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

         or

(     )  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
----------------

         On October 17, 1994, the Company effected the  recapitalization  of its
capital  stock  (the  "Recapitalization").   As  a  result  of  the  substantial
indebtedness incurred in connection with the  Recapitalization,  the Company has
significant  debt service  obligations.  At December 31, 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"). (See Items 7 and 13 and
Note 15 to Consolidated Financial Statements of the Company in Item 8 hereof).

                                       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.

                                       11

<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.

         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.

                                       14
<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.

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


<PAGE>
<TABLE>

                                                    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.

                                       24



<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>

                                       30


<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.

                                       39

<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