
Marketing costs ........................................... 51,148 36,585 30,538
Coupon redemption costs ................................... 3,290 3,843 3,671
Depreciation and amortization ............................. 3,599 3,405 3,059
Other expenses ............................................ 633 186 529
-------- -------- --------

OPERATING INCOME ............................................... 39,890 38,080 35,854
Expenses related to aborted stock offering ................ 2,047 -- --
Interest income ........................................... 35 71 90
Interest expense .......................................... 16,888 16,632 18,109
-------- -------- --------

INCOME BEFORE PROVISION FOR INCOME TAXES ....................... 20,990 21,519 17,835
PROVISION FOR INCOME TAXES ..................................... 8,762 8,055 6,242
-------- -------- --------

NET INCOME ..................................................... $ 12,228 $ 13,464 $ 11,593
======== ======== ========

<FN>

See notes to consolidated financial statements
</FN>
</TABLE>
21
<PAGE>
<TABLE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(Dollars in thousands)
<CAPTION>

1999 1998 1997
-------- -------- -------
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income ....................................................... $ 12,228 $ 13,464 $ 11,593
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization ................................. 3,599 3,405 3,059
Amortization of debt issue costs and discounts ................ 1,732 1,701 1,844
(Gain) loss on sale and abandonments of property and equipment (2) (7) 4
Amortization of restricted stock .............................. 250 250 250
Amortization of deferred customer acquisition costs ........... 45,376 32,134 24,489
(Increase) decrease in operating assets:
Accounts receivable ..................................... (17,411) (7,596) (1,241)
Inventories ............................................. 5,760 (4,513) 380
Payments for deferred customer acquisition costs ........ (59,306) (47,188) (30,492)
Prepaid and other current assets ........................ (2,789) (2,381) (656)
Other assets ............................................ (387) (604) (44)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other liabilities 2,183 8,394 (630)
Income taxes payable .................................... 358 -- --
Deferred income taxes ................................... 9,133 7,844 3,150
Accrued coupon redemption costs ......................... (585) (321) (542)
-------- -------- --------
Net cash provided by operating activities ......... 139 4,582 11,164
-------- -------- --------
INVESTING ACTIVITIES:
Acquisitions of property and equipment ........................... (1,090) (1,191) (919)
Acquisition of business .......................................... -- (3,914) --
Proceeds from sale of property and equipment ..................... 47 20 3
-------- -------- --------
Net cash used in investing activities ............. (1,043) (5,085) (916)
-------- -------- --------
FINANCING ACTIVITIES:
Net borrowings under line of credit .............................. 10,350 3,400 --
Proceeds from bank and other financing ........................... -- -- 65,000
Payments on bank and other financing ............................. (7,646) (3,617) (70,566)
Payments on capital leases ....................................... (1,800) (1,663) (1,783)
Debt issuance costs .............................................. -- (164) (532)
Proceeds from exercise of options, net of tax .................... -- 296 --
Purchase of treasury stock ....................................... -- (2,076) --
-------- -------- --------
Net cash provided by (used in) financing activities 904 (3,824) (7,881)
-------- -------- --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................ -- (4,327) 2,367
Cash and cash equivalents at beginning of year ................... -- 4,327 1,960
-------- -------- --------
Cash and cash equivalents at end of year ......................... $ -- $ -- $ 4,327
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ...................................................... $ 15,080 $ 14,768 $ 16,310
======== ======== ========
Income taxes .................................................. $ 403 $ 1,618 $ 3,303
======== ======== ========

<FN>

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations of $823, $2,424, and $1,999 were entered into for new equipment during 1999, 1998, and
1997, respectively.

See notes to consolidated financial statements.
</FN>
</TABLE>
22

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(Dollars in thousands)
<CAPTION>

PREFERRED STOCK COMMON STOCK
---------------- -------------------------------------
CLASS A, Retained
PIK NON VOTING Additional Earnings
----------------- ----------------- ----------------- Paid-In (Accum
Shares Amount Shares Amount Shares Amount Capital Deficit)
----------------- ----------------- ----------------- -------- --------

<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE January 1, 1997 ............. 3,739,782 $37,398 1,321,522 $ 13 75,652 $ 1 $ 16,669 $(159,894)
Net income .......................... 11,593
Compensation under restricted
stock awards .....................
Accretion of preference value over
carrying value of redeemable
preferred stock .................. (104)
------------------ ----------------- --------------- -------- --------
BALANCE December 31, 1997 ........... 3,739,782 37,398 1,321,522 13 75,652 1 16,565 (148,301)
Net income .......................... 13,464
Compensation under restricted
stock awards
Accretion of preference value over
carrying value of redeemable
preferred stock .................. (121)
Purchase of shares for treasury ..... (113)
Exercise of stock options, net of tax 17,344 2,291
Reclass of redeemable equity
securities ....................... 8,715 87 1,256 134
------------------ ----------------- --------------- -------- --------
BALANCE December 31, 1998 ........... 3,748,497 37,485 1,340,122 13 75,652 1 18,869 (134,950)
Net income .......................... 12,228
Compensation under restricted
stock awards
Accretion of preference value over
carrying value of redeemable
preferred stock .................. (136)
Lapse of redemption provisions on
equity securities ................ 63,404 634 10,052 387
------------------ ----------------- --------------- -------- --------
BALANCE December 31, 1999 ........... 3,811,901 $38,119 1,350,174 $ 13 75,652 $ 1 $ 19,120 $(122,722)
================== ================= =============== ======== ========
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIENCY
(Dollars in thousands)

TREASURY STOCK
-------------------------------
Preferred Common Compensatory
Stock Stock Stock
--------- ------ Restricted Options
Shares Shares Amount Stock Outstanding Total
--------- ------ ------ ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE January 1, 1997 ............. -- -- $ -- $ (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 ..... (8,715) (18,600) (2,076) (2,189)
Exercise of stock options, net of tax (1,995) 296
Reclass of redeemable equity
securities........................ 221
--------- ------- ------- ---------- ------------ --------
BALANCE December 31, 1998 ........... (8,715) (18,600) (2,076) (447) 20,943 (60,162)
Net income........................... 12,228
Compensation under restricted
stock awards ..................... 250 250
Accretion of preference value over
carrying value of redeemable
preferred stock................... (136)
Lapse of redemption provisions on
equity securities................. 1,021
--------- ------- ------- ---------- ------------ --------
BALANCE December 31, 1999 ........... (8,715) (18,600) $(2,076) $ (197) $ 20,943 $(46,799)
========= ======= ======= ========== ============ ========
</TABLE>

See notes to consolidated financial statements.

<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

1. ORGANIZATION

HCI Direct, Inc. (formerly, Hosiery Corporation of America, Inc.) and
subsidiaries is a company incorporated in the State of Delaware and is
engaged in the direct mail marketing, manufacturing and distribution of
quality women's sheer hosiery products to consumers throughout North
America, the United Kingdom, France and Germany. On June 24, 1999, the
Company name was changed to HCI Direct, Inc. (see Note 14). 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 69% 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.) (the "Company") and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.

Revenue Recognition - Revenue less allowance for returns is recognized
when merchandise is shipped. The Company provides for returns at the time
of shipment based upon historical experience.

Cash and Cash Equivalents - Cash and cash equivalents consist of cash and
other short-term securities purchased with maturities of less than three
months.

Inventories - Inventories are stated at the lower of cost (first-in,
first-out) or market.

Property and Equipment - Property and equipment are stated at cost less
accumulated depreciation. Depreciation is provided on a straight-line
basis using estimated lives of 31 years for buildings, 5 to 10 years for
machinery and equipment, 5 to 7 years for furniture and fixtures and 3 to
5 years for automobiles. Leasehold improvements are amortized over the
shorter of the estimated useful life or the lease periods which are
generally 15 to 18 years.

Deferred Customer Acquisition Costs - Deferred customer acquisition costs
consist of marketing costs (postage, printed material, customer list
rentals, etc.) of the initial shipment to a customer and similar costs
associated with the resolicitation of previously canceled customers.
These costs are aggregated by promo- tional program and are amortized on
an accelerated basis based upon the estimated current year revenue in
proportion to the expected future revenue generated by these customers.
Approximately 58% of these costs are amortized in the first 12 months,
71% 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.

25
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)

Derivative Financial Instruments - The Company enters into interest rate
caps to manage exposure to fluctuations in interest rates. Premiums paid
on caps are amortized to interest expense over the term of the cap. The
interest rate caps were fully amortized at December 31, 1997.

Deferred Debt Issuance Costs - Debt issuance costs represent costs
associated with bank borrowings and notes and are amortized using the
straight-line method over the terms of the related borrowings. The effect
of utilizing the straight-line method instead of the effective-interest
method is not material to the financial statements.

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 Statement of
Financial Accounting Standard ("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. Examples of such estimates and assumptions
that could affect the reported amounts of assets and liabilities include,
inter alia, provisions for sales returns and bad debts, provisions for
coupon redemption and currency exchange rates. Actual results could
differ from those estimates.

26
<PAGE>

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued)

New Accounting Standards - In June 1998, the FASB issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. As issued, SFAS No. 133 was
effective for fiscal years beginning after June 15, 1999. In June 1999,
the FASB issued SFAS No. 137, Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133. SFAS No. 137 defers the effective date of SFAS No. 133 for one year
to fiscal years beginning after June 15, 2000. The Company has not yet
assessed what the impact of the SFAS will be on the Company's future
earnings or financial position.

Reclassifications - Certain reclassifications were made to the prior
year's consolidated financial statements to conform to classifications
used in the current period.

3. OPERATING SEGMENTS

The Company organizes its business units into two geographic segments:
North America and International. The President of HCI Direct, Inc., is
responsible for North America, and the President of Hosiery Corporation
International is responsible for all International locations. The
business is basically the same in both segments in that the bulk of the
pantyhose is self-manufactured and sold directly to the end user via mail
order. The business is a continuity business, and the goal of the program
is to maintain customers in the program receiving full-priced shipments.
Since North America is the established business (24 years) as compared to
International (4 years), this explains the difference in profitability.

27
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

3. OPERATING SEGMENTS (continued)

The segment's accounting policies are the same as those described in the
summary of significant accounting policies.
<TABLE>
<CAPTION>
1999
North America International Total
------------- ------------- -------
<S> ......................................................... <C> <C> <C>
Revenues from External Customers ............................ 215,773 44,108 259,881
Intersegment Revenues ....................................... 2,284 -- 2,284
Interest Revenue ............................................ 16 19 35
Interest Expense ............................................ 16,888 -- 16,888
Depreciation and Amortization ............................... 3,517 82 3,599
Segment Profit (EBITDA) (1) ................................. 43,795 (271) 43,524
Segment Assets .............................................. 128,759 26,853 155,612
Income Tax Expense (Benefit) ................................ 10,603 (1,841) 8,762
Long-Lived Assets ........................................... 23,869 470 24,339

1998
North America International Total
------------- ------------- -------

Revenues from External Customers ............................ 173,580 25,101 198,681
Intersegment Revenues ....................................... 8,209 -- 8,209
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 .......................................... 7,707 348 8,055
Long-Lived Assets ........................................... 26,824 312 27,136

1997
North America International Total
------------- ------------- -------

Revenues from External Customers ............................ 159,988 18,694 178,682
Intersegment Revenues ....................................... 6,356 -- 6,356
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
<FN>

(1) Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) represents Income (Loss) Before Provision (Benefit) For
Income Taxes of $20,990, $21,519, and $17,835 for 1999, 1998 and
1997, respectively, excluding Interest Expense of $16,888, $16,632
and $18,109 for 1999, 1998 and 1997, respectively, Depreciation
and Amortization of $3,599, $3,405 and $3,059 for 1999, 1998 and
1997, respectively and Expenses related to Stock Offering of
$2,047 in 1999. EBITDA does not purport to represent net income or
net cash provided by operating activities, as those terms are
defined under generally accepted accounting principles. Further,
the Company's measure of EBITDA may not be comparable to similarly
titled measures of other companies.
</FN>
</TABLE>

28
<PAGE>

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

4. ACQUISITION

On June 10, 1998, the Company acquired substantially all of the assets
and assumed certain liabilities of Enchantress Hosiery Corporation of
Canada Ltd. ("EHC") for approximately $3,900 which was funded through a
borrowing under the Company's revolving credit facility. EHC is engaged
in the direct mail marketing and distribution of quality sheer hosiery
products to consumers throughout Canada. The acquisition was accounted
for using the purchase method of accounting. Accordingly, a portion of
the purchase price was allocated to the net assets acquired based on
estimated fair values at date of acquisition. The fair value of assets
acquired and liabilities assumed was approximately $100. The excess of
the purchase price over the estimated fair value of the net assets
acquired of approximately $3,800 is amortized over a period of 30 years
using the straight-line method.

5. PROVISION FOR COUPON REDEMPTION

As part of the marketing program, the Company issues coupons to program
participants based upon the products purchased or the referral of new
customers to the Company. Customers may redeem coupons for free gifts
from a program catalog once they have collected the required number of
coupons. During 1999, customers with an average of 34 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

1999 1998
---- ----

Raw materials.................................... $ 859 $ 909
Work-in-process.................................. 2,984 3,023
Finished goods................................... 7,658 13,500
Promotional and packing material................. 2,747 2,576
------- -------
$14,248 $20,008
======= =======

7. PROPERTY AND EQUIPMENT

1999 1998
---- ----

Land and buildings.............................. $ 7,125 $ 7,125
Machinery and equipment......................... 23,688 22,658
Furniture and fixtures.......................... 2,249 2,322
Leasehold improvements.......................... 3,839 3,781
Automobiles..................................... 523 642
------- -------
37,424 36,528
Less accumulated depreciation and amortization.. 20,962 18,622
------- -------
$16,462 $17,906
======= =======

Included in the above amounts are machinery and equipment operated under
agreements which have been recorded as capital leases having a carrying
value of $5,801 and $7,252 as of December 31, 1999 and 1998, respectively
(net of accumulated depreciation of $6,293 and $7,801 as of December 31,
1999 and 1998, respectively). Depreciation and amortization expense for
capital lease assets for 1999, 1998 and 1997 was $1,658, $1,738 and
$1,542, respectively.

29
<PAGE>

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

8. OTHER ASSETS
1999 1998
---- ----

Software, net of accumulated amortization of
approximately $6,316 and $6,190, respectively.. $831 $444
Deposits......................................... 13 176
Miscellaneous other............................... 82 87
---- ----
$926 $707
==== ====

9. OTHER EXPENSES

Included in other expenses are the following:
1999 1998 1997
---- ---- ----

Loss on foreign exchange.................. $634 $194 $225
Multistate group administrative expenses.. -- -- 300
Miscellaneous expenses (income)........... (1) (8) 4
---- ---- ----
$633 $186 $529
==== ==== ====

10. LINE OF CREDIT AND LONG-TERM DEBT
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Amounts due under term loan agreement ............................ $ 52,000 $ 59,500
13.75% Senior Subordinated Notes due August 2002 ................. 69,071 68,792
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 ..................................... 612 758
-------- --------

Total long-term debt ............................................. 121,683 129,050
Less current portion ............................................. 13,117 7,617
-------- --------

TOTAL LONG-TERM PORTION .......................................... $108,566 $121,433
======== ========
</TABLE>

<PAGE>

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

10. LONG-TERM DEBT (continued)

On October 17, 1994, the Company entered into a revolving credit and term
loan agreement (the "Agreement") with a group of banks which was
restructured on November 20, 1997 and amended on March 26, 1999 and March
29, 2000. Outstanding borrowings at December 31, 1999 and 1998 are
$52,000 and $59,500, respectively. The facility is secured by
substantially all of the assets of HCI Direct, Inc. The facility is also
subject to the continuing guarantees of the subsidiaries of HCI Direct,
Inc. The revolving credit and term loan portions of the facility have
maximum borrowings of $25,000 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% (9.00% at December 31, 1999).
There were borrowings outstanding under the revolving credit facility at
December 31, 1999 of $13,750 and $3,400 in 1998. The amount available
under the revolving credit facility at December 31 was $10,533 and
$15,800 in 1999 and 1998, 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, 1999 ranged from 6.94% to 7.9375%. 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.

In March 1999, the Company amended the Agreement to include an
Incremental Revolving Loan of $5.0 million. This loan can be made from
time to time after the existing revolving credit facility equals $20.0
million. In December 1999, this loan was extended until March 2000.
Effective March 30, 2000, $4.0 million of this loan was extended through
the life of the Agreement (see Note 24).

During 1994, the Company issued 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 issued 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, 1999 except minimum EBITDA and leverage ratios. On
December 29, 1999, the group of banks amended the Agreement which
included waivers of certain financial covenants as of December 31, 1999.
Effective March 30, 2000, the group of banks amended the agreement
(see Note 24) which included the amendments of certain financial
covenants for 2000 and subsequent years. Under the amended agreement, the
Company is in compliance with all debt covenants at December 31, 1999.

The Company was contingently liable for outstanding letters of credit in
the amount of approximately $717 as of December 31, 1999.

The Company expects to finance debt repayment requirements from
internally generated funds and/or its Credit Facility.

31
<PAGE>

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

10. LONG-TERM DEBT (continued)

Maturities of long-term debt consisted of the following as of December
31, 1999:

2000....................................... 13,117
2001....................................... 20,117
2002....................................... 88,186
2003....................................... 117
2004....................................... 117
Thereafter................................. 29
--------
$121,683
========
11. INCOME TAXES

The domestic and foreign components of pre-tax income consisted of the
following:

1999 1998 1997
---- ---- ----

United States.................... $20,479 $21,110 $17,835
Foreign.......................... 511 409 --
------- ------- -------
20,990 21,519 17,835
======= ======= =======

The provision for income taxes (benefit) consisted of the following:

1999 1998 1997
---- ---- ----
Federal:
Current.......................... $ (887) $ 468 $2,640
Deferred......................... 8,073 6,701 3,297
------- ------ ------
7,186 7,169 5,937
------- ------ ------
States:
Current.......................... 138 (31) 451
Deferred......................... 818 728 (146)
------- ------ ------
956 697 305
------- ------ ------
Foreign:
Current.......................... 378 -- --
Deferred......................... 242 189 --
------- ------ ------
620 189 --
------- ------ ------
$ 8,762 $8,055 $6,242
======= ====== ======

32
<PAGE>

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

11. INCOME TAXES (continued)

The components of net deferred tax liabilities consisted of the
following:

1999 1998
-------- --------
Deferred tax liabilities:
Deferred customer acquisition costs........ $ 17,782 $ 12,129
Accounts receivable........................ 11,922 7,309
Prepaid assets............................. 2,951 3,642
Property and equipment..................... 448 508
Other assets............................... 705 802
Other current assets....................... -- 161
Accrued coupon redemption costs............ 366 368
State deferred taxes....................... 2,425 1,885
Other...................................... (38) 199
-------- --------
36,561 27,003
-------- --------
Deferred tax assets:
Accrued expenses........................... (1,268) (868)
Stock option............................... (7,121) (7,121)
Foreign Tax Credit......................... (361) --
Other...................................... (40) (15)
-------- --------
(8,790) (8,004)
Valuation Allowance 361 --
-------- --------
(8,429) (8,004)
-------- --------
$28,132 $18,999
======== ========

<TABLE>
<CAPTION>
The following is a reconciliation of the federal statutory rate and the
Company's effective tax rate:

1999 1998 1997
----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Tax provision at statutory rate ................... $ 7,137 34.0% $ 7,317 34.0% $ 6,064 34.0%
State taxes, net of federal benefit ............... 631 3.0 460 2.1 202 1.1
Foreign incremental tax ........................... 415 2.0 43 0.2 -- --
Other.............................................. 579 2.7 235 1.1 (24) (0.1)
------- ---- ------- ---- ------- ----
Provision for income taxes ........................ $ 8,762 41.7% $ 8,055 37.4% $ 6,242 35.0%
======= ==== ======= ==== ======= ====
</TABLE>

The Company has recorded a Deferred Tax Asset for Foreign Tax Credits of
$358 for 1999 which will expire in 2005. A full valuation allowance of
$358 has been established due to the uncertainty of its usage during the
5-year carryforward period.

33
<PAGE>

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

12. REDEEMABLE EQUITY SECURITIES

In connection with the Recapitalization, the Company issued 2,826 shares
of voting common stock, $.01 par value, to management stockholders for
cash. The Company is obligated to redeem these shares from the management
stockholders upon the death, disability or termination of employment of
the holder. The redeemable common stock was recorded at fair value on the
date of issuance, less issuance costs, totaling $45. During 1995, the
Company issued an additional 4,048 shares of voting common stock, $.01
par value, for cash under the same basic terms. The redeemable common
stock was recorded at fair value on the date of issuance, less issuance
costs, totaling $63. In connection with the issuance of redeemable common
shares in 1995, certain agreements were amended and executed in order
that 14,643 shares of preferred stock issued for cash in 1995 and 10,218
shares of preferred stock issued for cash in October 1994 would be
redeemable under the same basic terms of the redeemable common stock.
Each preferred share has a $.01 par value, a stated value at liquidation
of $10 and cumulative dividends of 25% of additional shares of PIK
preferred stock or fractions thereof. The redeemable preferred stock was
recorded at fair value on the date of issuance or amendment providing for
their redemption, less issuance costs, totaling $224. The excess of the
preference value over the carrying value is being accreted by periodic
charges to Additional Paid-In Capital over the life of the issue. The
redemption provisions were due to 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. These provisions
expired in October of 1999. Accordingly, the redeemable equity securities
were reclassified to stockholders' deficiency.

In 1996, two officers of the Company were granted 4,434 shares of voting
common stock, $.01 par value, as additional compensation. The Company was
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 15), the Company
repurchased from the Stockholder for approximately $199.0 million, which
includes approximately $0.9 million in post-closing adjustments, all of
its then outstanding shares of Preferred Stock (5,460 Class A shares and
9,425 Class B shares) and 17,337 shares of its then outstanding Common
Stock. These shares along with all previously acquired shares of
Preferred and Common Stock were then retired. During 1995, additional
post closing adjustments totaling $88 were made to the purchase price
relating to the retired treasury shares. During 1998, the Company
repurchased from two officers of the Company a total of 18,600 shares of
common stock and 8,715 shares of preferred stock for a total value of
$1,556.

34
<PAGE>

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

14. STOCKHOLDERS' EQUITY

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.

On June 24, 1999, the Board of Directors and Stockholders approved an
8.6976942 to 1 stock split, effective June 24, 1999.

On October 20, 1999, a majority of the Stockholders of the Company
approved by written consent the reversal of the 8.6976942 to 1 stock
split effective June 24, 1999 (the "reverse stock split"). The reverse
stock split was previously approved by the Board of Directors on
September 1, 1999. The reverse stock split was effective on October 27,
1999 when the Restated Articles of Incorporation of the Company were
filed with the State of Delaware.

Redeemable equity securities were reclassified into stockholders'
deficiency due to redemption provisions that expired on October 17, 1999
(see Note 12).

15. 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 20).
35

<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

15. RECAPITALIZATION (continued)

The Recapitalization and Stock Purchase Agreement contained customary
representations, warranties and conditions. The Recapitalization and
Stock Purchase Agreement also provided that, at or prior to the
consummation of the Acquisition, the Stockholder and the Company enter
into an Escrow agreement pursuant to which, among other things, $10,000
of the aggregate purchase price paid by the Company to the Stockholder
pursuant to the Repurchase be held in escrow to provide a source of
payment to satisfy the Stockholder's indemnification obligations under
the Recapitalization and Stock Purchase Agreement.

Prior to the Recapitalization, the Company had authorized classes of
voting and non-voting common stock, with shares of voting stock issued
and outstanding. As part of the Recapitalization, such non-voting stock
was retired and such voting stock was changed and reclassified from Class
A Common Stock, par value $1.00 per share, into one share of Common
Stock, par value $.01 per share. In addition, in connection with the
Recapitalization, the Company issued and sold shares of non-voting Class
A Common Stock, a small number of which was purchased by certain
designees of Kelso, and the remainder of which was sold in the form of
Shares as part of the Units. Upon the occurrence of any Conversion Event
(as defined, e.g., any transfer of shares of Class A Common Stock to any
persons who are not affiliates of the transferor), each share of Class A
Common Stock shall be convertible into one share of the Company's Common
Stock. Subsequent to the Recapitalization, the Company effected a stock
split of its Common Stock on approximately a 62.22-to-1 basis.

On November 20, 1997, the Company amended and restructured its credit
agreement. This change resulted in lower interest rates, an increase in
the revolving credit facility from $15,000 to $20,000, a substantial
change in the timing of principal payments and changes to the debt
covenants.

16. 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, 1999:

Year ending Capital Operating
December 31, Leases Leases
------------ ------- ---------
2000..................................... 1,723 2,789
2001..................................... 1,601 1,148
2002..................................... 1,277 1,027
2003..................................... 779 989
2004..................................... 516 973
Thereafter........... ................... 535 2,356
----- -----
6,431 9,282
Amount representing imputed interest..... 506 =====
-----
Present value of net minimum lease payments 5,925
Less current portion 1,526
-----
4,399
=====

Rental expense under all operating leases for the years ended December
31, 1999, 1998 and 1997, was approximately $2,495, $2,094 and $1,887,
respectively.

36
<PAGE>

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

17. 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.

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.

37
<PAGE>

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

17. COMMITMENTS AND CONTINGENCIES (continued)

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 2 states. However, the state never finalized this
agreement and the Company has not heard further 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.

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.

18. 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
$560, $550, and $514 in 1999, 1998, and 1997, 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.

19. 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:

38
<PAGE>

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

19. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)

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, 1999 and
1998, the Company had a carrying amount of long-term debt of $121,683 and
$129,050, respectively and an estimated fair value of $125,412 and
$132,358, respectively.

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 215,369 shares of Common Stock. On June 28, 1996, the Board of
Directors granted options to purchase an aggregate of 215,369 shares of
Common Stock. The exercise price with respect to 199,458 shares is $30.00
per share. The exercise price with respect to 15,911 shares will be the
price per share obtained in an initial public offering. All options
vested on the date of such grant and are 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 June 24, 1999, the Board of Directors approved that
the Company's 1996 Stock Option Plan be amended to, among other things,
increase from 215,369 to 321,369, the number of shares of Common Stock
authorized for issuance under the plan.

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 $30 per share, and
simultaneously, the Company reacquired these shares at a fair value of
$107 per share.

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 the grant of options to
purchase an aggregate of 106,000 shares of common stock to Messrs. Whalen
(53,000 shares) and Pearson (53,000 shares) under the 1996 Stock Option
Plan. The exercise price for Mr. Whalen's shares and 26,500 of Mr.
Pearson's shares is $130.75 per share. These options will have vested on
the date of their grant (except for 26,500 of Mr. Pearson's shares which
will vest upon the culmination of an initial public offering) and will be
exercisable at the earlier of seven years from the date of the grant or
upon completion of an initial public offering of common stock. Mr.
Pearson is no longer employed by the Company but will retain his options
for 90 days after ending his relationship with the Company.

<PAGE>

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

20. STOCK OPTION PLAN (continued)

A summary of the status of the Company's stock option plan as of December
31, 1999 and changes during the year ending on that date is presented
below:
<TABLE>
<CAPTION>
Options with Exercise Options with Exercise
Price Equal to Price Less Than the
Market Price of Market Price of
Stock on Grant Date Stock at Date of Grant
--------------------- ----------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------ -------- ------ --------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1997 .................. 15,911 $ --(1) 199,458 $30.00
Granted ......................................... -- --
Exercised ....................................... -- --
Cancelled ....................................... -- --
-------- ------ -------- --------

Outstanding at December 31, 1997 ................ 15,911 $ --(1) 199,458 $30.00
Granted ......................................... -- --
Exercised ....................................... -- 17,344
Cancelled ....................................... -- --
-------- ------ -------- ------

Outstanding at December 31, 1998 ................ 15,911 $ --(1) 182,114 $30.00
Granted ......................................... 106,000 $130.75 --
Exercised ....................................... -- --
Cancelled ....................................... -- --
-------- -------- --------- ------
Outstanding at December 31, 1999 ................ 121,911 $ --(2) 182,114 $30.00
======== ======== ========= ======

Options exercisable at December 31,
1997, 1998 and 1999 ............................. -0- 17,344
======== =========
Weighted average fair value of options
Granted during 1999 .......................... $ 130.75 $ --
======== =========
</TABLE>

At December 31, 1999, there were 600,000 options available for future
grants under the Option Plan.

(1) Exercise price to be determined at the time of the Company's initial
public offering.

(2) There were 79,500 shares outstanding at a weighted average price of
$130.75; 42,411 shares outstanding at an exercise price to be
determined at the time of the Company's initial public offering.

40
<PAGE>

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

20. STOCK OPTION PLAN (continued)

The following table summarizes information about stock options
outstanding at December 31, 1999:

Options Outstanding
-----------------------------------------------
Weighted
Average Weighted
Number Remaining Average
Exercise Outstanding Contractual Exercise
Prices at 12/31/99 Life Price
-------- ----------- ----------- --------

$ 30.00 182,114 6.5 years $ 30.00
130.75 79,500 6.5 years 130.75
(1) 42,411 6.5 years (1)

The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," in accounting for its plan.
As there is no 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,
no compensation expense has been recorded in the Company's financial
statements for the year ending December 31, 1999. 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 income for
the year ending December 31, 1999, would have been decreased to the pro
forma amounts indicated below:

Net income:

As reported $12,228
=======

Pro forma $ 8,939
=======

The fair value of each option granted during 1999 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 6.0%, 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, 1999
and 1998 totaled $250 in each year.

41
<PAGE>

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

21. RELATED PARTIES TRANSACTIONS (continued)

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 totaling 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 totaled
$293 in 1999, $294 in 1998 and $270 in 1997.

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 9.0 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.

Redeemable equity PIK Preferred Stock was reclassified into Preferred
Stock due to redemption provisions that expired on October 17, 1999 (see
Note 12).

23. QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Summarized quarterly financial data for 1999 and 1998 are set forth
below:

March June September December Total
------- ------- --------- ------- --------
1999
- ----
<S> <C> <C> <C> <C> <C>
Net Revenues......................... $57,145 $62,422 $61,246 $79,068 $259,881
Gross Profit......................... 28,004 34,748 34,760 44,560 142,072
Operating Income..................... 6,234 9,356 11,629 12,671 39,890
Net Income........................... 1,352 3,219 3,253 4,404 12,228

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
</TABLE>

42
<PAGE>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(Dollars in thousands, except per share data)

24. SUBSEQUENT EVENTS

Effective March 30, 2000, the Company amended its Credit Agreement to
extend $4,000 of the Incremental Revolving Loan 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 (see Note 10).

43
<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
- -----------------------------------------------------------------
None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ---------------------------------------------------------------

The Company's executive officers and directors, as well as additional
information with respect to those persons, are set forth in the table below.

Name Age Position
- ---- --- --------
John F. Biagini 56 Chairman and Chief Executive Officer
Philip G. Whalen 54 President and Chief Operations Officer
Michael D. Rowley 50 Vice President and Chief Financial Officer
Hans Lengers 54 Director of the Board and President, U.S. Textile
Corporation
Darrell Edwards 41 Vice President and Director of Marketing
William J. Kelly 50 Director, International Operations
Arthur Hughes 58 Senior Vice President, Finance
Martin J. Pearson 53 President, International Operations
Frank K. Bynum, Jr. 37 Director
Michael B. Goldberg 53 Director

Directors shall be elected by a plurality of the votes cast at annual
meetings of stockholders (except in the case of vacancies on the Board of
Directors). All directors of the Company serve for the term for which they are
elected or until their successors are duly elected and qualified or until death,
retirement, resignation, or removal. All executive officers hold office at the
pleasure of the Board of Directors. See "--Stockholders Agreement" and Item 11
Executive Compensation "--Employment Agreements."

Non-officer directors of the Company, other than those directors who
are affiliated with Kelso, will be paid on annual retainer of $20,000. In
addition, all out-of-pocket expenses of non-officer directors, including those
directors who are affiliated with Kelso, related to meetings attended will be
reimbursed by the Company. Non-officer directors, including those directors
affiliated with Kelso, will receive no additional compensation for their
services as directors of the Company except as described above. Officers of the
Company who serve as directors do not receive compensation for their services as
directors other than the compensation they receive as officers of the Company.

There are no family relationships among directors and executive
officers of the Company. For certain information regarding the stock ownership
of the Company, see "Security Ownership of Certain Beneficial Owners and
Management."

The business experience for at least the last five years of each of the
directors and executive officers is as follows:

Mr. Biagini has been the Chairman of the Company since consummation of
the Recapitalization and Chief Executive Officer from October 1994 to February
2000. Mr. Biagini served as President from June 1992 through March 1998.

Mr. Whalen has been President of the Company since April 1998 and Chief
Executive Officer since February 2000. From 1985 to March 1998 he served as
President of Enchantress Hosiery of Canada which, in June 1998, became a
wholly-owned subsidiary of Hosiery Corporation of America.

44
<PAGE>
Mr. Rowley joined the Company in November 1999 as Chief Financial Officer.
He was formerly Chief Financial Officer of Harris Specialty Chemicals from 1996
to 1999 and of Hickson International plc from 1991 to 1995. Between 1987 and
1991 he was Chief Financial Officer and Divisional Chief Executive Officer of
Parkland Group plc.

Mr. Lengers has been the President of U.S. Textile Corporation (the
Company's wholly-owned manufacturing subsidiary) and a Director of the Company
since 1978, and is one of the founders of U.S. Textile Corporation.

Mr. Edwards has been the Vice President and Director of Marketing of the
Company since consummation of the Recapitalization. Mr. Edwards served as Vice
President and Director of Marketing since he joined the company in October 1992.

Mr. Kelly has been Director, International Operations, of the Company since
July 1996. From December 1993 until June 1996, Mr. Kelly was Vice President,
Systems and Operations. From November 1988 until December 1993, Mr. Kelly was
Vice President, Systems and Programming.

Mr. Hughes has been the Vice President and Chief Financial Officer of the
Company from August 1995 through October 1999 and has served as Senior Vice
President, Finance since that time until February 2000 when Mr. Hughes retired
from the Company. Mr. Hughes served as Vice President and Controller of the
Company from 1990 to August 1995.

Mr. Pearson has been President, International Operations, from January 1999
until November 1999 when he resigned from the Company. 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. Bynum has been a Director of the Company since the consummation of the
Recapitalization. Mr. Bynum has been a Vice President of Kelso from July 1991 to
April 1998 when he was named a Managing Director of Kelso. He is a director of
CDT Holdings, plc, Citation Corporation, Cygnus Publishing, Inc., IXL
Enterprises, Inc., 21st Century Newspapers, Inc. and MJD Communications, Inc.

Mr. Goldberg has been a Director of the Company since consummation of the
Recapitalization. Mr. Goldberg has been a Managing Director of Kelso since
October 1991. Mr. Goldberg served as a Managing Director and jointly managed the
merger and acquisitions department at The First Boston Corporation from 1989 to
May 1991. Mr. Goldberg was a partner at the law firm of Skadden, Arps, Slate,
Meagher & Flom from 1980 to 1989. Mr. Goldberg is a director of Consolidated
Vision Group, Inc., Endo Pharmaceuticals, Inc., Netspeak Corporation and Unilab
Corporation.

In connection with the transactions effected by the Recapitalization
Agreement, the Company paid Kelso a fee of $2.625 million for financial advisory
services and reimbursed it for out-of-pocket expenses incurred in connection
with rendering such services. In addition, the Company has agreed to pay Kelso
an annual fee of $262,500 each year for financial advisory services and to
reimburse it for out-of-pocket expense incurred. The Company has also agreed to
indemnify Kelso against certain claims, losses, damages, liabilities and
expenses which may arise, in connection with rendering such financial advisory
services.

The Company has a Compensation Committee, which currently consists of three
directors: John Biagini, Frank Bynum and Michael Goldberg. Messrs. Bynum and
Goldberg are neither officers nor employees of the Company or any of its
affiliates.

45
<PAGE>

Stockholders Agreement
- ----------------------

The Stockholders Agreement provides, among other things, that, (subject
to changes that may be made from and after such time with respect to the members
and size of the Board of Directors in accordance with the Company's Restated
Certificate of Incorporation and By-Laws), the Company's Board of Directors will
consist of five members, including (i) two officers of the Company designated by
Kelso from certain management stockholders of the Company, (ii) two other
individuals designated by Kelso (who may be affiliates of Kelso) and (iii) the
Stockholder. In addition, Kelso and the Stockholder agreed pursuant to the
Stockholders Agreement that (i) so long as the Stockholder and certain of his
transferees collectively own 10% or more of the outstanding Common Stock, the
Stockholder shall be a director of the Company and (ii) so long as Kelso and its
affiliates collectively are the largest stockholders of the Company and
collectively own at least 35% of the outstanding stock of the Company, Kelso
shall be entitled to elect a majority of the Board of Directors of the Company.
Under the Company's Restated Certificate of Incorporation and By-Laws, the Board
of Directors shall consist of not less than three (3) nor more than eight (8)
members, and following consummation of the Recapitalization shall be fixed from
time to time by resolution of the Board of Directors (the "Board Resolution"),
or by resolution adopted by the vote of a majority of the stockholders of the
Common Stock or by consent executed on behalf of such stockholders (the
"Stockholder Resolution"); provided, that in the event of a conflict between the
Board Resolution and the Stockholder Resolution, the Stockholder Resolution
shall govern. The Stockholders Agreement also limits transfers of Common Stock
and Class A Common Stock by certain parties thereto, and provides for certain
tag-along, drag-along and registration rights. (The Stockholders Agreement is
dated as of October 17, 1994. The original signatories thereto are the Company;
the Stockholder, Joseph A. Murphy; Kelso Investment Associates V, L.P. ("KIAV");
Kelso Equity Partners V, L.P. ("KEPV"); as well as John F. Biagini, CEO of the
Company and Hans Lengers, President of U.S. Textile Corporation.)

46
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------

The following table sets forth the total compensation earned by the
Chief Executive Officer and the six most highly compensated executive officers
of the Company for the fiscal year ended December 31, 1999, as well as the total
compensation earned by such individuals for the two previous fiscal years.

SUMMARY COMPENSATION TABLE
- --------------------------
<TABLE>
<CAPTION>

Long-Term
Annual Compensation Compensation
---------------------- ------------

Securities All Other
Underlying Other Annual
Name Year Salary Bonus (b) Options (c) Compensation Compensation
- ---- ---- ------ --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
John F. Biagini 1999 $384,392 $450,000 -- $ 7,548(a)
Chairman of the Board & 1998 367,474 350,000 -- 7,038(a)
Chief Executive Officer 1997 372,745 500,000 -- 7,119(a)

Hans Lengers 1999 438,830 -- 7,548(a)
President, U.S. Textile 1998 431,919 -- 7,038(a)
Corporation 1997 423,754 -- -- 2,230(a)

Philip G. Whalen 1999 259,062 75,000 53,000 --
President and 1998 187,896 -- -- --
Chief Operating Officer

Martin J. Pearson 1999 244,295 53,000 --
President, International 1998 93,548 --
Operations

Arthur Hughes 1999 244,196 40,000 -- 7,548(a)
Senior Vice President, 1998 233,451 40,000 -- 7,038(a)
Finance 1997 220,615 50,000 -- 7,119(a)

William J. Kelly 1999 238,493 10,000 -- 7,548(a)
Senior Vice President, 1998 231,043 24,000 -- 7,038(a)
International Operations 1997 232,551 40,000 -- 7,119(a)

Robert M. Henry 1999 149,629 -- -- --
Senior Vice President, 1998 288,939 35,000 -- 7,038(a) $1,334,447(d)
Systems and Operations 1997 261,146 53,700 -- --

<FN>
- ----------------
(a) Amounts represent Company contributions to the 401(k) Plan, which is a defined contribution plan.
(b) Represents amounts awarded as cash/stock bonuses.
(c) Represents options granted to certain officers under the Company's Stock Option Plan.
(d) Includes $1,334,447 of stock option compensation, 17,344 options awarded in 1996. Mr. Henry resigned July 15, 1998 and was
granted the rights to exercise his options at the option price of $30 per
share and, simultaneously, the Company reaquired these shares at a fair
value of $107 per share. Salary includes severance paid for 1999 and 1998
since that date.
</FN>
</TABLE>

47
<PAGE>

Long-Term Compensation
- ----------------------

Management Stock Purchase and Restricted Stock Award Agreements
- ---------------------------------------------------------------

Prior to the closing of the Recapitalization, Mr. Biagini and Mr.
Lengers entered into Management Stock Purchase and Restricted Stock Award
Agreements with the Company (the "Management Stock Agreements"), pursuant to
which Mr. Biagini was granted 18,841 restricted shares of Common Stock and
68,120 restricted shares of PIK Preferred Stock, and Mr. Lengers was granted
9,421 restricted shares of Common Stock and 34,060 restricted shares of PIK
Preferred Stock in addition to the shares of Common Stock and PIK Preferred
Stock granted to Mr. Biagini and Mr. Lengers is $1,000,000 and $500,000,
respectively. The Common Stock was sold at $16.92 per share and the PIK
Preferred Stock at $10.00 per share to the original investor group. Compensation
with respect to the grant of shares will be recognized ratably over the six-year
period for which services must be performed in order for Messrs. Biagini and
Lengers to receive the shares without restriction. No dividends will be paid on
any restricted stock. Additionally, in 1995 the management group was offered
limited opportunities to purchase stock at the same price as Messrs. Biagini and
Lengers which resulted in net proceeds to the Company of $190,000.
<TABLE>
<CAPTION>
OPTION GRANTS IN LAST FISCAL YEAR
---------------------------------
Potential Realized Value
at Assumed Annual
Rates of Stock
Price Appreciation
Individual Grants for Option Term
- ----------------------------------------------------------------------------- -----------------------------------

Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted Fiscal Year ($/Share) Date 5% 10%
- ---- ---------- ----------- ----------- ---------- --- ---
<S> <C> <C> <C> <C> <C> <C>
Philip G. Whalen 53,000 50.00 130.75 6/24/06 2,821,104 6,574,372

Martin J. Pearson 26,500 25.00 130.75 6/24/06 1,410,552 3,287,186
Martin J. Pearson 26,500 25.00 (1) 6/24/06
</TABLE>

(1) Options exercisable at a price per share to be obtained in an initial
public offering. There is no current public market for these
securities.

FISCAL YEAR-END OPTION VALUES
-----------------------------

Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1999 (#) at December 31, 1999 ($)
----------------------- ------------------------

Name Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ------------------------- -------------------------
John F. Biagini 0/94,676 0/8,737,040
Hans Lengers 0/47,339 0/4,368,621
Philip G. Whalen 0/53,000 0/0
Arthur Hughes 0/21,322 0/1,747,408
William J. Kelly 0/17,344 0/1,747,408
Martin Pearson 0/53,000 0/0

There is no public market for the common stock of the Company. The
value utilized for the In-the-Money Options as of December 31, 1999 was based on
a valuation completed by an independent appraiser and reviewed by management for
reasonableness.

Options granted in 1999 were 106,000.

48
<PAGE>

Employment Agreements
- ---------------------

In August 1980, Hans Lengers entered into an Employment Agreement with
the Company's manufacturing subsidiary, U.S. Textile Corporation ("U.S.
Textile"), pursuant to which he is employed as President and Chief Executive
Officer of U.S. Textile and to manage and operate its business and affairs for
his lifetime, such agreement having been amended on September 12, 1994. Mr.
Lengers is not entitled to receive compensation upon the voluntary termination
of his employment with U.S. Textile. In addition, the Company may abrogate the
terms and conditions of the Employment Agreement for good cause as defined by
the law of North Carolina, and in any event, the Employment Agreement will
terminate upon Mr. Lengers' death, adjudicated incompetency, bankruptcy or
physical or mental inability to perform his duties thereunder. The agreement
provides for a base salary of $5,000 per month and additional compensation in
the amount that 25.0% of the U.S. Textile net profits exceed such base
compensation, such that the sum of the base compensation and this additional
compensation does not exceed $250,000 per annum, adjusted each year for cost of
living increases. The Consumer Price Index for Urban Wage Earners and clerical
workers is used as the index to compute cost of living increases. The ceiling
for Mr. Lengers' salary in 1998 was $439,000. In addition, Mr. Lengers has
agreed during the time of his employment not to devote any of his time and
efforts to the affairs of any other business in direct competition with U.S.
Textile.

The aforementioned employment agreements require a successor to the
employer thereunder to assume the respective obligations of such employer under
the applicable agreement.

Compensation Committee Interlocks and Insider Participations in Compensation
Decisions
- -----------------------------------------------------------------------------

Mr. Biagini was the Chairman and Chief Executive Officer of the
Company during the last fiscal year. Messrs. Goldberg and Bynum are both
general partners of the general partner of KIAV, general partners of KEPV and
are Managing Directors of Kelso.

49
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
- ------------------------------------------------------------

The following table sets forth information as of March 29, 1999 with
respect to the beneficial ownership of shares of Common Stock of all
stockholders of the Company who are known by the Company to beneficially own
more than 5% of any such class, by each director, by each executive officer of
the Company named in the summary compensation table and by all directors and
executive officers of the Company as a group, as determined in accordance with
Rule 13d-3(i) under the Securities Exchange Act of 1934, as amended. The Common
Stock set forth in the following table includes voting Common Stock and
non-voting Class A Common Stock. Except as indicated in the footnotes below, all
shares of Common Stock are voting Common Stock. Prior to the consummation of the
Recapitalization, all of the issued and outstanding shares of Common Stock and
Old Preferred Stock were owned by the Stockholder.
<TABLE>
<CAPTION>
Percentage of Shares
Name and Address Number of Shares of Common Stock
of Beneficial Owner of Common Stock Outstanding
------------------- ---------------- --------------------
<S> <C> <C>
Kelso Investment Associates V, L.P. (a)(b)....... 995,932 70.77%
Kelso Equity Partners V, L.P. (a)(b)............. 995,932 70.77%
Joseph S. Schuchert(b)........................... (d) (d)
Frank T. Nickell(b)(c)........................... (d) (d)
Thomas R. Wall, IV(b)(c)......................... (d) (d)
George E. Matelich(b)............................ (d) (d)
Michael B. Goldberg(b)(c)(e)..................... (d) (d)
David I. Wahrhaftig (b)(c)....................... (d) (d)
Frank K. Bynum, Jr.(b)(c)(e)..................... (d) (d)
Joseph A. Murphy(i).............................. 292,600 20.79%
John F. Biagini(f)(g)(h)......................... 23,681 1.68%
Hans Lengers(f)(g)(h)............................ 11,841 .84%
William J. Kelly(f)(g)........................... 188 .01%
Arthur C. Hughes(f)(g)........................... 471 .03%
All directors and executive officers of the
Company as a group(f)(g)..................... 38,314 2.72%
- ---------------
<FN>
(a) As part of the 1994 Recapitalization, KIAV and KEPV acquired respectively
960,634 and 40,026 shares of Common Stock, representing 68.6% and 0.9%,
respectively, of the shares of Common Stock outstanding. Subsequent to the
1994 Recapitalization, KEPV transferred 4,728 shares of Common Stock to
certain family trusts of Messrs. Wall and Goldberg for which Mr. Nickell
serves as trustee. The Kelso Affiliates, due to their common control,
could be deemed to beneficially own each of the other's shares, but
disclaim such beneficial ownership.
(b) The business address for such person(s) is c/o Kelso & Company, 320 Park Avenue, 24th Floor, New York, New York 10022.
(c) Excludes 4,728 shares of Common Stock owned by certain family trusts of Messrs. Wall and Goldberg, which may be deemed to be
beneficially owned by each of Messrs. Wall and Goldberg, but each disclaims such beneficial ownership. Mr. Nickell serves as
trustee for these family trusts of Messrs. Wall and Goldberg, and as such these shares may be deemed to be beneficially owned
by Mr. Nickell, but Mr. Nickell disclaims such beneficial ownership.

(d) Messrs. Schuchert, Nickell, Wall, Matelich, Goldberg, Wahrhaftig and Bynum
may be deemed to share beneficial ownership of shares of Common Stock and
PIK Preferred Stock owned of record by KIAV and KEPV, by virtue of their
status as general partners of the general partner of KIAV and general
partners of KEPV. Messrs. Schuchert, Nickell, Wall, Matelich , Goldberg,
Wahrhaftig and Bynum share investment and voting power with respect to
securities owned by the KIAV and KEPV. Messrs. Schuchert, Nickell, Wall,
Matelich, Goldberg, Wahrhaftig and Bynum disclaim beneficial ownership of
shares of Common Stock and PIK Preferred Stock owned of record by KIAV and
KEPV.
(e) Mr. Goldberg and Mr. Bynum are directors of the Company.
(f) The business address of such person(s) is HCI Direct, Inc., 3369 Progress Drive, Bensalem, Pennsylvania 19020.
(g) Each of such persons may hold options granted under the option plan. Shares of Common Stock subject to such options are not
reflected in the table.
(h) In addition, prior to the closing of the Recapitalization, Messrs. Biagini
and Lengers acquired in the aggregate approximately 3.0% of the shares of
PIK Preferred Stock issued in the Recapitalization. The amounts of Common
Stock beneficially owned by Messrs. Biagini and Lengers as reflected in
the above table and PIK Preferred Stock acquired by Messrs. Biagini and
Lengers as described in the preceding sentence include grants made by the
Company prior to the consummation of the Recapitalization to Messrs.
Biagini and Lengers of an aggregate of 28,262 shares of Common Stock and
approximately 2.7% of the shares of PIK Preferred Stock, in each case
subject to certain restrictions.
(i) The business address of such person is Sheffield Marketing Associates, 19 Short Road, Doylestown, Pennsylvania 18901.
</FN>
</TABLE>
50

<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------

Set forth below is a summary of certain agreements and arrangements
entered into by the Company and related parties in connection with the
Recapitalization.

Investor Relationships
- ----------------------

Kelso affiliates beneficially own 70.8% of the shares of common equity
of the Company as described under "Security Ownership of Certain Beneficial
Owners and Management". The Company has agreed to indemnify Kelso and its
affiliates against certain claims, losses, damages, liabilities and expenses
which may arise in connection with the transactions contemplated by the
Recapitalization Agreement. The Company has also agreed to pay Kelso an annual
fee of $262,500 each year for financial advisory services and to reimburse it
for out-of-pocket expenses incurred, and to indemnify it against certain claims,
losses, damages, liabilities and expenses which may arise, in connection with
rendering such services. Kelso's out-of-pocket expenses in connection with its
services rendered during 1999 and 1998 were approximately $30,000 and $32,000,
respectively.

Certain Kelso affiliates are parties to a stockholders agreement. In
addition, certain affiliates of Kelso, the Company and certain investors in the
Company's stock who are designees of Kelso entered into Letter Agreements
(collectively, the "Letter Agreements"), each of which, among other things,
provides for certain restrictions on the transfer of stock by such investors.
The Company has a stockholders agreement which provides, among other things, for
certain restrictions on the transfer of the Company's stock.

The Recapitalization and Related Transactions
- ---------------------------------------------

The Recapitalization Agreement contains customary representations,
warranties, indemnities and conditions. In addition, the Recapitalization
Agreement provides that the Stockholder, on the one hand, and Company, on the
other, will, subject to certain limitations set forth therein, indemnify each
other and their respective stockholders, subsidiaries, affiliates, officers and
directors and their respective successors and assigns, from, against and in
respect of any damages, losses, deficiencies, liabilities, costs and expenses,
incurred as a result of any (i) misrepresentations or breaches of warranties set
forth in the Recapitalization Agreement or in any certificate delivered pursuant
thereto and (ii) non-fulfillment of certain agreements or covenants set forth in
the Recapitalization Agreement. The representations and warranties and covenants
and agreements to which such indemnification relates are standard and include
representations and warranties with respect to ownership of stock,
capitalization, financial statements, absence of defaults under agreements and
violations of law and similar matters. In addition, the Recapitalization
Agreement provides for similar indemnification by the Stockholder with respect
to certain other matters, including, among other things, claims by third parties
resulting from or arising out of certain activities in connection with the
Stockholder's auction and sale of the Company and certain liabilities incurred
as a result of the operations (or relating to the assets) which were transferred
to the Stockholder prior to the Recapitalization (as described below) or arising
out of such transfer. Under the Recapitalization Agreement, such indemnification
is subject to certain baskets and deductibles and, in general, has an aggregate
limit of $15 million.

The Recapitalization Agreement also provided for the Stockholder and
the Company to enter into an Escrow Agreement pursuant to which, among other
things, $10 million of the aggregate purchase price paid by the Company to the
Stockholder pursuant to the Repurchase is held in escrow to provide a source of
payment to satisfy the Stockholder's indemnification obligations under the
Recapitalization Agreement. In addition, the Stockholder has pledged to the
Company the shares of Common Stock which were not purchased by the Company
pursuant to the Repurchase and which the Stockholder continues to own following
the consummation of the Recapitalization (such shares represent approximately
21% of the Company's Common Stock outstanding following the consummation of the
Recapitalization).

51
<PAGE>

In connection with the Recapitalization, the Company transferred to the
Stockholder certain assets consisting primarily of the stock of all of its
non-hosiery related subsidiaries, some of which are inactive businesses, certain
receivables, equipment leased to one of the non-hosiery subsidiaries, certain
life insurance policies, four owned or leased automobiles and three owned or
leased personal computers. None of the assets transferred to the Stockholder,
except the life insurance policies and loans thereon, automobiles and computers,
were used in the Company's hosiery business.

52
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
- -------------------------------------------------------------------------

A. The following documents are filed as a part of this Report:

(1) and (2) Financial Statements and Financial Statement Schedule--see
Index to Financial Statements and Financial Statement Schedule appearing on
Page 18.

(3) Exhibits, including those incorporated by reference. The following is
a list of exhibits filed as part of this Annual Report on Form 10-K.
Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference. For exhibits incorporated by reference,
the location of the exhibit in the previous filing is indicated.
<TABLE>
<CAPTION>
EXHIBITS INCORPORATION BY REFERENCE
-------- --------------------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation Exhibit 3.1 to Registration Statement No.
of the Company 33-87392 on Form S-1 dated May 15, 1995

3.2 Certificate of Designation, Powers, Exhibit 3.2 to Registration Statement
Preferences and Rights of Pay-in-Kind No. 33-87392 on Form S-1 Dated May 15,
Preferred Stock 1995

3.3 Amendment to the Restated Exhibit 3.3 to Registration Statement
Certificate of Incorporation of No. 33-87392 on Form S-1 dated May 15,
the Company 1995

3.4 Amendment to the Restated Exhibit 3.1 to Report 10-Q for the quarter
Certificate of Incorporation of ended September 30, 1995
the Company

3.5 By Laws of the Company Exhibit 3.4 to Registration Statement No.
33-87392 on Form S-1 dated May 15, 1995

3.6 Form of Restated Certificate of Exhibit 3.1 to Registration Statement No.
Incorporation of the Company filed 33-07197 on Form S-1 dated June 28, 1999
with the Secretary of State of the
State of Delaware on June 24, 1999

*3.7 Form of Restated Certificate of
Incorporation of the Company filed
With the Secretary of State of the
State of Delaware on October 20, 1999

4.1 Indenture dated as of October 17, Exhibit 4.1 to Registration Statement No.
1994 between the Company and 33-87392 on Form S-1 dated May 15, 1995
United States Trust Company of
New York, as Trustee

4.2 Credit Agreement dated as of October Exhibit 4.1 to Registration Statement No.
17, 1994, among the Company; 33-87392 on Form S-1 dated May 15, 1995
National Westminster Bank PLC, as
Co-Agent; Nations Bank of North
Carolina, N.A., as Co-Agent; Bankers
Trust Company, as Agent; and the
Financial institutions listed on the
Signature pages thereto

53
<PAGE>

EXHIBITS INCORPORATION BY REFERENCE
-------- --------------------------

4.3 Amended and Restated Credit Exhibit 4.3 to Form 10-K dated
Agreement dated as of November 20, March 30, 1998
1997 among the Company, various
lending institutions and Bankers Trust
Company, as Agent

4.4 Amended and Restated Credit Agreement Exhibit 4.4 to Form 10-K dated
dated as of March 26, 1999 among the March 29, 1999
Company; various lending institutions
and Bankers Trust Company, as Agent

*4.5 Amendment and Waiver to the Credit
Agreement dated as of December 29, 1999
among the Company, various lending
institutions and Bankers Trust Company,
as Agent

10.1 Executive Employment Agreement between Exhibit 10.2 to Registration Statement No.
Hosiery Corporation of America, Inc. 33-87392 on Form S-1 dated May 15, 1995
and Arthur C. Hughes, dated as of
August 3, 1992

10.2 Employment Agreement between U.S. Exhibit 10.3 to Registration Statement No.
Textile Corporation and Hans Lengers, 33-87392 on Form S-1 dated May 15, 1995
dated as of August 29, 1980, and an
Amendment thereto among U.S. Textile
Corporation, the Company and Hans
Lengers, dated as of September 12, 1994

10.3 Executive Employment Agreement between Exhibit 10.4 to Registration Statement No.
the Company and Robert J. Mooney, 33-87392 on Form S-1 dated May 15, 1995
dated as of September 16, 1993

10.4 Executive Employment Agreement between Exhibit 10.4 to Form 10-K dated
the Company and Robert M. Henry, dated March 26, 1996
as of August 7, 1995

10.5 Management Stock Subscription Exhibit 10.5 to Form 10-K dated
Agreement dated August 14, 1995 March 26, 1996

10.6 Stock Option Plan Exhibit 10.3 to Form 10-Q dated
August 12, 1996

10.7 Executive Employment Agreement between Exhibit 10.1 to Form 10-Q dated
the Company and Suzanne M. Roper, November 12, 1996
dated as of July 30, 1996

10.8 Executive Employment Agreement between Exhibit 10.1 to Form 10-Q dated
the Company and Philip G. Whalen, August 10, 1998
dated as of March 16, 1998

10.9 Executive Employment Agreement between Exhibit 10.1 to Form 10-Q dated
the Company and Martin J. Pearson, November 5, 1998
dated as of June 30, 1998

54
<PAGE>

EXHIBITS INCORPORATION BY REFERENCE
-------- --------------------------

10.10 Amended and Restated HCI Direct, Inc. Exhibit 10.8 to Registration Statement No.
1996 Stock Option Plan 333-07197 on Form S-1 dated June 28, 1999

10.11 Form of HCI Direct, Inc. 1996 Stock Exhibit 10.9 to Registration Statement No.
Option Plan Stock Option Agreement 333-07197 on Form S-1 dated June 28, 1999

10.12 HCI Direct, Inc. 1999 Stock Option Exhibit 10.10 to Registration Statement No.
Plan. 333-07197 on Form S-1 dated June 28, 1999

*10.13 Executive Employment Agreement between
the Company and Michael D. Rowley,
dated as of October 5, 1999

*21.1 Subsidiaries of the Registrant

*27.0 Financial Data Schedule

</TABLE>
* Filed herewith.

B. Reports on Form 8-K filed during the quarter ended December 31, 1999:

None.

55
<PAGE>

SIGNATURES
- ----------

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on the 30th day of
March, 2000.

HCI DIRECT, INC.

/s/ MICHAEL D. ROWLEY
BY: ______________________________
Michael D. Rowley
Vice President and Chief
Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 30th day of March, 2000.

Signatures Title
- ---------- -----

/s/ JOHN F. BIAGINI
_____________________________ Chairman of the Board
John F. Biagini

/s/ PHILIP G. WHALEN
_____________________________ President and Chief Executive Officer
Philip G. Whalen

_____________________________ President, U.S. Textile Corporation
Hans Lengers and Director

/s/ MICHAEL D. ROWLEY
_____________________________ Vice President and Chief Financial Officer
Michael D. Rowley (Principal Financial and Accounting Officer)

/s/ FRANK K. BYNUM, JR.
_____________________________ Director
Frank K. Bynum, Jr.

/s/ MICHAEL B. GOLDBERG
_____________________________ Director
Michael B. Goldberg

56
<PAGE>

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
HCI Direct, Inc.
Bensalem, Pennsylvania

We have audited the consolidated financial statements of HCI Direct, Inc.
(formerly Hosiery Corporation of America, Inc.) and subsidiaries (the "Company")
as of December 31, 1999 and 1998, and for each of the three years in the period
ended December 31, 1999, and have issued our report thereon dated March 30,
2000, such report is included elsewhere in this Form 10-K. Our audits also
included the consolidated financial statement schedule of the Company referred
to in Item 8. This consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such consolidated financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

Deloitte & Touche LLP
Philadelphia, Pennsylvania

March 30, 2000

S-1
<PAGE>

SCHEDULE I
<TABLE>
<CAPTION>
HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)

Balance at Charged to Balance at
Beginning of Costs and Amounts End of
Period Expenses Written Off Period
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
Allowance for Uncollectible Accounts.............. $ 1,901 $28,552 $24,405 $ 6,048
======= ======= ======= =======

YEAR ENDED DECEMBER 31, 1998
Allowance for Uncollectible Accounts.............. $ 1,448 $11,536 $11,083 $ 1,901
======= ======= ======= =======

YEAR ENDED DECEMBER 31, 1997
Allowance for Uncollectible Accounts.............. $ 1,540 $10,791 $10,883 $ 1,448
======= ======= ======= =======
</TABLE>

S-2
<PAGE>

EXHIBIT INDEX

EXHIBITS
--------

3.7 Form of Restated Certificate of Incorporation of the Company
filed with the Secretary of State of the State of Delaware on
October 20, 1999

4.5 Amendment and Waiver to the Credit Agreement dated as of
December 29, 1999 among the Company; various lending
institutions and Bankers Trust Company, as Agent

10.13 Executive Employment Agreement between
the Company and Michael D. Rowley,
dated as of October 4, 1999

21.1 Subsidiaries of the Registrant

27.0 Financial Data Schedule

EXHIBIT 3.7

296178.02-New York S2A
RESTATED CERTIFICATE OF INCORPORATION

HCI Direct, Inc.

(pursuant to Sections 242 and 245 of the
Delaware General Corporation Law)

HCI Direct, Inc., a Delaware corporation (the "Corporation"),
the original Certificate of Incorporation of which was filed with the Secretary
of State of the State of Delaware on August 9, 1979 under the name Bear Brand
Hosiery Corporation, HEREBY CERTIFIES AS FOLLOWS:

1 Effective upon the filing of this Restated Certificate of
Incorporation with the Secretary of State, each share of Common Stock
outstanding shall be reclassified on a basis of 1/8.6976942 or 0.114973 shares
of Common Stock for each share of Common Stock outstanding and, accordingly,
each share of Common Stock outstanding shall, without further action by the
Corporation or any stockholder, be deemed to represent 1/8.6976942 or 0.114973
shares of Common Stock, provided that all fractional shares resulting therefrom
shall be eliminated and each holder thereof shall be entitled to receive a cash
payment equal to such holder's fraction of a share of Common Stock multiplied by
the per share fair market value, as determined by the Board of Directors.

2 Effective upon the filing of this Restated Certificate of
Incorporation with the Secretary of State each share of Class A Common Stock
outstanding shall be reclassified on a basis of 1/8.6976942 or 0.114973 shares
of Class A Common Stock for each share of Class A Common Stock outstanding and,
accordingly, each share of Class A Common Stock outstanding shall, without
further action by the Corporation or any stockholder, be deemed to represent
1/8.6976942 or 0.114973 shares of Class A Common Stock, provided that all
fractional shares resulting therefrom shall be eliminated and each holder
thereof shall be entitled to receive a cash payment equal to such holder's
fraction of a share of Class A Common Stock multiplied by the per share fair
market value, as determined by the Board of Directors.

<PAGE>

296178.02-New York S2A

3 This Restated Certificate of Incorporation, restates,
integrates and further amends the Corporation's Restated Certificate of
Incorporation, as heretofore amended and restated. This Restated Certificate of
Incorporation was proposed by the Board of Directors and was duly adopted by the
written consent of the stockholders of the Corporation along with the provision
of the requisite written notice in accordance with Sections 228, 242 and 245 of
the General Corporation Law of the State of Delaware as set forth in Title 8 of
the Delaware Code (the "GCL"). The text of this Restated Certificate of
Incorporation, as so amended and restated is as follows:

FIRST: The name of the Corporation is HCI Direct, Inc. (hereinafter
the "Corporation").

SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at that address is The
Corporation Trust Company.

THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which a corporation may be ----- organized under the GCL.

FOURTH: The total number of shares of capital stock which the
Corporation shall have authority to issue is 73,000,000 shares, consisting
of (i) 60,000,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), (ii) 1,000,000 shares of Class A Common Stock, par value
$0.01 per share (the "Class A Common Stock") and (iii) 12,000,000 shares of
preferred stock, par value $.01 per share (the "Preferred Stock"), which
includes 4,000,000 shares of Pay-In-Kind Preferred Stock, par value $.01
per share, having the powers, preferences and rights, and qualifications,
limitations and restrictions set forth in paragraph C below.

2
<PAGE>

296178.02-New York S2A

A. Common Stock and Class A Common Stock. Except as otherwise provided
in this Article FOURTH or as otherwise required by law, shares of Common
Stock and Class A Common Stock shall be identical and shall entitle the
holders thereof to the same rights and privileges, subject to the same
qualifications, limitations and restrictions.

4 Voting Rights. Except as otherwise required by applicable law,
the holders of Common Stock will be entitled to one vote per share on
all matters to be voted on by the Corporation's Common Stockholders
and the holders of Class A Common Stock will have no voting rights.

5 Dividends. When and as dividends are declared thereon, whether
payable in cash, property or securities of the Corporation, the holders of
Common Stock and the holders of Class A Common Stock will be entitled to
share equally, share for share, in such dividends; provided, however, that
if dividends are declared which are payable in shares of Common Stock or
Class A Common Stock, dividends will be declared which are 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.

6 Conversion and Exchange. (a) Upon the occurrence of any Conversion
Event, each record holder of Class A Common Stock shall be entitled,
without the payment of any consideration whatsoever, to convert into the
same number of shares of Common Stock any or all of the shares of such
holder's Class A Common Stock being sold, distributed or otherwise disposed
of or converted in connection with the occurrence of such Conversion Event.
For purposes of this Section 3, (i) a "Conversion Event" shall mean (A) any
transfer of shares of Class A Common Stock to any person or persons who are
not affiliates of the transferor, including, without limitation, pursuant
to any public offering or public sale of securities of the Corporation

3
<PAGE>

296178.02-New York S2A

(including a public offering registered under the Securities Act of 1933, as
amended (the "Securities Act"), and a public sale pursuant to Rule 144 under the
Securities Act, or any similar rule then in force) or (B) conversion of shares
of Class A Common Stock into shares of Common Stock at the option of the holder
(whether all or a portion of such holder's shares) at such time that all
applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (or any successor statute), and the regulations
promulgated thereunder (the "HSR Act") shall have expired or shall have
terminated, or, if it is determined that no filings under the HSR Act are
applicable, at any time or (C) in the case of shares of Class A Common Stock
owned by a holder other than Kelso & Company, Inc. or any of its affiliates or
designees, conversion of shares of Class A Common Stock at the option of the
holder (whether all or a portion of such holder's shares) at any time, (ii) a
"person" shall mean any natural person or any corporation, partnership, joint
venture, trust, unincorporated organization and any other entity or organization
and (iii) an "affiliate", with respect to any person, shall mean such person's
spouse, parents, members of such person's family or such person's lineal
decedents and any other person that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with
such person. In addition, all of the Corporation's Class A Common Stock shall be
automatically and mandatorily 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
the Corporation to the record holders of Class A Common Stock, provided that all
applicable waiting periods under the HSR Act shall have expired, shall be
inapplicable or shall have terminated.

(b) Subject to Section 3(e) of this Part A, each conversion of shares
of Class A Common Stock into shares of Common Stock at the option of the holder
shall be effected by (i) the surrender of the certificate or certificates
representing the shares to be converted at the principal office of the
Corporation, or at the office of any transfer agent for the Common Stock and the
Class A Common Stock, together with a written

4
<PAGE>

296178.02-New York S2A

notice by the holder of such Class A Common Stock stating that such holder
desires to convert the shares, or a stated number of the shares, of such Class A
Common Stock represented by such certificate or certificates into shares of
Common Stock (and including instructions for issuance of the Common Stock to be
issued upon such conversion), or (ii) in the case of any global certificate
representing shares of Class A Common Stock which is deposited with the
Depository Trust Company, or any successor depositary (the "Depositary"), or a
custodian therefor, and registered in the name of the Depositary or its nominee
(a "Global Certificate"), the conversion of any shares represented thereby in
accordance with the applicable rules and operating procedures of the Depositary,
in either case, at any time (including within a reasonable time prior to the
occurrence of any Conversion Event, if necessary to effect the conversion of
shares related thereto, provided, however, that the holders of such shares will
not be entitled to vote on any matters to be voted on by the Corporation's
stockholders during such interim period, such certificates being deemed to
represent only shares of Class A Common Stock for such purpose) during normal
business hours. Each conversion at the option of the holder shall be deemed to
have been effected as of the close of business on the date on which (i) the
certificate or certificates representing shares of Class A Common Stock shall
have been surrendered to, and such notice shall have been received by, the
Corporation as set forth in the preceding sentence or (ii) in the case of any
Global Certificate, the shares of Class A Common Stock represented thereby shall
have been converted in accordance with the applicable rules and operating
procedures of the Depositary, as the case may be (or, if the events described in
either clause (i) or clause (ii) above shall have occurred prior to the
occurrence of a Conversion Event as provided in the preceding sentence, the date
of the occurrence of the Conversion Event), and at such time the rights of the
holder of the converted Class A Common Stock, as a holder of Class A Common
Stock, shall cease and the person or persons in whose name or names the
certificate or certificates for shares of Common Stock are to be issued upon
such conversion shall be deemed to have become the holder or holders of record
of the shares represented thereby. Promptly after the surrender of certificates
and the receipt of written

5
<PAGE>

296178.02-New York S2A

notice, the Corporation shall issue and deliver in accordance with the
surrendering holder's instructions (a) a certificate or certificates for the
shares of Common Stock issuable upon such conversion and (b) a certificate
representing any shares of Class A Common Stock which were represented by the
certificate or certificates delivered to the Corporation in connection with such
conversion but which were not converted. Promptly after the conversion of any
shares of Class A Common Stock represented by a Global Certificate, the
Corporation shall issue and deliver in accordance with applicable rules and
operating procedures of the Depositary a certificate or certificates, which may
be one or more Global Certificates, for the shares of Common Stock issuable upon
such conversion and take such other action as may be required to effect such
conversion in accordance with the applicable rules and operating procedures of
the Depositary. If any shares of Class A Common Stock are converted into shares
of Common Stock in connection with a Conversion Event described in clause (A) of
the definition thereof and such shares of Common Stock are not actually sold,
distributed or otherwise disposed of so that such Conversion Event does not
actually occur, such shares of Common Stock shall be automatically converted
back into the same number of shares of Class A Common Stock. The issuance of
certificates upon conversion will be made without charge to the holders of such
shares for any issuance tax in respect thereof or any other cost whatsoever
incurred by the Corporation in connection with such conversion. Any mandatory
conversion of shares of Class A Common Stock into Common Stock shall be effected
upon the Corporation delivering to the holders of such shares, to the last
address appearing for such holders on the books of the Corporation, written
notice to the effect that the Board of Directors has determined to mandatorily
convert the Class A Common Stock into Common Stock and upon and after such
notice all of the shares of Class A Common Stock so converted shall be deemed to
be no longer outstanding, any right to receive dividends thereon shall cease and
all rights and privileges with respect to the Class A Common Stock so converted
shall cease except for the right of the holder thereof to receive any previously
declared but unpaid dividends on the Class A Common Stock, and the certificates
which theretofore had represented Class A Common Stock shall

6
<PAGE>

296178.02-New York S2A

for all purposes represent only Common Stock; provided, however, that no
dividends on the Common Stock shall be paid to such holder unless and until the
certificates for the Class A Common Stock have been surrendered to the
Corporation or, in the case of any Global Certificate, shares of Class A Common
Stock represented thereby have been converted in accordance with applicable
rules and operating procedures of the Depositary, and the Corporation shall
thereupon issue certificates for the Common Stock to such holder, if necessary,
and pay to such holder any dividends on the Common Stock which have been
declared as of a record date, and which otherwise would have been paid, since
the date the shares of Class A Common Stock were deemed to have been converted.

(c) The Corporation shall at all times reserve and
keep available out of its authorized but unissued shares of Common Stock solely
for the purpose of issuance upon the conversion of the Class A Common Stock,
such number of shares of Common Stock issuable upon the conversion of all
outstanding Class A Common Stock. All shares of Common Stock which are so
issuable shall, when issued, be duly and validly issued, fully paid and
nonassessable and free from all taxes, liens and charges. The Corporation
shall take all such actions as it deems necessary or appropriate to
assure that all such shares of Common Stock may be so issued without violation
of any applicable law or governmental regulation or any requirements of any
domestic securities exchange upon which shares of Common Stock may be listed.

(d) If the Corporation in any manner subdivides (by
stock split, stock dividend or otherwise) or combines (by reverse stock split or
otherwise) the outstanding shares of Common Stock, the outstanding shares of the
Class A Common Stock will be proportionately subdivided or combined, as the case
may be, and effective provision shall be made by the Board of Directors of the
Corporation (whose determination with respect thereto will be final and binding)
for the protection of all conversion rights hereunder.

(e) In case the Corporation shall be a party to any
transaction (including without limitation

7
<PAGE>

296178.02-New York S2A

a merger, consolidation or sale of all or substantially all of the Corporation's
assets) as a result of which shares of Common Stock shall be converted into the
right to receive cash, stock, securities or other property (or any combination
thereof) (each of the foregoing being referred to as a "Transaction"), each
share of Class A Common Stock shall thereafter be convertible into the kind and
amount of cash, stock, securities and other property (or any combination
thereof) receivable upon the consummation of such Transaction by a holder of one
share of Common Stock.

7 Tag-Along and Drag-Along Rights. So long as the
Stockholders Agreement, dated as of October 17, 1994, among the Company and
certain of its stockholders (the "Stockholders Agreement") shall be in effect:

(i) None of Kelso Investment Associates V, L.P., a Delaware
limited partnership ("KIA V"), Kelso Equity Partners V, L.P., a
Delaware limited partnership ("KEP V" and, together with KIA V,
"Kelso"), and any of their Permitted Transferees (as defined in the
Stockholders Agreement) (collectively, the "Kelso Group") shall,
individually or collectively, in any one transaction or any series of
similar transactions, directly or indirectly, sell, assign, mortgage,
transfer, pledge, hypothecate or otherwise dispose of or transfer
(collectively, "Transfer") any shares of Common Stock or Class A Common
Stock, except pursuant to an Excluded Transaction (as defined below) or
pursuant to the following paragraph (ii), to any third party or parties
unaffiliated with Kelso (a "Third Party") unless the other holders of
Common Stock and the other holders of Class A Common Stock are offered
the right, at the option of each such other holder, to participate in
such Transfer, all as provided by and in accordance with Section 6.6(a)
of the Stockholders Agreement, as amended from time to time. An
"Excluded Transaction" shall mean any Transfer by KIA V or KEP V or any
of their Permitted Transferees to any affiliate (as defined in the
Stockholders Agreement), any Permitted Transferee thereof or the
Company, or pursuant to a bona fide public offering

8
<PAGE>

296178.02-New York S2A

pursuant to an effective registration statement, other than a
registration statement on Form S-4 or S-8 or any successor forms, under
the Securities Act of 1933, that covers shares of Common Stock or Class
A Common Stock.

(ii) If any member or members of the Kelso Group shall,
individually or collectively, propose to Transfer at least 75% of all
shares of Common Stock and Class A Common Stock collectively owned by
the Kelso Group to a Third Party, then holders of Common Stock and
holders of Class A Common Stock (in addition to the rights of such
holders of Common Stock or Class A Common Stock to participate in such
Transfer pursuant to the preceding paragraph (i)) shall, upon written
notice by any member of the Kelso Group, be obligated to participate in
such Transfer, all as provided by and in accordance with Section 6.6(b)
of the Stockholders Agreement, as amended from time to time.

A copy of the Stockholders Agreement is on file with the Secretary of the
Corporation, at the Corporation's principal executive offices (currently located
at 3369 Progress Drive, Bensalem, Pennsylvania 19020), and is available without
charge to any stockholder of record upon written request.

B. Preferred Stock. The Board of Directors is expressly
authorized to provide for the issuance of all or any shares of the Preferred
Stock in one or more classes or series, and to fix for each such class or series
such voting powers, full or limited, or no voting powers, and such distinctive
designations, preferences and relative, participating, optional or other special
rights and such qualifications, limitations or restrictions thereof, as shall be
stated and expressed in the resolution or resolutions adopted by the Board of
Directors providing for the issuance of such class or series and as may be
permitted by the GCL, including, without limitation, the authority to provide
that any such class or series may be (i) subject to such mandatory or optional
redemption at such time or times and at such price or prices, or, if
appropriate, not subject to such mandatory or optional redemption, (ii) entitled
to receive

9
<PAGE>

296178.02-New York S2A

dividends (which may be cumulative or non-cumulative) at such rates, on
such conditions, and at such times, and payable in preference to, or in such
relation to, the dividends payable on any other class or classes or any other
series, (iii) entitled to such rights upon the dissolution of, or upon any
distribution of the assets of, the Corporation, or (iv) convertible into, or
exchangeable for, shares of any other class or classes of stock, or of any other
series of the same or any other class or classes of stock, of the Corporation at
such price or prices or at such rates of exchange and with such adjustments, all
as may be stated in such resolution or resolutions.

C. PAY-IN-KIND PREFFERED STOCK

1 Designation. The designation of said series of preferred
stock shall be Pay-In-Kind Preferred Stock (the "PIK Preferred Stock"). The
authorized number of shares of PIK Preferred Stock shall be 4,000,000 shares.
The par value of the PIK Preferred Stock shall be $.01 per share. The PIK
Preferred Stock shall not be subject to any sinking fund or mandatory redemption
provision.

2 Dividends. The holders of shares of PIK Preferred Stock
shall be entitled to receive, when, as and if properly declared by the Board of
Directors or a duly authorized committee thereof, out of funds legally available
therefor, cumulative dividends, payable at a rate per annum of $2.50 per share
in additional shares of PIK Preferred Stock or fractions thereof (based on a
value of $10.00 per share of such additional PIK Preferred Stock). Dividends
shall be payable semiannually on February 1 and August 1 of each year,
commencing February 1, 1995. Dividends shall accrue from the date on which the
Corporation initially issues shares of this series and are cumulative from such
date, whether or not there shall be funds of the Corporation legally available
for payment of such dividends and whether or not such dividends are declared.
Dividends shall be payable in arrears to the holders of record of PIK Preferred
Stock, as they appear on the stock records of the Company at the close of
business on the 15th day of the month preceding the month in which the
particular

10
<PAGE>

296178.02-New York S2A

dividend payment date occurs, or on such other record date, not exceeding 60
days preceding the corresponding payment date, as shall be fixed by the Board of
Directors.

The amount of dividends payable for each semiannual dividend
period for the PIK Preferred Stock shall be computed by dividing the annual
dividend rate by two. The amount of dividends payable on the PIK Preferred Stock
for any partial semiannual dividend period shall be computed on the basis of a
360-day year consisting of twelve 30-day months and, solely with respect to any
partial month, the actual number of days elapsed. No interest, or sum of money
in lieu of interest, shall be payable in respect of any dividend payment or
payments on the PIK Preferred Stock which may be in arrears. Prior to the
payment of any dividend declared by the Board of Directors, the Corporation
shall take all action necessary, including, without limitation, amending its
Restated Certificate of Incorporation or this Certificate of Designation,
Powers, Preferences and Rights, to ensure that the Corporation has sufficient
authorized but unissued shares of PIK Preferred Stock to pay such dividend.

Except as otherwise set forth in this paragraph, so long as
any shares of the PIK Preferred Stock are outstanding, no dividends (other than
in stock ranking junior to the PIK Preferred Stock as to dividends and upon
liquidation, dissolution or winding up, and rights to acquire the foregoing)
shall be paid or declared and set apart for payment and no other distribution
shall be made upon the stock of the Corporation ranking junior to or on a parity
with the PIK Preferred Stock as to dividends, nor shall any such stock of the
Corporation be redeemed, purchased or otherwise acquired for any consideration
(or any moneys be paid to or made available for a sinking fund for the
redemption of any shares of any such stock) by the Corporation (except by
conversion into or exchange for stock of the Corporation ranking junior to the
PIK Preferred Stock as to dividends and upon liquidation, dissolution or winding
up) unless, in each case, all accumulated and unpaid dividends (whether or not
declared) on all outstanding shares of the PIK Preferred Stock shall have been
paid, and sufficient funds shall have been set apart for the payment of the

11
<PAGE>

296178.02-New York S2A

dividend for the current dividend period with respect to the PIK Preferred
Stock. If dividends are not paid in full upon the PIK Preferred Stock and any
other preferred stock of the Corporation ranking on a parity with the PIK
Preferred Stock as to dividends, all dividends declared on the PIK Preferred
Stock and such other preferred stock may only be declared pro rata so that in
all cases the amount of dividends declared per share on the PIK Preferred Stock
and such other preferred stock bear to each other the same ratio that
accumulated and unpaid dividends (whether or not declared) per share on the
shares of the PIK Preferred Stock and such other preferred stock bear to each
other.

3 Redemption. The shares of PIK Preferred Stock will be
redeemable for cash at the option of the Corporation, subject to the notice
provisions described below, in whole or in part, at any time or from time to
time out of funds legally available therefor, at a price per share of PIK
Preferred Stock equal to the liquidation preference thereof plus the liquidation
preference of all accumulated and unpaid dividends thereon (whether or not
declared), if any, to the redemption date (the "Redemption Price").

If full cumulative dividends on the PIK Preferred Stock have
not been paid, the PIK Preferred Stock may not be redeemed in part and the
Corporation may not purchase or otherwise acquire any shares of PIK Preferred
Stock otherwise than pursuant to a purchase or exchange offer made on the same
terms to all holders of PIK Preferred Stock.

If fewer than all the outstanding shares of PIK Preferred
Stock are to be redeemed pursuant to the first paragraph of this Section 3, the
shares to be redeemed shall be determined in good faith by the Board of
Directors, and such shares shall be redeemed by lot or pro rata from the holders
of Preferred Stock in proportion to the number of shares of PIK Preferred Stock
held by such holders or some other equitable manner determined in good faith by
the Board of Directors. If fewer than all the shares of PIK Preferred Stock
represented by any certificates are redeemed, a new certificate shall be issued

12
<PAGE>

296178.02-New York S2A

representing the unredeemed shares without any cost to the holder thereof.

In the event the Corporation shall exercise its option to
redeem shares of PIK Preferred Stock, notice of such redemption shall be given
by first class mail, postage prepaid, mailed at least 20 but no more than 60
days prior to the redemption date, to each holder of record of PIK Preferred
Stock to be redeemed, at such holder's address as the same appears on the stock
records of the Company. Each such notice shall state: (1) the redemption date;
(2) the number of shares of PIK Preferred Stock to be redeemed and, if less than
all the shares held by such holder are to be redeemed, the number of such shares
to be redeemed from such holder; (3) the Redemption Price; (4) the place or
places where certificates for such shares are to be surrendered for payment of
the Redemption Price; and (5) that dividends on the shares to be redeemed shall
cease to accrue on such redemption date. Notice having been mailed as aforesaid,
on and after the redemption date, provided that the Redemption Price has been
duly paid or provided for, (i) dividends shall cease to accrue on the PIK
Preferred Stock so called for redemption, (ii) such shares shall no longer be
deemed to be outstanding and (iii) all rights of the holders of such shares as
holders of PIK Preferred Stock of the Corporation shall cease except the right
to receive the Redemption Price, without interest thereon, upon surrender of the
certificates evidencing such shares. The Corporation's obligation to provide
moneys in accordance with the preceding sentence shall be deemed fulfilled if,
on or before the redemption date, the Corporation shall deposit with a bank or
trust company having an office or agency in the Borough of Manhattan, City of
New York, and having a combined capital and surplus of at least $100,000,000,
funds necessary for such redemption, in trust, with irrevocable instructions
that such funds be applied to the redemption of the shares of PIK Preferred
Stock so called for redemption. Any interest accrued on such funds shall be paid
to the Corporation from time to time. Any funds so deposited to which holders of
PIK Preferred Stock are lawfully entitled but which are unclaimed at the end of
two years from such redemption date shall be released or repaid to the

13
<PAGE>

296178.02-New York S2A

Corporation, after which, subject to any applicable laws relating to escheat or
unclaimed property, the holder or holders of such shares of PIK Preferred Stock
so called for redemption shall look only to the Corporation for payment of the
Redemption Price. Upon surrender, in accordance with the notice of redemption,
of the certificates evidencing such shares to be so redeemed (properly endorsed
or assigned for transfer, if the Board of Directors shall so require and the
notice shall so state), such shares shall be redeemed by the Corporation at the
applicable Redemption Price.

4 Liquidation, Dissolution or Winding Up. Upon the
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary, the holders of the PIK Preferred Stock then outstanding shall be
entitled to be paid out of the assets of the Corporation, or any proceeds
thereof, available for distribution to the Corporation's stockholders, whether
such assets are capital, surplus or earnings, following payment or provision for
payment of all amounts owed in respect of the Corporation's obligations,
liquidating distributions in an amount (the "Liquidation Preference") equal to
$10.00 for each share outstanding, plus the liquidation preference of all
accumulated and unpaid dividends thereon (whether or not declared) before any
payment shall be made or any assets distributed to the holders of capital stock
of the Corporation that are junior to the shares of PIK Preferred Stock with
respect to the distribution of assets upon liquidation, dissolution or winding
up of the Corporation. If the assets of the Company are not sufficient to pay in
full the aggregate liquidation preference payable to the holders of outstanding
shares of the PIK Preferred Stock and any shares of preferred stock of the
Corporation ranking pari passu with the PIK Preferred Stock with respect to the
distribution of assets upon liquidation, dissolution or winding up of the
Corporation, then the holders of all such shares shall share ratably in such
distribution of assets in proportion to the preferential amounts which they
would have received if paid in full. Except as provided in this Section 4, the
holders of PIK Preferred Stock shall not be entitled to any distribution in the
event of the liquidation, dissolution or winding up of the affairs of the
Corporation. A consolidation or merger of the

14
<PAGE>

296178.02-New York S2A

Corporation with one or more corporations or a sale or other transfer of all or
substantially all of the assets of the Corporation shall not be deemed to be a
liquidation, dissolution or winding up of the Corporation for purposes of this
Section 4.

5 Voting Rights. Except as set forth herein and as otherwise
required by law, the holders of the PIK Preferred Stock shall have no voting
rights. So long as any shares of the PIK Preferred Stock remain outstanding, the
Corporation will not, without the affirmative vote at a meeting or the written
consent with or without a meeting of the holders of at least a majority of the
shares of PIK Preferred Stock then outstanding (voting or consenting in writing
as a separate class):

(i) authorize, create or issue, or increase
the authorized or issued amount, of any class or series of capital
stock ranking prior to or on parity with the PIK Preferred Stock as to
dividends or as to the distribution of assets upon liquidation,
dissolution or winding up, or securities convertible into or
exchangeable or exercisable for such stock;

(ii) amend, alter or repeal any of the
provisions of the Restated Certificate of Incorporation of the
Corporation (including, without limitation, the provisions of this
Certificate of Designation, Powers, Preferences and Rights) but
excluding (except as provided by (i) above) the adoption of any
certificate of designation relating to any other series of preferred
stock; or (iii) merge, consolidate or sell all or substantially all of
the assets of the Corporation, or reclassify any of the Corporation's
authorized or issued capital stock; provided however, a vote of the PIK
Preferred Stock shall not be required in order to increase the
authorized shares of the PIK Preferred Stock to an amount not to exceed
4,250,000 shares, nor to authorize, create or issue, or increase the
authorized or issued amount, of any class or series of capital stock
ranking on a parity with the PIK Preferred Stock as to dividends

15
<PAGE>

296178.02-New York S2A

or as to the distribution of assets upon liquidation, dissolution or
winding up, or securities convertible into or exchangeable or
exercisable for such, in or up to an amount of shares not to exceed the
difference between 4,250,000 shares and the number of issued and
outstanding shares of PIK Preferred Stock at such time.

In exercising the voting rights set forth in this Section 5 or
when otherwise granted voting rights by operation of law, each share of PIK
Preferred Stock shall be entitled to one vote.

6 Waiver. The holders of at least a majority of the shares of
PIK Preferred Stock may by written notice to the Corporation waive or modify
past, present or future compliance by the Corporation with any of the
conditions, covenants or obligations set forth in this Certificate of
Designation, Powers, Preferences and Rights. Any waiver by the holders of PIK
Preferred Stock of a breach of any provision of this Certificate of Designation,
Powers, Preferences and Rights as contemplated by the preceding sentence, shall
not operate or be construed as a waiver of any preceding or succeeding breach
and no failure by the holders of the PIK Preferred Stock to exercise any right
or privilege hereunder shall be deemed a waiver of such holders' rights to
exercise the same at any subsequent time or times hereunder.

7 Shares to be Retired. All shares of PIK Preferred Stock
which are purchased or redeemed by the Corporation shall revert to the status of
authorized but unissued shares of preferred stock of the corporation, without
designation as to series."

8 Redemption of Shares Held by Management of the Corporation.
Anything herein to the contrary notwithstanding, the Corporation is hereby
authorized to redeem, repurchase or otherwise acquire (i) Common Stock in
accordance with the Stockholders Agreement dated as of October 17, 1994 among
the Corporation and certain of its stockholders (the "Stockholders Agreement")
without first having made payment of any or all accumulated and unpaid dividends
(whether or not declared) on all outstanding

16
<PAGE>

296178.02-New York S2A

shares of the PIK Preferred Stock and without first having set apart funds for
the payment of the dividend for the current dividend period with respect to the
PIK Preferred Stock; and (ii) PIK Preferred Stock in accordance with the
Preferred Stockholders Agreement dated as of August 14, 1995 among the
Corporation and certain of its stockholders (the "Preferred Stockholders
Agreement") without first having paid full cumulative dividends on the PIK
Preferred Stock.

FIFTH: The following provisions are inserted for the
management of the business and the conduct of the affairs of the Corporation,
and for further definition, limitation and regulation of the powers of the
Corporation and of its directors and stockholders:

(1) The business and affairs of the Corporation
shall be managed by or under the direction of the Board of Directors.

(2) The directors shall have concurrent power with
the stockholders to make, alter, amend, change, add to or repeal the By-Laws of
the Corporation.

(3) The number of directors of the Corporation shall
not be less than three (3) nor more than fifteen (15), the exact number of
directors to be fixed from time to time by, or in the manner provided in, the
By-Laws of the Corporation. Election of directors need not be by written
ballot unless the By-Laws so provide.

(4) No director shall be personally liable to the
Corporation or any of its stockholders 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 Corporation 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 GCL or (iv) for
any transaction from which the director derived an improper personal benefit.
Any repeal or modification of this Article FIFTH by the stockholders of the
Corporation shall not adversely affect any right or protection of a director of
the Corporation existing at the time of such repeal or modification with respect
to acts or omissions occurring prior to such repeal or modification.

17
<PAGE>

18
296178.02-New York S2A

(5) In addition to the powers and authority hereinbefore or by statute
expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation, subject, nevertheless, to the
provisions of the GCL, this Restated Certificate of Incorporation, and any
By-Laws adopted by the stockholders; provided, however, that no By-Laws
hereafter adopted by the stockholders shall invalidate any prior act of the
directors which would have been valid if such By-Laws had not been adopted.

SIXTH: Meetings of stockholders may be held within or without the
State of Delaware, as the By-Laws may provide. The books of the Corporation
may be kept (subject to any provision contained in the GCL) outside the
State of Delaware as such place or places as may be designated from time to
time by the Board of Directors or in the By-Laws of the Corporation.

SEVENTH: The private property of the stockholders shall not be subject
to the payment of corporate debts to any extent whatsoever.

EIGHTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and
all rights conferred upon stockholders herein are granted subject to this
reservation.

<PAGE>

IN WITNESS WHEREOF, the Corporation has caused this
Certificate of Amendment to be executed this th day of October, 1999.

HCI Direct, Inc.

By:
--------------------------------
Name: John F. Biagini
Title: Chairman and Chief
Executive Officer

EXHIBIT 4.5

AMENDMENT AND WAIVER

AMENDMENT AND WAIVER (this "Amendment"), dated as of December
29, 1999, 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 including the Amendment Effective Date referred to
below, the "Credit Agreement"); and

WHEREAS, subject to and on the terms and conditions set forth
herein, the parties hereto wish to amend the Credit Agreement, as provided
below;

NOW, THEREFORE, it is agreed:

I. Amendments and Waivers to Credit Agreement.
- ---------------------------------------------------

1. The reference to "December 31, 1999" in definition of IRF
Maturity Date in Section 10 of the Credit Agreement is changed to read "March
31, 2000".

2. The obligations of the Borrower to satisfy (i) the
requirements of Section 8.12 for the Test Period ending at the end of the fiscal
quarter ended in December, 1999 and (ii) the requirements of Section 8.13 as of
the end of the fiscal quarter ended in December, 1999 are hereby waived.

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. The 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.

<PAGE>

3. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with the Borrower and the Agent.

4. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK.

5. This Amendment shall become effective on the date (the
"Amendment Effective Date") when 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: Delores Walker
(facsimile number 212-354-8113).

6. So long as the Amendment Effect Date occurs, the Borrower
shall pay (i) to each Bank which has executed a counterpart hereof on or prior
to 5:00 P.M. (New York time) on the Amendment Effective Date, a consent fee
equal to 0.125% of the sum of (x) its Revolving commitment as in effect
immediately prior to the Amendment Effective Date plus (y) the aggregate
outstanding principal amount of Term Loans immediately prior to the amendment
Effective Date and (ii) to each Bank with an Incremental Revolving Commitment
which has executed a counterpart hereof on or prior to 5:00 P.M. (New York time)
on the Amendment Effective Date, a fee equal to 0.25% of its Incremental
Revolving Commitment as in effect on the Amendment Effective Date. All fees
payable pursuant to the immediately preceding sentence shall be paid to the
agent within one Business Day after the later date specified in the immediately
preceding sentence, which fees shall be distributed by the Agent to the relevant
Banks in the amounts specified in the immediately preceding sentence.

7. 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:

October 4, 1999 EXHIBIT 10.13
-------------

Mr. Michael D. Rowley
7852 Woodside Lane
Jacksonville, FL 32256

Dear Michael:

I am delighted to extend this offer to you to join us at HCI Direct as Chief
Financial Officer. I expect that your experience and talents will make you a
highly visible and valuable member of our management team.

This letter summarizes the offer of employment to you by HCI Direct.

1. Position: Chief Financial Officer

2. Reporting Relationship: Reports to Chairman and CEO.

3. Primary Responsibilities: Development and implementation of HCI
Direct financial strategy, controls and procedures, including banking
and investor relations, accounting functions, budgetary planning and
controls for all North America and International operations and for
U.S. Textile Corp.

4. Base Salary: Your total annual base salary will be $240,000 to be paid
in equal weekly installments.

5. Bonus: Based on the attainment of objectives agreed on by you and the
CEO, you may receive a bonus of up to 25% per year of your base salary.

For the remainder of 1999, you will receive a bonus at year end of
$10,000.

6. Benefits: You will be entitled to the employee benefits described in
the attached materials. During your first, second and third year of
employment, you shall be entitled to a three-week vacation with full
pay; after the fourth anniversary, four weeks with full pay. Vacation
time shall be taken with due regard for work schedules and the business
interests of the Company.

7. Company Car & Other Perquisites: While your permanent residence remains
in Florida, the Company will provide you with a furnished, one-bedroom
apartment (at Company expense) and will reimburse you for air travel to
your Florida residence, on terms to be worked out. The Company will
provide you with the use of a Company car. The Company will be
responsible for operating costs such as insurance, gasoline and
maintenance of the vehicle.

8. Upon your hire date, you will be granted the option to purchase 25,000
shares, with a strike price based on the current value. If you are
employed by the Company on 1/1/01, you will be granted an additional
25,000 shares with a strike price based on the Company's 2000 financial
results. These grants will be exercisable under conditions outlined in
certain documents related to stock options.

<PAGE>

9. Confidentiality: During the term of your employment, you will have
access to and become familiar with substantial amounts of proprietary
and confidential information concerning the business operations of the
Company, its products, marketing systems, sales information, computer
systems and software, customer lists, financial and economic data and
various plans for future operations (all of such information being
herein referred to as the "Confidential Information"). You shall
not disclose any portion of the Confidential Information, directly or
indirectly, or use it in any way, either during the term of this
Agreement or at any later time, except as required in the course of
your employment or by law. All files, records, documents, drawings,
specifications and similar items relating to the business of the
Company, whether prepared by you or otherwise coming into your
possession, shall remain the exclusive property of the Company and
shall not be removed from the premises of the Company under any
circumstances and shall be immediately returned upon cessation of your
employment.

10. While employed at Corporate Headquarters, you will work a four-day
week; in the event you oversee the operation of an acquired business,
you will be expected to adjust your work schedule to that of the
acquired Company. Only with written permission of the Company will you
be allowed to provide services of a business nature directly or
indirectly to any other person or organization during your employment.

Michael, I am extremely pleased that you will join us. Your turn-around
experience, international exposure and high-leverage background make you a
perfect fit with our team.

This offer expires two weeks from this date. Please countersign below,
confirming your start date. Please call me if you have any questions.

Sincerely,

HCI DIRECT, INC.

John F. Biagini

JFB/lbs

I intend to start employment on _________________.

- -------------------- ---------------
Michael D. Rowley Date

EXHIBIT 21.1
------------

HCI DIRECT, INC. (FORMERLY, HOSIERY CORPORATION OF AMERICA, INC.)
SUBSIDIARIES OF THE REGISTRANT

The following table lists each significant subsidiary of HCI Direct,
Inc. (formerly, Hosiery Corporation of America, Inc.) and its jurisdiction
of organization.

Jurisdiction
of
Subsidiary Organization
- ---------- -------------

U.S. Textile Corporation (100% owned).......................... North Carolina
The Stonebury Group, Inc. (100% owned)......................... Nevada
Hosiery Corporation International, Inc. (100% owned)........... Delaware
Enchantress Hosiery of Canada (100% owned)..................... Ontario, Canada

<ARTICLE> 5
<CIK> 0000934383
<NAME> HCI Direct, Inc. (Formerly, Hosiery Corporation of
America, Inc.)
<MULTIPLIER> 1000

<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999

<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 55,673
<ALLOWANCES> 6,048
<INVENTORY> 14,248
<CURRENT-ASSETS> 75,070
<PP&E> 37,423
<DEPRECIATION> 20,956
<TOTAL-ASSETS> 155,612
<CURRENT-LIABILITIES> 73,357
<BONDS> 69,683
0
38,119
<COMMON> 14
<OTHER-SE> (84,932)
<TOTAL-LIABILITY-AND-EQUITY> 155,612
<SALES> 259,881
<TOTAL-REVENUES> 259,881
<CGS> 55,745
<TOTAL-COSTS> 117,809
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 28,552
<INTEREST-EXPENSE> 16,888
<INCOME-PRETAX> 20,990
<INCOME-TAX> 8,762
<INCOME-CONTINUING> 12,228
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,228
<EPS-BASIC> 0
<EPS-DILUTED> 0

</TABLE>