<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 JUNE 29, 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: 93,829,535 shares outstanding as of
August 9, 1996.
<PAGE> 2
HANOVER DIRECT, INC.
FORM 10-Q
JUNE 29, 1996
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 30, 1995 and June 29, 1996................................. 3
Condensed Consolidated Statements of Income (Loss) - thirteen and twenty-six weeks ended
July 1, 1995 and June 29, 1996............................................................................ 5
Condensed Consolidated Statements of Cash Flows - twenty-six weeks ended
July 1, 1995 and June 29, 1996............................................................................ 6
Notes to Condensed Consolidated Financial Statements for the twenty-six weeks
ended July 1, 1995 and June 29, 1996...................................................................... 8
Item 2. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations................................................................................... 17
Part II - Other Information
Item 1. Legal Proceedings..................................................................................... 26
Item 5. Other Information..................................................................................... 26
Item 6. Exhibits and Reports on Form 8-K...................................................................... 26
Signatures..................................................................................................... 27
</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 JUNE 29, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 30, JUNE 29,
1995 1996
------------ --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 2,682 $ 2,614
Accounts receivable, net 30,176 23,295
Inventories 79,281 91,785
Prepaid catalog costs 37,118 36,309
Deferred tax assets, net 3,300 3,300
Other current asset 6,170 4,592
-------- --------
Total Current Assets 158,727 161,895
-------- --------
Property and equipment, at cost:
Land 4,811 4,820
Buildings and building improvements 19,353 19,287
Leasehold improvements 14,001 14,154
Furniture, fixtures and equipment 39,508 41,135
Construction in progress 5,479 6,392
-------- --------
83,152 85,788
Accumulated depreciation and amortization (25,525) (29,424)
-------- --------
Net Property and Equipment 57,627 56,364
-------- --------
Goodwill, net 36,586 36,732
Deferred tax asset, net 11,700 11,700
Other assets, net 14,369 14,122
-------- --------
Total Assets $279,009 $280,813
======== ========
</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 JUNE 29, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 30, JUNE 29,
1995 1996
------------ --------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital lease
obligations $ 3,546 $ 28,557
Accounts payable 93,291 80,415
Accrued liabilities 25,969 23,468
Customer prepayments and credits 7,147 6,529
--------- ---------
Total Current Liabilities 129,953 138,969
--------- ---------
Noncurrent Liabilities:
Long-term debt 57,283 73,314
Capital lease obligations 1,973 1,225
Other 2,590 1,754
--------- ---------
Total Noncurrent Liabilities 61,846 76,293
--------- ---------
Total Liabilities 191,799 215,262
--------- ---------
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
and 1996 795 818
Series B Preferred Stock, convertible, $.01 par value,
authorized and issued 634,900 shares in 1995 and 1996 5,558 5,653
Common Stock, $.66 2/3 par value, authorized 150,000,000
shares; issued 93,706,508 shares in 1995 and 93,829,535
shares in 1996 62,461 62,552
Capital in excess of par value 255,390 255,466
Accumulated deficit (231,332) (253,447)
--------- ---------
92,872 71,042
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) (1,954)
Deferred compensation (294) (192)
--------- ---------
Total Shareholders' Equity 87,210 65,551
--------- ---------
Total Liabilities and Shareholders' Equity $ 279,009 $ 280,813
========= =========
</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 26 WEEKS ENDED
-------------- --------------
JULY 1, JUNE 29, JULY 1, JUNE 29,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $182,774 $180,195 $359,365 $345,722
------------ ------------ ------------- ------------
Operating costs and expenses:
Cost of sales and operating expenses 114,851 120,283 227,565 228,721
Write-down of inventory of discontinued catalogs 3,945 -- 3,945 1,100
Provision for facility closings 214 -- 530 0
Selling expenses 51,198 52,026 101,832 97,417
General and administrative expenses 16,468 14,299 32,090 29,632
Depreciation and amortization 2 ,086 3,483 3,537 6,481
------------ ------------ ------------ ------------
188,762 190,091 369,499 363,351
------------ ------------ ------------ ------------
Income (loss) from operations (5,988) (9,896) (10,134) (17,629)
------------ ------------ ------------ ------------
Interest expense (1,386) (2,420) (2,138) (4,083)
Interest income 197 46 283 215
------------ ------------ ------------ ------------
(1,189) (2,374) (1,855) (3,868)
------------ ------------ ------------ ------------
Income (loss) before income taxes (7,177) (12,270) (11,989) (21,497)
Income tax provision (313) (250) (403) (500)
------------ ------------ ------------ ------------
Net income (loss) (7,490) (12,520) (12,392) (21,997)
Preferred Stock dividends and accretion (59) (59) (105) (118)
------------ ------------ ------------ ------------
Net income (loss) applicable to common shareholders $ (7,549) $ (12,579) $ (12,497) $ (22,115)
============ ============ ============ ============
Primary and fully diluted net income (loss) per share $ (0.08) $ (0.13) $ (0.13) $ (0.24)
============ ============ ============ ============
Weighted average shares outstanding for
primary and fully diluted earnings per share 92,846,299 93,576,472 92,818,157 93,535,204
============ ============ ============ ============
</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>
26 WEEKS ENDED
JULY 1, JUNE 29,
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $(12,392) $(21,997)
Adjustments to reconcile net (loss) to net cash (used)
by operating activities:
Depreciation and amortization, including deferred fees 4,174 7,186
Other -- 81
Changes in assets and liabilities, net of acquisitions:
Accounts receivable 8,069 6,640
Inventories 5,623 (13,534)
Prepaid catalog costs 1,677 809
Other assets 615 (186)
Accounts payable (14,576) (12,146)
Accrued liabilities (3,535) (3,102)
Customer prepayments and credits (884) (618)
-------- --------
NET CASH (USED) BY OPERATING ACTIVITIES (11,229) (36,867)
-------- --------
Cash flows from investing activities:
Acquisitions of property (12,293) (2,677)
Proceeds from sale of businesses -- 1,164
Proceeds from sale of securities -- 474
Payments for businesses acquired, net of cash acquired (13,008) --
Notes receivable and investments with affiliated companies (3,376) --
Other, net (2,049) (1,372)
-------- --------
NET CASH (USED) BY INVESTING ACTIVITIES $(30,726) $ (2,411)
-------- --------
</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>
26 WEEKS ENDED
JULY 1, JUNE 29,
1995 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Cash flows from financing activities:
Net borrowings under credit facility $ 29,000 $ 16,369
Proceeds from issuance of debt -- 25,000
Payments of long-term debt and capital lease obligations (566) (1,075)
Proceeds from issuance of Common Stock 166 136
Payment of debt issuance costs -- (384)
Other net (57) (836)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 28,543 39,210
-------- --------
Net (decrease) in cash and cash equivalents (13,412) (68)
Cash and cash equivalents at the beginning of the year 24,053 2,682
-------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 10,641 $ 2,614
======== ========
Supplemental cash flow disclosures:
Interest paid $ 1,166 $ 3,264
======== ========
Income taxes paid $ 932 $ 641
======== ========
Supplemental disclosure of non-cash investing and financing activities:
Issuance of Common Stock for notes receivable $ 388 $ 86
======== ========
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
TWENTY-SIX WEEKS ENDED JULY 1, 1995 AND JUNE 29, 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 per share - Net income per share was computed using the
weighted average number of shares outstanding. Due to the net loss for the
thirteen and twenty-six weeks ended July 1, 1995 and June 29, 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 thirteen and twenty-six weeks ended July 1,
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
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 THIRTEEN WEEKS ENDED FOR THE TWENTY-SIX WEEKS ENDED
JULY 1, 1995 JULY 1, 1995
------------ ------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 182,774 $ 191,584 $ 359,365 $ 378,974
Net income (loss) $ (7,490) $ (7,030) $ (12,392) $ (12,441)
Net income (loss) per share $ (.08) $ (.08) $ (.13) $ (.14)
</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,
David Austad and certain family members surrendered to Austad's their Austad's
shares, amounting to the remaining 32.5% of the outstanding shares, and paid
approximately $1.1 million in exchange for all the outstanding shares of AGS,
Inc. ("AGS"), a South Dakota corporation newly formed by TAC to hold the
existing retail assets and liabilities of TAC. The transaction assumed a value
for Austad's and TAC based on the Company's purchase price in the May 1995
acquisition, as adjusted by adding the net income of Austad's and TAC from May
25, 1995 through February 16, 1996. There was no gain or loss recognized on this
transaction.
As a result of the reorganization, Austad's became a wholly-owned
subsidiary of the Company. In connection with the reorganization, TAC was
released from all future obligations under three of four store leases. The
Company expects that a similar release will be obtained in the near future
regarding the fourth lease. AGS will operate the four existing retail stores
acquired from TAC as Austad's stores under license from Austad's. The license
grants Mr. Austad exclusive retail rights to the Austad's name in 37 states and
Canada. Austad's retains all direct marketing rights and all other rights. Mr.
Austad will continue to work together with TAC on joint buying and other
cooperative efforts. 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.
TAC had a revolving credit facility that was secured by substantially
all of TAC's assets that was to expire on February 26, 1996. Such facility was
paid off at the February 16th closing with the proceeds from the sale of the
retail operations and from the Company's revolving credit facility.
9
<PAGE> 10
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,
PA facility. The former distribution facility in Ohio, which is held for sale,
is being carried at its estimated net realizable value of $.8 million, as of
June 29, 1996. 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 the estimated fair value of $1.7 million. During 1995,
certain assets of Regal were 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 other assets. As of June 29, 1996,
the Company has received approximately $.7 million from asset distributions made
by Regal. Such proceeds have been applied against the $1.7 million net carrying
value of the investment.
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, are eligible to
participate in the offering. The rights are exercisable 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 will expire on August 16,
1996 and will close on August 23, 1996. The Company has registered 48,544,000
shares of Common Stock to be issued upon exercise of the rights with the
Securities and Exchange Commission for the Rights Offering.
NAR Group Limited ("NAR"), the Company's majority shareholder, received
rights entitling it to purchase approximately 50.5% of the shares offered in the
Rights Offering and has indicated that it intends to exercise such rights. In
addition, the Company and NAR have entered into a Standby Purchase Agreement,
pursuant to which NAR will be required, subject to the fulfillment of various
terms and conditions thereof, to purchase all shares not subscribed by
shareholders and will receive a fee as a result. NAR is not irrevocably
committed to exercise any such rights under the Standby Purchase Agreement. Due
to the Company's continued operating losses, the Company requested that NAR
advance up to $25 million against all the rights distributed to it and/or its
commitment to purchase all of the unsubscribed shares. In May 1996, NAR advanced
the Company $25 million under the NAR Promissory Note, which is included in the
Current portion of long-term debt and capital lease obligations in the Condensed
Consolidated Balance Sheets. Under the provisions of the NAR Promissory Note,
the Company will repay NAR the $25 million advance plus accrued interest on the
earlier of December 31, 1996 or the completion of the Rights Offering. The NAR
Promissory
10
<PAGE> 11
Note carries an interest rate of 1.5% above prime, currently 9.75%, which is
payable either in cash or shares of Common Stock valued at the Rights Offering
price of $1.03 per share. The NAR Promissory Note is subordinate to the
Company's revolving credit facility.
The proceeds of the Rights Offering will be used by the Company for the
following purposes:(i) to repay the $14 million of 9.25% Senior Subordinated
Notes ("9.25% Notes") due on August 1, 1998 held by an affiliate of NAR, (ii) to
repay the $25 million principal amount advanced under the NAR Promissory Note
and (iii) to reduce outstanding indebtedness under its revolving credit
facility. At the time of repayment of the 9.25% Notes, the Company will record
an extraordinary expense related to the early extinguishment of this debt,
representing a write-off of the unamortized debt issuance costs of approximately
$1.2 million.
6. CHANGES IN MANAGEMENT AND EMPLOYMENT AGREEMENTS
On March 7, 1996, Rakesh K. Kaul was named President and Chief
Executive Officer and elected to the Board of Directors of the Company.
Effective that date, Mr. Kaul entered into an Executive Employment Agreement
(the "Employment Agreement") which provides for an "at will" term commencing on
March 7, 1996 at a base salary of $525,000 per year. The Employment Agreement
also provides for Mr. Kaul's participation in the Short-Term Incentive Plan for
Rakesh K. Kaul. That plan, which was approved by the shareholders at the June
20, 1996 shareholders meeting, provides for an annual bonus of between 0% and
125% of Mr. Kaul's base salary, depending on the attainment of various
performance objectives as determined in accordance with the objective formula
or standard to be adopted by the Compensation Committee as part of the
performance goals for each such year. The Employment Agreement also provides
for Mr. Kaul's participation in the Long-Term Incentive Plan for Rakesh K.
Kaul. That plan, which was approved by the shareholders at the June 20, 1996
shareholders meeting, provides for the purchase by Mr. Kaul of 1,000,000 shares
of Common Stock at their fair market value (the Tandem Stock Purchase Right");
an option expiring March 7, 2006 for the purchase of 2,000,000 shares of Common
Stock (the "Tandem Option"); an option expiring March 7, 2006 to purchase
2,000,000 shares of Common Stock exercisable only upon satisfaction of the
condition that the closing price of the Common Stock has attained an average of
$7.00 per share during a 91-day period ending on or before March 7, 2002; an
option expiring March 7, 2006 to purchase 1,000,000 shares of Common Stock at
their fair market value, subject to the attainment of certain objective
performance goals to be set by the Compensation Committee; and four options
expiring March 7, 2002, and the first three anniversaries thereof,
respectively, for the purchase of 250,000 shares of Common Stock each, to be
granted by NAR, the Company's majority shareholder (the "NAR Options"). As a
result of the Rights Offering, there shall be added to the shares subject to
the Tandem Stock Purchase Right, the Tandem Option, and the NAR Options
(collectively, the "Award Sares") the number of shares of Common Stock which
would have been issued on the exercise of the Rights that woiuld have been
distributed with respect to such number of Award Shares. The Employment
Agreement also provides for the grant of registration rights under the
Securities Act of 1993, as amended (the "Securities Act"), for shares of Common
Stock owned by Mr. Kaul. Pursuant to the Employment Agreement, the Company will
make Mr. Kaul whole, on an after-tax basis, for various relocation and
temporary living expenses related to his employment with the Company. In the
event that Mr. Kaul's employment is actually or constructively terminated by
the Company, other than for cause, he will be entitled for a 12-month period
commencing on the date of his termination to (i) a continuation of his base
salary, (ii) continued participation in the Company's medical, dental, life
insurance and retirement plans offered to senior executives of the Company, and
(iii) a bonus, payable in 12 equal installments, equal to 100% of his base
salary (at the rate in effect immediately prior to such termination). In
addition, Mr. Kaul will be entitled to receive (i) to the extent not previously
paid, the short-term bonus payable to Mr. Kaul for the year preceding the year
of termination and (ii) for the year in which Mr. Kaul's employment is
terminated, an additional bonus equal to his annual base salary for such year,
pro-rated to reflect the portion of such year during which Mr. Kaul is
employed. Mr. Kaul's employment will
11
<PAGE> 12
be deemed to be constructively terminated by the Company in the event of a
change in control (as defined in the Employment Agreement), the Company's
bankruptcy, a material diminution of his responsibilities, or a relocation of
the Company's headquarters outside the New York metropolitan area without his
prior written consent. In the event that Mr. Kaul's employment terminates other
than as a result of a termination by the Company, Mr. Kaul will not be entitled
to any payment or bonus, other than any short-term bonus he is entitled to
receive from the year prior to termination.
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 agreed in principal to
enter into a Termination of Employment Agreement, to be dated as of December 30,
1995 (the "Termination Agreement"), providing for the termination of (i) the
Employment Agreement, dated as of October 25, 1991, between the Company and Mr.
Rosenfeld, and (ii) all benefits, salary and prerequisites provided for therein
except for (a) benefits, salary and prerequisites earned and accrued up to
December 30, 1995, (b) salary of $500,000 through December 31, 1996, and (c)
benefits including (I) continued disability and term life insurance in amounts
not less than the amounts in force on the date of the Termination Agreement for
a three-year period and (II) the right to continue to participate in the
Company's medical plans to the extent he is eligible for up to three years from
the date of the Termination Agreement. The Termination Agreement calls for Mr.
Rosenfeld to serve as a Director Emeritus of the Company and will allow Mr.
Rosenfeld to attend meetings of the Board of Directors and participate in Board
discussions for a one-year period, but Mr. Rosenfeld has no right to vote on any
matters that come before the Board of Directors. The Termination Agreement will
preclude Mr. Rosenfeld for a one-year period from competing with the Company
under certain circumstances.
In April 1996, the Executive Vice President, Secretary and General
Counsel resigned. Also, in April 1996, the Executive Vice President and Chief
Financial Officer indicated his intention to resign his position in order to
pursue other interests. He has agreed to stay with the Company until the closing
of the Rights Offering. In connection therewith, the Company has entered into a
settlement of his employment agreement. The Chief Information Officer resigned
in June 1996.
7. 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. 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 requirements contained in the Credit
Facility and in the Indenture relating to the 9.25% Notes were reduced by $5
million 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.
At June 29, 1996, the Company had $18.4 million of borrowings
outstanding under the revolving line of credit and $9.4 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 June 29,
1996.
12
<PAGE> 13
The face amount of unexpired documentary letters of credit at June 29,
1996, was $4.6 million. In addition, the Company had issued $28.9 million of
standby letters of credit at June 29, 1996.
8. INVENTORY OF DISCONTINUED CATALOGS
In 1995, the Company made a decision to discontinue six catalogs. The
six discontinued catalogs generated revenues of $52 million and $.9 million and
losses of $11.8 million and $2.1 million through the first twenty-six weeks of
1995 and 1996, 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 $3.9 million through the
second quarter of 1995 and $1.1 million for the same period in 1996. The
write-down in 1995 occurred because the Company decided to mail fewer catalogs
than had been planned originally, which created significantly more merchandise
on hand that needed to be moved through non-catalog channels. The inventory
write-down in 1996 was required because some of these catalogs experienced 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 liquidations of remaining
inventory through off-price merchants. This liquidation process typically takes
from six to nine months. The $3.9 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 twenty-six weeks ended July 1, 1995 and June
29, 1996 represents an incremental write-down in excess of the original
write-down included in cost of sales expense. 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.
9. INCOME TAXES
At June 29, 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 carryforwards ("NOLs"). At June 29, 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 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 1994 as well as the losses incurred in 1995 and the twenty-six week
period ended June 29, 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.
13
<PAGE> 14
10. 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 no employee stock options granted
during the twenty-six week period ended June 29, 1996 and, accordingly, there is
no income statement or balance sheet impact related to the adoption of SFAS No.
123.
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 (34.13%-40.81%) 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%-7.14%). 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.
14
<PAGE> 15
A summary of the status of the Company's two stock option plans as of December
30, 1995 and June 29, 1996 and changes during the periods ending on those dates
is as follows:
Executive Equity Incentive Plan
<TABLE>
<CAPTION>
DECEMBER 30, 1995 JUNE 29, 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 -- --
Options cancelled (339,332) $3.59 (600,672) $2.75
--------- ---------
Options outstanding end of period 1,021,170 $2.66 420,498 $2.53
========= =========
Options exercisable end of period -- -- 273,832 $2.54
=========
Options exercised end of period -- -- -- --
Weighted average fair value of options -- $1.19 -- --
granted during the year
</TABLE>
Stock Option Plan
<TABLE>
<CAPTION>
DECEMBER 30, 1995 JUNE 29, 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 -- --
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 70,000 $2.11
======== =======
Options exercisable end of period 20,000 $3.50 -- --
========
Options exercised end of period -- -- -- --
Weighted average fair value of options -- $ .90 -- --
granted during the year
</TABLE>
15
<PAGE> 16
The following table summarizes information with regard to stock options
outstanding at June 29, 1996:
Executive Equity Incentive Plan
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
REMAINING
EXERCISE PRICE OPTIONS OUTSTANDING CONTRACTUAL LIFE
-------------- ------------------- ----------------
<S> <C> <C>
$1.75 30,000 5.50 Years
$2.50 253,832 2.75 Years
$2.63 50,000 5.00 Years
$2.75 66,666 4.75 Years
$3.00 20,000 2.75 Years
</TABLE>
There are 273,832 options exercisable at the end of the second quarter at a
weighted average exercise price of $2.54.
Stock Option Plan
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
REMAINING
EXERCISE PRICE OPTIONS OUTSTANDING CONTRACTUAL LIFE
-------------- ------------------- ----------------
<S> <C> <C>
$1.75 20,000 4.25 Years
$2.25 50,000 4.25 Years
</TABLE>
There are no options exercisable at the end of the second quarter under this
plan.
16
<PAGE> 17
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 26 WEEKS ENDED
-------------- --------------
JULY 1, JUNE 29, JULY 1, JUNE 29,
1995 1996 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales and operating expenses 62.8 66.8 63.3 66.2
Write-down of inventory of
discontinued catalogs 2.2 - 1.1 .3
Provision for facility closings .1 - .2 -
Selling expenses 28.0 28.9 28.3 28.2
General and administrative expenses 9.0 7.9 8.9 8.5
Depreciation and amortization 1.2 1.9 1.0 1.9
Income (loss) from operations (3.3) (5.5) (2.8) (5.1)
Interest expense, net (.7) (1.3) (.5) (1.1)
Net income (loss) (4.1%) (7.0%) (3.5%) (6.4%)
</TABLE>
RESULTS OF OPERATIONS
THIRTEEN WEEKS ENDED JUNE 29, 1996 COMPARED WITH THIRTEEN WEEKS ENDED JULY 1,
1995
Net Income (Loss). The Company reported a net loss of $(12.5) million
or $(.13) per share for the quarter ended June 29, 1996 compared to a net loss
of $(7.5) million or $(.08) per share in the same period last year.
The higher loss was primarily a result of: (i) a 2 percentage point
decrease in product margins due primarily to increased sale price merchandise
being offered in the Company's catalogs; (ii) tightening vendor credit which has
affected the availability of merchandise resulting in higher backorder levels,
increased split shipments and increased order cancellations; and (iii) increased
operational and fulfillment costs due to continued operating problems in the new
Roanoke fulfillment center.
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. 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).
17
<PAGE> 18
Revenues. Revenues decreased 1% in the quarter ended June 29, 1996 to
$180 million from $183 million for the same period last year. Continuing catalog
revenues increased 11%, or $17 million, to $173 million in the quarter ended
June 29, 1996 from $156 million for the same period last year. This increase was
more than offset by the $19 million decline in revenues of the Company's
discontinued catalogs. Overall, the Company circulated 97 million catalogs in
the second quarter of 1996, a reduction of 2% from the prior year. Back order
levels increased to $15.7 million on June 29, 1996 compared to $8.9 million on
July 1, 1995.
Non-apparel continuing catalog revenues increased 12%, on a 4% increase
in circulation to $133 million, due to an increase in revenues from the
Company's venture with Sears, and from Domestications, The Company Store,
Improvements and Austad's, which offset reductions in the other non-apparel
catalogs. Overall, the Company's average order size increased in the second
quarter of 1996. Revenues were negatively impacted in the quarter by higher
backorder levels and order cancellation rates as a result of the Company's
continuing vendor credit problems (see Liquidity and Capital Resources).
Domestications' revenues were also negatively impacted by higher return rates
due to a change in merchandise mix. Revenues from catalogs discontinued in 1995
(Mature Wisdom, Tapestry and Hanover House) decreased in the second quarter of
1996 by 70% to $6 million from $20 million for the same period in 1995.
Apparel continuing catalog revenues increased 7% to $40 million for the
second quarter of 1996 from $38 million in the same period of 1995. Increased
circulation and response rates as well as decreased backorder levels in the
Women's Apparel catalogs contributed to a 16% increase in revenues. This
increase was partially offset by a 5% decrease in Men's Apparel revenues due to
decreased circulation and lower response rates. Revenues from catalogs
discontinued in 1995 (Essence By Mail, One 212 and Simply Tops) declined by $5.9
million from July 1, 1995 to $.6 million in the second quarter of 1996.
Operating Costs and Expenses. Cost of sales and operating expenses
increased to 66.8% of revenues in the second quarter of 1996 compared to 62.8%
for the same period in 1995. The Company overall experienced a 2 percentage
point decrease in profit margins in the current quarter when compared to the
same period last year due to increased off-price sale activity and fulfillment
and merchandise delivery costs due to increased split shipments caused by
inventory unavailability related to the Company's vendor credit problems. Also,
in the current quarter, the Company continued to experience significant
operating problems in connection with the new Roanoke fulfillment center, which
will continue to impact the Company's operating results for the balance of the
year. These problems result from equipment and software malfunctions and certain
bottlenecks in the facility. The Company is continuing to utilize outside
consultants to implement a plan to substantially correct this situation for the
fourth quarter. Corrective measures will involve an approximate $3 million
capital expenditure during 1996 for additional material handling equipment.
The write-down of inventory of discontinued catalogs totaled $3.9
million in the second quarter of 1995 compared to no such charges in the current
quarter. The significant write-downs represented the estimated cost to liquidate
the inventory of four discontinued catalogs (One 212, Simply Tops, Essence and
Mature Wisdom).
The provision for facility closings was $.2 million in 1995, which
reflected expenses incurred for relocation ($.1 million) and severance ($.1
million) costs related to several Pennsylvania facility closings in connection
with the opening of the new Roanoke distribution center. There were no such
costs in the current period.
18
<PAGE> 19
Selling expenses increased to 28.9% of revenues in the second quarter
of 1996 from 28.0% for the same quarter last year. This increase was
attributable to a lower response rate and the effects of a 3% increase in paper
prices. While paper prices have decreased the Company has not received the full
benefit of this decrease due to the timing of paper purchases related to catalog
mailings.
General and administrative expenses were 7.9% of revenues in the second
quarter of 1996, compared to 9.0% in the same period in 1995. The total expense
decreased $2.2 million to $14.3 million in the second quarter of 1996 as a
result of the Company's cost reduction program designed to reduce administrative
and payroll-related expenses.
Depreciation and amortization increased to 1.9% of revenues in the
second quarter of 1996 from 1.2% of revenues for the same period in 1995. The
total expense increased $1.4 million or 67% from the second quarter of 1995 to
the same period in 1996 as a result of depreciation charges related to the
Gump's retail store and the Roanoke distribution facility. The 1995 acquisition
of Austad's also increased depreciation expense, goodwill and mailing list
amortization in the current quarter.
Income (Loss) from Operations. The Company recorded a loss from
operations of $(9.9) million in the second quarter of 1996, or (5.5)% of
revenues, compared to a loss from operations of $(6.0) million for the same
period in 1995, or (3.3)% of revenues.
The Non-Apparel group's results of operations decreased $6.9 million,
from a loss of $(1.4) million in the second quarter of 1995 to a loss of $(8.3)
million in the same period in 1996. The tightening of vendor credit has created
merchandise availability issues which in turn increased backorder levels, which
resulted in higher order cancellation rates and split shipments. All of these
increases have been factors in the Company's continuing operating losses. Also,
the results of operations of Domestications which were adversely affected by the
higher operating and fulfillment costs related to the Company's problems with
the new Roanoke distribution center have contributed to these losses. In
addition, the Company's product margin was negatively impacted by a 2 percentage
point decrease related to increased sale activity. These factors more than
offset improved catalog productivity. The catalogs discontinued in 1995 lost
($.2) million in the second quarter of 1996 compared to ($1.6) million in the
same period of the prior year.
The Apparel group's results of operations improved $4.0 million from a
loss of $(4.2) million in the second quarter of 1995 to a loss of $(.2) million
for the same period in 1996. The Men's Apparel catalogs generated income of $.3
million in the second quarter of 1996 compared to income of $1.3 million for the
same period in 1995 as a result of lower response rates. The Women's Apparel
continuing catalogs incurred a loss of $(.5) million in the second quarter of
1996 compared to income of $.1 million for the same period in 1995 due to lower
response rates and higher cancellations due to inventory availability issues.
The catalogs discontinued in 1995 incurred a loss of $(5.6) million in the
second quarter of 1995 compared to breakeven results for the same period in
1996. Such loss in 1995 included an additional $3.9 million write-down of the
remaining inventory for the discontinued catalogs, as discussed above.
Interest Expense, Net. Interest expense, net increased to $2.4 million
in the second quarter of 1996 from $1.2 million in the second quarter of 1995
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.
19
<PAGE> 20
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 the thirteen week
period of both 1996 and 1995.
TWENTY-SIX WEEKS ENDED JUNE 29, 1996
COMPARED WITH TWENTY-SIX WEEKS ENDED JULY 1, 1996
Net Income (Loss). The Company reported a net loss of $(22.0) million
or $(.24) per share for the twenty-six weeks ended June 29, 1996 compared to a
net loss of $(12.4) million or $(.13) per share in the same period last year.
The higher loss was primarily a result of: (i) tightening vendor credit
which has affected the availability of merchandise resulting in higher backorder
levels, increased split shipments and increased order cancellations; (ii) paper
costs which were approximately 14% higher than in the 1995 period; and(iii)
increased telemarketing, operational and fulfillment costs due to the continuing
operating problems at the new Roanoke fulfillment center.
The Company experience a tightening of vendor credit during the first
half of 1996 due to its previously discussed losses and the general retail
environment. This has affected the Company's ability to obtain merchandise on a
timely basis, resulting in higher back order levels and increased fulfillment
costs. The Company's backorder level increased to $15.7 million on June 29, 1996
compared to $8.9 million on July 1, 1995. Fulfillment costs increased to $48.1
million for the first half of 1996 compared to $47.7 million for the same period
last year (see Liquidity and Capital Resources).
Revenues. Revenues decreased 4% for the twenty-six week period end June
29, 1996 to $346 million from $360 million for the same period last year.
Continuing catalog revenues increased 6% to $327 million in the current period
from $307 million for the same period last year. This increase was more than
offset by a $33 million decline in the revenues of the catalogs discontinued in
1995 from $52 million for the first half of 1995 to $19 million for the same
period in 1996. The Company circulated 196 million catalogs during the first
half of 1996, a reduction of 7% from the prior year period.
Non-apparel continuing catalog revenues increased 7% to $258 million,
due to an increase in revenues from the Company's venture with Sears, and from
The Company Store, Improvements and Austad's, which offset reductions in the
other non-apparel catalogs. Revenues have been negatively impacted overall by
increased backorder levels and order cancellations due to the previously
discussed tightening of vendor credit and operational problems the Company has
experienced. Revenues from catalogs discontinued in 1995 (Mature Wisdom,
Tapestry and Hanover House) decreased in the first half of 1996 by 56% to $17
million from $38 million in the same period in 1995.
20
<PAGE> 21
Apparel continuing catalog revenues increased 3% to $69 million for the
twenty-six weeks ended June 29, 1996 from $67 million in the same period last
year, as improved response rates in the Women's Apparel catalogs more than
offset decreased circulation and lower response rates in the Men's Apparel
catalogs. Revenues from catalogs discontinued in 1995 (Essence By Mail, One 212
and Simply Tops) declined by $12 million from $14 million in 1995 to $2.0
million in 1996.
Operating Costs and Expenses. Cost of sales and operating expenses
increased to 66.2% of revenues compared to 63.3% for the same period in 1995.
Overall the Company has experienced a decrease in its profit due to increased
off-price sale activity, fulfillment costs and merchandise delivery costs. These
increases are attributable to inventory availability issues resulting from
tightening vendor credit and operating difficulties in the Roanoke fulfillment
center. The Company is also implementing an action plan as well as making an
additional investment in the Roanoke center to correct the operating problems.
The write-down of inventory of discontinued catalogs totaled $1.1
million in the twenty-six weeks ended June 29, 1996 compared to $3.9 million in
the same period last year, when the Company decided to discontinue four
under-performing catalogs with their write-downs as follows: (One 212 $1.9
million, Simply Tops $1.0 million, Essence By Mail $.4 million, and Mature
Wisdom $.6 million). In the 1996 period additional write-downs for the disposal
of the remaining inventory for the discontinued Simply Tops ($.5 million) and
One 212 ($.6 million) catalogs were recorded as the Company experienced
significantly lower recovery rates on liquidation of such inventory than had
previously been anticipated.
The provision for facility closings was $.5 million in 1995, which
reflected expenses incurred for relocation ($.3 million) and severance ($.2
million) costs related to the previously discussed facility closings. There have
been no such costs in the current year.
Selling expenses decreased to 28.2% of revenues in the twenty-six week
period ended June 29, 1996 from 28.3% for the same period last year. This
decrease is attributable to a 7% reduction in catalog circulation from the
previous year which has more than offset increases in paper prices.
General and administrative expenses were 8.6% of revenues in the
twenty-six week period ended June 29, 1996 compared to 8.9% for the same period
last year. The total expense decreased $2.5 million to $29.6 million in 1996 due
to the Company's cost reduction program designed to reduce administrative and
payroll-related expenses.
Depreciation and amortization increased to 1.9% of revenues in the
first half of 1996 from 1.0% for the same period last year. The total expense
increased $2.9 million or 83% from the first half 1995 to the first half of 1996
as a result of depreciation charges related to the Gump's retail store, the
Roanoke distribution center and the Austad's acquisition all of which had
minimal impact on the 1995 period. 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 $(17.6) million in the twenty-six week period ended June 29, 1996,
or (5.1%) of revenues, compared to a loss from operations of $(10.1) million for
the same period in 1995, or (2.8%) of revenues.
21
<PAGE> 22
The Non-Apparel group's results of operations decreased $10.4 million,
to a loss of $(12.7) million for the twenty-six weeks ended June 29, 1996 from a
loss of $(2.3) million for the same period last year. The increased loss was
primarily due to the tightening of vendor credit as well as the Domestications
operations which were adversely affected by higher telemarketing and fulfillment
costs related to the problems at the Roanoke fulfillment center. The catalogs
discontinued in 1995 lost $(.9) million in the first half of 1996 compared to
$(3.0) million in the prior year period.
The Apparel group's results of operations improved $4.3 million to a
loss of $(2.1) million in the twenty-six week period end June 29, 1996 from a
loss of $(6.4) million in the same period last year. This increase was the
result of the Company's decision to discontinue three apparel catalogs in 1995
which lost $(1.2) million compared to a loss of $(7.8) million in the prior
year. Continuing Men's Apparel catalogs income from operations decreased $1.4
million to $.3 million in the 1996 period mainly as a result of lower response
rates. The continuing Women's Apparel catalogs generated a loss of $(1.2)
million during the 1996 twenty-six week period compared to a loss of $(.3)
million in the 1995 period mainly due to inventory availability issues due to
the Company's liquidity problems.
Interest Expense, Net. Interest expense, net increased to $3.9 million
for the twenty-six week period ended June 29, 1996 from $1.9 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.
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 $.5 million in the first half of
1996 and $.4 million in the same period last year.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital. At June 29, 1996, the Company had $2.6 million in cash
and cash equivalents, compared to $2.7 million at December 30, 1995. Working
capital and the current ratio were $22.9 million and 1.16 to 1 at June 29, 1996
versus $28.8 million and 1.22 to 1 at December 30, 1995. The $36.9 million of
cash used in operations in the first twenty-six weeks of 1996, which was
provided from additional borrowings under the Credit Facility and the Rights
Offering prefunding by NAR, was primarily utilized to fund the operating losses
incurred in the first half of 1996 and a working capital increase. This working
capital increase is in part a seasonal increase in inventory and in part a
reaction to the tightening of vendor credit terms that the Company began to
experience in 1995.
As a result of the Company's continuing operating losses, its financial
condition has deteriorated, which caused a tightening of vendor credit and
resulted in an increase in long-term debt. Backorder levels have increased and,
although the Company has managed to receive merchandise shipments in most cases
in sufficient quantities to satisfy customer demand, their timeliness has
increased order cancellation rates and negatively affected initial fulfillment
which has resulted in an increase in split shipments and higher customer inquiry
calls, all of which has contributed to the higher
22
<PAGE> 23
fulfillment expense experienced in the first half 1996. In addition, the Company
has had to utilize more working capital than had previously been anticipated,
due to a tightening in trade terms. As a result of these factors, the Company
concluded that its recent operating results would have a further negative impact
on the Company's ability to conduct business on normal trade terms. The Company
decided that it was necessary to obtain an equity infusion which would: (i)
restore the Company's equity base that had deteriorated due to the operating
losses since the beginning of 1995, (ii) reduce long-term debt, and (iii)
provide the Company with additional liquidity. The Company commenced a $50
million Rights Offering on July 19, 1996 that is being underwritten by NAR, the
Company's majority shareholder. In May 1996, in order to improve liquidity and
alleviate vendor concerns about the Rights Offering, the Company received a $25
million advance from NAR against all the rights distributed to it and/or its
commitment to purchase all of the unsubscribed shares. The proceeds of the
Rights Offering will be utilized to repay the $14 million of 9.25% Senior
Subordinated Notes due August 1, 1998 held by an affiliate of NAR and to repay
the $25 million advance from NAR. At the time of repayment of the 9.25% Notes,
the Company will record an extraordinary expense related to the early
extinguishment of this debt, representing a write-off of the unamortized debt
issuance costs of approximately $1.2 million. The balance of the proceeds will
be used to reduce outstanding indebtedness under the Company's revolving credit
facility.
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, although this
could be affected by the problems in the Roanoke facility. The Company will
incur higher MIS costs in 1996 due to the completion of the new system. As of
June 29, 1996, the Company had incurred costs of approximately $16.4 million as
part of this plan, including $1.0 million in the first half of 1996. Such costs
included hardware and software costs aggregating $6.0 million and internal costs
of $10.4 million related to production of this new system that have been
capitalized. The Company currently anticipates making additional expenditures of
approximately $3 million in its Roanoke facility in 1996 to alleviate certain
problems it is currently experiencing. Overall, the Company's level of capital
spending has been reduced in 1996 and will focus 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.
23
<PAGE> 24
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
anticipates this reclassification will favorably impact its postage expense by
2%-3% on an annualized basis. Paper costs represented approximately 8% of
revenues in 1995 and the first half 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 this decline 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:
"On July 1, 1996, the USPS reclassification of postal rates became
effective and the Company anticipates this reclassification will
favorably impact its postage expense by 2%-3% on an annualized basis."
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
in 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 Rights Offering to be consummated on a timely basis;
the failure of the Company to achieve quarterly profitable operating
results by the end of fiscal 1996;
24
<PAGE> 25
the failure of the Company to solve its operating problems at the new
Roanoke fulfillment center, including the installation and retrofitting
of the facility's conveyer system;
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.
25
<PAGE> 26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On July 8, 1996, a petition for certiorari was filed by plaintiffs
with the US Supreme Court in Zucker v. Quasha. The Company filed an opposition
brief in response 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 $25 million advanced by NAR.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Earnings Per Share.
27 Financial Data Schedule (EDGAR filing only).
(b) Reports on Form 8-K - On April 17, 1996, the Company filed an Amendment No.
1 to its current report on Form 8-K dated May 25, 1995 attaching, pursuant to
Item 7(a)(i) of such form, financial statements for The Austad Company reported
on by Arthur Andersen LLP, together with a consent of such firm. On July 12,
1996, the Company filed an Amendment No. 2 to its current report on Form 8-K
dated May 25, 1995 amending item 7(b) to reflect proforma adjustments to the
condensed consolidated proforma statement of operations for the year ended
December 31, 1994 for the acquisition of Leichtung Workshops and The Safety Zone
by the Company.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANOVER DIRECT, INC.
--------------------
Registrant
By: /s/ Edward J. O'Brien
----------------------------------------------
Edward J. O'Brien
Senior Vice President, Treasurer and Secretary
(on behalf of the Registrant and as
principal financial officer)
August 13, 1996
27
<PAGE> 28
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
11 COMPUTATION OF EARNINGS PER SHARE
27 FINANCIAL DATA SCHEDULE
<PAGE> 1
EXHIBIT 11
HANOVER DIRECT, INC.
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
(In 000's, except per share amounts)
13 WEEKS ENDED
JUNE 29, JULY 1,
1996 1995
---------------------------- ----------- ----------
<S> <C> <C>
Net income (loss) ($ 12,520) ($ 7,490)
Preferred stock dividends (59) (59)
--------- ---------
Net income (loss) applicable to common
shareholders (12,579) (7,549)
Average shares of common stock
outstanding during the period 93,576 92,846
Total shares used to calculate PEPS* 93,576 92,846
Primary earnings per share $ (0.13) $ (0.08)
Average shares of common stock
outstanding during the period 93,576 92,846
Total shares used to calculate FDEPS* 934,576 92,846
Fully diluted earnings per share $ (0.13) $ (0.08)
Average shares of common stock
outstanding during the period 93,576 92,846
Basic earnings per share $ (0.13) $ (0.08)
</TABLE>
- -------------------------------
* Per APB 15, when a net loss is reported, exercise or conversion of stock
options is not to be assumed.
<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 SIX MONTHS ENDED JUNE 29,1996 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> 6-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> JUN-29-1996
<CASH> 2,614
<SECURITIES> 0
<RECEIVABLES> 25,912
<ALLOWANCES> (2,617)
<INVENTORY> 91,785
<CURRENT-ASSETS> 161,895
<PP&E> 85,788
<DEPRECIATION> (29,424)
<TOTAL-ASSETS> 280,813
<CURRENT-LIABILITIES> 138,969
<BONDS> 73,314
6,471
0
<COMMON> 62,552
<OTHER-SE> (3,472)
<TOTAL-LIABILITY-AND-EQUITY> 280,813
<SALES> 165,527
<TOTAL-REVENUES> 345,722
<CGS> 228,721
<TOTAL-COSTS> 363,351
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,083
<INCOME-PRETAX> (21,497)
<INCOME-TAX> 500
<INCOME-CONTINUING> (21,997)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,997)
<EPS-PRIMARY> (0.24)
<EPS-DILUTED> (0.24)
</TABLE>
