<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 SEPTEMBER 30, 1995
------------------
Commission file number 1-12082
HANOVER DIRECT, INC.
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-0853260
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(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: 93,466,114 shares outstanding as of
November 10, 1995.
<PAGE> 2
HANOVER DIRECT, INC.
FORM 10-Q
SEPTEMBER 30, 1995
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information Page
----
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 31, 1994 and September 30, 1995 . . . . . . . 3
Condensed Consolidated Statements of Income (Loss) - thirteen and thirty-nine weeks ended
October 1, 1994 and September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows - thirty-nine weeks ended October 1, 1994
and September 30, 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements for the thirteen and thirty-nine weeks
ended October 1, 1994 and September 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Part II - Other Information
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1994 AND SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------ -------------
(IN THOUSANDS)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 24,053 $ 7,689
Accounts receivable, net 25,247 17,019
Inventories 83,653 91,721
Prepaid catalog costs 33,725 40,895
Deferred tax asset, net 3,200 3,200
Other current assets 2,658 3,877
-------- --------
Total Current Assets 172,536 164,401
-------- --------
Property and Equipment, at cost
Land 1,917 4,750
Buildings and building improvements 7,994 20,135
Leasehold improvements 6,807 14,714
Furniture, fixtures and equipment 24,103 39,335
Construction in progress 22,556 4,972
-------- --------
63,377 83,906
Accumulated depreciation and amortization (19,708) (24,003)
-------- --------
Net Property and Equipment 43,669 59,903
-------- --------
Goodwill, net 19,026 32,468
Investments and advances 6,000 2,674
Deferred tax asset, net 11,800 11,800
Other assets, net 9,215 12,672
-------- --------
Total Assets $262,246 $283,918
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31, 1994 AND SEPTEMBER 30, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1994 1995
------------ -------------
(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 $ 812 $ 4,755
Accounts payable 89,366 83,951
Accrued liabilities 20,215 22,988
Customer prepayments and credits 3,642 6,545
--------- ---------
Total Current Liabilities 114,035 118,239
--------- ---------
Noncurrent Liabilities:
Long-term debt 35,907 67,485
Capital lease obligations 1,196 2,238
Other 1,383 2,130
--------- ---------
Total Noncurrent Liabilities 38,486 71,853
--------- ---------
Total Liabilities 152,521 190,092
--------- ---------
Commitments and Contingencies
Shareholders' Equity:
6% Series A Preferred Stock, convertible, $.01 par value, authorized
5,000,000 shares; issued 156,600 shares in 1994 and 78,300 shares
in 1995 1,589 783
Series B Preferred Stock, convertible, $.01 par value, authorized and
issued 634,900 shares in 1995 - 5,502
Common Stock, $.66 2/3 par value, authorized 150,000,000
shares; issued 92,978,234 shares in 1994 and 93,706,508
shares in 1995 61,985 62,470
Capital in excess of par value 253,210 254,281
Accumulated deficit (201,102) (223,251)
--------- ---------
115,682 99,785
Less:
Treasury stock, at cost (1,157,061 shares in 1994 and 1995) (3,345) (3,345)
Notes receivable from sale of Common Stock (1,912) (2,167)
Deferred compensation (700) (447)
--------- ---------
Total Shareholders' Equity 109,725 93,826
--------- ---------
Total Liabilities and Shareholders' Equity $ 262,246 $ 283,918
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
-------------------------- ----------------------------
OCTOBER 1, SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30,
1994 1995 1994 1995
----------- ----------- ----------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES $ 178,282 $ 169,175 $ 542,621 $ 528,540
Operating costs and expenses:
Cost of sales and operating expenses 115,875 114,890 345,029 348,348
Selling expenses 44,951 42,380 137,755 144,212
General and administrative expenses
16,147 17,947 50,124 52,156
----------- ----------- ----------- -----------
176,973 175,217 532,908 544,716
----------- ----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS 1,309 (6,042) 9,713 (16,176)
----------- ----------- ----------- -----------
Interest expense (674) (1,542) (2,893) (3,680)
Interest income 291 135 529 418
Other expense (270) - (445) -
----------- ----------- ----------- -----------
(653) (1,407) (2,809) (3,262)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 656 (7,449) 6,904 (19,438)
Income tax provision (16) (300) (276) (703)
----------- ----------- ----------- -----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 640 (7,749) 6,628 (20,141)
Extraordinary loss-early extinguishment of debt - (1,837) - (1,837)
----------- ----------- ----------- -----------
NET INCOME (LOSS) 640 (9,586) 6,628 (21,978)
Preferred stock dividends and accretion (41) (66) (112) (171)
----------- ----------- ----------- -----------
Net income (loss) applicable to common shareholders $ 599 $ (9,652) $ 6,516 $ (22,149)
=========== =========== =========== ===========
Net income (loss) per share:
Earnings (loss) before extraordinary item $ 0.01 $ (0.08) $ 0.07 $ (0.22)
Extraordinary item - debt refinancing costs - (0.02) - (0.02)
----------- ----------- ----------- -----------
Net income (loss) per share $ 0.01 $ (0.10) $ 0.07 $ (0.24)
=========== =========== =========== ===========
Weighted average shares outstanding 94,931,058 93,005,117 92,744,287 92,880,477
=========== =========== =========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS ENDED
-------------------------
OCTOBER 1, SEPTEMBER 30,
1994 1995
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
NET INCOME (LOSS) $ 6,628 $(21,978)
Adjustments to reconcile net income (loss) to net cash used
by operating activities:
Depreciation and amortization 4,478 7,224
Extraordinary loss - early extinguishment of debt - 1,837
Equity in losses of affiliates 790 -
Changes in assets and liabilities
Accounts receivable (2,816) 9,999
Inventories (3,567) 5,290
Prepaid catalog costs (16,233) (3,599)
Other assets (988) (565)
Accounts payable (934) (15,411)
Accrued liabilities (1,239) (2,049)
Customer prepayments and credits (1,649) 2,532
------- -------
NET CASH (USED) BY OPERATING ACTIVITIES (15,530) (16,720)
------- -------
Cash flows from investing activities:
Acquisitions of property (12,267) (14,928)
Payments for businesses acquired, net of cash acquired - (13,008)
Notes receivable and investments with unconsolidated subsidiaries (7,705) -
Other, net (1,085) (1,631)
------- -------
NET CASH (USED) BY INVESTING ACTIVITIES (21,057) (29,567)
------- -------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 7
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS ENDED
-------------------------
OCTOBER 1, SEPTEMBER 30,
1994 1995
---------- -------------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from financing activities:
Net borrowings under credit facility 340 30,072
Payments of long-term debt and capital lease obligations (6,742) (575)
Cash dividends paid on Preferred Stock (886) -
Proceeds from issuance of Common Stock 49,087 495
Other, net (27) (69)
------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 41,772 29,923
------- --------
Net increase (decrease) in cash and cash equivalents 5,185 (16,364)
Cash and cash equivalents at the beginning of the year 2,583 24,053
------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 7,768 $ 7,689
======= ========
Supplemental cash flow disclosures:
Interest paid $ 1,992 $ 2,547
======= ========
Income taxes paid $ 696 $ 1,281
======= ========
Issuance of Common Stock for notes receivable $ 1,227 $ 678
======= ========
Exchange of 6% Preferred Stock for Common Stock $ 783 $ 877
======= ========
Acquisition of businesses:
Fair value of assets acquired $ - 40,474
Fair value of liabilities assumed - 22,066
Preferred stock issued - 5,400
------- --------
Net cash paid $ - $ 13,008
======= ========
</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
THIRTY-NINE WEEKS ENDED OCTOBER 1, 1994 AND SEPTEMBER 30,
1995 (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 December 31, 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 the current year
presentation.
2. RETAINED EARNINGS RESTRICTIONS
The Company is restricted from paying dividends at any time on its
Common Stock by the most restrictive debt covenants contained in its debt
agreements.
3. EARNINGS PER SHARE
Net income per share - Net income per share was computed using the
weighted average number of shares outstanding. At October 1, 1994, 5,033,735
warrants and 1,477,412 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 nine months ended October 1,
1994. Due to the net loss for the quarter and nine months ended September 30,
1995, warrants, stock options and convertible preferred stock are excluded from
the calculations of both primary and fully diluted earnings per share.
Supplemental earnings per share - The following represents the pro
forma results of operations for the thirteen weeks and thirty-nine weeks ended
October 1, 1994 and the thirty-nine weeks ended September 30, 1995, as if the
Leichtung, The Safety Zone and Austad's acquisitions, which were made in the
first half of 1995, had occurred at the beginning of each fiscal year (in
thousands, except per share data). The pro forma results include the impact of
accounting for the acquisitions including amortization of goodwill and customer
lists, amortization of the discount related to the Series B Preferred Stock
issued to acquire The Safety Zone and interest on the cash used to acquire
Leichtung and Austad's.
<TABLE>
<CAPTION>
FOR THE THIRTEEN WEEKS ENDED FOR THE THIRTY-NINE WEEKS ENDED
OCTOBER 1, 1994 OCTOBER 1, 1994
---------------------------- -------------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $178,282 $ 195,401 $542,621 $601,938
Net income (loss) $ 640 $ (989) $ 6,628 $ 4,351
Net income (loss) per share $ .01 $ (.01) $ .07 $ .05
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
FOR THE THIRTY-NINE WEEKS ENDED
SEPTEMBER 30, 1995
-------------------------------
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Revenues $ 528,540 $ 548,149
Net (loss) $ (21,978) $ (22,027)
Net (loss) per share $ (.24) $ (.24)
</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.
4. INVESTMENTS AND ACQUISITIONS
Acquisitions
Leichtung, Inc. In January 1995, the Company acquired substantially
all of the assets of Leichtung, Inc. ("Leichtung"), a direct marketer of
wood-working and home improvement tools and related products sold under the
Improvements and Leichtung Workshops names, for a purchase price of
approximately $12.8 million in cash and the assumption of certain liabilities.
The Company has offered the Leichtung Workshops catalog for sale. This
acquisition has been accounted for using the purchase method of accounting based
on the estimated fair market values of the assets and liabilities acquired and
has resulted in the recording of approximately $6.0 million of goodwill and $2.3
million of customer mailing list intangible assets. These estimates are subject
to revision in future periods in 1995. The Improvements and Leichtung
Workshops catalogs had revenues of approximately $29 million and $12 million for
the full year 1994, respectively. The customer service and fulfillment
operations of Leichtung will be transferred to the Company's Hanover,
Pennsylvania location in the first quarter of 1996. The Company has offered for
sale the Leichtung distribution facility in Ohio and such facility is carried at
its estimated realizable value.
The Safety Zone. In February 1995, the Company acquired 80% of the
outstanding common stock of Aegis Safety Holdings, Inc. ("Aegis"), publisher
of The Safety Zone catalog, through the issuance of 634,900 shares of a
newly-created Class B Convertible Preferred Stock ("Series B Stock") of the
Company with a stated value of $10 per share. Previously, in September 1993,
the Company had acquired 20% of the outstanding common stock of Aegis.
Non-cumulative dividends on the Series B Stock will accrue and be paid at 5%
per annum during each of the first three years if Aegis attains at least $1
million in earnings before interest and taxes each year. In years four and
five, dividends will accrue and be paid at 7% per annum and are not contingent
on the achievement of any earnings target. The Series B Stock is convertible
at any time, at $6.66 per share, subject to antidilution, at the option of the
holder and is convertible at the Company's option if the market value of the
Company's Common Stock is greater than $6.66 per share, subject to
antidilution, for 20 trading days in any consecutive 30 day trading period or
at the holder's option from time to time. If after five years the Series B
Stock is not converted, it is mandatorily redeemable, at the Company's option,
in cash or for 952,359 shares, subject to antidilution, of the Company's Common
Stock provided the market value of the stock is at least $6.33 per share,
subject to antidilution. If the market value of the Company's Common Stock
does not meet this minimum, the redemption rate is subject to adjustment which
would increase the number of shares for which the Series B Stock is redeemed.
The Company does not anticipate that dividends will be paid based on the 1995
results to date.
This investment has been accounted for using the purchase method of
accounting based on the fair market values of Aegis' assets and liabilities and
the Series B Stock, and has resulted in the recording of approximately $7.1
million of goodwill and $.5 million of customer mailing list intangible assets.
The fair
9
<PAGE> 10
value of the Series B Stock, which is based on an independent appraisal, is $.9
million less than the stated value and the discount is being amortized over a
five-year period. This amortization is included in Preferred Stock dividends
and accretion in the statement of income. The results of operations of Aegis
are included in the accompanying statement of income from the date of
acquisition. Aegis had revenues of approximately $14 million for the full year
1994.
Austad's. In May 1995, the Company acquired 67.5% of the outstanding
common stock of Austad Holdings, Inc. ("Austad's"), a direct marketer of golf
equipment and related apparel and accessories, for a purchase price of $1.8
million in cash. This acquisition has been accounted for using the purchase
method of accounting based on the estimated fair market values of the assets
and liabilities acquired (including $.4 million in cash) and has resulted in
the recording of approximately $1.7 million of goodwill and approximately $1.1
million of customer mailing list intangible assets. The results of operations
of Austad's are included in the accompanying statement of income from the date
of acquisition. Austad's had revenues of approximately $39 million for the
full year 1994. The customer service and fulfillment operations of Austad's
will be transferred to the Company's other facilities in the first quarter of
1996. The Company has offered for sale the Austad's warehouse in South Dakota.
The Company also lent $2.2 million to The Austad Company ("TAC"), a
wholly owned subsidiary of Austad's. The loan bears interest at the rate of
10%, is due by May 2000 and is subordinated to certain of Austad's existing
bank indebtedness. The Company also provided a $.4 million loan to TAC which
bears interest at a fluctuating rate (8.75% through April 1996) and is secured
by a second mortgage on TAC's office and warehouse. The $.4 million loan is
repayable in the event that either the office and warehouse are sold or the
first mortgage on the building is refinanced. TAC has a $5.0 million revolving
credit agreement with a bank that expires in February 1996 and is secured by
substantially all of TAC's assets with available borrowings based on inventory
and receivable balances. The outstanding balance was $3.3 million at September
30, 1995 and $1.7 million was available for borrowing.
In the event that TAC reaches certain earnings goals in fiscal 1995,
the Company is required to contribute up to $2.2 million to Austad's. Such
contribution can be in cash or forgiveness of any outstanding indebtedness,
including the $2.2 million loan discussed above. It is not anticipated that
TAC will reach such earnings goals based on the 1995 results to date.
Investments and Advances
Tiger Direct. In February 1995, the Company entered into an agreement
to acquire certain securities of Tiger Direct, Inc. ("Tiger"), a direct
marketer of computer software, peripherals and CD-ROM hardware and software.
In February 1995, the Company entered into a loan and security
agreement with Tiger pursuant to which the Company provided a secured working
capital line of credit to Tiger, up to a maximum of $3.0 million, bearing
interest at the prime rate plus 2% per annum. A total of $3.0 million was
loaned under such loan agreement. In September 1995, due to the continued
deterioration of Tiger's financial condition, the Company terminated the
securities purchase agreement. The Company sold the loan to a third party and
received payment in full for the principal of the loan and interest to the
date of sale.
During the period from February 1995 to September 1995, the Company
provided certain services to Tiger and also incurred certain costs related to
entering into the loan and security agreement. Under the terms of the
agreement, Tiger is required to reimburse the Company for services rendered
and costs incurred in entering into the agreement. Such reimbursable costs are
carried at their realizable value.
10
<PAGE> 11
Boston Publishing Company. In February 1994, the Company acquired a
20% equity interest in Boston Publishing Company ("BPC") and provided secured
and unsecured loans to BPC. In August 1994, BPC filed for protection under
Chapter 11 of the United States Code. In 1995, the Company received the
inventory and rights to the customer mailing list of BPC in payment of a $1.2
million loan. The Company is in the process of liquidating such assets and has
written down the assets by $.7 million to their expected net realizable value.
Regal Communications, Inc. During 1994, the Company invested
approximately $2.7 million in convertible debt securities of Regal
Communications, Inc. ("Regal"). In September 1994, Regal filed for protection
under Chapter 11 of the United States Code. As a result, during 1994, the
Company established a valuation allowance against the securities reflecting
their estimated fair value of $1.7 million. During 1995, certain assets of
Regal have been liquidated at or above the estimates established in 1994 and
the Company continues to expect to recover the $1.7 million carrying value of
its investment that is included in Investments and advances. To date, no asset
distributions have been made by Regal. The Company expects distributions to
begin no sooner than the first quarter of 1996.
5. LONG-TERM DEBT
As a result of the operating losses that the Company incurred in 1995,
the Company was not in compliance with certain financial covenants under its
five year $80 million credit facility ("Credit Facility"). In order to obtain
waivers to the Credit Facility for these covenant violations, the Company agreed
to more restrictive terms with respect to availability (reduced to $55 million),
rate, and financial covenants. The Company determined that the terms of a
proposed amendment to the Credit Facility were too restrictive and agreed to a
waiver through November 15, 1995, when the Company replaced the Credit Facility
with a new three year $75 million secured credit facility with Congress
Financial Corporation ("Congress Facility").
The Congress Facility is comprised of a revolving line of credit of up
to $65 million and a two year term loan of $10 million. The amount that can be
borrowed under the revolving line of credit is based on percentages of eligible
inventory and accounts receivable. The revolving line of credit carries an
interest rate of 1.25% above CoreStates' prime rate and the term loan carries an
interest rate of 1.5% above CoreStates' prime rate. The Congress Facility is
secured by all assets of the Company, and the Company is required to maintain a
minimum net worth of $80 million, as well as a working capital of $26 million.
In addition, the Congress Facility places limitations on the incurrance of
additional indebtedness.
The Company entered into a Repurchase and Option Agreement with the
holder of the 9.25% Senior Subordinated Notes due 1998 ("9.25% Notes") on
September 29, 1995 under which the holder of the 9.25% Notes received an option
to put the 9.25% Notes at par plus accrued interest to Intercontinental Mining &
Resources Incorporated ("IMR"), an affiliate of NAR Group Limited ("NAR"), a
British Virgin Islands corporation which owns approximately 50% of the
outstanding Common Stock of the Company, if the 9.25% Notes had not been
refinanced by the Company or purchased by a third party located by the Company
by the earlier of the close of business on November 15, 1995 or the refinancing
of the indebtedness under the Credit Facility. As of September 30, 1995, there
were $14 million aggregate principal amount of 9.25% Notes outstanding. IMR was
granted an option to acquire the 9.25% Notes at par plus accrued interest from
the holder at any time on or prior to such dates. IMR exercised such option on
November 8, 1995 and purchased the Notes on November 13, 1995. The Company paid
NAR a fee of $105,000 upon the signing of the Repurchase and Option Agreement
and a fee of $210,000 (1.5% of the outstanding principal amount of the 9.25%
Notes acquired by IMR) upon the funding of the call as well as all expenses
incurred by NAR in performing its obligation under the call. The Company has
also agreed to indemnify NAR against any
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<PAGE> 12
and all claims or losses asserted against it or incurred by it relating to the
transactions contemplated by the Repurchase and Option Agreement. The Company
also extended by two years the terms of the warrants to purchase 5,033,735
shares held by NAR and IMR through August 1, 1998.
In connection with IMR's purchase of the 9.25% Notes, the Company and
IMR agreed to amend the financial covenants contained in the Indenture relating
to the 9.25% Notes and to grant to the Trustee for such 9.25% Notes a second
priority security interest in the Company's customer and mailing lists.
As a result of the replacement of the Credit Facility and the
purchase of the 9.25% Notes, the Company wrote off approximately $1.8 million of
unamortized debt issuance costs as an extraordinary item due to the early
extinguishment of debt.
6. INCOME TAXES
At September 30, 1995, the Company had a net deferred tax asset of $15
million, including a deferred tax asset valuation allowance of approximately
$47 million, which was recorded in prior years primarily relating to the
realization of certain net operating loss carryforwards ("NOLs"). At September
30, 1995, the Company had $158 million of NOLs. 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 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.
In assessing the realizability of the $15 million net deferred tax
asset, the Company has considered numerous factors, including its future
operating plans and its recent history of operating results (including pre-tax
income in 1993 and 1994 as well as the losses incurred to date in 1995).
Management believes that the $15 million net deferred tax asset represents a
reasonable, conservative estimate of the future utilization of the NOLs and the
Company will continue to routinely evaluate the likelihood of future profits
and the necessity of future adjustments to the deferred tax asset valuation
allowance.
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<PAGE> 13
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 39 WEEKS ENDED
------------------------------ -----------------------------
OCTOBER 1, SEPTEMBER 30, OCTOBER 1, SEPTEMBER 30,
1994 1995 1994 1995
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . 100.0% 100 .0% 100.0% 100.0%
Cost of sales and operating expenses . . . . . . . 65.0 67.9 63.6 65.9
Selling expenses . . . . . . . . . . . . . . . . . 25.2 25.1 25.4 27.3
General and administrative expenses . . . . . . . . 9.1 10.6 9.2 9.9
Income (loss) from operations . . . . . . . . . . . .7 (3.6) 1.8 (3.1)
Interest expense, net . . . . . . . . . . . . . . . .2 .8 .4 .6
Net income (loss) before extraordinary item . . . . .4 (4.6) 1.2 (3.8)
Net income (loss) . . . . . . . . . . . . . . . . . .4 (5.7) 1.2 (4.2)
</TABLE>
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 30, 1995 COMPARED WITH THIRTEEN WEEKS ENDED
OCTOBER 1, 1994.
Net Income (Loss). The Company reported a net loss before an
extraordinary item of $(7.7) million or $(.08) per share for the quarter ended
September 30, 1995 compared to net income of $.6 million or $.01 per share in
the same period last year. Including the effect of the extraordinary loss of
$(1.8) million for the early extinguishment of debt, the Company reported a
net loss of $(9.6) million or $(.10) per share for the quarter ended
September 30, 1995 compared to net income of $.6 million or $.01 per share in
the same period last year.
The net loss was primarily the result of the impact of postage rate
increases at the beginning of 1995, substantial paper price increases that
began in the fourth quarter of 1994 and continued into 1995, and the weak
performance of certain of the Company's catalogs, including Domestications.
To address these issues, the Company has discontinued four poorly performing
catalogs, reduced circulation, consolidated facilities and reduced the
workforce by 10%. In addition, the Company incurred an extraordinary loss
of $1.8 million related to the early extinguishment of debt.
Revenues. Revenues decreased 5% in the quarter ended September 30,
1995 to $169 million from $178 million for the same period in 1994. The decline
in revenues was a result of the weak performance of certain of the Company's
catalogs, including Domestications, and a planned reduction in the number of
catalogs mailed. The Company discontinued four poorly performing catalogs in
1995 which had $6 million of revenues in the third quarter of 1995 compared to
$11 million of revenues in the same period in 1994.
The Company's revenues, excluding revenues from acquisitions in 1995,
decreased 16%. This decrease from existing catalogs was partially offset by
revenues of $20 million from Improvements, The Safety Zone and Austad's ("1995
acquisitions") which were acquired in the first half of 1995. Non-Apparel
catalog revenues, including revenues related to the 1995 acquisitions,
decreased 5% while Apparel catalog revenues decreased 7%.
Operating Costs and Expenses. Cost of sales and operating expenses
increased to 67.9% of revenues in the third quarter of 1995 compared to 65.0%
for the same period in 1994. The increase was primarily a
13
<PAGE> 14
result of the start-up and transitional costs of opening the new Roanoke
fulfillment center and an additional $2.5 million of postage costs as a
result of the 18% rate increase by the United States Postal Service for the
delivery of customer packages. The increase was also a result of markdowns to
liquidate the inventory of the discontinued catalogs and increased promotional
activities at other catalogs.
Selling expenses decreased to 25.1% of revenues in the third quarter
of 1995 from 25.2% of revenues for the same period in 1994. Selling expenses
for such period reflected a 14% increase in postage rates for the mailing of
catalogs to customers and increases in paper prices up to 50% higher than
prices paid in the third quarter of 1994. These increases resulted in
approximately $6.0 million of additional costs in the third quarter of 1995.
The Company reduced the circulation of its existing catalogs by
17% for the fall 1995 season compared to the fall 1994 season. Including the
1995 acquisitions, the Company mailed approximately 66 million catalogs for the
fall 1995 season, a decrease of 2% from 1994.
General and administrative expenses were 10.6% of revenues in the
third quarter of 1995 compared to 9.1% in the same period in 1994. Total
expenses increased $1.8 million, or 11%, from 1994 to 1995, primarily as a
result of $2.1 million of expenses from the 1995 acquisitions, including $.3
million of amortization of goodwill and customer mailing lists. These
increases were partially offset by expense reductions from the Company's cost
reduction program.
Income (Loss) from Operations. The Company recorded a loss from
operations of $(6.0) million in the third quarter of 1995, or (3.6)% of
revenues, compared to income from operations of $1.3 million for the same
period in 1994, or .7% of revenues.
The Non-Apparel group's results of operations decreased $7.7 million,
from $3.5 million of income in the third quarter of 1994 to a loss of $(4.2)
million in the same period in 1995 due primarily to the decrease in sales and
cost increases mentioned above.
The Apparel group's results of operations improved $1.1 million from a
loss of $(1.0) million in the third quarter of 1994 to a income of $.1 million
for the same period in 1995. The Men's Apparel catalogs generated $.4 million
of income from operations in the third quarter of 1995, unchanged from the
third quarter of 1994 as customer demand remained strong in 1995. The Women's
Apparel catalogs generated a loss from operations of $(.3) million in the third
quarter of 1995 compared with a loss of $(1.4) million in the same period in
1994.
The 1995 acquisitions generated $.3 million of income from operations
in the third quarter of 1995. The Company's agreement with Sears generated $.5
million of income in the third quarter of 1995, which is consistent with the
same period in 1994.
Interest Expense, Net. Interest expense, net increased from $.4
million in the third quarter of 1994 to $1.4 million in the third quarter of
1995 due to increased borrowings for capital expenditures, acquisitions and
working capital requirements.
Income Taxes. In assessing the realizability of the $15 million net
deferred tax asset, the Company has considered numerous factors, including its
future operating plans and its recent history of operating results (including
pre-tax income in 1993 and 1994 as well as the losses incurred to date in
1995). The
14
<PAGE> 15
Company believes that the $15 million net deferred tax asset represents a
reasonable, conservative estimate of the future utilization of the tax 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.
The Federal income tax provision of $.2 million for the quarter ended October
1, 1994 was offset by the utilization of certain NOLs. The Company recorded a
state tax provision of $.3 million in the third quarter of 1995.
THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 1995 COMPARED WITH THIRTY-NINE WEEKS ENDED
OCTOBER 1, 1994.
Net Income (Loss). The Company reported a net loss before an
extraordinary loss of $(20.1) million or $(0.22) per share for the nine months
ended September 30, 1995 compared to net income of $6.6 million or $.07 per
share in the same period last year. Including the effect of the extraordinary
loss of $(1.8) million for the early extinguishment of debt, the Company
reported a net loss of $(22.0) million or $(.24) per share for the thirty-nine
weeks ended September 30, 1995 compared to net income of $6.6 million or
$.07 per share in the same period last year.
The net loss was primarily the result of the impact of the postage rate
increases at the beginning of 1995, substantial paper prices increases that
began in the fourth quarter of 1994 and continued into 1995, and the weak
performance of certain of the Company's catalogs, including Domestications. The
Company discontinued four poorly performing catalogs in the second quarter of
1995 which could not meet these cost challenges. These catalogs generated losses
of $(9.2) million in the first three quarters of 1995, including a charge of
approximately $4.0 million representing the estimated costs to liquidate the
inventory and severance. The Company also incurred an extraordinary loss of
$1.8 million related to the early extinguishment of debt. In addition, the
Company has incurred costs in connection with the consolidation of facilities
into its new Roanoke, Virginia fulfillment center and the operation of duplicate
facilities resulting in $1.8 million of costs that will not be incurred in the
remainder of 1995.
To address these issues, during the first quarter of 1995, the Company
began reducing catalog circulation and implemented a cost reduction program that
has reduced the Company's workforce by 10%. In addition, the Company will
consolidate additional facilities including the Austad's direct marketing
facility in Sioux Falls, South Dakota and the Improvements fulfillment
operations in Cleveland, both of which will be relocated to other facilities
early next year.
Revenues. Revenues decreased slightly in the thirty-nine weeks ended
September 30, 1995 to $529 million from $543 million for the same period in
1994. The decline in revenues was a result of the weak performance of certain
of the Company's catalogs, including Domestications, and a planned reduction in
the number of catalogs mailed. The Company discontinued four poorly performing
catalogs in 1995 which had $25 million of revenues in the first nine months of
1995 compared to $39 million of revenues in the same period of 1994.
The lower revenues in 1995 were primarily the result of a $58 million
or 11% decrease in revenues from catalogs, excluding the 1995 acquisitions,
partially offset by revenues of $44 million from the 1995 acquisitions.
Non-Apparel catalog revenues, including the revenues related to the 1995
acquisitions, decreased 2% while Apparel catalog revenues decreased 5%.
Operating Costs and Expenses. Cost of sales and operating expenses
increased to 65.9% of revenues in the first nine months of 1995 compared to
63.6% for the same period in 1994. This increase was primarily the result of
temporarily operating out of multiple facilities and start-up and transitional
costs of the new Roanoke facility as well as an additional $7.1 million in
postage costs as a result of the 18% rate increase by the United States Postal
Service for the delivery of customer packages. In addition, the Company absorbed
significant markdowns representing the estimated cost to liquidate the inventory
of the four discontinued catalogs and increased promotional activities of other
catalogs.
Selling expenses increased to 27.3% of revenues in the thirty-nine
weeks ended September 30, 1995 from 25.4% of revenues for the same period in
1994 due to a 14% increase in postage rates for the mailing of catalogs to
customers and increases in paper prices up to 50% higher than prices paid in
the same period
15
<PAGE> 16
of 1994. These increases resulted in approximately $15.4 million of additional
costs in the first nine months of 1995. To address these price increases, the
Company's catalog circulation, excluding the 1995 acquisitions, was 14% lower
for the spring, summer and fall 1995 seasons than for the same seasons in 1994.
Including the 1995 acquisitions, the Company mailed approximately 273 million
catalogs for the spring, summer and fall 1995 seasons, a decrease of 1% from
the same seasons in 1994.
General and administrative expenses were 9.9% of revenues in the first
nine months of 1995 compared to 9.2% is the same period in 1994. Total
expenses increased $2.0 million, or 4%, from 1994 to 1995, primarily as a
result of $3.9 million of expenses from the 1995 acquisitions, including $.6
million of amortization of goodwill and customer mailing lists. The expense
increases were partially offset by expense reductions from the Company's cost
reduction program.
Income (Loss) from Operations. The Company recorded a loss from
operations of $(16.2) million in the thirty-nine weeks ended September 30,
1995, or (3.1)% of revenues, compared to income from operations of $9.7 million
for the same period in 1994, or 1.8% of revenues. The four discontinued
catalogs generated a loss of $(9.2) million in the first nine months of 1995
compared to a loss of $(2.2) million in 1994.
The Non-Apparel group's results of operations decreased $19.4 million
from income of $12.9 million in the first nine months of 1994 to a loss of
$(6.5) million in the same period in 1995 due primarily to the cost increases
mentioned above. The Company discontinued the Mature Wisdom catalog (which had
1994 full year revenues of $14 million and a 1995 first nine months loss of
$(1.0) million).
The Apparel Group's results of operations decreased $6.8 million from
break-even in the first nine months of 1994 to a loss of $(6.8) million for the
same period in 1995. The Men's Apparel catalogs generated $2.0 million of
income from operations in the first nine months of 1995 compared to income of
$1.4 million in the same period of 1994 as customer demand remained strong.
The Women's Apparel catalogs generated a loss from operations of $(8.8) million
in the first nine months of 1995 compared with a loss of $(1.4) million for the
same period in 1994. The loss in 1995 includes $(7.8) million of losses from
three catalogs in the group, Essence by Mail, Simply Tops and One 212, which
were discontinued after their summer 1995 mailings. These catalogs had
combined revenues of $40 million for the full year 1994.
The 1995 acquisitions generated $1.0 million of income from operations
in the thirty-nine weeks ended September 30, 1995. The Company's agreement
with Sears generated $2.0 million of income in the thirty-nine weeks ended
September 30, 1995 compared to income of $1.8 million for the same period in
1994.
Interest Expense, Net. Interest expense, net increased from $2.4
million in the first nine months of 1994 to $3.3 million in the same period in
1995 due to higher levels of borrowings in 1995 to fund capital expenditures,
acquisitions and working capital requirements.
Income Taxes. In assessing the realizability of the $15 million net
deferred tax asset, the Company has considered numerous factors, including its
future operating plans and its recent history of operating results (including
pre-tax income in 1993 and 1994 as well as the losses incurred to date in
1995). The Company believes that the $15 million net deferred tax asset
represents a reasonable, conservative estimate of the future utilization of the
tax 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. The Federal income tax provision of $2.4 million for the
thirty-nine weeks ended October 1, 1994 was offset by the utilization of
certain NOLs. The Company recorded a state tax provision of $.3 million and
$.7 million in
16
<PAGE> 17
the thirty-nine weeks ended September 30, 1995 and October 1, 1994,
respectively.
Shareholders' Equity. The number of shares of Common Stock
outstanding increased by 728,274 in 1995 due to shares issued in connection
with the conversion of shares of 6% preferred stock and the Company's equity
incentive plans, net of forfeitures. At September 30, 1995, there were
93,466,114 shares of Common Stock outstanding compared to 92,737,840 shares
outstanding at December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital. At September 30, 1995, the Company had $7.7 million
in cash and cash equivalents, compared to $24.1 million at December 31, 1994.
The $16.4 million decrease in cash and cash equivalents resulted from $16.6
million of infrastructure investments, the payment of $13.0 million for the
acquisitions of Leichtung ($1.2 million of the purchase price of Leichtung was
paid in 1994) and Austad's, and the use of $15.3 million of cash in operations,
offset by $29.9 million of additional borrowings under the Credit Facility.
The $16.7 million of cash used in operations in the first nine months of 1995
was primarily to fund operating losses. Working capital and the current ratio
were $46.2 million and 1.39 to 1 at September 30, 1995 versus $58.5 million and
1.51 to 1 at December 31, 1994.
Infrastructure Investments. In 1994, the Company substantially
completed the construction of its fulfillment center in Roanoke, Virginia.
The Company began partial shipping and receiving activities at the facility in
the first quarter of 1995 and performed significant testing of the systems in
the second quarter. In September 1995, the Company began fulfilling all
Domestication orders through the Roanoke facility. The Company experienced
typical inefficiencies and start-up problems that would be anticipated with
bringing such a facility into service. The Company anticipates that it will
have resolved all start-up and transitional issues at the facility by the
holiday 1995 selling season. The Company's operating margins were negatively
impacted in the first three quarters of 1995 by these operating inefficiencies
associated with the start-up of this facility and the Company also incurred
approximately $1.8 million of costs in connection with the start-up and
relocation of distribution activities to the Roanoke facility and the operation
of several small duplicate distribution facilities which were closed in 1995.
The Company is continuing its management information systems upgrade
project and has spent a total of $12.3 million through September 1995,
including $3.2 million in 1995. As of September 30, 1995, four of the
Company's catalogs were on line with the new system and the Company expects to
roll out the system to the rest of its catalogs through mid 1996. The Company
expects to continue to incur certain duplicate system costs during 1995 as it
transitions to the new computer system.
Financing. In the first nine months of 1995, the Company borrowed
approximately $29 million under its Credit Facility to meet its cash needs.
The Company has made significant infrastructure investments and does not
anticipate significant future cash outlays for such purposes. These
infrastructure investments are expected to result in improved cash flows for
the remainder of 1995 and in 1996.
As discussed in Note 5 to the Condensed Consolidated Financial
Statements, on November 14, 1995 the Company entered into a new $75
million secured credit facility with Congress Financial Corporation to replace
its current $55 million, as amended, Credit Facility. The Company believes
that the new Congress Facility will provide sufficient capital to support
its operating activities.
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
17
<PAGE> 18
mail order 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.
Paper and Postage. The Company mails its catalogs and ships most of
its merchandise through the United States Postal Service ("USPS"), with catalog
mailing and product shipment expenses representing approximately 16% of
revenues in 1994. In January 1995, the USPS increased postage rates by
approximately 14% to 18%. The Company is also experiencing record price
increases in 1995 for paper that is used in the production of its catalogs and
expects these price increases to continue but at a more moderate rate. The
increase in paper prices have increased the Company's costs by approximately
$9.3 million in the first nine months of 1995 and the increase in catalog and
parcel postage rates have increased costs by approximately $13.2 million in the
same period. These cost increases and the duplicate costs associated with the
consolidation of the distribution facilities and the transition to the new
management information system discussed previously have adversely impacted the
Company's margins and earnings in the first nine months of 1995.
18
<PAGE> 19
PART II - OTHER INFORMATION
Item 5. Other Information
On November 14, 1995, the Company entered into a new 3 year $75
million secured credit facility with Congress Financial
Corporation ("Congress Facility"). This facility replaces the
Company's unsecured $55 million, as amended, credit facility
with the syndicate of banks led by NationsBank of North
Carolina, N.A.
The Congress Facility is comprised of a revolving line of
credit of up to $65 million and a two year term loan of $10
million. The amount that can be borrowed under the revolving
line of credit is based on percentages of eligible inventory
and accounts receivable. The revolving line of credit carries
an interest rate of 1.25% above CoreState's prime rate and the
term loan carries an interest rate of 1.5% above CoreState's
prime rate. The Congress Facility is secured by all assets of
the Company, and the Company is required to maintain a minimum
net worth of $80 million, as well as a working capital of $26
million. In addition, the Congress Facility places
limitations on the incurrance of additional indebtedness.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule (EDGAR filing only).
(b) Reports on Form 8-K - There were no reports on Form 8-K filed during
the third quarter ended September 30, 1995.
19
<PAGE> 20
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
By: /s/ Wayne P. Garten
-------------------------------
Wayne P. Garten
Executive Vice President and
Chief Financial Officer
(on behalf of the Registrant and as
principal financial officer)
November 14, 1995
20
<PAGE> 21
Exhibit Index
Exhibit 27 - Financial Data Schedule (EDGAR filing only).
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER
DIRECT, INC AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AND
STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND IS
QUALIFIED IN ITS ENTIRETY, EXCEPT FOR GROSS ACCOUNTS RECEIVABLE AND THE
ALLOWANCE FOR DOUBTFUL ACCOUNTS, BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 7,689
<SECURITIES> 0
<RECEIVABLES> 19,678
<ALLOWANCES> (2,659)
<INVENTORY> 91,721
<CURRENT-ASSETS> 164,401
<PP&E> 83,906
<DEPRECIATION> (24,003)
<TOTAL-ASSETS> 283,918
<CURRENT-LIABILITIES> 118,239
<BONDS> 67,485
<COMMON> 62,470
6,285
0
<OTHER-SE> 25,071
<TOTAL-LIABILITY-AND-EQUITY> 283,918
<SALES> 528,540
<TOTAL-REVENUES> 528,540
<CGS> 348,348
<TOTAL-COSTS> 544,716
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,680
<INCOME-PRETAX> (19,438)
<INCOME-TAX> 703
<INCOME-CONTINUING> (20,141)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,837)
<CHANGES> 0
<NET-INCOME> (21,978)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
