<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JULY 2, 1994
------------
Commission file number 1-12082
HANOVER DIRECT, INC.
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-0853260
----------------------- -------------------------------------
(State of incorporation) (IRS Employer Identification No.)
1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY 07087
- - -------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(201) 863-7300
------------------
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed 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
--- ---
* Common stock, par value $.66 2/3 per share: 92,540,554 shares outstanding
as of August 15, 1994.
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HANOVER DIRECT, INC.
FORM 10-Q
JULY 2, 1994
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
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<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - January 1, 1994 and July 2, 1994 . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income - thirteen and twenty-six weeks
ended June 26, 1993 and July 2, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows - twenty-six weeks ended
June 26, 1993 and July 2, 1994. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements - thirteen and twenty-six
weeks ended June 26, 1993 and July 2, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
2
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ITEM 1. FINANCIAL STATEMENTS
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
As of January 1, 1994 and July 2, 1994
<TABLE>
<CAPTION>
(Unaudited) JANUARY 1, JULY 2,
1994 1994
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,583 $ 10,464
Accounts receivable, net 19,043 22,597
Inventories 80,429 76,410
Prepaid catalog costs 25,571 29,174
Other current assets 5,349 5,856
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Total Current Assets 132,975 144,501
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Property and Equipment, at cost
Land 1,171 1,171
Buildings and building improvements 7,862 7,971
Leasehold improvements 6,242 6,525
Furniture, fixtures and equipment 22,551 23,269
Construction in progress 5,434 10,554
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43,260 49,490
Accumulated depreciation and amortization (18,341) (20,076)
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Net Property and Equipment 24,919 29,414
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Excess of Cost Over Net Assets of Acquired Businesses, net 18,463 18,045
Investments and Advances to Unconsolidated Subsidiaries - 4,793
Deferred Tax Asset, net 7,656 7,656
Other Assets, net 4,825 4,960
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Total Assets $ 188,838 $ 209,369
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
As of January 1, 1994 and July 2, 1994
<TABLE>
<CAPTION>
(Unaudited) JANUARY 1, JULY 2,
1994 1994
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(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE AMOUNTS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital lease obligations $ 2,024 $ 1,963
Accounts payable 78,905 55,991
Accrued liabilities 21,539 18,161
Customer prepayments and credits 5,031 4,892
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Total Current Liabilities 107,499 81,007
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Noncurrent Liabilities:
Long-term debt 32,313 26,223
Capital lease obligations 1,823 1,486
Other 1,335 1,825
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Total Noncurrent Liabilities 35,471 29,534
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Total Liabilities 142,970 110,541
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Commitments and Contingencies
Shareholders' Equity:
6% Preferred Stock, convertible, $10 stated value, authorized
5,000,000 shares; issued 234,900 shares in 1993 and 1994 2,378 2,449
Common Stock, $.66 2/3 par value, authorized 150,000,000
shares; issued 83,136,542 shares in 1993 and 92,629,234
shares in 1994 55,423 61,752
Capital in excess of par value 209,834 252,002
Accumulated deficit (215,805) (209,888)
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51,830 106,315
Less:
Treasury stock, at cost (1,120,032 shares in 1993 and (3,130) (3,268)
1,139,543 shares in 1994)
Notes receivable from sale of Common Stock (1,774) (1,808)
Deferred compensation (1,058) (1,035)
Valuation allowance - Marketable Securities - (1,376)
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Shareholders' Equity 45,868 98,828
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Total Liabilities and Shareholders' Equity $ 188,838 $ 209,369
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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<TABLE>
<CAPTION>
HANOVER DIRECT, INC. AND SUBSIDIARIES 13 WEEKS ENDED 26 WEEKS ENDED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME ---------------------------- ----------------------------
(Unaudited) JUNE 26, JULY 2, JUNE 26, JULY 2,
1993 1994 1993 1994
----------- ----------- ----------- -----------
(in thousands, except share and share amounts)
<S> <C> <C> <C> <C>
REVENUES $ 144,319 $ 185,113 $ 265,884 $ 364,339
Operating costs and expenses:
Cost of sales and operating expenses 91,741 114,870 169,721 229,154
Selling expenses 35,968 49,020 64,220 92,804
General and administrative expenses 12,565 17,578 24,247 34,152
----------- ----------- ----------- -----------
140,274 181,468 258,188 356,110
----------- ----------- ----------- -----------
EARNINGS BEFORE INTEREST AND TAXES 4,045 3,645 7,696 8,229
----------- ----------- ----------- -----------
Interest expense (1,127) (876) (2,317) (2,219)
Interest income 1,438 203 1,454 238
----------- ----------- ----------- -----------
311 (673) (863) (1,981)
INCOME BEFORE INCOME TAXES 4,356 2,972 6,833 6,248
Income tax provision - (129) - (260)
----------- ----------- ----------- -----------
NET INCOME 4,356 2,843 6,833 5,988
Dividends on preferred stock (1,005) (35) (2,005) (71)
----------- ----------- ----------- -----------
Net income applicable to common shareholders $ 3,351 $ 2,808 $ 4,828 $ 5,917
=========== =========== =========== ===========
Primary and fuly diluted net income per share $ 0.5 $ 0.03 $ 0.07 $ 0.06
=========== =========== =========== ===========
Weighted Average Shares Outstanding:
For primary earnings per share 72,688,218 95,441,204 72,280,731 91,515,952
=========== =========== =========== ===========
For fully diluted earnings per share 74,116,949 95,441,204 73,851,182 91,515,952
=========== =========== =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
26 WEEKS ENDED
------------------------------
JUNE 26, JULY 2,
1993 1994
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(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
NET INCOME $ 6,833 $ 5,988
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization 2,034 2,721
Other, net 256 20
Changes in assets and liabilities:
Accounts receivable 4,543 (3,554)
Inventories (5,453) 4,019
Prepaid catalog costs (4,716) (3,603)
Other current assets 416 (507)
Accounts payable 2,404 (22,914)
Accrued liabilities (5,032) (2,492)
Customer prepayments and credits (933) (139)
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NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 352 (20,461)
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Cash flows from investing activities:
Decrease in restricted cash 480 -
Acquisitions of property (1,695) (6,230)
Net proceeds from sales of property in discontinued
operations 941 -
Investments and advances to unconsolidated subsidiaries - (6,169)
Other, net (1,680) (680)
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NET CASH (USED) BY INVESTING ACTIVITIES (1,954) (13,079)
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</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
(Unaudited)
26 WEEKS ENDED
------------------------------
JUNE 26, JULY 2,
1993 1994
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(in thousands)
<S> <C> <C>
Cash flows from financing activities:
Net borrowings (payments) under credit facility 5,296 -
Payments of long-term debt and capital lease obligations (2,013) (6,489)
Cash dividends paid on Preferred Stock - (886)
Proceeds from issuance of Common Stock - 48,934
Purchase of Treasury Stock - (138)
Other, net 395 -
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NET CASH PROVIDED BY FINANCING ACTIVITIES 3,678 41,421
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Net increase in cash and cash equivalents 2,076 7,881
Cash and cash equivalents at the beginning of the year 2,073 2,583
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CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 4,149 $ 10,464
============= =============
Supplemental cash flow disclosures:
Interest paid $ 2,087 $ 1,400
============= =============
Income taxes paid $ 36 $ 482
============= =============
Supplemental disclosure of noncash investing and financing
activities:
Dividend on Hanover 7.5% Preferred Stock paid in-kind $ 397 $ -
============= =============
Dividend on Hanover Class B 8% Preferred Stock
paid in Common Stock $ 1,600 $ -
============= =============
Issuance of Common Stock for notes receivable $ 1,452 $ 1,042
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 8
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRTEEN AND
TWENTY-SIX WEEKS ENDED JUNE 26, 1993 AND JULY 2, 1994 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with the instructions for Form
10-Q, and therefore, do not include all information and footnotes necessary for
a fair presentation of financial condition, results of operations and cash
flows in conformity with generally accepted accounting principles. Reference
should be made to the annual financial statements, including the footnotes
thereto, included in the Hanover Direct, Inc. (the "Company") Annual Report on
Form 10-K for the fiscal year ended January 1, 1994. In the opinion of
management, the accompanying unaudited interim condensed consolidated financial
statements contain all material adjustments, consisting of normal recurring
accruals, necessary to present fairly the financial condition, the results of
operations and cash flows of the Company and its consolidated subsidiaries for
the interim periods. Operating results for interim periods are not necessarily
indicative of the results that may be expected for the entire year. Certain
prior year amounts have been reclassified to conform with current year
presentation.
2. RETAINED EARNINGS RESTRICTIONS
The Company is restricted from paying dividends on its Common Stock
or from acquiring any of its capital stock by certain debt covenants contained
in agreements to which the Company is a party.
3. EARNINGS PER SHARE
Net income per share - Net income per share was computed using the
weighted average number of shares outstanding. At July 2, 1994, 5,033,735
warrants and 1,511,912 stock options were considered to be common stock
equivalents and are included in the calculations of both primary and fully
diluted earnings per share for the quarter and the six months ended July 2,
1994. At June 26, 1993, 6,993,980 warrants and 1,481,170 stock options were
considered to be common stock equivalents and are included in the calculation
of both primary and fully diluted earnings per share for the quarter and the
six months ended June 26, 1993.
Supplemental earnings per share - The following represents the pro
forma results of operations for the quarter and six months ended June 26, 1993,
as if the Gump's, The Company Store and Tweeds acquisitions, which were made in
the second half of 1993, had occurred at the beginning of fiscal year 1993 (in
thousands, except per share data):
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE SIX MONTHS ENDED
JUNE 26, 1993 JUNE 26, 1993
--------------------------- -----------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $144,319 $179,080 $265,884 $337,931
Net income applicable to
Common Shareholders $3,351 $3,059 $4,828 $2,971
Net income per share $.05 $.04 $.07 $.04
</TABLE>
The pro forma information does not purport to be indicative of the
results that actually would have been obtained if the operations were combined
during the periods presented, and is not intended to be a projection of future
results or trends.
8
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4. PUBLIC OFFERING OF COMMON STOCK
On April 7, 1994, the Company completed a public offering (the "Public
Offering") of 8,045,296 shares of its Common Stock for proceeds of
approximately $47.5 million, net of expenses. The net proceeds are being used
for general corporate purposes, including the expansion of the Company's
business, consisting of upgrading and increasing its fulfillment capacity,
purchasing new management information systems, making potential future
acquisitions and to reduce outstanding indebtness under the Company's revolving
credit facility. In connection with the Public Offering, Sun Life Insurance
Company of America ("Sun Life") exercised 1,960,245 warrants and purchased
1,309,207 shares of Common Stock in a net-issue exchange, of which 654,604
shares were sold in the Public Offering. The Company did not receive any of
the proceeds from the sale of the shares by Sun Life.
In April 1994, the Company paid down $6 million of the $20 million
9.25% Notes held by Sun Life.
5. INVESTMENTS
The Company has invested approximately $2.5 million in debt
securities which the Company intends to hold as a long term investment. In
accordance with Statement of Financial Accounting Standards No. 115 -
Accounting for Debt and Equity Securities ("SFAS 115"), the Company has
established a valuation allowance as a component of shareholders' equity in the
amount of $1.4 million to reflect the estimated current market value. These
securities are included in investments and advances to unconsolidated
subsidiaries in the accompanying balance sheet.
Boston Publishing Company, Inc. - On August 3, 1994, Boston Publishing
Company, Inc. ("BPC"), in which the Company holds a 20% ownership interest,
filed for protection under Chapter 11 of the United States Code. As of August
2, 1994, the Company had advanced approximately $2.3 million in loans to BPC,
of which approximately $1.2 million is secured by all assets of BPC. The
Company has established a reserve of $.5 million against these loans and to
reflect the Company's portion of BPC's losses. The loans to BPC are included
in investments and advances to unconsolidated subsidiaries in the accompanying
balance sheet.
Aegis Safety Holdings, Inc. - As of July 2, 1994, the Company had
advanced $.7 million under a $1.0 million secured working capital line of
credit to Aegis Safety Holdings, Inc. ("Aegis"), the publisher of The Safety
Zone catalog. The working capital line of credit is secured by inventory and
other assets of Aegis. The Company holds a 20% ownership interest in Aegis.
Aegis is in violation of certain debt covenants with the Company and is
negotiating a restructuring of the loan agreement.
Blue Ridge Associates - In January 1994, the Company purchased for
$1.1 million, a 50% interest in Blue Ridge Associates, a partnership which owns
the Tweeds Roanoke, Virginia fulfillment center.
The investments in BPC, Aegis and Blue Ridge Associates are accounted
for by the equity method of accounting.
6. INCOME TAXES
At July 2, 1994, the Company had $143 million of net operating losses
("NOLs") for income tax purposes. Realization of the future tax benefits
associated with the NOLs is dependent on the Company's ability to generate
taxable income within the carryforward period and the periods in which net
temporary
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differences reverse. Future levels of operating income and taxable income are
dependent upon general economic conditions, competitive pressures on sales and
margins, postal and other delivery rates, and other factors beyond the
Company's control. Accordingly, no assurance can be given that sufficient
taxable income will be generated for utilization of all of the NOLs and
reversals of temporary differences. As of July 2, 1994, the Company had a
deferred tax asset valuation allowance of approximately $46 million with a net
deferred tax asset of $10.6 million, which was recorded in prior years relating
to the realization of the NOLs.
Management believes that, although the recent operating results might
justify a reduction of the deferred tax valuation allowance, in view of its
history of operating losses prior to 1992, the $10.6 million represents a
reasonable conservative estimate of the future utilization of the NOLs and the
Company will continue to evaluate the likelihood of future profit and the
necessity of future adjustments to the deferred tax asset valuation allowance.
Management anticipates that, if the trend in the Company's earnings continues
for the remainder of the year, the deferred tax asset valuation allowance would
be revised in the fourth quarter of 1994 to reflect the probability that a
greater amount of NOLs and temporary differences would be utilized.
10
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, the
percentage relationship to revenues of certain items in the Company's condensed
consolidated statements of income.
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
----------------------- ------------------------
JUNE 26, JULY 2, JUNE 26, JULY 2,
1993 1994 1993 1994
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0%
Cost of sales and operating expenses . . . . . . . . 63.6 62.1 63.8 62.9
Selling expenses . . . . . . . . . . . . . . . . . . 24.9 26.5 24.2 25.5
General and administrative expenses . . . . . . . . . 8.7 9.5 9.1 9.4
Earnings before interest and taxes . . . . . . . . . 2.8 2.0 2.9 2.3
Interest (income) expense, net . . . . . . . . . . . (.2) .4 .3 .6
Income before income taxes . . . . . . . . . . . . . 3.0 1.6 2.6 1.7
Income tax provision . . . . . . . . . . . . . . . . - - - -
Net income . . . . . . . . . . . . . . . . . . . . . 3.0 1.5 2.6 1.6
Net income applicable to common shareholders . . . . 2.3 1.5 1.8 1.6
</TABLE>
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JULY 2, 1994 COMPARED WITH THIRTEEN WEEKS ENDED JUNE 26,
1993.
Net Income. Net income decreased 35% to $2.8 million for the quarter
ended July 2, 1994, compared to net income of $4.4 million in the same period
last year. Net income applicable to common shareholders was $2.8 million or
$.03 per share for the current quarter, compared to $3.4 million or $.05 per
share for the same period in 1993, after deducting preferred stock dividends of
$1.0 million in 1993 and $.04 million in 1994. The weighted average number of
shares outstanding increased 29% to 95,441,204 shares for the quarter ended
July 2, 1994 due to the Public Offering, compared to 74,116,949 shares for the
same period in 1993.
Revenues. Revenues increased in the quarter by over 28% to $185
million from $144 million for the same period in 1993. Overall, Non-Apparel
catalog revenues increased approximately 41% while Apparel catalog revenues
remained flat. The significant increase in revenues was the result of a 13%
increase in revenues of Domestications, revenues of $18.4 million from the
Company's venture with Sears, and revenues of $28.1 million from Gump's, Tweeds
and The Company Store, which were acquired in the second half of 1993 ("1993
acquisitions"). Revenues from catalogs discontinued in 1993 were $6.9 million
in 1993. The Company mailed approximately 112 million catalogs for the summer
1994 season, an increase of 34% over 1993.
The second quarter of 1994 was negatively impacted by an increase in
customer returns to approximately 16% of shipped sales from approximately 13%
of shipped sales for the same period in 1993. The increased returns were
generated by certain product categories and the Company has implemented
measures to reduce the rate of returns of these items in the second half of
1994. Revenues in the quarter were positively impacted by an increase in
average order size compared to the same period in 1993.
Operating Costs and Expenses. Cost of sales and operating expenses
decreased to 62.1% of revenues in the second quarter of 1994 compared to 63.6%
for the same period in 1993. This decrease was primarily attributable to an
increase in the Apparel catalogs' gross margin, lower fulfillment costs, a
continued shift in
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sales mix towards Domestications and the 1993 acquisitions, which experience
overall higher profit margins. The lower fulfillment costs were partially
offset by higher delivery costs resulting from this shift in sales mix.
Selling expenses increased $13.1 million to 26.5% of revenues in 1994
from 24.9% of revenues for the same period in 1993. The increase in selling
expenses as a percentage of revenues resulted primarily from lower than
anticipated response to the Company's prospecting program for new customers, as
catalog circulation was significantly increased in anticipation of the 1995
postal rate increase. Overall demand from the new customer acquisition program
was soft principally in the Non-Apparel catalogs, where prospecting was
heaviest, resulting in an acceleration of the expensing of catalog costs in the
current quarter leading to higher selling expenses.
General and administrative expenses increased to 9.5% of revenues in
the second quarter of 1994 from 8.7% for the same period in 1993. Such
expenses increased $5.0 million, or 40% from 1993, due primarily to the 1993
acquisitions ($3.9 million) and higher MIS costs. Additionally general and
administrative expenses included $.5 million, relating to the establishment of
a reserve for a loan made to a 20% affiliate of the Company and the Company's
portion of the affiliates losses.
Earnings Before Interest and Taxes. Earnings before interest and
taxes ("EBIT") was $3.6 million in the second quarter of 1994, as compared to
$4.0 million in 1993. Losses from discontinued catalogs were $.3 million in
the second quarter of 1993 compared to no such losses for the same period in
1994. The 1993 acquisitions generated $.4 million of EBIT in the second
quarter of 1994.
Non-Apparel EBIT declined by $1.1 million in the second quarter of
1994 compared to 1993 primarily due to the previously discussed results of the
new customer acquisition program. Non-Apparel EBIT was also impacted by a
negative $.7 million EBIT from Gump's, where the retail store is currently
operating in smaller temporary space, until its new location, which is
currently under construction, opens in the first quarter of 1995. This smaller
location has negatively impacted revenues resulting in the operating loss. The
Company anticipates that Gump's retail will continue to incur these losses
through the next quarter.
Apparel EBIT increased by $1.1 million, excluding discontinued
catalogs ($.4 million) from the second quarter of 1993. The improved operating
results for the Apparel catalogs in 1994 reflects the Tweeds acquisition and
changes made in merchandise presentation, circulation and overhead of the
continuing catalogs, which has generated improved response rates and a lower
fixed cost structure. The results for 1994 also include start up costs
relating to the development of a new Women's Apparel catalog, One 212. During
the current quarter fulfillment of, the Women's Apparel catalogs was moved to
the Tweeds Roanoke, Virginia facility.
Interest Expense, Net. Interest expense decreased $.3 million to $.9
million in the second quarter of 1994 reflecting the pay down of the revolving
credit facility in April 1994 using the proceeds of the Public Offering (see
"Liquidity and Capital Resources"). This decrease was offset, in part, by the
issuance of $20 million of 9.25% Senior Subordinated Notes ("9.25% Notes") in
August 1993 and from the issuance of $4.6 million of long-term debt in
connection with the acquisition of The Company Store in August 1993. In April
1994, the Company paid down $6 million of the $20 million of 9.25% Notes. In
addition, interest income in the second quarter of 1993 included $1.4 million
which related to a refund of Federal income taxes paid in prior years.
Income Taxes. The Federal income tax provisions of $1.2 million for
the quarter ended July 2, 1994 and $1.3 million for the same period in 1993,
were offset by the utilization of certain NOLs. The Company recorded a state
tax provision of $.1 million in the second quarter of 1994.
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<PAGE> 13
The dividends of $1.0 million in the second quarter of 1993 represent
dividend requirements on the two preferred stocks which were converted into
Common Stock in the second half of 1993, which resulted in the elimination of
such dividends.
TWENTY-SIX WEEKS ENDED JULY 2, 1994 COMPARED WITH TWENTY-SIX WEEKS ENDED JUNE
26, 1993.
Net Income. Net income decreased 12.4% to $6.0 million for the
twenty-six weeks ended July 2, 1994, compared to net income of $6.8 million in
the same period last year. Net income applicable to common shareholders
increased to $5.9 million or $.06 per share in the current period ended July 2,
1994, compared to $4.8 million or $.07 per share for the same period in 1993,
after deducting preferred stock dividends of $2.0 million in 1993 and $.1
million in 1994. The weighted average number of shares outstanding increased
24% to 91,515,952 shares for the twenty-six weeks ended July 2, 1994, compared
to 73,851,182 shares for the same period in 1993.
Revenues. Revenues increased in the twenty-six weeks ended July 2,
1994 by over 37% to $364 million from $266 million for the same period in 1993.
Overall, Non-Apparel catalog revenues increased approximately 52% while Apparel
catalog revenues increased 4%. The significant increase in revenues was the
result of a 20% increase in revenues of Domestications, revenues of $34.0
million from the Company's venture with Sears, and revenues of $56.0 million
from the 1993 acquisitions. Revenues from catalogs discontinued in 1993 were
$11.5 million in 1993. The Company mailed approximately 208 million catalogs
for the spring and summer 1994 seasons, an increase of 29% over the same period
in 1993.
The first half of 1994 was negatively impacted by an increase in
customer returns to approximately 15% of shipped sales from approximately 13%
of shipped sales in 1993. The increased returns were generated by certain
product categories and the Company is implementing measures to reduce the rate
of returns of these items.
Operating Costs and Expenses. Cost of sales and operating expenses
decreased to 62.9% of revenues in the first half of 1994 compared to 63.8% for
the same period in 1993. This decrease was primarily attributable to a change
in sales mix and lower fulfillment costs. This decrease in costs were
partially offset by higher delivery costs resulting primarily from the increase
in revenues from Domestications which has larger products and, thus, higher
delivery costs.
Selling expenses increased $28.6 million to 25.5% of revenues in the
first half of 1994 from 24.2% of revenues for the same period in 1993 as the
Company increased circulation in anticipation of the 1995 postal rate increase.
As previously mentioned, overall demand from the new customer acquisition
program was soft, principally in the Non-Apparel catalogs where prospecting was
heaviest, resulting in lower response rates causing the higher selling expense.
General and administrative expenses increased to 9.4% of revenues in
the first half of 1994 from 9.1% for the same period in 1993. Such expenses
increased $9.9 million, or 40.1%, including $8.3 million of general and
administrative expenses for the 1993 acquisitions. In addition, in the first
half of 1993 other income of $.8 million was included in general and
administrative expenses. In 1994, general and administrative expenses included
a $.5 million provision for a loan and the Company's portion of the losses of a
20% affiliate of the Company. On a comparable basis, general and
administrative expenses excluding the 1993 acquisitions decreased to 8.4% of
such catalog revenues in the first quarter of 1994 from 9.1% for the same
period in 1993 primarily as a result of increased revenues from these catalogs
without significantly increasing the overhead base.
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Earnings Before Interest and Taxes. Earnings before interest and
taxes ("EBIT") was $8.2 million in the first half of 1994, as compared to $7.7
million in 1993. Losses from discontinued catalogs were $1.9 million in the
first half of 1993 compared to no such losses for the same period in 1994. The
1993 acquisitions generated $0.4 million EBIT in the first half of 1994.
Non-Apparel EBIT for the twenty-six weeks ended July 2, 1994 increased
$.9 million compared to 1993, as income from the Sears venture offset the
impact of the previously mentioned lower response rates on the customer
acquisition program.
Apparel EBIT, (excluding $1.9 million loss from discontinued catalogs)
decreased by $.8 million for the first half of 1994 compared to 1993. The
decrease was due the restructuring of the Apparel catalogs which returned these
catalogs to profitably in the current quarter. The results for the first half
of 1994 include start up costs for a new Women's Apparel catalog, One 212.
Interest Expense, Net. Interest expense decreased $.1 million to $2.2
million in the first half of 1994 reflecting the pay down of the revolving line
of credit in April 1994. This decrease was offset by the issuance of $20
million of 9.25% Notes in August 1993 and from the issuance of $4.6 million of
long-term debt in connection with the acquisition of The Company Store in
August 1993. In addition, interest income in 1993 included $1.4 million which
related to a refund of Federal income taxes paid in prior years. In April
1994, the Company paid down $6 million of the $20 million of the 9.25% Notes.
Income Taxes. The Federal income tax provision of $2.2 million for
the twenty-six weeks ended July 2, 1994 and $2.4 million for the same period in
1993 were offset by the utilization of certain NOLs. The Company recorded a
state tax provision of $.3 million in the first half of 1994. At July 2,
1994, the Company had $143 million of NOLs and a deferred tax asset valuation
allowance of approximately $46 million with a net deferred tax asset of $10.6
million, which was recorded in prior years relating to the realization of the
NOLs.
Management believes that, although the recent operating results might
justify a higher amount, in view of its history of operating losses prior to
1992, the $10.6 million represents a reasonable conservative estimate of the
future utilization of the NOLs and the Company will continue to evaluate the
likelihood of future profit and the necessity of future adjustments to the
deferred tax asset valuation allowance. Management anticipates that, if the
trend in the Company's earnings continues for the remainder of the year, the
deferred tax asset valuation allowance would be revised in the fourth quarter
of 1994 to reflect the probability that a greater amount of NOLs and temporary
differences would be utilized.
Shareholders' Equity. The number of shares of Common Stock
outstanding increased by 9,473,181 in 1994 due to: i) the issuance of
8,045,296 shares in connection with the Public Offering, ii) the issuance of
118,638 shares in connection with the Company's equity incentive plans, net of
forfeitures, and iii) the issuance of 1,309,247 shares in a cashless exchange
upon the exercise of certain warrants. At July 2, 1994, there were 92,406,358
shares of Common Stock outstanding compared to 82,933,177 shares outstanding at
January 1, 1994.
The dividends of $2.0 million in the first half of 1993 represent
dividend requirements on the two preferred stocks which were converted into
Common Stock in the second half of 1993, which resulted in the elimination of
such dividends.
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LIQUIDITY AND CAPITAL RESOURCES
Working Capital. At July 2, 1994, the Company had $10.5 million in
cash and cash equivalents, compared to $2.6 million at January 1, 1994.
Working capital and the current ratio were $63.5 million and 1.78 to 1 at July
2, 1994 versus $25.5 million and 1.24 to 1 at January 1, 1994. The Company
used $20.0 million of cash in operations in the first half of 1994, primarily
to reduce payables existing at year end. The payables reduction was financed
by operating profit and proceeds from the Public Offering. The Company's $52.5
million revolving credit facility had been substantially paid down at July 2,
1994.
Public Offering of Common Stock. On April 7, 1994, the Company
consummated a public offering (the "Public Offering") of 8,045,296 shares of
its Common Stock resulting in net proceeds of approximately $47.5 million. The
Company is using the net proceeds for general corporate purposes, including the
expansion of the Company's business, consisting of upgrading and increasing its
fulfillment capacity, purchasing new management information systems, making
potential future acquisitions and to reduce outstanding indebtness under the
Company's revolving credit facility.
In April 1994, the Company repaid $6 million of the $20 million of its
9.25% Notes and paid down the revolving credit facility using the proceeds of
the Public Offering.
Infrastructure Investments. In 1994, the Company began construction
of a 530,000 square foot fulfillment center on a 53 acre site in Roanoke,
Virginia to support the Domestications catalog. The center is projected to
cost $18 million. The Company expects to incur the costs over the next twelve
months and is pursuing mortgage financing for the facility, although the
Company is not dependent on external financing to fund the project. As of July
2, 1994, the Company had incurred costs of approximately $3.2 million in the
construction of this facility. The Company anticipates that the facility will
be operational in the first half of 1995.
The Company is in the process of upgrading its management information
systems by converting to newly developed integrated software that it has
purchased and is migrating from a centralized mainframe to mid-range
mini-computers at a total estimated cost of approximately $15 million. The new
system which the Company expects to be fully operational in 1995 is in the
final testing stage and is expected to be operational for one of the Company's
catalogs in the third quarter of 1994. As of July 2, 1994, the Company had
incurred costs of approximately $6.8 million as part of this plan, including
capital leases aggregating $2.4 million to be paid over four years.
The Company believes that it has sufficient capital to support the
growth of its business and infrastructure investments.
Investments and Advances. As of July 2, 1994, the Company had
advanced $.7 million to Aegis Safety Holdings, Inc., a 20% owned affiliate of
the Company, in accordance with a $1.0 million working capital line of credit
which is secured by inventory and other assets of Aegis.
In January 1994, the Company purchased for $1.1 million, a 50%
interest in Blue Ridge Associates, a partnership which owns the Tweeds
Roanoke, Virginia fulfillment center.
As of August 2, 1994, the Company had advanced a total of
approximately $2.3 million to Boston Publishing Company, Inc. ("BPC"), of
which approximately $1.2 million is secured by all assets of BPC. On August 3,
1994, BPC filed for protection under Chapter 11 of the United States Code. The
Company recorded a provision of $.5 million in connection with these loans and
to reflect the Company's share of BPC's losses.
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The Company has invested approximately $2.5 million in debt securities
which the Company intends to hold as a long term investment. In accordance
with SFAS 115 the Company established a valuation allowance of $1.4 million to
reflect the estimated current market value.
Effects of Inflation. The Company normally experiences increased cost
of sales and operating expenses as a result of the general rate of inflation in
the economy. Operating margins are generally maintained through selective
price increases where market conditions permit. The Company's inventory is
mailorder merchandise which undergoes sufficiently high turnover so that the
cost of goods sold approximates replacement cost. Because sales are not
dependent upon a particular supplier or product brand, the Company can adjust
product mix to mitigate the effects of inflation on its overall merchandise
base.
The Company mails its catalogs and ships most of its merchandise
through the United States Postal Service. At the present time, the Postal Rate
Commission is expected to announce an increase in postal rates to take effect
in early 1995. The Company is developing plans to mitigate the effects of any
increase.
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PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
On June 22, 1994 the Company held its 1994 Annual Meeting of
Shareholders. The matters acted upon at the meeting were:
(1) The amendment of the Company's Certificate of Incorporation to
eliminate Article Sixth thereof providing for a classified
Board of Directors, with 75,116,102 shares voted in favor,
848,063 shares voted against, and 207,265 shares abstaining;
(2) The election of all 11 members of the Board of Directors,
including Ralph Destino, J. David Hakman, S. Lee Kling,
Theodore H. Kruttschnitt, Jeffrey Laikind, Elizabeth Valk
Long, Edmund R. Manwell, Alan G. Quasha, Jack E. Rosenfeld,
Geraldine Stutz and Robert F. Wright, to serve until the 1995
Annual Meeting of Shareholders (or until their successors have
been duly elected and qualified), with a minimum vote for each
director of 85,060,578 shares in favor, 85,377 shares against,
and no shares abstaining; and
(3) The ratification and approval of the appointment of Arthur
Andersen & Co. as the Company's auditors for the fiscal year
ending December 31, 1994, with 85,666,481 shares in favor,
102,657 shares against, and 35,380 shares abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - There were no reports on Form 8-K filed during
the second quarter ended July 2, 1994.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANOVER DIRECT, INC.
-------------------------------
Registrant
s/Wayne P. Garten
-------------------------------
Wayne P. Garten
Executive Vice President and
Chief Financial Officer
August 15, 1994
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