HCI Direct, Inc. History

Company Perspectives:

For more than 25 years Silkies has been creating fabulous hosiery for women around the world. Thanks to our unique "at home" shopping experience, you're free from the hassle of running out of hosiery again. We deliver hosiery direct to your door, so you won't ever have to rummage through department store bins searching for the styles and shades you need. Silkies are available in all the styles, sizes and shades you want. They're guaranteed to be comfortable, fit perfectly and last a long time.

Key Dates:

1974:

Hosiery Corporation of America is founded.

1983:

Jules Nelson dies, leaving controlling interest in the company to his son Bryan Nelson.

1991:

Bryan Nelson dies.

1994:

The company sold in a leveraged buyout.

1998:

Enchantress Hosiery Corporation of Canada is acquired.

2002:

The company requests Chapter 11 bankruptcy protection.

Company History:

HCI Direct, Inc. is a manufacturer of women's hosiery, under the Silkies brand, sold primarily through a direct mail marketing continuity program. Consumers are initially enticed by an offer of a free pair of hosiery in hopes of making them long-term, repeat customers. The Bensalem, Pennsylvania, company offers a variety of sheer panty hose as well as knee-highs, socks, and tights for girls. Over the years, HCI's sales approach has resulted in litigation initiated by both the Federal Trade Commission and a number of states, which have charged that the company's offer of free merchandise is intentionally deceptive. The company is also noteworthy for its failed attempts to go public in the 1990s. In addition to its Bensalem facility, HCI owns and operates a manufacturing plant in Newland, North Carolina.

1970s Origins

HCI Direct was originally called Hosiery Corporation of America (HCA), established in 1974 in Philadelphia, Pennsylvania, by businessman Jules "Sonny" Nelson, the son of poor immigrants. He started out with little but grew wealthy through mail-order ventures, the most successful of which was his hosiery business. In the early years, HCA relied on a variety of marketing efforts in addition to direct mailing, including cooperative advertising, package inserts, and newspaper ads. Nelson's wife Claire was part-owner of HCA and served as president. After 25 years of marriage, the couple separated, although they never divorced. In 1980, they reached an agreement that paid Claire Nelson $1.8 million for her share of the company. During this difficult time for the Nelsons, an executive named Joseph Murphy was instrumental in keeping the business afloat. In 1981, as the health of Jules Nelson began to falter, Murphy officially took over as chief executive officer and chairman. At the same time, Jules Nelson was grooming the youngest of two adopted sons, Bryan D. Nelson, whom he hoped would one day take over the business.

When his father died of heart disease at the age of 56 in 1983, Bryan Nelson was 22 years old and, despite inheriting 97 percent of the voting stock, hardly ready to take control of HCA, a company generating $100 million in annual sales. Matters were further complicated when Claire Nelson sued for a share of HCA, resulting in a five-year legal battle that finally ended when she settled for $7 million and cash, a sprawling Bucks County estate, and title to several other properties. In the meantime, Bryan Nelson relied heavily on Murphy to run the company. According to insider accounts, the two men were close, with Murphy seeming to serve as a substitute father. Nevertheless, Nelson was afraid he might lose Murphy and in 1984 sold a 25 percent stake to him for just $1000. In addition, they signed a "buy-sell" agreement that required their shares to be sold back to the company in the event that either party died. According to HCA executive Ben Greber, as reported by the Philadelphia Inquirer, "Bryan knew that without Joe Murphy, the company would be down the tubes. And Joe wanted to make sure, naturally, that he would be protected if he stayed."

While the estate of Jules Nelson was being challenged and the young heir was working out a deal with the company's chief executive, HCA also dealt with Federal Trade Commission (FTC) litigation that had been initiated in 1982. As reported by the Philadelphia Daily News, the FTC charged that Hosiery Corp. had duped customers with low-priced come-on offers: "Mike Milgrom, a staff attorney for the Federal Trade Commission's Cleveland office, which covers Philadelphia, said the scheme worked this way: A person would receive one package of pantyhose in the mail. If the person liked the pantyhose, three additional pairs could be ordered at $1 each. 'The recipient was not told, however, that the company would continue to send pantyhose at a higher price of $1.39 each until the person refused to pay for them,' Milgrom said. When that occurred Hosiery Corp. mailed the person a series of warning letters in which the company threatened to damage the person's credit rating." In August 1984, HCA agreed to pay a $200,000 fine and signed a consent decree that called for the company to change its practices, although it did not admit to any wrongdoing.

Despite running into some difficulty with its direct mail continuity program, HCA began to explore the possibility of focusing exclusively on this approach. Starting in the spring of 1988, the company initiated test programs and by 1991 decided to drop other forms of marketing. It also chose to focus on its core customers, women in their 40s. In 1990, it sold a subsidiary, MAQ Inc., a mail order company that sold home electronics and other items. In addition, HCA launched Meteor Publishing, a direct-mail publisher of romance novels. The history of the company was soon to take a twist worthy of fiction when the principal owner, 29-year-old Bryan Nelson, died under unusual circumstance.

Early 1990s Ownership Dispute

Nelson was a wealthy newlywed, having married 19-year-old Sarah Jannicky Nelson in the spring of 1991 after her freshman year in college. He was also an avid golfer, a morning regular at the Commonwealth National Country Club in Horsham, Pennsylvania. After completing the front nine one day, he was chatting outside the pro shop when he was stung by a yellow jacket. Several minutes later he lay unconscious as a Horsham Fire Company ambulance rushed him to Abington Memorial Hospital, where four days later he died. What happened during that hurried drive to the hospital would soon be the subject of litigation, as his young widow filed suit against the fire company and the two-man ambulance crew. According to the Philadelphia Inquirer, the suit charged that "the workers, meaning to treat Nelson's allergic reaction to the bee sting with an intravenous bag of saline solution, grabbed the wrong bag. Nelson was given an overdose of an anesthetic called lidocaine, sending him into seizures and stopping his heart."

Nelson was only unconscious for a day when it became apparent that he was likely to die. His wife, accompanied by her father and brother, searched the bedroom safe for a will, which would determine who would own HCA. A week later, Sarah Nelson was appointed to administer her husband's estate and reported that no will was found, which meant that under Pennsylvania law she was entitled to a little more than half of the estate, the balance going to Claire Nelson because the couple had no children. Murphy then moved to enforce the 1984 "buy-sell" agreement, calling in the stock. A few months later, he reached an agreement with Sarah's lawyers stipulating that HCA would purchase Bryan Nelson's stock for $4.3 million, about $1 million more than it was worth according to HCA accountants. However, Sarah Nelson unexpectedly changed lawyers and rejected the deal, and her new representatives went to court to void the 1984 "buy-sell" agreement. According to the Philadelphia Inquirer, "Their petition essentially paints Nelson as a callow, trusting youth who was fleeced by a savvy elder. 'The effect of the [agreements] is that Joseph Murphy, for the nominal payment of $1,000, will have acquired rights to all of the stock in HCA, having a value in excess of $30 million,' the petition says. ... Murphy and his lawyers smelled a conspiracy. Claire Nelson, they alleged, was back on the scene, scheming with Sarah. The widow and her mother-in-law had formed an 'illegal windfall profit scheme ... which would operate in the same manner first used by Claire Nelson to extort millions of dollars from HCA and her estranged husband's estate,' Murphy's lawyers say in court documents."

While this matter began to wend its way through the courts, ownership of HCA was further clouded in March 1992 when the elder adopted child, Jeffrey Nelson, a photographer living in Santa Fe, showed up with a copy of a 1985 will that gave him most of his brother's estate and 88 percent of his HCA stock, while awarding nothing to their mother. With only a copy in their possession, Jeffrey and his lawyers suggested that the original had been destroyed or hidden by Sarah and Claire, and asked that the court accept the copy as valid. Several months later, Jeffrey agreed to drop his efforts to push the 1985 will in exchange for being cut in on his brother's estate. Only a month later, however, in November 1992, Murphy produced another Bryan Nelson will, an original signed in 1984 that gave most of Nelson's stock to Murphy. Finally, in early 1994, HCA agreed to pay $7.85 million to Nelson's estate as part of a settlement in which the three Nelson family members agreed to drop any ownership claims on HCA. They were then left to split the estate among themselves, while HCA executives returned to running the company.

During the two years of litigation that embroiled the company, HCA closed its romance publishing venture and focused solely on its hosiery business. A few months after settling with the Nelson estate, the company was on the auction block, attracting considerable attention, although the asking price of $200 million scared off some suitors. In the end, the buyout firm of Kelso Equity Partners, L.P. of New York acquired a 71 percent controlling interest of HCA in a leveraged buyout.

HCA Enters British Market in 1995

HCA began testing the British market in 1995 and was pleased enough with the results that a year later it increased its UK efforts as part of a plan to grow the business internationally. By now, the company was shipping approximately 42 million pairs of hosiery a year, roughly double the business it was doing in 1991. During that five-year period, net revenues grew at a compound annual rate of 11.7 percent. It was a business, however, that faced challenges. The rising popularity of "casual Fridays" in the corporate world hurt sales, as did the growing tendency of women to wear longer skirts and pants. Moreover, while the retail price of hosiery had changed little over the years, the cost of raw materials increased, forcing manufacturers like HCA to invest in equipment that could produce hosiery less expensively. Over the course of several years, HCA spent $25 million upgrading its North Carolina manufacturing facilities. In the summer of 1996, it looked to take the company public in order to keep it funded well enough to compete in the low-margin, high-volume hosiery business. HCA also needed cash to make an acquisition of a company that officials never did identify, an effort that was eventually dropped. Due to poor market conditions, however, the initial public offering (IPO) was postponed and eventually dropped. In preparing for the offering, the board had offered stock options to 33 shareholders at below market prices. Because of the aborted acquisition and the costs of the failed IPO, HCA reported a loss of $4.3 million in 1996. The stock options alone resulted in a $23 million charge, the uncompleted IPO and acquisition accounting for another $1.6 million.

In January 1997, HCA once again faced scrutiny from the FTC, along with attorney generals from a dozen states, which began to review the company's promotional materials after receiving numerous complaints over the years. As described by The Capital Times, "The company sends coupons offering a 'free' sample of 'Silkies' pantyhose, complete with a scratch off card allowing consumers to choose their size and shade. What wasn't obvious to a lot of consumers is that when you accept this 'free' offer, you are also agreeing to accept two more pairs that you must either buy or return to the company at your own expense." Moreover, some consumers had cards sent in by their friends, and when they did not pay for the unsolicited merchandise were told by HCA that the matter would be turned over to a collection agency. The states offered changes beyond those mandated by the 1984 injunction, including disclosures regarding initial and future shipments as well as a requirement that refunds be made under certain circumstances. To settle matters with the states, HCA agreed in July 1997 to pay $300,000, to be split among the states for refunds to customers. In addition, HCA agreed to make the terms of its offer more clear in future ads.

Between 1996 and 1999, HCA expanded its operations to Canada, Germany, and France. The move into Canada was accomplished through the 1998 acquisition of Enchantress Hosiery Corporation of Canada Ltd. at the cost of $3.9 million. Once again, the company took steps to make an initial public offering of stock, in the process of which, in 1999, HCA changed its name to HCI Direct. The hope was to repurchase preferred stock and pay down debt by selling 100 million shares at $15 to $17 each, but as was the case three years earlier the offering was ultimately cancelled.

With the start of the new century, HCI's business began to deteriorate, resulting in losses for both 2000 and 2001. In the early months of 2002, the company filed for Chapter 11 bankruptcy protection. Several weeks later, when a pre-packaged reorganization plan was approve by the U.S. Bankruptcy Court in Wilmington, Delaware, HCI emerged and the sum of $81 million in unsecured senior notes was exchanged for an 85 percent equity stake in the reorganized corporation. With its finances finally in order, HCI held onto its position as the third largest hosiery manufacturer in the United States. Nevertheles, the future of the company remained very much in question.

Principal Subsidiaries: Hosiery Corporation International.

Principal Competitors: Danskin, Inc.; Alba-Waldensian Inc.; Sara Lee Branded Apparel.

Further Reading:

• King, Larry, "Hosiery Firm Pays Off Heirs of Man Who Died of Bee Sting," Philadelphia Inquirer, February 11, 1994.
• ------, "Tangled Web of Wills Tees Off In Montgomery County," Philadelphia Inquirer, January 24, 1993.
• Lowe, Frederick, "$200G Fine for Hosiery," Philadelphia Daily News, August 15, 1984, p. 37.
• Owens, Jennifer, "Hosiery Corp.'s Loss Blamed on IPO Costs," WWD, April 7, 1997, p. 10.
• Richards, Bob, "'Free' Pantyhose Deal Has A Serious Run In It," Capital Times, August 9, 1997. p. 1C.

Source: International Directory of Company Histories, Vol. 55. St. James Press, 2003.

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