<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 28, 1996
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: 144,828,490 shares outstanding as of
November 7, 1996.
<PAGE> 2
HANOVER DIRECT, INC.
FORM 10-Q
SEPTEMBER 28, 1996
INDEX
<TABLE>
<CAPTION>
Page
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 30, 1995 and September 28, 1996............................ 3
Condensed Consolidated Statements of Income (Loss) - thirteen and thirty-nine weeks ended
September 30, 1995 and September 28, 1996................................................................. 5
Condensed Consolidated Statements of Cash Flows - thirty-nine weeks ended
September 30, 1995 and September 28, 1996................................................................. 6
Notes to Condensed Consolidated Financial Statements for the thirty-nine weeks
ended September 30, 1995 and September 28, 1996........................................................... 8
Item 2. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations................................................................................... 16
Part II - Other Information
Item 1. Legal Proceedings..................................................................................... 25
Item 5. Other Information..................................................................................... 25
Item 6. Exhibits and Reports on Form 8-K...................................................................... 25
Signatures..................................................................................................... 26
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 30, 1995 AND SEPTEMBER 28, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 30, SEPTEMBER 28,
1995 1996
---- ----
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,682 $ 2,853
Accounts receivable, net 30,176 24,541
Inventories 79,281 86,481
Prepaid catalog costs 37,118 40,214
Deferred tax asset, net 3,300 3,300
Other current assets 6,170 3,513
--------- ---------
Total Current Assets 158,727 160,902
--------- ---------
Property and equipment, at cost:
Land 4,811 4,797
Buildings and building improvements 19,353 17,253
Leasehold improvements 14,001 14,174
Furniture, fixtures and equipment 39,508 42,669
Construction in progress 5,479 8,130
--------- ---------
83,152 87,023
Accumulated depreciation and amortization (25,525) (31,223)
--------- ---------
Net Property and Equipment 57,627 55,800
--------- ---------
Goodwill, net 36,586 36,407
Deferred tax asset, net 11,700 11,700
Other assets, net 14,369 11,979
--------- ---------
Total Assets $ 279,009 $ 276,788
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 30, 1995 AND SEPTEMBER 28, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 30, SEPTEMBER 28,
1995 1996
--------- ---------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital lease
obligations $ 3,546 $ 13,478
Accounts payable 93,291 92,645
Accrued liabilities 25,969 23,621
Customer prepayments and credits 7,147 5,842
--------- ---------
Total Current Liabilities 129,953 135,586
--------- ---------
Noncurrent Liabilities:
Long-term debt 57,283 53,263
Capital lease obligations 1,973 841
Other 2,590 1,714
--------- ---------
Total Noncurrent Liabilities 61,846 55,818
--------- ---------
Total Liabilities 191,799 191,404
--------- ---------
Commitments and Contingencies
Shareholders' Equity:
6% Series A Preferred Stock, convertible, $.01 par value,
authorized 5,000,000 shares; issued 78,300 shares in 1995 795 --
Series B Preferred Stock, convertible, $.01 par value,
authorized and issued 634,900 shares in 1995 and 1996 5,558 5,701
Common Stock, $.66 2/3 par value, authorized 150,000,000
shares; issued 93,706,508 shares in 1995 and 145,068,884
shares in 1996 62,461 96,712
Capital in excess of par value 255,390 272,988
Accumulated deficit (231,332) (283,071)
--------- ---------
92,872 92,330
Less:
Treasury stock, at cost (1,157,061 shares in 1995 and 1996) (3,345) (3,345)
Notes receivable from sale of Common Stock (2,023) (3,517)
Deferred compensation (294) (84)
--------- ---------
Total Shareholders' Equity 87,210 85,384
--------- ---------
Total Liabilities and Shareholders' Equity $ 279,009 $ 276,788
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
-------------- --------------
SEPTEMBER 30, SEPTEMBER 28, SEPTEMBER 30, SEPTEMBER 28,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 169,175 $ 156,732 $ 528,540 $ 502,454
----------- ------------- ------------ -------------
Operating costs and expenses:
Cost of sales and operating expenses 113,420 115,580 340,985 344,301
Write-down of inventory of discontinued catalogs 365 0 4,310 1,100
Provision for facility closing 0 300 530 300
Selling expenses 42,380 44,842 144,212 142,259
General and administrative expenses 16,585 18,775 48,675 48,407
Depreciation and amortization 2,467 2,856 6,004 9,337
----------- ------------- ------------ -------------
175,217 182,353 544,716 545,704
----------- ------------- ------------ -------------
Income (loss) from operations (6,042) (25,621) (16,176) (43,250)
----------- ------------- ------------ -------------
Interest expense (1,542) (2,683) (3,680) (6,766)
Interest income 135 123 418 338
----------- ------------- ------------ -------------
(1,407) (2,560) (3,262) (6,428)
----------- ------------- ------------ -------------
Income (loss) before income taxes (7,449) (28,181) (19,438) (49,678)
Income tax provision (300) (250) (703) (750)
----------- ------------- ------------ -------------
Net income (loss) before extraordinary item (7,749) (28,431) (20,141) (50,428)
Extraordinary item (1,837) (1,134) (1,837) (1,134)
----------- ------------- ------------ -------------
Net income (loss) (9,586) (29,565) (21,978) (51,562)
Preferred stock dividends and accretion (66) (59) (171) (177)
----------- ------------- ------------ -------------
Net income (loss) applicable to common shareholders $ (9,652) $ (29,624) $ (22,149) $ (51,739)
=========== ============= ============ =============
Net income (loss) per share:
Earnings (loss) before extraordinary item $ (0.08) $ (0.25) $ (0.22) $ (0.51)
Extraordinary item (0.02) (0.01) (0.02) (0.01)
----------- ------------- ------------ -------------
Net income (loss) per share $ (0.10) $ (0.26) $ (0.24) $ (0.52)
=========== ============= ============ =============
Weighted average shares outstanding 93,005,117 114,251,875 92,880,477 100,365,678
=========== ============= ============ =============
</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
--------------
SEPTEMBER 30, SEPTEMBER 28,
1995 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $(21,978) $(51,562)
Adjustments to reconcile net (loss) to net cash (used)
by operating activities:
Depreciation and amortization, including deferred fees 7,224 10,559
Extraordinary loss - early extinguishment of debt 1,837 1,134
Other -- 27
Changes in assets and liabilities, net of acquisitions:
Accounts receivable 9,999 5,000
Inventories 5,290 (7,200)
Prepaid catalog costs (3,599) (3,096)
Other assets (565) 893
Accounts payable (15,411) (646)
Accrued liabilities (2,049) (2,854)
Customer prepayments and credits 2,532 (1,305)
-------- --------
NET CASH (USED) BY OPERATING ACTIVITIES (16,720) (49,050)
-------- --------
Cash flows from investing activities:
Acquisitions of property (14,928) (8,306)
Proceeds from sale of businesses and properties -- 1,164
Proceeds from sale of securities -- 662
Payments for businesses acquired, net of cash acquired (13,008) --
Other, net (1,631) (10)
-------- --------
NET CASH (USED) BY INVESTING ACTIVITIES $(29,567) $ (6,490)
-------- --------
</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
--------------
SEPTEMBER 30, SEPTEMBER 28,
1995 1996
---- ----
(IN THOUSANDS)
<S> <C> <C>
Cash flows from financing activities:
Net borrowings under Credit Facility $ 30,072 $ 12,413
Proceeds from issuance of debt -- 35,000
Payments of long-term debt and capital lease obligations (575) (40,946)
Proceeds from issuance of Common Stock 495 50,504
Payment of debt issuance costs -- (384)
Other net (69) (876)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 29,923 55,711
-------- --------
Net (decrease) increase in cash and cash equivalents (16,364) 171
Cash and cash equivalents at the beginning of the year 24,053 2,682
-------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 7,689 $ 2,853
======== ========
Supplemental cash flow disclosures:
Interest paid $ 2,457 $ 5,203
======== ========
Income taxes paid $ 1,281 $ 670
======== ========
Supplemental disclosure of non-cash investing and financing activities:
Issuance of Common Stock for notes receivable $ 678 $ 2,034
======== ========
Exchange of 6% Preferred Stock for Common Stock $ 877 $ 830
======== ========
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
THIRTY-NINE WEEKS ENDED SEPTEMBER 30, 1995 AND SEPTEMBER 28, 1996
(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 30, 1995. 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, 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 or from acquiring its capital stock by certain debt covenants
contained in agreements to which the Company is a party.
3. EARNINGS PER SHARE
Net income (loss) per share - Net income (loss) per share was computed
using the weighted average number of shares outstanding. Due to the net loss for
the thirteen and thirty-nine weeks ended September 30, 1995 and September 28,
1996, 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 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 the 1995 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
Convertible Additional Preferred Stock issued to acquire The Safety Zone and
interest on the cash used to acquire Leichtung and Austad's.
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 income (loss) $ (21,978) $ (22,027)
Net income (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. SALE OF ASSETS
Businesses
Austad's. In May 1995, the Company acquired 67.5% of the outstanding
shares of Austad's Holdings, Inc. ("Austad's"), which owned The Austad Company
("TAC"), the publisher of the Austad's catalog, featuring golf equipment,
apparel and gifts, for a purchase price of $1.8 million in cash. On February 16,
1996, the Company acquired the remaining 32.5% of TAC's outstanding shares and
formed AGS, Inc., a South Dakota corporation, to hold the existing retail assets
and liabilities of TAC. Former minority shareholders of TAC paid approximately
$1.1 million for all of the outstanding shares of AGS, Inc. There was no gain or
loss recognized on this transaction. The customer service and fulfillment
operations of Austad's were transferred to other Company facilities during the
first quarter of 1996 and the Company sold the Austad's South Dakota warehouse
and distribution facility in July 1996 for $2.1 million which approximated its
book value. The net proceeds were used to repay the outstanding mortgage on the
property. The TAC revolving credit facility was paid off at the February 16th
closing with the proceeds from the sale of AGS, Inc. and from the Company's
revolving credit facility.
Leichtung Workshops. In January 1995, the Company acquired
substantially all of the assets of Leichtung, Inc., 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.
In the first quarter of 1996, the Company sold the assets of the Leichtung
Workshops catalog for $.9 million in cash and short-term notes and relocated all
Improvements' telemarketing and fulfillment operations to the Company's Hanover,
Pennsylvania facility. There was no gain or loss recognized on the sale of the
assets of the Leichtung Workshops catalog.
Debt Securities
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
Bankruptcy Code. As a result, during 1994, the Company wrote-down the
convertible debenture to its estimated fair value of $1.7 million. During 1995,
certain assets of Regal were liquidated at or above the estimates established in
1994 and, as of September 28, 1996, the Company has received approximately $.7
million from asset distributions. Approximately $1.0 million representing the
remaining net carrying value of this investment is included in Other assets,
net.
9
<PAGE> 10
5. RIGHTS OFFERING
The Company commenced a $50 million rights offering (the"Rights
Offering") on July 19, 1996. Holders of record of the Company's common stock, 6%
Series A Convertible Additional Preferred Stock and Series B Convertible
Additional Preferred Stock as of July 18, 1996, the record date, were eligible
to participate in the offering and purchase shares of the Company's Common Stock
at a price of $1.03 per share. Shareholders received 0.51 rights for each share
of common stock held, 3.72 rights for each share of Series A Convertible
Additional Preferred Stock held and .77 rights for each share of Series B
Convertible Additional Preferred Stock held as of the record date. The Rights
Offering closed on August 23, 1996.
Due to the Company's continued operating losses during 1996, the
Company requested that NAR Group Limited ("NAR") advance up to $25 million
against all the Rights distributed to it and/or its commitment to purchase all
of the unsubscribed shares ( the "NAR Promissory Note"). In May 1996, NAR
advanced the Company $25 million under the NAR Promissory Note. Under the
provisions of the NAR Promissory Note, the Company repaid NAR the $25 million
advance plus accrued interest upon the closing of the Rights Offering.
The Company issued 48,748,785 shares of Common Stock as a result of the
Rights Offering which generated proceeds of approximately $48 million, net of
expenses. NAR received Rights entitling it to purchase 24,015,964 shares in the
Rights Offering and exercised such rights. In addition, the Company and NAR
entered into a Standby Purchase Agreement pursuant to which NAR purchased
6,898,866 shares not subscribed by shareholders and received approximately $.5
million as a fee. The proceeds of the Rights Offering were used by the Company:
(i) to repay the $14 million principal amount of 9.25% Senior Subordinated Notes
("9.25% Notes") due August 1, 1998 held by an affiliate of NAR plus accrued
interest, (ii) to repay the $25 million principal amount advanced under the NAR
Promissory Note plus accrued interest and (iii) to repay approximately $9
million under the Credit Facility with Congress. The Company recorded an
extraordinary expense related to the early extinguishment of the 9.25% Notes,
representing a write-off of the unamortized debt issuance costs of approximately
$1.1 million.
6. RELATED PARTY TRANSACTIONS
NAR purchased 30,914,830 shares of the Company's Common Stock, received
approximately $.5 million in fees related to the Standby Purchase Agreement and
received principle and interest payments under the 9.25% Notes and the NAR
Promissory Note from the proceeds of the Rights Offering completed August 23,
1996. (See Note 5 Rights Offering)
NAR and its affiliates held warrants to purchase 5,033,735 shares of
the Company's Common Stock at prices ranging from $2.19 to $2.91 per share. The
warrant agreements under which these warrants were granted contain antidilution
provisions which increased the warrants held by NAR and affiliates to 7,646,490
and reduced the exercise prices at which the warrants are exercisable to prices
ranging from $1.95 to $2.59 per share upon the completion of the Rights
Offering. As a result of the Rights Offering, NAR currently owns approximately
55.5% of the Company's Common Stock on a fully diluted basis.
In September 1996, Intercontinental Mining & Resources
Incorporated, an affiliate of NAR ("IMR"), loaned the Company $10 million as
evidenced by a subordinated promissory note in the amount of $10 million (the
"IMR Promissory Note"). Such loan bears interest at prime plus 1
10
<PAGE> 11
1/2%, is due on November 14, 1996 and, if not repaid before May 15, 1997, is
convertible at the option of IMR into shares of Common Stock at the lower of the
current fair market value thereof or the then current fair market value thereof.
The IMR Promissory Note is subordinate to the Credit Facility and is excluded
from the calculation of the consolidated working capital covenant under the
Credit Facility.
The Company has entered into an agreement in principle (the
"Reimbursement Agreement") with Richemont S. A. (Richemont), who along with the
family of Alan G. Quasha, Chairman of the Board of the Company, jointly own NAR,
that when implemented will provide the Company with up to $30 million of letters
of credit to replace letters of credit issued or to be issued under the Credit
Facility. The letters of credit will expire on February 29, 1998 and carry an
interest rate of 3.5% above the prime rate, currently 11.75%, payable to
Richemont quarterly on amounts drawn under the letters of credit. The Company
has agreed to pay a facility fee equal to 5% of the principle amount of the
letters of credit as well all other fees incurred in connection with providing
the facility. In the event that the Company has not paid in full, by the
expiration date, any outstanding balances under the letters of credit, Richemont
shall have the option, exerciseable at any time prior to payment in full of all
amounts outstanding under the letters of credit to convert such amount into
common stock of the Company at the mean of the bid and ask prices of the
Company's Common Stock on November 8, 1996, or the mean of the bid and ask
prices of the Company's Common Stock on each of the thirty days immediately
prior to the date of exercise of the conversion privilege. The Reimbursement
Agreement is subordinate to the Credit Facility.
7. CHANGES IN MANAGEMENT AND EMPLOYMENT AGREEMENTS
Jack E. Rosenfeld resigned as President and Chief Executive Officer and
as a Director of the Company effective December 30, 1995. In connection with
such resignation, the Company and Mr. Rosenfeld have entered into a Termination
of Employment Agreement, to be dated as of December 30, 1995. On March 7, 1996,
Rakesh K. Kaul was named President and Chief Executive Officer and elected to
the Board of Directors of the Company. Also as of that date, the Company and Mr.
Kaul entered into an executive employment agreement. In addition to a base
salary and a minimum bonus, Mr. Kaul has purchased 1,510,000 shares of the
Company's Common Stock and received 3,020,000 tandem options to purchase Common
Stock at an exercise price of $1.16 per share and an additional 4,510,00 options
to purchase Common Stock at an exercise price of $1.16 per share under various
other plans.
In 1996, the Executive Vice President, Secretary and General Counsel,
Executive Vice President and Chief Financial Officer and Chief Information
Officer resigned. The General Counsel position is currently being filled on a
part-time basis by an individual who has served as a service provider to the
Company. The Company has hired a new Chief Financial Officer and promoted an
executive to the position of Chief Information Officer. The Company has adopted
various retention programs and the Company believes it will not have problems
finding acceptable replacements.
8. LONG-TERM DEBT
In November 1995, the Company entered into a three year, $75 million
secured revolving Credit Facility (the "Credit Facility") with Congress
Financial Corporation ("Congress"). Pursuant to the terms of the Credit
Facility, the Company is required to maintain minimum net worth and working
capital levels. In addition, the Credit Facility places limitations on the
Company's ability to incur additional indebtedness. The Credit Facility was
amended in February 1996 to permit the reorganization of Austad's and was
further amended in April 1996 to permit borrowing of an additional $4 million
over the borrowing base formula until the closing of the Rights Offering,
subject to the $75 million limit of the Credit Facility. In addition, the
minimum working capital and net worth
11
<PAGE> 12
requirements contained in the Credit Facility and in the Indenture relating to
the 9.25% Notes were reduced by $5 million to $21 million and $75 million,
respectively, for the same period. In May 1996, the definitions of consolidated
net worth and consolidated working capital were amended to take into account the
$25 million advanced by NAR until its repayment with the proceeds of the Rights
Offering. In September 1996, the definition of consolidated working capital was
amended to take into account the $10 million advance by IMR.
At September 28, 1996, the Company had $14.4 million of borrowings
outstanding under the revolving line of credit and $9.3 million outstanding
under the revolving term notes. The rates of interest related to the revolving
line of credit and term notes were 9.75% and 10.0%, respectively, at September
28, 1996.
The face amounts of unexpired documentary letters of credit and
standby letters of credit were $4.6 million and $28.9 million, respectively, on
September 28, 1996.
9. INVENTORY OF DISCONTINUED CATALOGS
In 1995, the Company made a decision to discontinue six catalogs.
Through the first thirty-nine weeks of 1995 and 1996, the six discontinued
catalogs generated revenues of $72 million and $22 million and losses of $13.7
million and $3.9 million, respectively. These losses represent operating losses
attributable to falling revenues due to poor sales on the discontinued catalogs,
in addition to increasing operating costs and expenses, costs of sales and
selling expenses predominantly incurred to create liquidation catalogs. The
Company wrote-down inventory for these catalogs by $4.3 million through the
third quarter of 1995 and $1.1 million for the same period in 1996. The
write-down in 1995 occurred due to the Company's decision to mail fewer catalogs
than its original plan, which created significantly more merchandise on hand
that needed to be moved through non-catalog channels. The inventory write-down
in 1996 was required due to some of these catalogs experiencing lower recovery
rates on liquidation of inventory. The Company utilizes various methods to
dispose of the inventory related to discontinued catalogs, including special
sale catalogs, sales sections in other catalogs and liquidation of remaining
inventory through off-price merchants. This liquidation process typically takes
from six to nine months. The $4.3 million and $1.1 million included in the
Write-down of inventory of discontinued catalogs in the Condensed Consolidated
Statements of Income (Loss) for the thirty-nine weeks ended September 30, 1995
and September 28, 1996 represent an incremental write-down in excess of the
original write-down included in cost of sales and operating expenses. Fixed
overhead, primarily telemarketing and fulfillment costs, that was allocated to
the six discontinued catalogs has been absorbed by the operations of the 1995
acquisitions and through cost containment measures made by the Company.
10. INCOME TAXES
At September 28, 1996, the Company had a net deferred tax asset of $15
million, including a deferred tax asset valuation allowance of approximately $52
million, which was recorded in prior years primarily relating to the realization
of certain net operating loss carry-forwards ("NOLs"). At September 28, 1996,
the Company had $172 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 carry-forward 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
12
<PAGE> 13
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 1994 as well as the losses incurred in 1995 and the thirty-nine week
period ended September 28, 1996). Management believes that the $15 million net
deferred tax asset represents a reasonable, conservative estimate of the future
utilization of the NOLs. 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.
11. ACCOUNTING FOR STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123, "Accounting for Stock-Based Compensation," which is
effective in 1996. The statement encourages entities to adopt the fair
value-based method of accounting for employee stock option plans, as opposed to
the method which measures compensation cost for those plans using the intrinsic
value-based accounting prescribed by APB Opinion No. 25, "Accounting for Stock
Issued to Employees." The Company adopted the recognition provisions of SFAS No.
123 in the first quarter of 1996. There were 6,900,000 employee stock options
granted during the thirty-nine week period ended September 28, 1996 and,
accordingly, the Company recorded an expense of approximately $.2 million
related to the adoption of SFAS No. 123 in the current period.
The fair value of each option granted during the year ended December
30, 1995 is estimated at the date of grant using the Black-Scholes
option-pricing model utilizing expected volatility calculations based on
historical data (37.69%-45.41%) and risk free rates based on U.S. government
strip bonds on the date of grant with maturities equal to the expected option
term (6.03%-6.80%). The expected lives are equal to the option terms and no
dividends are assumed. The Company did not adopt SFAS No. 123 for the year ended
December 30, 1995 and therefore was not required to recognize compensation cost
in accordance with SFAS No. 123 for the year then ended. Had the Company
actually adopted SFAS No. 123 as of December 30, 1995, compensation cost
recognized for grants issued during that period would have been immaterial.
Included in the Executive Equity Incentive Plan table on the following
page are 3,020,000 options related to the Rakesh K. Kaul Tandem Plan. The Stock
Option Plan table consists of options related to the Company's 1978 Option Plan,
1996 Option Plan, Rakesh K. Kaul NAR Option Plan, Rakesh K. Kaul Closing Price
Option Plan and the Rakesh K. Kaul Performance Year Option Plan.
13
<PAGE> 14
A summary of the status of the Company's two stock option plans as of December
30, 1995 and September 28, 1996 and changes during the periods ending on those
dates is as follows:
Executive Equity Incentive Plan
<TABLE>
<CAPTION>
DECEMBER 30, 1995 SEPTEMBER 28, 1996
----------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Options outstanding beginning of period 1,073,836 $2.98 1,021,170 $2.66
Options granted 286,666 $2.53 3,370,00 $1.14
Options cancelled (339,332) $3.59 (730,672) $2.76
--------- ---------
Options outstanding end of period 1,021,170 $2.66 3,660,498 $1.19
========= =========
Options exercisable end of period -- -- 173,832 $2.20
=======
Options exercised end of period -- -- -- --
Weighted average fair value of options -- $1.19 $.80 --
granted during the year
</TABLE>
Stock Option Plan
<TABLE>
<CAPTION>
DECEMBER 30, 1995 SEPTEMBER 28, 1996
----------------- ------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Options outstanding beginning of period 496,050 $3.60 90,000 $2.42
Options granted 70,000 $2.11 8,040,000 $1.09
Options cancelled (142,000) $3.50 -- --
Options expired (334,050) $3.65 (20,000) $3.50
-------- -----------
Options outstanding end of period 90,000 $2.42 8,110,000 $1.10
========
Options exercisable end of period 20,000 $3.50 16,667 $2.50
========
Options exercised end of period -- -- -- --
Weighted average fair value of options -- $.90 $.55 --
granted during the year
</TABLE>
14
<PAGE> 15
The following table summarizes information with regard to stock options
outstanding at September 28, 1996:
Executive Equity Incentive Plan
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
REMAINING
EXERCISE PRICE OPTIONS OUTSTANDING CONTRACTUAL LIFE
-------------- ------------------- ----------------
<S> <C> <C>
$ 2.50 153,832 2.50 Years
$ 2.63 50,000 4.75 Years
$ 2.75 66,666 4.50 Years
$ 3.00 20,000 2.50 Years
$ 1.16 3,020,000 5.75 Years
$ 1.00 350,000 5.75 Years
</TABLE>
There are 173,832 options exercisable at the end of the third quarter at a
weighted average exercise price of $2.20.
Stock Option Plan
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
REMAINING
EXERCISE PRICE OPTIONS OUTSTANDING CONTRACTUAL LIFE
-------------- ------------------- ----------------
<S> <C> <C>
$ 2.25 50,000 4.00 Years
$ 1.75 20,000 4.25 Years
$ 1.16 377,500 5.50 Years
$ 1.16 377,500 6.50 Years
$ 1.16 377,500 7.50 Years
$ 1.16 377,500 8.50 Years
$ 1.16 2,000,000 9.50 Years
$ 1.16 1,000,000 9.50 Years
$ 1.00 3,530,000 5.75 Years
</TABLE>
There are 16,667 options exercisable at the end of the third quarter under this
plan at a weighted average exercise price of $2.50.
15
<PAGE> 16
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 (Loss).
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
-------------- --------------
SEPT. 30, SEPT. 28, SEPT. 30, SEPT. 28,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales and operating expenses 67.0 73.7 64.5 68.5
Write-down of inventory of
discontinued catalogs .2 -- .8 .2
Provision for facility closings -- .2 .1 .1
Selling expenses 25.1 28.6 27.3 28.3
General and administrative expenses 9.8 12.0 9.2 9.6
Depreciation and amortization 1.5 1.8 1.2 1.9
Income (loss) from operations (3.6) (16.3) (3.1) (8.6)
Interest expense, net (.8) (1.6) (.6) (1.3)
Net income (loss) before extraordinary item (4.6) (18.1) (3.8) (10.0)
Net income (loss)
(5.7%) (18.9%) (4.2%) (10.3%)
</TABLE>
The following table sets forth, for the fiscal periods indicated, revenues (in
millions) for the Apparel and Non-Apparel groups.
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
Sept. 30, Sept. 28, Sept. 30, Sept. 28,
1995 1996 1995 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues:
Continuing Apparel $ 29.4 $ 29.5 $ 95.1 $ 98.2
Non-Continuing Apparel 5.4 -- 20.5 2.1
------- ------- ------- -------
Total Apparel 34.8 29.5 115.6 100.3
------- ------- ------- -------
Continuing Non-Apparel $ 121.4 124.2 361.8 382.3
Non-Continuing Non-Apparel 13.0 3.0 51.2 19.9
------- ------- ------- -------
Total Non-Apparel 134.4 127.2 413.0 402.2
------- ------- ------- -------
Total Revenues $ 169.2 $ 156.7 $ 528.6 $ 502.5
======= ======= ======= =======
</TABLE>
16
<PAGE> 17
RESULTS OF OPERATIONS
THIRTEEN-WEEKS ENDED SEPTEMBER 28, 1996 COMPARED WITH THIRTEEN-WEEKS ENDED
SEPTEMBER 30, 1995
Net Income (Loss). The Company reported a net loss before an
extraordinary item of $(28.4) million or $(.25) per share for the thirteen-week
period ended September 28, 1996 compared to a net loss before an extraordinary
item of $(7.7) million or $(.08) per share for the same period last year.
Including the effect of the extraordinary losses of $(1.1) million and $(1.8)
million for the early extinguishment of debt, the Company reported net losses of
$(29.6) million and $(9.6) million or $(.26) per share and $(.10) per share for
the thirteen-week period ended September 28, 1996 and September 30, 1995,
respectively.
The higher loss in 1996 was primarily a result of: (i) tightened vendor
credit which affected the availability of merchandise resulting in higher
backorder levels, increased split shipments, increased order cancellations,
higher return rates and higher telemarketing costs; (ii) a reduction in gross
margin as a result of the increased sale of promotionally-priced merchandise;
(iii) increased selling expenses due to higher order cancellations and return
rates; and (iv) costs associated with the Company's management hiring and
retention program.
As a result of the operating losses incurred by the Company in 1995
coupled with a very difficult year for retailers with numerous Chapter 11
filings occurring, the Company experienced a tightening of vendor credit in the
fourth quarter of 1995. The demand for the Company's merchandise has remained
strong when comparing the prior year period to the current year period. As the
Company's operating losses have continued into 1996, so has the tightening of
vendor credit. This has affected the Company's ability to obtain merchandise on
a timely basis, resulting in higher back order levels (unfilled orders) and
increased fulfillment costs (telemarketing, distribution, outbound
transportation and credit card commission costs). The Rights Offering which was
completed in August 1996 and a $10 million short-term loan from IMR provided the
Company with only temporary relief from the vendor credit situation. As the
operating losses continued into the current quarter, the Company decided it
would need additional working capital in order to implement its new business
management plan. The Company's agreement in principle with Richemont, S. A.
(Richemont), joint owner of NAR, should provide added financial flexibility to
the Company and is designed to permit the Company to obtain available
merchandise on a more timely basis. The Company's plan to correct the
operational problems at the Roanoke fulfillment center was substantially
completed by the end of the current period, reducing the magnitude of
operational problems at this facility in the near future. The Company has also
instituted a cost reduction and inventory management plan designed to tighten
control over expenses and should improve inventory turnover rates.
Revenues. Revenues decreased approximately 7% in the thirteen-week
period ended September 28, 1996 to $157 million from $169 million for the same
period last year. Continuing catalog revenues increased approximately 2%, or $3
million, to $154 million for the thirteen-week period ended September 28, 1996
from $151 million for the same period last year. This increase was more than
offset by the $15 million decline in revenues of the Company's non-continuing
catalogs. The Company's revenues were negatively impacted by higher return rates
and order cancellation as a result of merchandise availability due to tightened
vendor credit as well as vendor production issues. The Company's continuing
catalogs circulated 61 million catalogs in the third quarter of 1996, an
increase of 6% from the prior year. Back order levels [unfilled orders]
increased to $19.0 million on September 28, 1996 compared to $16.1 million on
September 30, 1995. The increase in backorders was mainly due to the tightening
of vendor credit and production quality issues with some of the Company's
vendors.
17
<PAGE> 18
Non-apparel continuing catalog revenues increased 2% on a 5% increase
in circulation to $124 million, due primarily to an increase in revenues from
the Company's venture with Sears and The Company Store, which offset reductions
in the other non-apparel catalogs. The increase in revenues was further aided by
an increase in response rates that was partially offset by a decrease in average
order size. Revenues from the non-continuing non-apparel catalogs (Mature
Wisdom, Tapestry and Hanover House) decreased in the third quarter of 1996 by
77% to $3 million from $13 million for the same period in 1995.
Apparel continuing catalog revenues were $29 million for the
thirteen-weeks ended September 28, 1996 and September 30, 1995. Overall, the
continuing Apparel circulation increase of 5% was offset by lower response rates
despite an increase in average order size. Revenues from the non-continuing
Apparel catalogs (Essence By Mail, One 212 and Simply Tops) declined by $5
million when comparing the thirteen-week period ended September 28, 1996 to the
same period last year.
Operating Costs and Expenses. Cost of sales and operating expenses
increased to 73.7% of revenues for the thirteen-week period ended September 28,
1996 compared to 67.0% of revenues for the same period in 1995. The total
expense increased $2.2 million to $115.6 million for the thirteen-week period
ended September 28, 1996 as a result of the Company's decision to increase the
amount of promotionally priced merchandise offered in its catalogs which
resulted in a deterioration in gross margin. The Company also experienced higher
fulfillment and telemarketing charges as customer's inquiries increased due to
the Company's merchandise availability situation.
The write-down of inventory of discontinued catalogs totaled $.4
million in the thirteen-week period ended September 30, 1995 compared to no such
charges in the current period. The write-downs represented the estimated
additional cost to liquidate the inventory of four discontinued catalogs (One
212, Simply Tops, Essence and Mature Wisdom).
The provision for facility closing was $.3 million for the
thirteen-week period ended September 28, 1996, which reflects expenses incurred
for relocation costs related to one of the Company's distribution facilities.
There were no such costs in the prior year period.
Selling expenses increased to 28.6% of revenues in the third quarter of
1996 from 25.1% for the same quarter last year. The total expense increased $2.4
million to $44.8 million for the thirteen-week period ended September 28, 1996
as a result of higher order cancellations and return rates.
General and administrative expenses were 12.0% of revenues for the
thirteen-week period ended September 28, 1996, compared to 9.8% of revenues for
the same period in 1995. The total expense increased $2.2 million to $18.8
million during the current year period as a result of the costs associated with
the Company's management hiring and retention program.
Depreciation and amortization increased to 1.8% of revenues in the
third quarter of 1996 from 1.5% of revenues for the same period in 1995. The
total expense increased $.4 million or 16% for the thirteen-week period ended
September 28, 1996 as compared to the same period in 1995 as a result of
depreciation charges related to the Roanoke distribution facility and the
Company's new information system.
Income (Loss) from Operations. The Company recorded a loss from
operations of $(25.6) million for the thirteen-week period ended September 28,
1996, or (16.3)% of revenues, compared to a loss from operations of $(6.0)
million for the same period in 1995, or (3.6)% of revenues.
18
<PAGE> 19
The Non-Apparel group's results of operations decreased $12.6 million,
to a loss of $(16.8) million for the thirteen-weeks ended September 28, 1996
from a loss of $(4.2) million for the same period in 1995. In the current
period, the Company continued to experience tightened vendor credit which
affected the availability of merchandise resulting in higher backorder levels,
increased split shipments, increased order cancellations, higher return rates
and higher telemarketing costs. The Rights Offering which closed in August 1996
and the $10 million temporary loan from IMR in September 1996 generated only
temporary relief from the vendor credit situation due to the Company's
continuing losses. The Company's improvements to its Roanoke distribution
center have begun to have a positive effect on the Company's throughput
activity which should aid the cost reduction process for the balance of the
year. The non-continuing catalogs lost $(1.8) million in the third quarter of
1996 compared to $(2.1) million in the same period of the prior year.
The Apparel group's results of operations decreased $4.2 million to a
loss of $(4.5) million for the thirteen-week period ended September 28, 1996
from a loss of $(.3) million for the same period in the prior year. The
increased loss is mainly attributable to an increase in inventory write-downs,
lower than anticipated response rates and higher order cancellations. The
catalogs discontinued in 1995 generated breakeven results in the third quarter
of 1996 compared to a loss of $(.6) million for the same period in the prior
year.
Interest Expense, Net. Interest expense, net increased to $2.6 million
for the thirteen-week period ended September 28, 1996 from $1.4 million for the
same period in the prior year due to the Company's higher cost of credit under
its new Credit Facility and increased borrowings related to the Company's
increased 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 1994 as well as the losses incurred in 1995 and 1996). The
Company believes that the $15 million net deferred tax asset represents a
reasonable, conservative estimate of the future utilization of the tax NOLs. 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 Company recorded a state tax provision of $.3 million in each of the
thirteen-week periods ended September 28, 1996 and September 30, 1995.
Extraordinary Item. The Company incurred extraordinary losses related
to the early extinguishment of debt of $1.l million for the thirteen-week period
ended September 28, 1996 compared to $1.8 million for the same period last year.
THIRTY-NINE WEEKS ENDED SEPTEMBER 28, 1996
COMPARED WITH TWENTY-SIX WEEKS ENDED SEPTEMBER 30, 1995
Net Income (Loss). The Company reported a net loss before an
extraordinary item of $(50.4) million or $(.51) per share for the thirty-nine
weeks ended September 28, 1996 compared to a net loss of $(20.1) million or
$(.22) per share for the same period last year. Including the effect of the
extraordinary losses of $(1.1) million and $(1.8) million related to the early
extinguishment of debt, the Company reported net losses of $(51.6) million and
$(22.0) million or $(.52) per share and $(.24) per share for the thirty-nine
week period ended September 28, 1996 and September 30, 1995, respectively.
The increased loss was primarily a result of: (i) tightened vendor
credit which affected the availability of merchandise resulting in higher
backorder levels, increased split shipments, increased order cancellations and
return rates and higher telemarketing costs; (ii) a reduction in gross margin as
19
<PAGE> 20
a result of the increased sale of promotionally-priced merchandise; (iii)
increased paper costs which were approximately 12% higher than in the 1995
period; and (iv) increased telemarketing, operational and fulfillment costs due
to the operating problems at the Roanoke fulfillment center during the first
nine months of the year.
The Company has experienced a tightening of vendor credit during fiscal
1996 due to its previously discussed losses. This has affected the Company's
ability to obtain merchandise on a timely basis, resulting in higher back order
levels (unfilled orders) and increased fulfillment costs (telemarketing,
distribution, outbound transportation and credit card commission costs). The
Company obtained a capital infusion of approximately $48 million from the Rights
Offering completed in August 1996 as well as a $10 million short-term loan from
IMR, an affiliate of the Company's majority shareholder. Due to the Company's
continued operating losses, this capital infusion has not satisfied its working
capital needs. The Company has entered into an agreement in principle to
provide a $30 million letter of credit facility. The agreement in principle is
designed to provide the Company with a temporary financial solution to its
current operating difficulties, permitting it to maintain the current course of
the Company's new strategic operating plan that is designed to improve its
control over expenses, monitor inventory levels to create maximum utilization
of working capital and reduce the fixed overhead infrastructure.
Revenues. Revenues decreased 5% for the thirty-nine week period end
September 28, 1996 to $502 million from $529 million for the same period last
year. Continuing catalog revenues increased 5% to $481 million in the current
period from $457 million for the same period last year. This increase was more
than offset by a $50 million decline in the revenues of the non-continuing
catalogs to $22 million for the first thirty-nine weeks of 1996 from $72 million
for the same period in the prior year. The Company's continuing catalogs
circulated 244 million catalogs during the first thirty-nine weeks of 1996, an
increase of 6% from the prior year period. The Company's backorder level
increased to $19.0 million as of September 28, 1996 compared to $16.1 million
at September 30, 1995. This increase in backorders was mainly due to the
tightening of vendor credit and production quality issues with some of the
Company's vendors.
Non-Apparel continuing catalog revenues increased 6% to $382 million,
due to an increase in revenues from the Company's venture with Sears, and from
The Company Store, Improvements and Austad's catalogs, which more than offset a
revenue reductions in the Domestications catalog. Overall demand for the
Company's merchandise has remained strong although revenues have been negatively
impacted overall by higher backorder levels, order cancellations and return
rates due to tightened vendor credit and vendor production issues which affected
the availability of merchandise. Revenues from the non-continuing non-apparel
catalogs (Mature Wisdom, Tapestry and Hanover House) decreased during the
thirty-nine week period ended September 28, 1996 by 61% to $20 million from $51
million for the same period in the prior year.
Apparel continuing catalog revenues increased 3% to $98 million for the
thirty-nine weeks ended September 28, 1996 from $95 million for the same period
in the prior year, as increased circulation and higher average order size more
than offset lower response rates. Revenues from the non-continuing Apparel
catalogs (Essence By Mail, One 212 and Simply Tops) declined by $18 million to
$2.0 million for the 1996 period from $20 million for the prior year period.
Operating Costs and Expenses. Cost of sales and operating expenses
increased to 68.5% of revenues for the thirty-nine week period ended September
28, 1996 from to 64.5% of revenues for the same period in the prior year. These
costs have increased due to the sale of promotionally-priced merchandise. These
increases are also attributable to inventory availability issues resulting from
tightened vendor credit and vendor production quality issues.
20
<PAGE> 21
The write-down of inventory of discontinued catalogs totaled $1.1
million for the thirty-nine week period ending September 28, 1996 compared to a
$4.3 million inventory write-down in the same period last year, when the Company
decided to discontinue four under-performing catalogs. Their write-downs are as
follows: One 212 $1.9 million, Simply Tops $1.2 million, Essence By Mail $.4
million, and Mature Wisdom $.8 million. In the 1996 period additional inventory
write-downs for the discontinued Simply Tops ($.5 million) and One 212 ($.6
million) catalogs were recorded as the Company experienced significantly lower
recovery rates on the liquidation of such inventory.
The provision for facility closing was $.5 million in 1995, which
reflected expenses incurred for relocation ($.3 million) and severance ($.2
million) costs related to the previously discussed facility closing. The $.3
million charge in 1996 is related to the relocation of one of the Company's
distribution facilities.
Selling expenses increased to 28.3% of revenues in the thirty-nine week
period ended September 28, 1996 from 27.3% of revenues for the same period last
year due to an overall decline in response rates caused primarily by merchandise
availability. The total expense decreased $1.9 million to $142.3 million for the
1996 period due mainly to an 8% reduction in catalog circulation which was
partially offset by a 12% increase in paper cost.
General and administrative expenses were 9.6% of revenues for the
thirty-nine week period ended September 28, 1996 compared to 9.2% for the same
period last year. The total expense decreased $.3 million to $48.4 million for
the 1996 period. This decrease is primarily attributable to the Company's cost
reduction program which was partially offset by the costs associated with its
management hiring and retention program.
Depreciation and amortization increased to 1.9% of revenues in the
thirty-nine week period ended September 28, 1996 from 1.2% for the same period
last year. The total expense increased $3.3 million or 56% to $9.3 million for
the 1996 period as a result of depreciation charges related to the Gump's retail
store, the Roanoke distribution center and the Austad's acquisition. Goodwill
and mailing list amortization also increased as a result of the Austad's
acquisition.
Income (Loss) from Operations. The Company recorded a loss from
operations of $(43.3) million for the thirty-nine week period ended September
28, 1996, or (8.6%) of revenues, compared to a loss from operations of $(16.2)
million for the same period in 1995, or (3.1%) of revenues.
The Non-Apparel group's results of operations decreased $23.0 million
to a loss of $(29.5) million for the thirty-nine week period ended September 28,
1996 from a loss of $(6.5) million for the same period in the prior year. The
increased loss was primarily due to the previously discussed tightened vendor
credit, higher telemarketing and higher fulfillment costs related to operating
problems at the Roanoke fulfillment center. The non-continuing catalogs lost
$(2.7) million in the first thirty-nine weeks of 1996 compared to a loss of
$(5.0) million in the prior year period.
The Apparel group's loss from operations decreased $7.3 million to a
loss of $(5.4) million for the thirty-nine week period end September 28, 1996
from income of $1.9 million for the same period in the prior year. The increased
losses are mainly a result of inventory write-downs associated with the
increased sale of off-price merchandise and inventory availability issues
related to the Company's vendor credit problems. The non-continuing catalogs
lost $(1.2) million in the first thirty-nine weeks of 1996 compared to a loss of
$(8.7) million in the prior year period.
Interest Expense, Net. Interest expense, net increased to $6.4 million
for the thirty-nine week period ended September 28, 1996 from $3.3 million for
the same period in the prior year due to the Company's previously discussed
higher cost of credit and increased working capital requirements.
21
<PAGE> 22
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 1994 as well as the losses incurred in 1995 and 1996). The
Company believes that the $15 million net deferred tax asset represents a
reasonable, conservative estimate of the future utilization of the tax NOLs. 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 Company recorded a state tax provision of $.8 million in the thirty-nine
week period ended September 28, 1996 and $.7 million for the same period in the
prior year.
Extraordinary Item. The Company incurred extraordinary losses related
to the early extinguishment of debt of $1.1 million for the thirty-nine week
period ended September 28, 1996 compared to $1.8 million for the same period in
the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital. At September 28, 1996, the Company had $2.9 million in
cash and cash equivalents, compared to $2.7 million at December 30, 1995.
Working capital and the current ratio were $25.3 million and 1.19 to 1 at
September 28, 1996 versus $28.8 million and 1.22 to 1 at December 30, 1995. The
$49.0 million of cash used in operations in the first thirty-nine weeks of 1996,
which was provided from additional borrowings under the Credit Facility,
proceeds from the Rights Offering and funding from NAR, was primarily utilized
to fund the operating losses incurred in the first thirty-nine weeks of 1996,
repay outstanding indebtedness and to make certain infrastructure investments.
As a result of the Company's continued operating losses, its financial
condition has deteriorated, which caused vendor credit to tighten and also
resulted in increased debt levels. Backorder levels increased throughout the
year due to the lack of timely receipt of merchandise. Order cancellation rates
increased and negatively affected initial fulfillment which resulted in an
increase in split shipments and higher customer inquiry calls, all of which has
contributed to the higher fulfillment and operational expenses in 1996. As a
result of these factors, the Company decided that it was necessary to obtain an
equity infusion. The Company's $50 million Rights Offering that closed on August
23, 1996 helped to restore the Company's equity base that had deteriorated due
to the continued operating losses, reduce long-term debt and provided additional
liquidity. The proceeds from the Rights Offering were used to repay the $25
million advance from NAR, the $14 million of 9.25% Senior Subordinated Notes
held by an affiliate of NAR and approximately $9 million under the Credit
Facility. The Company recorded an extraordinary expense related to the early
extinguishment of debt related to the repayment of the 9.25% Notes, representing
a write-off of the unamortized debt issuance costs of approximately $1.1
million.
The Company's continued operating losses which were greater than
originally anticipated have more than consumed the increased liquidity provided
by the Rights Offering. The Company has embarked on a plan to reduce the
introduction of slower moving untested products and continue focusing each of
its catalogs on their core businesses. This plan is designed to tighten control
over expenses at all levels, better manage inventories and reduce the fixed
overhead infrastructure of the Company through the guidance of the new
management team. The Company has begun to see the effects of its cost reduction
program with cost savings in the telemarketing and catalog production areas. The
previously discussed agreement in principle available to the Company should
provide it with the temporary liquidity it needs to implement its new business
plan. The Company's ability to maintain compliance with its borrowing
arrangements during 1996 and beyond is dependent upon the improvement of its
operating results and achievement of its operating plan of which there can be no
more assurance.
22
<PAGE> 23
The Company experiences seasonality in its working capital requirements
and fluctuations in the Credit Facility will occur usually within the first and
fourth quarters of the year.
Infrastructure Investments. The Company continued its management
information systems upgrade in 1996. The new system was operational in ten
catalogs at the end of 1995 and the Company expects to complete the roll-out of
the system to the remaining catalogs by the first quarter of 1997. The Company
has incurred higher MIS costs in 1996 due to the completion of the new system.
As of September 28, 1996, the Company had incurred costs of approximately $18.1
million as part of this plan, including $3 million in 1996. Such costs included
hardware and software costs aggregating $6.1 million, internal costs of $3.0
million and outside consulting of $9.0 million related to production of this new
system that have been capitalized. The Company has made an additional investment
in its Roanoke facility which has alleviated certain problems the facility was
experiencing which the Company believes has prepared it to handle the
anticipated increased demand of the holiday season. Overall, the Company's level
of capital spending has been reduced in 1996 and has focused on these projects.
Effect of Inflation and Cost Increases. The Company normally
experiences increased costs of sales and operating expenses as a result of the
general rate of inflation in the economy. Operating margins are generally
maintained through internal cost reductions and operating efficiencies and then
through selective price increases where market conditions permit. The Company's
inventory is 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"). On July 1, 1996,
the USPS reclassification of postal rates became effective and the Company has
begun to realize the favorable impact on its postage expense. Paper costs
represented approximately 8% of revenues in 1995 and the first thirty-nine weeks
of 1996. Since January 1996, paper prices have declined from their record levels
in 1995. While this is a favorable development for the Company, there can be no
assurance that these declines will continue or that prices will not increase
later in the year.
CAUTIONARY STATEMENTS
The following statements constitute forward-looking statements which involve
risks and uncertainties:
This plan is designed to tighten control over expenses at all levels,
better manage inventories and reduce the fixed overhead infrastructure
of the Company through the guidance of the new management team;
The previously discussed $30 million agreement in principle available
to the Company should provide it with the temporary liquidity it needs
to implement its new business plan. The Company anticipates that this
increased liquidity will finally result in a return to more normalized
vendor credit relations;
The Company anticipates that this new arrangement will have an
immediate positive impact on the financial results of the Company
through the first half of the next fiscal year, at that point the
Company believes the new strategic plan will be fully implemented;
23
<PAGE> 24
The Company's plan to correct the operational problems at the Roanoke
fulfillment center was substantially completed by the end of the
current period, reducing the magnitude of operational problems at this
facility in the near future.
The following are important factors, among others, that could cause the
Company's actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf of, the Company:
A general deterioration in the economic conditions in the United States
leading to increased competitive activity including a business failure
of a substantial size company in the retail industry; and a reduction
in consumer spending generally or specifically with reference to the
types of merchandise that the Company offers in its catalogs;
an increase in the failure rate of consumer indebtedness generally; and
an increase in credit sales by the Company accompanied by an increase
in its bad debt experience with respect to consumer debt;
a delay in the implementation of the actions to be taken by the Company
to increase the efficiency of its operations; rapid increases and
decreases in the volume of merchandise that passes through the
Company's warehouse facilities;
incurring larger than anticipated losses in future interim periods;
the failure of the Company to stem the losses attributable to
Domestications;
the failure of the Company to achieve quarterly profitable operating
results by the end of fiscal 1996;
the inability of the Company to attract and retain high quality
executives to fill open management positions;
and a reversal in the implementation of postal rate decreases or an
increase in paper costs.
24
<PAGE> 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On or about July 8, 1996, a petition for certiorari was filed by
plaintiffs with the US Supreme Court in Zucker v. Quasha. The Company filed a
brief in opposition to the petition on August 13, 1996.
Item 5. Other Information
In November 1995, the Company entered into the Credit Facility with
Congress. The Credit Facility was amended in February 1996 to permit the
reorganization of Austad. In addition, the Credit Facility was amended in April
1996 to permit the borrowing of an additional $4 million over the borrowing base
formula until the closing of the Rights Offering, subject to the $75 million
limit of the Credit Facility. In addition, the minimum working capital and net
worth requirements contained in the Credit Facility and in the Indenture
relating to the 9.25% Notes were reduced by $5 million to $21 million and $75
million, respectively, until the closing of the Rights Offering. In May 1996,
the definitions of consolidated net worth and consolidated working capital were
amended to take into account the $25 million advanced by NAR until its repayment
with the proceeds of the Rights Offering. In September 1996, the definition of
consolidated working capital was amended to take into account the $10 million
advanced by IMR.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Earnings (Loss) Per Share.
27 Financial Data Schedule (EDGAR filing only).
(b)Reports on Form 8-K - On April 17, 1996, the Company filed an Amendment No. 1
to its current report on Form 8-K dated May 25, 1995 attaching, pursuant to Item
7(a)(i) of such form, financial statements for The Austad Company reported on by
Arthur Andersen LLP, together with a consent of such firm. On July 12, 1996, the
Company filed an Amendment No. 2 to its current report on Form 8-K dated May 25,
1995 amending item 7(b) to reflect proforma adjustments to the condensed
consolidated proforma statement of operations for the year ended December 31,
1994 for the acquisition by the Company of Leichtung Workshops and The Safety
Zone .
25
<PAGE> 26
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/ Larry J. Svoboda
-------------------------------------
Larry J. Svoboda
Senior Vice-President and Chief
Financial Officer (on behalf of the
Registrant and as principal financial
officer)
November 12, 1996
26
<PAGE> 1
EXHIBIT 11
HANOVER DIRECT, INC.
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
(In 000's, except per share amounts)
13 WEEKS ENDED
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
------------ --------
<S> <C> <C>
Net income (loss) before extraordinary item $ (28,431) $ (7,749)
Extraordinary item (1,134) (1,834)
------------ --------
Net income (loss) (29,565) (9,586)
Preferred stock dividends (59) (66)
------------ --------
Net income (loss) applicable to common
shareholders $ (29,624) $ (9,652)
============ ========
Average shares of common stock
outstanding during the period 114,252 93,005
Total shares used to calculate PEPS* 114,252 93,005
Primary earnings per share:
Earnings (loss) before extraordinary item $ (0.25) $ (0.08)
Extraordinary item (0.01) (0.02)
------------ --------
Primary earnings per share $ (0.26) $ (0.10)
============ ========
Average shares of common stock
outstanding during the period 114,252 93,005
Total shares used to calculate FDEPS* 114,252 93,005
Fully diluted earnings per share:
Earnings (loss) before extraordinary
item $ (0.25) $ (0.08)
Extraordinary item (0.01) (0.02)
------------ --------
Fully diluted earnings per share $ (0.26) $ (0.10)
============ ========
Average shares of common stock
outstanding during the period 114,252 93,005
Basic earnings per share:
Earnings (loss) before extraordinary
item $ (0.25) $ (0.08)
Extraordinary item (0.01) (0.02)
------------ --------
Basic earnings per share $ (0.26) $ (0.10)
============ ========
</TABLE>
- --------------------------------------
* Per APB 15, when a net loss is reported, exercise or conversion of stock
options is not to be assumed.
27
<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 28, 1996 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-28-1996
<PERIOD-END> SEP-28-1996
<CASH> 2,853
<SECURITIES> 0
<RECEIVABLES> 24,541
<ALLOWANCES> (3,415)
<INVENTORY> 86,481
<CURRENT-ASSETS> 160,902
<PP&E> 87,023
<DEPRECIATION> (31,223)
<TOTAL-ASSETS> 276,788
<CURRENT-LIABILITIES> 135,586
<BONDS> 53,263
5,701
0
<COMMON> 96,712
<OTHER-SE> (6,946)
<TOTAL-LIABILITY-AND-EQUITY> 276,788
<SALES> 502,454
<TOTAL-REVENUES> 502,454
<CGS> 344,301
<TOTAL-COSTS> 545,704
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,766
<INCOME-PRETAX> (49,678)
<INCOME-TAX> 750
<INCOME-CONTINUING> (50,428)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (50,428)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
</TABLE>
