SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
( X ) QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2000
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _______ to ________
Commission File No. 33-87392
HCI DIRECT, INC.
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-0782950
---------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3369 Progress Drive
Bensalem, Pennsylvania 19020
--------------------------------------------- ------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 244-1777
Indicate by check mark whether the Registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--------------- ---------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 13, 2000
---------------------------- ---------------------------------
Voting 1,331,574
Class A, non-voting 75,652
<PAGE>
INDEX PAGE
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PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
Three month and nine month periods ended
September 30, 2000 and September 25, 1999 4
Condensed Consolidated Statements of Cash Flows
Nine month periods ended September 30, 2000 and
September 25, 1999 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 13
PART II - OTHER INFORMATION 14
---------------------------
SIGNATURES 15
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
----------------------------------------------------
<TABLE>
HCI DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
(Dollars in thousands, except share and per share data)
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ........................................................... $ -- $ --
Accounts receivable, less an allowance for doubtful accounts of
$3,856 and $6,048 in 2000 and 1999, respectively ................................... 35,188 49,625
Inventories ......................................................................... 23,059 14,248
Prepaid customer acquisition costs .................................................. 905 6,548
Prepaid and other current assets .................................................... 3,140 4,649
---------- ----------
Total current assets ........................................................... 62,292 75,070
PROPERTY AND EQUIPMENT, net .............................................................. 15,893 16,467
DEFERRED CUSTOMER ACQUISITION COSTS ...................................................... 58,818 56,203
DEFERRED DEBT ISSUANCE COSTS, less accumulated amortization of
$9,338 and $8,227 in 2000 and 1999, respectively .................................... 2,288 3,337
GOODWILL, less accumulated amortization of $280 and $185 in 2000 and 1999, respectively... 3,514 3,609
OTHER ASSETS ............................................................................. 946 926
---------- ----------
TOTAL .................................................................................... $ 143,751 $ 155,612
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Borrowings under line of credit ..................................................... $ 17,233 $ 13,750
Current portion of long-term debt ................................................... 18,367 13,117
Current portion of capital lease obligations ........................................ 1,738 1,526
Bank overdrafts ..................................................................... 6,817 33
Accounts payable .................................................................... 10,836 15,061
Accrued expenses and other current liabilities ...................................... 8,132 8,342
Accrued interest .................................................................... 2,251 4,625
Accrued coupon redemption costs ..................................................... 3,758 4,166
Deferred income taxes ............................................................... 10,850 12,379
Income taxes payable ................................................................ 347 358
---------- ----------
Total current liabilities ...................................................... 80,329 73,357
LONG-TERM DEBT, Less current portion ..................................................... 93,745 108,566
CAPITAL LEASE OBLIGATIONS, Less current portion .......................................... 4,110 4,399
ACCRUED COUPON REDEMPTION COSTS .......................................................... 310 336
DEFERRED INCOME TAXES .................................................................... 13,809 15,753
---------- ----------
Total liabilities .............................................................. 192,303 202,411
---------- ----------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' DEFICIENCY:
Preferred stock, $.01 par value, 12,000,000 shares authorized:
5,000,000 and 4,000,000 shares designated as pay-in-kind preferred stock
in 2000 and 1999 respectively, value of $10 per share; 25% cumulative,
(liquidation preference of $158,463 and $127,885 in 2000 and 1999,
respectively), 3,811,901 shares issued in 2000 and 1999,
3,803,186 shares outstanding in 2000 and 1999 ..................................... 43,118 38,119
Common stock, voting, $.01 par value: 60,000,000 shares authorized,
1,350,174 shares issued in 2000 and 1999, 1,331,574 shares outstanding in
2000 and 1999 ..................................................................... 13 13
Common stock, Class A, non-voting, $.01 par value:
1,000,000 shares authorized, 75,652 shares issued and outstanding ................. 1 1
Additional paid-in capital .......................................................... 19,120 19,120
Compensatory stock options outstanding .............................................. 20,943 20,943
Accumulated deficit ................................................................. (129,662) (122,722)
Restricted stock .................................................................... (9) (197)
---------- ----------
(46,476) (44,723)
Treasury stock, at cost, 27,315 shares in 2000 and 1999 (8,715 preferred shares
and 18,600 common shares) ......................................................... (2,076) (2,076)
---------- ----------
Net stockholders' deficiency ................................................... (48,552) (46,799)
---------- ----------
TOTAL .................................................................................... $ 143,751 $ 155,612
========== ==========
<FN>
See notes to condensed consolidated financial statements.
</FN>
3
</TABLE>
<PAGE>
<TABLE>
HCI DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Three Month Periods Ended Nine Month Periods Ended
----------------------------- -----------------------------
September 30, September 25, September 30, September 25,
2000 1999 2000 1999
-------- -------- --------- --------
<S> <C> <C> <C> <C>
NET REVENUES ................................ $ 50,703 $ 61,246 $ 169,908 $ 180,813
-------- -------- --------- ---------
COSTS AND EXPENSES:
Cost of sales .......................... 22,464 26,486 81,668 83,301
Administrative and general expenses..... 3,723 3,386 11,742 10,740
Provision for doubtful accounts ........ 4,944 5,553 17,603 17,263
Marketing costs ........................ 17,871 12,653 49,964 36,487
Coupon redemption costs ................ 483 694 1,893 2,663
Depreciation and amortization .......... 930 879 2,718 2,636
Expenses related to stock offering ..... -- 2,000 -- 2,000
Other expenses ......................... 491 (34) 1,282 504
-------- -------- --------- ---------
OPERATING (LOSS) INCOME ..................... (203) 9,629 3,038 25,219
Interest income ........................ 11 9 27 24
Interest expense ....................... 4,469 4,178 13,193 12,410
-------- -------- --------- ---------
(LOSS) INCOME BEFORE (BENEFIT) PROVISION
FOR INCOME TAXES .......................... (4,661) 5,460 (10,128) 12,833
(BENEFIT) PROVISION FOR INCOME TAXES ........ (1,312) 2,207 (3,188) 5,009
-------- -------- --------- ---------
NET (LOSS) INCOME ........................... $ (3,349) $ 3,253 $ (6,940) $ 7,824
======== ======== ========= =========
<FN>
See notes to condensed consolidated financial statements.
</FN>
4
</TABLE>
<PAGE>
<TABLE>
HCI DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 25, 1999
(Dollars in thousands)
(Unaudited)
<CAPTION>
2000 1999
-------- --------
OPERATING ACTIVITIES:
<S> <C> <C>
Net (loss) income ..................................................... $ (6,940) $ 7,824
Adjustments to reconcile net (loss) income to net cash used in
operating activities:
Depreciation and amortization ...................................... 2,718 2,636
Amortization of debt issue costs and discounts ..................... 1,348 1,374
Other .............................................................. 195 186
Amortization of deferred customer acquisition costs ................ 41,873 32,708
(Increase) decrease in operating assets:
Accounts receivable .......................................... 14,437 (9,783)
Inventories .................................................. (8,811) 838
Payments for deferred customer acquisition costs ............. (44,488) (43,271)
Prepaid and other current assets ............................. 7,152 (3,146)
Other assets ................................................. (196) (124)
Increase (decrease) in operating liabilities:
Accounts payable, accrued expenses and other liabilities ..... (36) 897
Deferred income taxes ........................................ (3,473) 4,832
Accrued coupon redemption costs .............................. (434) (267)
-------- --------
Net cash provided by (used in) operating activities..... 3,345 (5,296)
-------- --------
INVESTING ACTIVITIES:
Acquisitions of property and equipment ................................ (789) (611)
Proceeds from sale of property and equipment .......................... 24 16
-------- --------
Net cash used in investing activities .................. (765) (595)
-------- --------
FINANCING ACTIVITIES:
Net borrowings under line of credit ................................... 3,483 11,200
Payments on bank and other financing .................................. (9,808) (3,838)
Payments on capital leases ............................................ (1,192) (1,354)
Issuance of preferred stock ........................................... 4,999 --
Debt issuance costs ................................................... (62) (117)
-------- --------
Net cash (used in) provided by financing activities..... (2,580) 5,891
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ................................ -- --
Cash and cash equivalents at beginning of year ........................ -- --
-------- --------
Cash and cash equivalents at end of period ............................ $ -- $ --
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest ........................................................... $ 14,144 $ 13,764
======== ========
Income taxes ....................................................... $ 285 $ 372
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease obligations of $1,115 and $730 were entered into for new equipment during the nine month periods
ended 2000 and 1999 respectively.
<FN>
See notes to condensed consolidated financial statements.
</FN>
5
</TABLE>
<PAGE>
HCI DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(Unaudited)
NOTE 1. Condensed Consolidated Financial Statements
In the opinion of management, the accompanying condensed consolidated financial
statements of HCI Direct, Inc. and subsidiaries, which are unaudited except for
the Consolidated Balance Sheet as of December 31, 1999, which is derived from
audited financial statements, include all normal and recurring adjustments
necessary to present fairly the Company's financial position as of September 30,
2000 and the results of operations for the three and nine month periods ended
September 30, 2000 and September 25, 1999, and cash flows for the nine month
periods ended September 30, 2000 and September 25, 1999.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K as filed with the Securities and Exchange Commission on March 30, 2000.
NOTE 2. Inventories
September 30, December 31,
2000 1999
------------- ------------
Raw materials................................... $ 1,300 $ 859
Work-in-process................................. 2,269 2,984
Finished goods.................................. 15,605 7,658
Promotional and packing material................ 3,885 2,747
------- -------
$23,059 $14,248
======= =======
NOTE 3. Commitments and Contingencies
The Company has continuing obligations with certain members of management
pursuant to previously signed employment agreements.
The Company has agreed to pay Kelso an annual fee of $263 each year for
financial advisory services and to reimburse Kelso for out-of-pocket expenses
incurred. Non-officer directors of the Company, other than those directors who
are affiliated with Kelso, will be paid an annual retainer of $20. In addition,
all out-of-pocket expenses of non-officer directors, including those directors
who are affiliated with Kelso, related to meetings attended, will be reimbursed
by the Company. Non-officer directors, including those directors affiliated with
Kelso, will receive no additional compensation for their services as directors
of the Company except as described above.
The Company is involved in, or has been involved in, litigation arising in the
normal course of its business. The Company cannot predict the timing or outcome
of these claims and proceedings. Currently, except as discussed below, the
Company is not involved in any litigation which is expected to have a material
effect on the financial position of the business or the results of operations
and cash flows of the Company.
From time to time, the Company has received inquiries from the Federal Trade
Commission ("FTC"), various state regulatory authorities, self-regulatory
agencies and trade associations concerning aspects of the Company's promotional
materials, including whether the terms of the Company's promotional offers are
sufficiently disclosed in these materials.
6
<PAGE>
As a result of a lawsuit brought by the FTC, the Federal District Court for the
Eastern District of Pennsylvania issued a consent injunction in 1984, which
specifies rules the Company must follow in conducting its mail order business.
The consent injunction permanently enjoins the Company from violating various
FTC and Postal Service laws and regulations. As a result of these inquiries, in
1984 the Company adopted revised promotional materials. The Company believes but
cannot assure that these modifications and its current and future promotional
materials will meet the concerns expressed by the FTC or be deemed to be in
compliance with the consent injunction.
In 1997, the Company reached an agreement with an 11-state group that imposes
specific disclosure requirements on the Company's promotional materials and
specifies rules the Company must follow in its promotional materials and in
conducting its mail order business. The modifications the Company made to its
solicitation materials had a material adverse effect on its U.S. response rates
in 1997 and 1998. The Company does not believe that these modifications will
have a further significant negative impact on its response rates in the future,
although the Company cannot guarantee that this will be the case. In addition,
while the Company believes the modifications to its promotional materials meet
the concerns expressed by the 11-state group and comply with the terms of that
agreement, the Company cannot assure that these modifications will be deemed to
be in compliance with the 11-state agreement.
Under the terms of the 11-state agreement, the Company paid $0.3 million in
administrative expenses and fees during 1997. The agreement also required that
the Company pay refunds to customers under certain circumstances for a six-month
period. These refunds were not material to the Company's business, financial
condition or results of operations.
Beginning in early 1999, the Company introduced a new promotional offer in North
America whereby the customer has the opportunity to receive one free pair of
hosiery when the customer responds to the Company's initial solicitation. Under
this offer, if the customer does not elect to cancel future shipments, the
customer automatically becomes a participant in the Company's continuity
program. While the Company believes that this new promotional offer complies
with the terms of its agreement with the 11-state group, the Company cannot
assure this. Accordingly, there may be some additional modifications that the
Company may need to make to its promotional materials to fully satisfy the terms
of the agreement.
In 1997 and 1998, the Company received inquiries from the Direct Marketing
Association and the National Advertising Division of the Better Business Bureau
concerning whether the terms of its promotional offers are sufficiently
disclosed in its promotional materials. These inquiries were resolved without
any future modifications to the Company's promotional materials.
The Company received formal inquiries from 2 states which were not part of the
11-state group. The Company had reached an agreement in principle with one of
the two states. However, the state never finalized this agreement and the
Company has not heard from the state in over a year. The Company is in
discussions with the other state and is seeking to settle the inquiry. The
Company does not believe that the amount of any settlement of either inquiry
will be significant. While the Company believes that it will be able to resolve
these inquiries and other future inquiries, it cannot assure this, nor can it
assure that these or other regulators or trade associations will not require or
seek to impose additional changes to the Company's promotional materials or
billing practices. In addition, the Company cannot assure that these additional
changes to its materials or billing practices, if any, will not be significant
or will not have a material adverse effect on its business, financial condition
or results of operations.
The direct mail marketing industry is subject to ongoing and changing federal,
state, local and foreign consumer protection, mail order and other laws and
regulations. Accordingly, it is possible that new or additional laws or
regulations could be passed at any time. While the Company's management believes
that its promotional materials are in substantial compliance with applicable
laws and regulations, the Company cannot give any assurance in that regard nor
can it assure that additional laws or regulations will not be passed which could
have a material adverse effect on the Company's ability to rent customer lists
from third parties, or on its future response rates, business, financial
condition or results of operations.
7
<PAGE>
On January 6, 2000, the Internal Revenue Service issued notice of a Tax
Deficiency for the years ended December 31, 1993 and 1994 of $639 and $2,336,
respectively plus accrued interest of $419 for 1993 and $1,230 for 1994. The
total assessment for both tax and interest for these years is $4,624. The
deficiency being assessed is for a corporate-owned life insurance (COLI) plan.
This plan was discontinued when the Company was sold in 1994 and the policies
were transferred to the former owner at that time. As part of the acquisition
agreement, the former owner is responsible for any tax deficiencies related to
the COLI and the monies being assessed by the Internal Revenue Service are
currently being held in an escrow account.
NOTE 4. Note Payable to Bank
The Company has a revolving credit facility which provides for maximum
borrowings of $24,000 of which $1,000 is not currently committed. The Company
can borrow based on a formula which comprises the sum of 80% of accounts
receivable and 50% of inventory. Interest is charged at the bank's prime lending
rate plus 1% or 2% over the Eurodollar rate.
Effective March 30, 2000, the Company amended its Credit Agreement to extend the
Incremental Revolving Loan of $4,000 through the life of the Credit Agreement.
This loan can be made from time to time after the existing revolving credit
facility equals $20,000. Also, the Company amended certain financial ratios as
defined in the agreement for 2000 and subsequent years and increased the Euro
and Base Rate margin .50%.
Effective September 27, 2000, the Company amended its Credit Agreement to change
certain financial ratios as defined in the agreement for 2000 and subsequent
years and increased the Euro and Base Rate margin .50%.
At September 30, 2000, there were outstanding borrowings of $17,233 at a
weighted average interest rate of 9.8%. In addition, there were outstanding
letters of credit of approximately $894 resulting in $4,873 available to borrow.
NOTE 5. Operating Segments
The Company organizes its business units into two geographic segments: North
America and International. Segment information for the three and nine month
period ended September 30, 2000 and September 25, 1999 is as follows:
Three Month Period Ended September 30, 2000
-------------------------------------------
North
America International Total
------- ------------- -------
Revenues from external customers..... $42,950 $7,753 $50,703
Intersegment revenues................ 785 -- 785
Segment profit (EBITDA) (1).......... 2,206 (1,468) 738
Segment assets....................... 116,435 27,316 143,751
Three Month Period Ended September 25, 1999
-------------------------------------------
North
America International Total
------- ------------- -------
Revenues from external customers..... $53,453 $7,793 $61,246
Intersegment revenues................ 330 -- 330
Segment profit (EBITDA) (1).......... 12,295 222 12,517
Segment assets....................... 126,615 23,842 150,457
----------
(1) Earnings before interest, taxes, depreciation and amortization (EBITDA)
represents income before provision for income taxes of ($4,661) and
$5,460 for the three month period ended September 30, 2000 and September
25, 1999, respectively, excluding interest expense of $4,469 and $4,178
for the three month period ended September 30, 2000 and September 25,
1999, respectively, and depreciation and amortization of $930 and $879
for the three month period ended September 30, 2000 and September 25,
1999, respectively. EBITDA does not purport to represent net income or
net cash provided by operating activities, as those terms are defined
under generally accepted accounting principles. Further, the Company's
measure of EBITDA may not be comparable to similarly titled measures of
other companies.
8
<PAGE>
Nine Month Period Ended September 30, 2000
------------------------------------------
North
America International Total
------- ------------- -------
Revenues from external customers..... $138,184 $31,724 $169,908
Intersegment revenues................ 2,341 -- 2,341
Segment profit (EBITDA) (1).......... 11,030 (5,247) 5,783
Segment assets....................... 116,435 27,316 143,751
Nine Month Period Ended September 25, 1999
------------------------------------------
North
America International Total
------- ------------- -------
Revenues from external customers..... $150,783 $30,030 $180,813
Intersegment revenues................ 2,272 -- 2,272
Segment profit (EBITDA) (1).......... 30,967 (1,088) 29,879
Segment assets....................... 126,615 23,842 150,457
----------
(1) Earnings before interest, taxes, depreciation and amortization (EBITDA)
represents income before provision for income taxes of ($10,128) and
$12,833 for the nine month period ended September 30, 2000 and September
25, 1999, respectively, excluding interest expense of $13,193 and $12,410
for the nine month period ended September 30, 2000 and September 25,
1999, respectively, and depreciation and amortization of $2,718 and
$2,636 for the nine month period ended September 30, 2000 and September
25, 1999, respectively. EBITDA does not purport to represent net income
or net cash provided by operating activities, as those terms are defined
under generally accepted accounting principles. Further, the Company's
measure of EBITDA may not be comparable to similarly titled measures of
other companies.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three and Nine Month Periods Ended September 30, 2000 and
September 25, 1999
------------------------------------------------------------------------
The following discussion should be read in conjunction with the audited
Consolidated Financial Statements of HCI Direct, Inc. and Subsidiaries, and the
respective Notes thereto, filed with the registrants' Annual Report on Form 10-K
for the fiscal year ended December 31, 1999. As used within Item 2 and 3, the
term "Company" refers to HCI Direct, Inc. and its wholly-owned subsidiaries.
The information herein contains forward looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 that involve a number of
risks and uncertainties. A number of factors could cause actual results,
performance, achievements of the Company, or industry results to be materially
different from any future results, performance or achievements expressed or
implied by such forward looking statements. These factors include, but are not
limited to, the significant indebtedness of the Company and in the Company's
specific market areas: changes in prevailing interest rates and the availability
of and terms of financing to fund the cash needs of the Company; inflation;
changes in costs of goods and services; economic conditions in general and in
the Company's specific market areas; demographic changes; changes in or failure
to comply with federal, state and/or local government regulations; liability and
other claims asserted against the Company; changes in operating strategy or
development plans; labor disturbances; changes in the Company's acquisition and
capital expenditure plans; and other factors referenced in Item 7A, Quantitative
and Qualitative Disclosures About Market Risk, in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999. In addition, such forward
looking statements are necessarily dependent upon assumptions, estimates and
dates that may be incorrect or imprecise and involve known and unknown risks,
uncertainties and other factors. Accordingly, any forward looking statements
included herein do not purport to be predictions of future events or
circumstances and may not be realized. Forward looking statements can be
identified by among other things, the use of forward-looking terminology such as
"believes", "expects", "may", "will", "should", "seeks", "pro forma",
"anticipates", "intends" or the negative of any thereof, or other variations
thereon or comparable terminology, or by discussions of strategy or intentions.
Given these uncertainties, readers are cautioned not to place undue reliance on
such forward looking statements. The Company disclaims any obligations to update
any such factors or to publicly announce the results of any revisions to any of
the forward looking statements contained herein to reflect future events or
developments.
Results of Operations
---------------------
<TABLE>
The following table sets forth certain income statement data for the Company expressed as a percentage of net revenues:
<CAPTION>
Three Month Periods Ended Nine Month Periods Ended
------------------------- ------------------------
September 30, September 25, September 30, September 25,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales 44.3 43.3 48.1 46.1
Administrative and general expenses 7.3 5.5 6.9 5.9
Provision for doubtful accounts 9.8 9.1 10.4 9.5
Marketing costs 35.2 20.7 29.4 20.2
Coupon redemption costs 1.0 1.1 1.1 1.5
Depreciation and amortization 1.8 1.4 1.6 1.5
----- ------ ------ ------
Subtotal 99.4 81.1 97.5 84.7
----- ------ ------ ------
Income before interest-net, other expenses
and provision for income taxes 0.6% 18.9% 2.5% 15.3%
===== ====== ====== =====
</TABLE>
10
<PAGE>
Three Month Period Ended September 30, 2000 Compared to Three Month Period Ended
September 25, 1999
--------------------------------------------------------------------------------
Net revenues for the third quarter of 2000 were $50.7 million, a decrease of
$10.5 million or 17.2% from 1999 third quarter net revenues of $61.2 million.
The decrease occurred primarily in the United States due mainly to the timing of
and response to marketing campaigns.
Cost of sales decreased from $26.5 million in 1999 to $22.5 million in 2000, a
decrease of 15.2%. As a percentage of net revenues, cost of sales increased to
44.3% in 2000 from 43.3% in 1999, largely reflecting the expansion in the
Company's developing overseas markets.
Provision for doubtful accounts decreased to $4.9 million in 2000 from $5.6
million in 1999, a decrease of 11.0%. As a percentage of net revenues, bad debts
were 9.8% for 2000 compared to 9.1% for 1999.
Marketing costs increased by 41.2% to $17.9 million in 2000 from $12.7 million
in 1999, despite a reduction in the overall level of marketing activity. The
Company typically defers the cost of marketing campaigns and amortizes them,
provided that sufficient data exists to provide a reliable basis for
amortization. The increase in costs in 2000 was attributable to two main
factors: (a) the increase in the number and volume of marketing campaigns in
1999 versus 1998 and (b) the fact that several new marketing initiatives were
undertaken in 2000, including socks, "Little Silkies", Internet customer
acquisition and a further broadening of the Company's geographic base.
Operating loss of $(0.2) million in 2000 compared with operating profit of $9.6
million in 1999. This decrease was primarily the result of decreased revenue and
the increase in marketing costs as explained above.
Nine Month Period Ended September 30, 2000 Compared to Nine Month Period Ended
September 25, 1999
------------------------------------------------------------------------------
Net revenues decreased by 6.0% to $169.9 million in the nine months of 2000 from
$180.8 million for the same period in 1999. The decrease occurred primarily in
the United States.
Cost of sales increased to $81.7 million in the nine months of 2000 from $83.3
million in 1999. As a percentage of net revenues, cost of sales is 48.1% in the
first nine months of 2000 compared to 46.1% in 1999.
Administrative and general expenses increased to $11.7 million in the nine
months of 2000 from $10.7 million in 1999. Increased personnel costs account for
the increase. As a percentage of net revenues, administrative and general
expenses increased to 6.9% in the first nine months of 2000 from 5.9% in 1999.
Provision for doubtful accounts increased to $17.6 million in 2000's nine months
from $17.3 million in 1999. As a percentage of net revenues, provision for
doubtful accounts was 10.4% and 9.5% for the nine months of 2000 and 1999,
respectively.
Marketing costs increased by 36.9% to $50.0 million in 2000 from $36.5 million
in 1999, despite a reduction in the overall level of marketing activity. The
Company typically defers the cost of marketing campaigns and amortizes them,
provided that sufficient data exists to provide a reliable basis for
amortization. The increase in costs in 2000 was attributable to two main
factors: (a) the increase in the number and volume of marketing campaigns in
1999 versus 1998 and (b) the fact that several new marketing initiatives were
undertaken in 2000, including socks, "Little Silkies", Internet customer
acquisition and a further broadening of the Company's geographic base.
Operating income of $3.0 million decreased 88.0% from $25.2 million in 1999.
This decrease was primarily the result of decreased revenues and increased
expenses for administrative and general, provision for doubtful accounts and
marketing costs. As a percentage of net revenues, operating income was 1.8% in
2000 versus 13.9% in 1999.
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Liquidity and Capital Resources
-------------------------------
The Company's cash requirements arise principally from the need to finance new
customer acquisitions, capital expenditures, debt repayment and other working
capital requirements. The Company expects to finance these cash requirements
from its Revolving Credit Facility.
The decrease in working capital of $16.3 million from the end of 1999 is caused
mainly by the reduction in revenues.
Net cash provided by (used in) operating activities was $3.3 million for the
nine months of 2000 as compared to ($5.3) million in 1999. This improvement
reflects the reduction in working capital and in the overall level of marketing
activity as discussed above.
Net cash used in investing activities to acquire assets was $0.8 million and
$0.6 million in the nine months of 2000 and 1999, respectively.
Net cash (used in) provided by financing activities was ($2.6) million and $5.9
million for the nine months of 2000 and 1999, respectively. There was $7.7
million reduced net borrowing on the credit line in 2000 as compared to 1999 as
well as a $6.0 million increase in repayment made on bank debt. The Company also
issued new shares of preferred stock of $5.0 million.
The Recapitalization
As a result of the substantial indebtedness incurred in connection with a
Recapitalization, in October 1994, the Company has significant debt service
obligations. At September 30, 2000, the outstanding amount of the Company's
indebtedness (other than trade payables and accrued expenses) is $135.2 million,
including $61.1 million of senior secured debt and $69.3 million of senior
subordinated debt (represented by the Notes). Since consummation of the
Recapitalization, the Company's ongoing cash requirements through the end of
fiscal 2000 will consist primarily of interest payments and required
amortization payments under the Credit Agreement, interest payments on the
Notes, payments of capital lease obligations, front end marketing expenditures,
working capital, capital expenditures and taxes. The required amortization
payments under the Credit Agreement will be: $13.0 million in 2000, $20.0
million in 2001 and $19.0 million in 2002. Other than upon a change of control
(as defined) or as a result of certain asset sales, the Company will not be
required to make any principal payments in respect of the Notes until maturity,
August 2002.
The Company's primary source of liquidity will be cash flow from operations and
funds available to it under a revolving credit facility. The revolving credit
facility provides for maximum borrowings of $24.0 million of which $1.0 million
is not currently committed. As of September 30, 2000, $4.9 million was available
on the facility. Management is currently working to secure commitment for the
remaining $1.0 million. In response to a tightening of liquidity in the first
half of the current year, the Company's marketing programs are being adjusted
such that there should be a gradual easing of liquidity during the fourth
quarter of 2000.
Inflation and Currencies
------------------------
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.
Because the Company's cost base is predominately linked to the U.S. Dollar, the
strengthening of the U.S. Dollar relative to the principal European currencies
has adversely affected the Company's performance. The Company minimizes the
currency impact where possible by sourcing from local suppliers.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
-------------------------------------------------------------------
The market risk of the Company's financial instruments as of September 30, 2000
has not significantly changed since December 31, 1999. The market risk profile
on December 31, 1999, is disclosed in the Company's 1999 Annual Report on Form
10-K.
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PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
During the period ended September 30, 2000, there were no material developments
in previously reported legal proceedings involving the Company.
Item 2. Change in Securities and Use of Proceeds
(c) Recent Sales of Unregistered Securities
On September 27, 2000, the Company completed a private placement of 499,900
shares of Pay-In-Kind Preferred Stock, par value $.01 per share ("PIK Preferred
Stock"), to Kelso Investment Associates V, L.P. ("KIA V") and Kelso Equity
Partners V, L.P. ("KEP V," and, together with KIA V, "Kelso"), at a price of $10
per share for an aggregate purchase price of $4,999,000. Kelso is the majority
stockholder of the Company.
The above private placement was completed pursuant to the exemption from
registration contained in Section 4(2) of the Securities Act of 1933, as
amended. Kelso made certain representations to the Company as to investment
intent. Kelso possesses a sufficient level of financial sophistication and
information about the Company. The shares issued to Kelso were subject to
restrictions on transfer absent registration under the Securities Act, and no
offers to sell the securities were made by any form of general solicitation or
general advertisement.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a vote of Security Holders
On September 19, 2000, a majority of holders of the Company's issued and
outstanding Common Stock and Pay-In-Kind Preferred Stock approved by written
consent the Company's filing of a Restated Certificate of Incorporation that was
amended to increase to 5 million shares the number of shares of Pay-In-Kind
Preferred Stock, par value $.01 per share, that the Company shall have the
authority to issue.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8K.
A. Exhibits
3.0 Certificate of Amendment of the Certificate of Incorporation of
the Company filed with the Secretary of State of the State of
Delaware on September 19, 2000.
4.0 Amendment to the Credit Agreement dated as of September 27,
2000 among the Company, various lending institutions and Bankers
Trust, as Agent.
10.0 Stock Subscription Agreement dated as of September 27, 2000
between the Company and Kelso Investment Associates V, L.P. and
Kelso Equity Partners V, L.P.
27.0 Financial Data Schedule
B. Form 8K
No reports on Form 8K have been filed during the quarter for which this
report is filed.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HCI DIRECT, INC.
----------------
(Registrant)
/s/ MICHAEL D. ROWLEY
Date: November 13, 2000 ____________________________
------------------------
Michael D. Rowley
Vice President &
Chief Financial Officer
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