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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A3
AMENDMENT NO. 3
TO
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 30, 1995
Commission file number 1-12082
HANOVER DIRECT, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 13-0853260
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(State of incorporation) (I.R.S. Employer Identification No.)
1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY 07087
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 863-7300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.66 2/3 Par Value American Stock Exchange
Securities registered pursuant to Section None
12(g) of the Act:
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
As of March 21, 1996 the aggregate market value of the voting stock held by
non-affiliates of the registrant was $52 million (based on the closing price of
the Common Stock on the American Stock Exchange on March 21, 1996).
As of March 21, 1996 the registrant had 93,516,651 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
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EXPLANATORY NOTE
This Form 10-K/A3 is being filed by Hanover Direct, Inc., a Delaware
corporation (the "Company"), as an amendment to its Annual Report on Form 10-K
for the fiscal year ended December 30, 1995, amended April 29, 1996 and April
30, 1996, to make certain amendments to Part II -- Items 7 and 8 and Part IV --
Item 14 thereof.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, the percentage
relationship to revenues of certain items in the Company's Consolidated
Statements of Income:
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Cost of sales and operating expenses . . . . . . . . . . 63.4 62.9 64.5
Write-down of inventory of discontinued catalogs . . . . - - 1.1
Provision for facility closings . . . . . . . . . . . . . - - .3
Selling expenses . . . . . . . . . . . . . . . . . . . . 24.6 25.7 27.4
General and administrative expenses . . . . . . . . . . . 8.5 8.5 8.5
Depreciation and amortization . . . . . . . . . . . . . . .5 .8 1.2
Income (loss) from operations . . . . . . . . . . . . . . 3.0 2.1 (3.0)
Interest expense, net . . . . . . . . . . . . . . . . . .4 .4 .6
Other income (expense) . . . . . . . . . . . . . . . . . .1 (.2) -
Net income (loss) . . . . . . . . . . . . . . . . . . . . 2.7% 1.9% (4.0%)
</TABLE>
RESULTS OF OPERATIONS
1995 COMPARED WITH 1994
Net Income (loss). The Company reported a net loss before
extraordinary items of $28.2 million or $(.30) per share for the year ended
December 30, 1995 compared to net income of $14.8 million or $.16 per share in
1994. Including the effect of the extraordinary loss of $1.8 million for the
early extinguishment of debt, the Company reported a net loss of $30 million or
$(.32) per share for the year ended December 30, 1995. Per share amounts are
expressed after deducting preferred dividends of $.2 million in 1995 and $.1
million in 1994. The weighted average number of shares outstanding was
93,029,816 for the year ended December 30, 1995 compared to 93,285,190 in 1994.
The net loss in 1995 was primarily the result of the cumulative impact
on the Company of the 14% to 18% increase in USPS rates, a 43% increase in paper
prices and weak consumer demand. As a result of these factors, the Company
discontinued six poorly performing catalogs in 1995 which have incurred
substantial losses which the Company believed could not overcome these
obstacles. Including an incremental write-down of inventory associated with
discontinuing these catalogs of $8.6 million, these catalogs lost $20 million
in 1995 compared to $4.7 million in the prior year. In addition, the Company
also incurred costs, aggregating $2.7 million, in connection with the
consolidation of facilities into its new Roanoke, VA fulfillment center.
These costs included operating expenses related to maintaining duplicate
facilities of $1.0 million and $1.7 million of costs related to start-up
problems, operating down-time and inefficiencies in the new facility. Due to
these cost pressures, the Company implemented a cost reduction program in 1995
whereby the Company instituted a salary freeze, reduced its work force by
approximately 10%, closed 5 facilities and reduced other administrative and
overhead expenses. In connection with the closing of these 5 facilities, the
Company incurred non-recurring costs of $1.5 million. The Company also
incurred one-time severance and employee separation expenses of $2.0 million.
Revenues. Revenues decreased 2.5% in 1995 to $750 million from
$769 million in 1994. Revenues of continuing catalogs increased approximately 2%
from $651 million in 1994 to $662 million in 1995, which
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was offset by a 26% decline to $88 million in revenues from discontinued
catalogs. The Company circulated 370 million catalogs in 1995, a 2% reduction
from the prior year.
Non-Apparel continuing catalog revenues increased 1% to $528 million,
due to a 14% increase in revenues from the Company's venture with Sears to $81
million and $68 million of revenues from the 1995 acquisitions of Improvements,
Safety Zone and Austad's which offset revenue reductions in the other
Non-Apparel catalogs, principally Domestications and Colonial Garden Kitchens.
Domestications revenues were down 28% as improved customer response rates
partially offset a decline in the average order and a 31% reduction in
circulation. Revenues from discontinued catalogs decreased $11.7 million from
$77.7 million in 1994 to $66 million in 1995. The Company discontinued the
Mature Wisdom catalog in mid-1995 and the Tapestry and Hanover House catalogs in
the fourth quarter of 1995.
Apparel continuing catalog revenues increased $5 million, or
approximately 4%, from $129 million in 1994 to $134 million in 1995, as all
continuing catalogs, International Male, Undergear, Silhouettes and Tweeds
reported higher sales than the prior year. Revenues from discontinued Apparel
catalogs declined 46% from $40 million in 1994 to $22 million in 1995, including
the effect of discontinuing Essence by Mail, One 212 and Simply Tops.
Operating Costs and Expenses. Cost of sales and operating
expenses as a percentage of revenues increased from 62.9% in 1994 to 64.5% in
1995. This increase is primarily attributable to lower overall product margins
due to greater sale activity as a result of the generally weak consumer demand
and the impact of inventory write-downs for the discontinued catalogs. In
addition, fulfillment costs were higher in 1995 due to the start up of the new
facility in Roanoke and higher outbound freight expenses of approximately
$7 million or 15% as a result of the increase in USPS rates.
The write-down of inventory for the discontinuance of six of the
Company's catalogs of $8.6 million primarily consisted of incremental inventory
write-downs in excess of normal seasonal write-downs and severance expenses.
During 1995, the Company recorded a Provision for Facility Closings totalling
$1.5 million consisting primarily of moving expenses ($.7 million), lease
termination fees ($.3 million) and severance expenses ($.5 million),
substantially all of which were paid in 1995. No such charges were recorded
in 1994.
Selling expenses increased $8.2 million or 4.2% in 1994 to 27.4% of
revenues for the current year, primarily due to a 43% increase in average paper
costs and a 15% increase in the average cost of mailing a catalog which more
than offset the 2.0% reduction in catalog circulation and higher customer
response rates. As a result of these price increases, the Company incurred
approximately $18.0 million of higher costs to prepare and deliver its catalogs
in 1995.
General and administrative expenses declined $1.1 million or 2% in 1995
although they remained constant as a percentage of revenues at 8.5% in both
years. Excluding the impact of one-time severance expenses of $2.0 million,
these expenses declined as a percentage of sales to 8.3% due to the Company's
cost reduction program instituted in early 1995. This reduction was partially
offset by higher bad debt expenses, reflecting increased losses on major credit
cards and the Company's private label credit card.
Depreciation and amortization increased $2.8 million from $6.2 million
in 1994 to $9.0 million in 1995. The increase was attributable to new
amortization charges associated with the Roanoke, Virginia fulfillment facility,
the management information system, the new Gump's retail store and the goodwill
and mailing lists associated with the 1995 acquisitions.
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Income (Loss) from Operations. Income from operations declined from
$16.0 million in 1994 to a loss of $22.6 million in 1995. Losses from
discontinued catalogs increased from $4.7 million in 1994 to $20 million in
1995.
Non-Apparel income from operations decreased from $20.5 million in 1994
to a loss of $7.8 million in 1995. The most significant contributor to the
decrease in profitability was Domestications, which in addition to being
significantly impacted by the higher postage and paper costs also incurred
additional costs in connection with the move of its operations into the new
Roanoke facility. These costs included start-up costs, down time due to
equipment problems, temporary labor costs, higher shipping, damages and
replacement costs. Additionally, Domestications' product margin was adversely
impacted by product mix changes, increased promotional activities and higher
obsolescence charges. The loss from discontinued Non-Apparel catalogs increased
from $1.3 million in 1994 to $10.1 million in 1995. Profitability from the Sears
venture increased by $.1 million to $3 million in 1995 and the 1995 acquisitions
contributed income of $2.5 million. The Company Store and Gump's also had higher
operating profits in 1995 compared to 1994.
Apparel results of operations declined $7.7 million from a loss of $.5
million in 1994 to a loss of $8.2 million in 1995. This decrease is mainly
attributable to the discontinued Apparel catalogs whose losses increased $6.5
million from $3.4 million in 1994 to $9.9 million in 1995. Mens Apparel
operating income increased 35% to $2.6 million which offset lower earnings at
Tweeds and an operating loss at Silhouettes, where credit problems in the fourth
quarter of 1995 contributed to its loss.
Interest Income (Expense). Interest expense increased
approximately $1.5 million from $3.5 million in 1994 to $5.0 million in 1995.
This increase was due to higher average borrowings outstanding under the
Company's revolving credit facility in 1995 as well as an increase in the basis
point of approximately 3% in the Company's borrowing rate which is attributable
to the Company's deteriorating financial performance in 1995. Interest income
declined by $.2 million to $.5 million in 1995 because the Company had less cash
available for investment.
Other Income (Expense). Other expenses in 1994 totaled a net $1.8
million while there were no similar expenses in 1995. The loss in 1994 was
comprised of $1.2 million related to the Company's investment in Boston
Publishing Company and $1.3 million related to its investment in Regal
Communications, Inc. offset by other income of $.7 million. The Company acquired
a 20% ownership in Boston Publishing Company in February 1994. The Company made
this investment with the intention of possibly acquiring Boston Publishing
Company at some point in the future. During 1994 the Company made an investment
in debt securities of Regal Communications, Inc. It was the Company's intention
to hold these debt securities as a long term investment and perhaps at some
point in the future obtain certain operating subsidiaries of Regal in exchange
for such securities.
Income Taxes. The Company did not record a Federal income tax provision
in 1995 based on the current year net operating loss. The Federal income tax
provision of $5.9 million in 1994 was offset by the utilization of net operating
loss carry forwards. The Company's state tax provision was $1.0 million and $.9
million in 1995 and 1994, respectively.
Shareholders' Equity. The number of shares of Common Stock
outstanding increased by 714,928 in 1995 due to shares issued in connection with
the Company's equity and incentive plans, the exchange of the 6% Series A
Convertible Preferred Stock and other activities. At December 30, 1995 there
were 93,452,768 shares of Common Stock outstanding compared to 92,737,840 shares
of Common Stock outstanding at December 31, 1994.
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Extraordinary Items. The extraordinary loss of $1.8 million in
1995 represented a loss on the early extinguishment of debt which arose in
connection with the refinancing of the Company's $75 million Revolving Credit
Facility and its $14 million 9.25% Senior Subordinated Notes due 1998.
1994 COMPARED WITH 1993
Net Income. The Company reported net income of $14.8 million or $.16
per share for the year ended December 31, 1994, compared to net income of $17.3
million or $.17 per share for the same period in 1993. Per share amounts are
expressed after deducting preferred dividends of $.1 million in 1994 and $4.1
million in 1993. The weighted average number of shares outstanding increased
approximately 21% to 93,285,190 shares for the year ended December 31, 1994,
compared to 77,064,131 shares for the same period in 1993, primarily due to the
public offering and the conversion of certain preferred stocks.
Revenues. Revenues increased $126 million, or 20%, from $643
million in 1993 to $769 million in 1994. This significant increase in revenues
was primarily a result of an increase of $48 million from the Company's venture
with Sears and increased revenues of $88 million from Gump's, The Company Store
and Tweeds which were acquired in the second half of 1993 ("1993 acquisitions").
Revenues from catalogs discontinued in 1993 were $20 million in 1993 and $1
million in 1994.
Revenues were negatively impacted in 1994 by an increase in customer
returns from approximately 13.1% of shipped sales in 1993 to 14.9% of shipped
sales in 1994. The increased returns were generated by new product categories
and the Company implemented measures that reduced the rate of returns in the
second half of 1994.
Non-Apparel continuing catalog revenues increased $122 million, or 26%,
from $477 million in 1993 to $599 million in 1994. The Company's venture with
Sears generated increased Non-Apparel revenues of $46 million from 1993 to 1994,
while revenues generated by Gump's and The Company Store increased $57 million
from 1993 to 1994. The remainder of the Non-Apparel revenue increase was
primarily due to increased revenues related to Domestications, and the new
Kitchen & Home catalog. Revenues from discontinued catalogs were $7 million and
$.2 million in 1993 and 1994, respectively.
Apparel continuing catalog revenues increased $23 million, or
approximately 16%, from $146 million in 1993 to $169 million in 1994. This
increase was primarily due to a $31 million increase in the revenues of Tweeds
which was acquired in the fourth quarter of 1993. Women's Apparel continuing
catalog revenues increased 6% which is mainly attributable to Silhouettes and
One 212, while Men's Apparel revenues decreased 16% as the group discontinued an
under performing catalog in 1993 thus focusing on its profitable segments.
Revenues from discontinued apparel catalogs were $13 million and $.5 million in
1993 and 1994, respectively.
Operating Costs and Expenses. Cost of sales and operating
expenses as a percentage of revenues decreased from 63.4% in 1993 to 62.9% in
1994. The decrease was primarily attributable to higher overall profit margins
and lower fulfillment costs primarily due to the commencement of the Company's
facilities consolidation program, as partially offset by higher delivery costs
in 1994 based on sales mix.
Selling expenses increased from 24.6% of revenues for the year ended
January 1, 1994 to 25.7% of revenues for the year ended December 31, 1994 as the
Company increased catalog circulation 17% in an effort to increase the number of
active customers on its mailing lists in anticipation of the 1995 postal rate
increase. The response to this prospecting program was less than anticipated
which resulted in higher selling expense. Overall demand from the new customer
acquisition program was soft principally in the Non-Apparel catalogs,
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particularly in Domestications, where prospecting was heaviest. The Company
mailed approximately 377 million catalogs in 1994.
General and administrative expenses remained flat as a percentage of
revenues at 8.5% in both years. General and administrative expenses increased
$10.0 million or 18.1% from 1993 to 1994 due primarily to the 1993 acquisitions.
Depreciation and amortization increased $2.9 million from $3.3 million
in 1993 to $6.2 million in 1994. The increase was attributable to a full year of
charges for goodwill, mailing lists and depreciation associated with the 1993
acquisitions of Gump's, The Company Store and Tweeds.
Income from Operations. Income from operations decreased from
$19.1 million in 1993, or 3.0% of revenues, to $16.0 million in 1994, or 2.1% of
revenues. Losses from discontinued catalogs were $3.9 million in 1993 compared
to $.1 million in 1994.
Non-Apparel income from operations decreased $5.7 million from $25.9
million in 1993 to $20.2 million in 1994. This decrease was mainly due to the
previously-mentioned lower response rates to the Company's customer acquisition
program. Non-Apparel income from operations was also impacted by a loss of $2.1
million in 1994 compared to break even results in 1993 related to the Gump's
retail operations due to the temporary relocation of its retail store prior to
the move to its new location in March 1995.
Apparel income from operations increased $3.1 million from a $3.6
million loss in 1993 to a $.5 million loss in 1994. The Men's Apparel income
from operations increased $3.3 million from a loss of $1.4 million in 1993 to
income of $1.9 million in 1994 as a result of overhead reductions and increased
response rates. The Women's Apparel income from operations increased $1.0
million excluding losses of $.5 million and $1.6 million in 1993 and 1994,
respectively, from the start-up of a new catalog. Apparel income from operations
for discontinued catalogs was a loss of $4.3 million in 1993 and income of $.2
million in 1994.
The Company's venture with Sears generated $1.4 million of income from
operations in 1993 versus $2.9 million in 1994.
Interest Income (Expense). Interest expense decreased approximately
$1.4 million from $4.9 million in 1993 to $3.5 million in 1994. This decrease
was the result of the Company using the proceeds of the public offering to pay
down its revolving line of credit in April 1994, thus reducing borrowing
requirements throughout the remainder of 1994. In addition, the Company
experienced lower interest rates upon entering into a new credit agreement in
October 1994. The Company's long-term debt increased $2.5 million from 1993 to
1994. Interest income decreased $1.5 million from $2.2 million in 1993 to $.7
million in 1994, due to interest income related to a Federal income tax refund
received in 1993.
Other Income (Expense). Other income decreased $2.7 million from income
of $.9 million in 1993 to a loss of $1.8 million in 1994. The income of $.9
million in 1993 represents a settlement of a claim in bankruptcy. The loss in
1994 was comprised of $2.5 million of charges due to losses on investments and
advances as partially offset by other income of $.7 million.
Income Taxes. The Company recorded a Federal income tax benefit of $4.4
million in 1994 based on its estimate of the amount of net operating loss carry
forwards ("NOLs") that can be utilized in the future. Federal income tax
provisions of $5.9 million and $4.2 million, respectively, were offset by the
utilization of
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NOLs in 1993 and 1994. The Company's state tax provision was $.5 million and $.9
million in 1993 and 1994, respectively.
Shareholders' Equity. The number of shares of Common Stock outstanding
increased by 9,804,663 in 1994 due to: (i) 8,045,296 shares issued in connection
with the Public Offering, (ii) 1,309,207 shares issued in connection with a
cashless exchange upon the exercise of certain warrants and (iii) 450,160 shares
issued in connection with the Company's equity and incentive plans, the exchange
of the 6% Series A Convertible Preferred Stock (the "6% Preferred Stock") and
other activities. At December 31, 1994, there were 92,737,840 shares of Common
Stock outstanding compared to 82,933,177 shares of Common Stock outstanding at
January 1, 1994.
The dividends of $.1 million in 1994 represent dividend requirements on
the 6% Preferred Stock issued in September 1993 while the dividends of $4.1
million in 1993 represent dividend requirements on the 7.5% Preferred Stock and
the Class B Preferred Stock, both of which were converted into Common Stock in
the fourth quarter of 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $24.1 million and $2.7 million in cash and cash
equivalents at December 31, 1994 and December 30, 1995 respectively. Working
capital and the current ratio were $58.5 million and 1.51 to 1 at December 31,
1994 versus $28.8 million and 1.22 to 1 at December 30, 1995.
The primary sources of cash in 1995 were the $20.7 million of proceeds
from the issuance of long-term debt and $8.7 million due to a reduction in
inventories. Cash was used primarily to fund: (i) the Company's 1995 operating
loss, (ii) $13.7 million of capital expenditures, (iii) $13.0 million for the
purchase of businesses, (iv) $8.7 million for the reduction of accounts payable,
and (v) $3.6 million for payments of long-term debt and debt issuance costs.
As a result of the operating losses incurred in 1995, the Company's
financial condition deteriorated which reduced its working capital position and
resulted in an increase in long-term debt. In addition, as a result of these
operating losses, the Company was not in compliance at various times during 1995
with certain financial covenants that had been contained in its $80 million
credit facility that it had entered into in 1994 ("Credit Facility"). The
Company obtained waivers for these covenant violations, but was required to
agree to more restrictive terms with respect to availability (reduced to $55
million), financial covenants and a higher interest rate. The disclosure of
these covenant violations in the Company's 1995 interim financial statements,
coupled with a very difficult year for retailers with numerous Chapter 11
filings occurring, caused a tightening of vendor credit in the fourth quarter of
1995. This resulted in higher back order levels (unfilled orders) and increased
fulfillment costs which negatively impacted the Company's operating results in
that quarter even though credit restrictions eased when the Company closed its
new three year $75 million credit facility with Congress Financial Corp.
("Congress Facility") on November 15, 1995. The Company had determined that it
was necessary to replace the original Credit Facility because the terms of the
proposed amendment were too restrictive. Although the Congress Facility is
secured by all of the Company's assets, it provides the Company with greater
liquidity and less restrictive financial covenants, and was competitive in terms
of cost with the proposed amendment.
At the time the Company closed the Congress Facility, the Company
believed that the facility would provide the Company with adequate capital to
fund its operations. The Company had made this determination based upon the
relaxing of the trade credit restrictions, the accompanying increased flow of
merchandise, and
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expectations for its fourth quarter operating results it had at that time. In
early 1996, after several additional retail companies filed Chapter 11, the
Company again began to experience tightening of vendor credit. Despite this,
backorder levels have increased only marginally, and the Company has managed to
receive merchandise shipments in most cases on a timely basis and in sufficient
quantities to satisfy its customer demand. However, it has had to utilize more
working capital to accomplish this than had previously been anticipated, due to
a tightening in trade terms. In addition, when the final results of 1995 became
known to the Company, it concluded that such results would have a further
negative impact on the Company's ability to conduct business on normal trade
terms. Therefore, 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 loss in 1995, (ii) reduce long-term debt, and
(iii) provide the Company with additional liquidity. As a result, the Company
announced that it would conduct a $40 million rights offering after the first
quarter to be underwritten by NAR, the Company's largest shareholder. The
Company will utilize $14 million of the net proceeds to repay its 9.25% Senior
Subordinated Notes due 1998. At such time, the Company will record an
extraordinary expense related to the early extinguishment of debt, representing
the write-off of the unamortized debt issuance costs of approximately $1.4
million. The balance of the proceeds will be used for general corporate
purposes, including the repayment of outstanding revolver indebtedness under the
Congress Facility.
The announcement of this rights offering has eased vendor/creditor
concerns about the Company's viability, and the Company believes that upon the
conclusion of the rights offering, the Company will return to normal trade terms
with all suppliers and will be able to obtain sufficient merchandise on a timely
basis to satisfy customer demand, as well as have adequate capital to support
its operations.
The Company experiences seasonality in its working capital requirements
and fluctuations in the revolving credit facility will occur usually within the
first and fourth quarters of the year.
Infrastructure Investments. In early 1995, the Company completed the
construction of a new fulfillment facility on a 53 acre site in Roanoke,
Virginia to support the Domestications catalog. The total cost of the facility
was $18.3 million. The Company began partial shipping and receiving activities
in the first quarter of 1995 and the facility was fully operational in September
1995. The Company experienced operating inefficiencies and start-up problems in
conjunction with bringing this facility into service. The Company's operating
margins were negatively impacted by approximately $2.7 million of costs in 1995.
The Company believes it will continue to experience inefficiencies in early
1996. However, the Company has taken and is taking actions which it believes
will lead to more efficient operations.
The Company also completed the construction and opened its new Gump's
retail store in San Francisco in March 1995. The total cost of the construction
was $7.8 million, of which $1.7 million was spent in 1995.
The Company continued its management information systems up-grade in
1995. The new system, which began operation in two of the Company's catalogs in
1994, was operational in ten catalogs at the end of 1995. The Company expects to
complete the roll-out of the system to the remaining catalogs in 1996. The
Company will incur higher MIS costs in 1996 due to the completion of the
transition to the new system. As of December 30, 1995, the Company had incurred
costs of approximately $15.9 million as part of this plan, including $6.8
million in 1995. Such costs included hardware and software costs aggregating
$10.3 million and internal costs of $2.5 million related to production of this
new system that have been capitalized. The Company began to amortize these costs
over 5 years in 1995. The Company's level of capital spending will be reduced in
1996 and will focus on the completion of the systems project.
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Effects 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 costs of goods sold approximates replacement cost. Because sales are
not dependent upon a particular supplier or product brand, the Company can
adjust product mix to mitigate the effects of inflation on its overall
merchandise base.
Paper and Postage. The Company mails its catalogs and ships
most of its merchandise through the United States Postal Service ("USPS"), with
catalog mailing and product shipment expenses representing approximately 18% of
revenues in 1995. In January 1995, the USPS increased postage rates by
approximately 14% to 18%. The Company also experienced record price increases in
1995 for the paper that is used in the production of its catalogs as the paper
industry announced a series of significant price increases that increased the
Company's average cost for paper by over 43% from 1994. Paper costs represented
approximately 8% of revenues in 1995. These cost increases which totaled $25
million, and the duplicate costs associated with the consolidation of the
distribution facilities and the transition to the new system discussed earlier,
adversely impacted the Company's margins and earnings in 1995. In 1996, the USPS
announced a reclassification of postal rates that will become effective on July
1, 1996. It is anticipated that this will favorably impact the Company's postage
expenses by approximately 2%-3% on an annualized basis. Paper prices may
continue at current levels during 1996.
Cautionary Statements
The following statements constitute forward looking statements which
involve risks and uncertainties:
"...the Company believes that upon the conclusion of the rights
offering, the Company will return to normal trade terms with all
suppliers and will be able to obtain sufficient merchandise on a
timely basis to satisfy customer demand, as well as have adequate
capital to support its operations."
"...the Company has taken and is taking actions which it believes
will lead to more efficient operations. Paper prices may continue
at current levels during 1996."
"In 1996, the USPS announced a reclassification of postal rates
that will become effective on July 1, 1996. It is anticipated that
this will favorably impact the Company's postage expenses by
approximately 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, a reduction in consumer spending generally or
specifically with reference to the types of merchandise that the
Company offers in its catalogs;
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an increase in the failure rate of consumer indebtedness
generally; 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 operations; rapid increases
and decreases in the volume of merchandise that passes through the
Company's warehouse facilities; and a delay or reversal in the
implementation of postal rate increase or an increase in paper
cost.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Hanover Direct, Inc.:
We have audited the accompanying consolidated balance sheets of Hanover
Direct, Inc. (a Delaware corporation) (successor to The Horn & Hardart Company,
see Note 1 to the Consolidated Financial Statements) and subsidiaries as of
December 30, 1995 and December 31, 1994, and the related consolidated statements
of income, shareholders' (deficit) equity and cash flows for each of the three
fiscal years in the period ended December 30, 1995. These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hanover Direct, Inc.
and subsidiaries as of December 30, 1995 and December 31, 1994, and the results
of their operations and their cash flows for each of the three fiscal years in
the period ended December 30, 1995 in conformity with generally accepted
accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statement schedule is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
February 26, 1996
(except with respect to the
matters discussed in Note 14,
as to which the date is March 7, 1996)
New York, New York
-12-
<PAGE> 13
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31, 1994 and December 30, 1995
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1994 1995
------------ -----------
(IN THOUSANDS)
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $24,053 $2,682
Accounts receivable, net of allowance for doubtful
accounts of $2,730 in 1994 and $2,597 in 1995 25,247 30,176
Inventories 83,653 79,281
Prepaid catalog costs 33,725 37,118
Deferred tax asset, net 3,200 3,300
Other current assets 2,658 6,170
------- -------
Total Current Assets 172,536 158,727
------- -------
Property and Equipment, at cost
Land 1,917 4,811
Buildings and building improvements 7,994 19,353
Leasehold improvements 6,807 14,001
Furniture, fixtures and equipment 24,103 39,508
Construction in progress 21,358 5,479
-------- --------
62,179 83,152
Accumulated depreciation and amortization (19,708) (26,090)
-------- --------
Property and Equipment, net 42,471 57,062
-------- --------
Goodwill 19,026 36,586
Deferred tax asset, net 11,800 11,700
Other assets 16,413 14,934
-------- --------
Total Assets $262,246 $279,009
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
-13-
<PAGE> 14
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
As of December 31, 1994 and December 30, 1995
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Current portion of long-term debt and capital
lease obligations $ 812 3,546
Accounts payable 89,366 93,291
Accrued liabilities 20,215 25,969
Customer prepayments and credits 3,642 7,147
---------- --------
Total Current Liabilities 114,035 129,953
---------- --------
Noncurrent Liabilities:
Long-term debt 35,907 57,283
Capital lease obligations 1,196 1,973
Other 1,383 2,590
---------- --------
Total Noncurrent Liabilities 38,486 61,846
---------- --------
Total Liabilities 152,521 191,799
---------- --------
Shareholders' Equity:
6% Series A Convertible Additional Preferred Stock, $10 stated value,
authorized 5,000,000 shares; issued
156,600 shares in 1994 and 78,300 shares in 1995 1,589 795
Series B Convertible Additional Preferred Stock, $.01
par value, authorized and issued 634,900 shares in 1995 - 5,558
Common Stock, $.66 2/3 par value, authorized
150,000,000 shares; issued 92,978,234 shares in
1994 and 93,693,162 shares in 1995 61,985 62,461
Capital in excess of par value 253,210 255,390
Accumulated deficit (201,102) (231,332)
---------- --------
115,682 92,872
Less:
Treasury stock, at cost (1,157,061 shares in 1994 and 1995) (3,345) (3,345)
Notes receivable from sale of Common Stock (1,912) (2,023)
Deferred compensation (700) (294)
---------- --------
Total Shareholders' Equity 109,725 87,210
---------- --------
Total Liabilities and Shareholders' Equity $262,246 $279,009
========== ========
</TABLE>
See Notes to Consolidated Financial Statements.
-14-
<PAGE> 15
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For the years ended January 1, 1994, December 31, 1994 and December 30, 1995
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
REVENUES $642,511 $768,884 $749,767
-------- -------- --------
Operating costs and expenses:
Cost of sales and operating expenses 407,087 484,059 483,493
Write-down of inventory of discontinued catalogs - - 8,580
Provision for facility closings - - 1,563
Selling expenses 157,811 197,436 205,618
General and administrative expenses 55,258 65,257 64,112
Depreciation and amortization 3,279 6,157 9,020
-------- -------- --------
623,435 752,909 772,386
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS 19,076 15,975 (22,619)
Interest expense (4,925) (3,544) (5,050)
Interest income 2,168 731 519
Other income (expense) 888 (1,833) -
-------- -------- --------
Income (loss) before income taxes 17,207 11,329 (27,150)
Income tax provision (benefit) (130) (3,509) 1,003
-------- -------- --------
Income (loss) before extraordinary item 17,337 14,838 (28,153)
Extraordinary item - - (1,837)
-------- -------- --------
NET INCOME (LOSS) 17,337 14,838 (29,990)
Preferred stock dividends (4,093) (135) (240)
-------- -------- --------
Net income (loss) applicable to Common
Shareholders $13,244 $14,703 ($30,230)
======== ======== ========
Net income (loss) per share:
Income (loss) before extraordinary item $ 0.17 $ 0.16 ($.30)
Extraordinary item - - (.02)
-------- -------- --------
NET INCOME (LOSS) PER SHARE $ 0.17 $ 0.16 ($ .32)
========== ======== ========
</TABLE>
-15-
See Notes to Consolidated Financial Statements.
<PAGE> 16
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended January 1, 1994, December 31, 1994 and December 30, 1995
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $17,337 $14,838 ($29,990)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization including deferred
fees . . . . . . . . . . . . . . . . . . . . . . . . . 4,122 6,499 9,419
Provision for doubtful accounts . . . . . . . . . . . . 3,404 3,697 4,448
Provision for catalog and facility closings . . . . . . - - 10,143
Extraordinary item - early extinguishment of debt . . . - - 1,837
Provision for losses on notes receivable and
marketable securities . . . . . . . . . . . . . . . . - 2,121 -
Deferred transaction costs . . . . . . . . . . . . . . - (837) -
Deferred taxes . . . . . . . . . . . . . . . . . . . . (631) (4,369) -
Other, net . . . . . . . . . . . . . . . . . . . . . . (33) 43 76
Changes in assets and liabilities, net of effects of
acquired businesses and dispositions of assets:
Accounts receivable, net . . . . . . . . . . . . . . . 5,503 (9,901) (6,161)
Inventories . . . . . . . . . . . . . . . . . . . . . . (12,081) (3,424) 8,679
Prepaid catalog costs . . . . . . . . . . . . . . . . . (5,305) (8,154) 206
Other current assets . . . . . . . . . . . . . . . . . 282 (1,220) (3,131)
Accounts payable . . . . . . . . . . . . . . . . . . . 24,530 10,518 (8,671)
Accrued liabilities . . . . . . . . . . . . . . . . . . (10,650) 185 (1,583)
Dividend payable . . . . . . . . . . . . . . . . . . . 886 - -
Customer prepayments and credits . . . . . . . . . . . 684 (1,389) 3,134
-------- -------- --------
Net cash provided (used) by operating activities . . . . . 28,048 8,607 (11,594)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment . . . . . . . . . (4,239) (23,856) (13,686)
Purchase of businesses . . . . . . . . . . . . . . . . . (100) - (13,008)
Purchase of convertible debt securities . . . . . . . . . - (2,693) -
Investments in affiliates . . . . . . . . . . . . . . . . - (3,183)
Advances . . . . . . . . . . . . . . . . . . . . . . . . - (2,300) -
Other, net . . . . . . . . . . . . . . . . . . . . . . . (313) (3,293) (887)
-------- -------- --------
Net cash provided (used) by investing activities . . . . . (4,652) (35,325) (27,581)
-------- -------- --------
</TABLE>
See Notes to Consolidated Financial Statements.
-16-
<PAGE> 17
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended January 1, 1994, December 31, 1994 and December 30, 1995
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under revolving credit facility . . . $(20,965) $ (230) -
Proceeds from issuance of debt . . . . . . . . . . 20,000 10,000 20,685
Payments of long-term debt and capital lease
obligations . . . . . . . . . . . . . . . . . . . (19,856) (8,015) (1,419)
Cash dividends paid . . . . . . . . . . . . . . . . (890) (1,027) -
Payment of debt issuance costs . . . . . . . . . . (1,560) (1,458) (2,202)
Repurchase of Common Stock . . . . . . . . . . . . - (215) -
Proceeds from issuance of Common Stock . . . . . . 912 49,305 400
Other, net . . . . . . . . . . . . . . . . . . . . (1,007) (172) 340
-------- --------- --------
Net cash provided (used) by financing activities . . (23,366) 48,188 17,804
-------- --------- --------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . 30 21,470 (21,371)
Cash and cash equivalents at the beginning of
the year . . . . . . . . . . . . . . . . . . . . . . 2,553 2,583 24,053
-------- -------- --------
Cash and cash equivalents at end of the year . . . . $ 2,583 $ 24,053 $ 2,682
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid . . . . . . . . . . . . . . . . . . . $ 4,883 $ 2,923 $ 4,586
Income taxes paid . . . . . . . . . . . . . . . . . $ 71 $ 701 $ 1,318
</TABLE>
See Notes to Consolidated Financial Statements.
-17-
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JANUARY 1, 1994, DECEMBER 31, 1994 AND DECEMBER 30, 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations - Hanover Direct, Inc. ("HDI") is a direct
specialty retailer in the United States that publishes a portfolio of branded
specialty catalogs offering home fashions, general merchandise and apparel. HDI
also operates several retail operations in the United States which comprised
approximately 3% of HDI's net revenues for the year ended December 30, 1995.
Merger - Hanover Direct, Inc. ("HDI") was formed in connection
with the September 8, 1993 merger (the "Merger") involving HDI, The Horn &
Hardart Company ("H&H") and The Hanover Companies ("THC"), a wholly-owned
subsidiary of H&H. The Merger consisted of the merger of H&H into HDI, followed
by the merger of THC into HDI. The financial statements of THC had previously
been included in the consolidated financial statements of H&H.
The Merger was consummated by (i) the exchange of shares of H&H Common
Stock for shares of HDI Common Stock, (ii) the exchange of shares of THC 7.5%
Preferred Stock for shares of HDI's 7.5% Preferred Stock, and (iii) the exchange
of shares of THC Class B Preferred Stock for shares of HDI's Class B Preferred
Stock, each such distribution being on a one-for-one-basis.
The Merger was accounted for similarly to a pooling-of-interests and,
accordingly, HDI's Consolidated Financial Statements include the results of H&H
and THC for all applicable periods presented.
Principles of Consolidation - The Consolidated Financial
Statements include the accounts of HDI and all subsidiaries (the "Company").
Intercompany transactions and balances have been eliminated. Certain prior year
amounts have been reclassified to conform to the current year presentation.
Fiscal Year - The Company operates on a 52/53 - week fiscal year. The
years ended December 31, 1994 and December 30, 1995 were 52 - week years. The
year ended January 1, 1994 was a 53 - week year.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Inventories - Inventories consist principally of merchandise held for
resale and are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method. The Company considers slow moving
inventory to be surplus and calculates a loss on the impairment as the
difference between an individual item's cost and the net proceeds anticipated to
be received upon disposal. Such inventory is written down to its net realizable
value. The costs capitalized by the Company are the costs of the product and
freight-in charges.
Prepaid Catalog Costs - Costs related to mail order catalogs and
promotional material are amortized over their estimated productive lives, not
exceeding six months. Costs related to mail order catalogs and promotional
material are capitalized and amortized over their estimated productive lives,
not exceeding six months. Total catalog expense was $197.3 million, $191.8
million, and $154.9 million, respectively, in 1995, 1994 and 1993.
-18-
<PAGE> 19
Depreciation and Amortization - Depreciation and amortization of
property and equipment are provided on the straight-line method over the
following lives: buildings and building improvements, 30-40 years; furniture,
fixtures and equipment, 3-10 years; and leasehold improvements, over the lower
of the estimated useful lives or the terms of the related leases. Expenditures
for maintenance and repairs are charged to operations as incurred; major
improvements are capitalized.
Capitalized development costs for the Company's new management
information systems aggregated $6.4 million and $5.5 million at December 30,
1995 and December 31, 1994, respectively. Such costs are included in other
assets and are being amortized over a five year period commencing July 1995. In
connection with the MIS upgrade the Company capitalizes its incremental internal
costs for its systems development (including payroll and fringe benefits for MIS
personnel working directly on new systems development and implementation).
Goodwill - Excess of cost over the net assets of acquired
businesses is being amortized on a straight-line basis over periods up to forty
years. Accumulated amortization was $4.5 million and $5.6 million at December
31, 1994 and December 30, 1995, respectively. On an ongoing basis, the Company
assesses the carrying value and the economic useful life of the goodwill based
on the acquired business' prior and future operating income and estimated net
cash flows. The evaluation of the carrying value of the goodwill asset is
performed on an undiscounted basis.
Mailing Lists - The costs of acquired mailing lists are
amortized over a five year period. Mailing lists, included in Other assets,
amounted to $1.8 million and $3.5 million at December 31, 1994 and December 30,
1995, respectively, and are carried net of accumulated amortization of $.7
million and $1.6 million, respectively. On an ongoing basis, the Company
assesses the carrying value and the economic useful life of the mailing lists
based on the acquired business' potential future operating income and estimated
net cash flows. The evaluation of the carrying value of the mailing lists asset
is performed on an undiscounted basis.
Accounting for the Impairment of Long-Lived Assets: In March
1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of". This
Statement is effective beginning in 1996 and requires long-lived assets as well
as identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate the carrying amount of the assets may not be
recoverable. The Company does not expect a material impact on their financial
position upon implementation of this Statement in 1996.
Accounting for Income Taxes - The Company accounts for income
taxes in accordance with Statement of Financial Accounting Standards No. 109 -
Accounting for Income Taxes ("SFAS 109").
Cash and Cash Equivalents - For purposes of the Consolidated
Statements of Cash Flows, the Company considers all highly liquid temporary
investments with an original maturity of less than ninety days as cash
equivalents.
Net Income Per Share - Net income per share was computed using
the weighted average number of common shares outstanding. The weighted average
number of shares used in the calculation for both primary and fully diluted net
income per share in 1994 and 1995 was 93,285,190 and 93,029,816 shares,
respectively. For 1993 the weighted average number of shares for primary and
fully diluted net income per share was 75,625,330 and 77,064,131 shares,
respectively. Common share equivalents for purposes of net income per share
consist of stock options and warrants.
-19-
<PAGE> 20
Supplemental Earnings Per Share - Assuming that the conversion of the
7.5% Preferred Stock and the exchange of the Class B 8% Preferred Stock and the
Class B Common Stock discussed in Note 8 had been consummated at the beginning
of fiscal year 1993, the weighted average number of shares outstanding for
primary and fully diluted earnings per share for 1993 would have been 84,408,807
and 85,847,608 and earnings per share for 1993 would have been $.21 and $.20,
respectively.
Extraordinary Items. The extraordinary loss of $1.8 million in
1995 represented a loss on the early extinguishment of debt which arose in
connection with the refinancing of the Company's $75 million Revolving Credit
Facility and its $14 million 9.25% Senior Subordinated Notes due 1998.
Revenues -- The Company's revenue recognition policy states
that revenue on mail-order merchandise sales should be recognized at the time
the merchandise is shipped to the customer. Amounts billed to customers for
postage and handling charges are recognized as revenue at the time that the
revenues on the product shipment are recognized. The Company provides a reserve
for expected future returns at the time the sale is recorded based upon
historical experience.
Fair Value of Financial Instruments - The fair value of financial
instruments does not materially differ from their carrying values. The assets
of Regal Communications, Inc. ("Regal") were valued in the bankruptcy
proceedings. The Company valued their share of the Regal assets in proportion
to their share of net realizable assets.
Supplemental Disclosure of Noncash Activities
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Dividend on Class B 8% Preferred Stock paid in THC Common
Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,508 $ - $ -
========== =========== =========
Exchange of 8% Class B Preferred Stock and 7.5%
Convertible Preferred Stock for HDI Common Stock . . . . . . . . . . . $ 32,674 $ - $ -
========== =========== =========
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . $ 2,541 $ - $ 1,155
========== =========== =========
Other equity issuances and exchanges . . . . . . . . . . . . . . . . . $ 4,990 $ 1,823 $ 1,456
========== =========== =========
Acquisition of businesses:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . $ 38,578 $ - $ 45,165
Fair value of liabilities assumed . . . . . . . . . . . . . . . . . . (26,180) - (26,757)
Preferred stock issued . . . . . . . . . . . . . . . . . . . . . . . - - (5,400)
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . (12,298) - -
---------- ----------- ---------
Net cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100 $ - $ 13,008
========== =========== =========
</TABLE>
2. ACQUISITIONS AND INVESTMENTS
Acquisitions - The Company made the following acquisitions in 1993:
Gump's - In July 1993, the Company acquired substantially all
of the mail order and retail assets of Gump's Inc. ("Gump's"), an upscale
catalog marketer of exclusive gifts and the legendary San Francisco retailer.
The consideration given for the assets acquired was $13.2 million and consisted
of $6.9 million in cash and 1,327,330 shares of Common Stock valued at $4.78 per
share or $6.3 million. The $6.9 million cash used for the purchase of the assets
was comprised of (i) proceeds of the sale of Gump's accounts receivable
aggregating $2.8 million; (ii) $1.5 million of additional credit under the
Company's revolving credit facility, as amended.
-20-
<PAGE> 21
The Company Store - In August 1993, the Company acquired
certain assets of the Company Store Holdings, Inc. and subsidiaries ("The
Company Store"), a direct marketer of down comforters, other down product and
home furnishings. The consideration given for assets acquired was $7 million and
consisted of (i) 516,824 shares of the Company's Common Stock, valued at $4.64
per share or $2.4 million, and (ii) two promissory notes in the aggregate
principal amount of $1.1 million issued by a subsidiary of the Company, with
interest thereon at six percent (6%) per annum due on October 31, 1994 and $3.5
million principal amount of secured notes issued by certain subsidiaries of the
Company with interest thereon at six (6%) per annum, with principal and interest
payments payable monthly on a fifteen-year amortization, with the remaining
balance due and payable on August 31, 1998.
Tweeds - In September 1993, the Company acquired all of the
outstanding shares of Tweeds, Inc., a well-known European-inspired women's
fashion catalog. The purchase price was $8.8 million and consisted of: (i) $1
million in cash; (ii) 771,774 shares of the Company's Common Stock, valued at
$4.60 per share or $3.6 million; and (iii) the assumption of $5.1 million of
liabilities.
The Company made the following acquisitions in 1995:
Leichtung, Inc. 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.
This acquisition has been accounted for using the purchase method of accounting
based on the fair market values of the assets and liabilities acquired and has
resulted in the recording of approximately $7.3 million of goodwill and $1.4
million of customer mailing list intangible assets. In connection with this
acquisition the Company plans to sell the assets of the Leichtung Workshops
catalog and has relocated all telemarketing and fulfillment operations to the
Company's Hanover, PA facility. The distribution facility in Ohio and the
Leichtung Workshops assets, which are being held for sale are being carried at
their estimated net realizable value of $1.7 million, as of December 30, 1995.
The Safety Zone. In February 1995, the Company acquired the remaining
80% of the outstanding common stock it did not already own of Aegis Safety
Holdings, Inc. ("Aegis"), publisher of The Safety Zone catalog, through the
issuance of 634,900 shares of a newly-created Series B Convertible Additional
Preferred Stock ("Series B Stock") of the Company with a stated value of $10 per
share. Previously, in September 1993, the Company had acquired 20% of the
outstanding common stock of Aegis. Dividends can be payable on the Series B
Stock at various rates and times and are contingent on specific earnings
targets. The Series B Stock is also convertible, subject to antidilution, as
discussed in Note 8. Dividends were not paid in 1995 based on The Safety Zone
catalog's 1995 operating results.
This investment has been accounted for using the purchase method of
accounting based on the fair market values of Aegis' assets and liabilities and
the Series B Stock, and has resulted in the recording of approximately $7.1
million of goodwill. The fair value of the Series B Stock, which is based on an
independent appraisal, is $.9 million less than the stated value and the
discount is being amortized over a five-year period. This amortization is
included in preferred stock dividends in the statement of income from the date
of acquisition.
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. The
Company also lent TAC, on a subordinated basis, $2.2 million which bears
interest at the rate of 10% per annum and is due by May
-21-
<PAGE> 22
2000. The Company also provided a $.4 million loan to TAC which bears interest
at a fluctuating rate (8.75% through April 1996) and is secured by a second
mortgage on TAC's office and warehouse. The acquisition has been accounted for
using the purchase method of accounting based on the estimated fair market
values of the assets and liabilities acquired and has resulted in the recording
of approximately $4.5 million of goodwill and approximately $1.2 million of
customer mailing list intangible assets.
On February 16, 1996, David Austad and certain family members
surrendered to Austad's their Austad's shares, amounting to 32.5% of the
outstanding shares, and paid approximately $1.2 million (subject to certain
post-closing adjustments) 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.
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
will be transferred to other Company facilities in the first quarter of 1996.
The Company plans on selling the Austad's South Dakota warehouse and
distribution facility and will use the proceeds to pay the 8.75% Mortgage Note
Payable. To the extent that the proceeds from both the sale of such facility and
certain computer equipment produces any gain or loss, Mr. Austad will share
therein to the extent of his previous 32.5% interest in Austad's.
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.
Accounting for Acquisitions - The acquisitions of Gump's, The
Company Store, Tweeds, Improvements, Leichtung Workshops, The Safety Zone and
Austad's have been accounted for using the purchase method of accounting with
goodwill of approximately $30.3 million recorded, based upon the fair values of
the net assets acquired and liabilities assumed. In addition, The Company
recorded $5.6 million representing the fair value of acquired mailing lists. In
accordance with the purchase of method of accounting, the Company updated its
estimates of fair value of the net assets acquired and increased goodwill by
$1.2 million in 1994.
-22-
<PAGE> 23
The following represents the unaudited pro forma results of operations
for the years ended January 1, 1994, December 31, 1994 and December 30, 1995 as
if these three acquisitions had occurred at the beginning of fiscal year 1993.
<TABLE>
<CAPTION>
(In thousands, except per share amounts)
(Unaudited)
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Revenues $782,365 $840,295 $ 763,786
======== ======== ===========
Income (loss) before extraordinary item $ 8,954 $ 14,305 $ (28,083)
======== ======== ===========
Net income (loss) $ 4,861 $ 14,170 $ (30,160)
======== ======== ===========
Per Share:
Income (loss) before extraordinary item $ .06 $ .15 $ (.30)
Extraordinary item -- -- (0.2)
-------- -------- -----------
Net income (loss) $ .06 $ .15 $ (.32)
======== ======== ===========
</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. Per share amounts are expressed after deducting preferred
stock dividends of $4.1, $.1 and $.2, million in 1993, 1994 and 1995,
respectively.
OTHER INVESTMENTS - Other Investments include the following:
Blue Ridge Associates - In January 1994, the Company purchased for $1.1
million a 50% interest in Blue Ridge Associates ("Blue Ridge"), a partnership
which owns the apparel distribution center in Roanoke, Virginia. The remaining
50% interest is held by an unrelated third party. This investment is accounted
for by the equity method of accounting. The Company made annual rent payments to
the partnership totaling $.7 million and $.6 million in 1994 and 1995,
respectively, as part of a 15 year lease through 2008. The Company recorded $.1
million in income for its portion of the partnership income in 1994, and 1995,
respectively. The Company's investment in Blue Ridge was $1.1 million and $1.0
million at December 31, 1994 and December 30, 1995, respectively.
Boston Publishing Company - In February 1994, the Company
acquired a 20% equity interest in Boston Publishing Company ("BPC") and provided
secured and unsecured loans to BPC. In August 1994, BPC filed for protection
under Chapter 11 of the United States Code. In 1995, the Company received
inventory and the customer mailing list of BPC in payment of its $1.2 million
loan and subsequently realized $.3 million upon disposition of these assets and
wrote off the remaining assets.
Regal Communications, Inc. - During 1994, the Company invested
approximately $2.7 million in convertible debt securities of Regal
Communications, Inc. ("Regal"). In September 1994, Regal filed for protection
under Chapter 11 of the United States Code. As a result, during 1994, the
Company wrote down the convertible debenture to the estimated fair value of $1.7
million. The decline in fair value of the investment was considered
other-than-temporary impairment and the $1 million decline was included in
realized loss in the other expense caption on the income statement. The
convertible debt matures on June 15, 2008.
-23-
<PAGE> 24
In December 1995, a plan of reorganization was confirmed by the Bankruptcy Court
and the Company expects to recover the $1.7 million carrying value of its
investment. The Company received its first distribution of $.5 million in
February 1996.
Tiger Direct. - In February 1995, the Company entered into an
agreement to acquire certain securities of Tiger Direct, Inc. ("Tiger"), a
direct marketer of computer software, peripherals and CD-ROM hardware and
software. In February 1995, the Company entered into a loan and security
agreement with Tiger pursuant to which the Company provided a secured working
capital line of credit to Tiger, up to a maximum of $3.0 million, which was
loaned under such agreement. In September 1995, due to the continued
deterioration of Tiger's financial condition, the Company terminated the
securities purchase agreement. The Company sold the loan to a third party and
received payment in full for the principal of the loan and interest to the date
of sale.
During the period from February 1995 to September 1995, the Company
provided certain services to Tiger and also incurred certain costs related to
entering into the loan and security agreements aggregating $.5 million. Under
the terms of the agreement, Tiger is required to reimburse the Company for such
costs and services rendered. To date, Tiger has refused to reimburse the Company
for these costs. The Company has instituted an action to recover such costs,
which are carried at their realizable value.
3. PROVISION FOR FACILITY CLOSINGS AND WRITE-DOWN OF INVENTORY OF
DISCONTINUED CATALOGS.
In 1995, the Company made a decision to discontinue six catalogs. The
six discontinued catalogs generated revenues of $88 million and $118 million and
losses of $20 million and $4.7 million, in 1995 and 1994, 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, cost of sales and selling expenses, predominantly incurred to
create liquidation catalogs. The 1995 loss also included a provision of
approximately $8.6 million, primarily related to the write-down of inventory
associated with these catalogs to its net realizable value, based on the planned
liquidation of such inventory. The $8.6 million write-down occured because the
Company will be mailing fewer catalogs than had been planned originally, so it
has significantly more merchandise that needs to be moved through non-catalog
channels. 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 $8.6 million is included in the write-down of inventory of
discontinued catalogs in the Consolidated Statements of Income (Loss) at
December 30, 1995 and represents an incremental provision in excess of the
original provision included in cost of sales expense. There were no such charges
incurred by the Company in 1993 or 1994. 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.
In 1995, the Company incurred costs, aggregating approximately $1.5
million, in connection with the consolidation of its fulfillment facilities.
These costs include moving expenses, lease termination fees and severance
expenses, substantially all of which were paid in 1995. There were no such
charges incurred by the Company in 1993 or 1994. These costs are included in
write-down of inventory of discontinued catalogs.
4. SEARS LICENSING AGREEMENT
In January 1994, the Company entered into a licensing agreement (the
"Sears Agreement") with the direct marketing subsidiary of Sears Roebuck and Co.
("Sears") to produce specialty catalogs for customers of the recently
discontinued Sears catalog. The specialty catalogs include: Show Place, based on
the Domestications catalog, Great Kitchens, based on the Colonial Garden
Kitchens catalog, and Sears Improvements, based on the Improvements catalog. The
Sears Agreement has an initial three-year term and continues thereafter unless
terminated by either party. Profits and losses from the venture are shared
between the parties on an equal basis. In accordance with the Sears Agreement,
EBIT generated by the Sears catalogs is the basis for dividing these profits.
The Sears specialty catalogs generated revenues of $81 million and $71 million
and earnings before interest and taxes ("EBIT") of $3.0 million and $2.9
million in 1995 and 1994, respectively.
-24-
<PAGE> 25
The Company also issued to Sears a performance warrant to purchase 3.5
million shares of Common Stock in 1999 if the licensed business with Sears has
revenues of at least $250 million and EBIT of at least $30 million in 1998.
Alternately, Sears will be entitled to purchase 7 million shares of Common Stock
in 1999 if the licensed business with Sears has revenues of at least $500
million and EBIT of at least $60 million in 1998. The warrant exercise price is
$10.57 per share. If neither of these goals is achieved, the performance warrant
will expire unexercised in 1999. Through 1995, no charges have been required to
be recorded in connection with the warrants. The Company is obligated to meet
various operational performance standards and if the Company is unable to meet
these standards, Sears is entitled to terminate the agreement. The Company also
has the right to terminate the agreement in certain circumstances, including if
Sears fails to comply with any material provision of the Sears Agreement.
5. ACCOUNTS RECEIVABLE, NET
The Company currently maintains an agreement with an unrelated third
party which provides for the sale and servicing of accounts receivable
originating from the Company's revolving credit card. The agreement expires in
December 2000. The Company remains obligated to repurchase uncollectible
accounts pursuant to the recourse provisions of the agreement and is required to
maintain a specified percentage of all outstanding receivables sold under the
program as a deposit with the third party to secure its obligations under the
agreement.
The proceeds to the Company relating to the sale of receivables for
1995, 1994 and 1993 were $46.2, $56.1 and $46.7, respectively. At December 31,
1994 and December 30, 1995, the uncollected balances under this program were
$45.9 million and $38.6 million, respectively, of which $11.5 million and $5.5
million, respectively, represent deposits under the agreement which are included
in Accounts receivable, net. The total reserve balance maintained for the
repurchase of uncollectible accounts was $2.3 million and $2.4 million at
December 31, 1994 and December 30, 1995, respectively, of which $1.2 million and
$1.4 million, respectively, are included in Accrued liabilities and the
remaining balance is included in the allowance for doubtful accounts.
Receivables sold under this agreement are considered financial
instruments with off-balance sheet risk as defined in Statement of Financial
Accounting Standards No. 105. Because the Company's sales are primarily made to
individual customers located throughout the United States, the Company believes
there are no concentrations of credit risks.
6. ACCRUED LIABILITIES
Accrued liabilities consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Reserve for future sales returns . . . . . . . . . . . . . . $ 6,023 $ 5,535
Compensation . . . . . . . . . . . . . . . . . . . . . . 3,923 5,795
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,330 3,007
Reserve for repurchase of accounts receivable
sold with recourse . . . . . . . . . . . . . . . . . . . . . 1,180 1,391
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,759 10,241
------- -------
$20,215 $25,969
======= =======
</TABLE>
-25-
<PAGE> 26
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 30,
1994 1995
------------ ------------
<S> <C> <C>
Revolving Term Notes . . . . . . . . . . . . . . . . . . . . $ - $ 9,931
TAC Revolving Credit Facility . . . . . . . . . . . . . . . . - 2,011
Term Financing Facility . . . . . . . . . . . . . . . . . . . 10,000 20,000
8.75% Mortgage Note Payable due 2003 . . . . . . . . . . . . - 1,718
Industrial Revenue Bonds with variable interest rates
averaging 4.5% in 1994 and 4.1% in 1995 due 2003 . . . . . . 8,000 8,000
6% Mortgage Notes Payable due 1998 . . . . . . . . . . . . . 3,300 3,139
9.25% Subordinated Notes due 1998 . . . . . . . . . . . . . 14,000 14,000
7 1/2% Convertible Subordinated Debentures due 2007 . . . . . 751 751
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 19
------- -------
36,091 59,569
Less current portion . . . . . . . . . . . . . . . . . . . . 184 2,286
------- -------
Noncurrent portion . . . . . . . . . . . . . . . . . . . . . $35,907 $57,283
======= =======
</TABLE>
Revolving Credit Facility - As a result of the operating losses
incurred during 1995, the Company was not in compliance with certain financial
covenants under its revolving credit facility that it had entered into in 1994.
In order to obtain waivers to this facility for these covenant violations, the
Company agreed to more restrictive terms with respect to availability (reduced
from $80 million to $55 million), rate and financial covenants. The Company
determined that the terms of these proposed amendments were too restrictive and
agreed to a waiver through November 15, 1995, when the Company replaced this
facility with a new $75 million secured credit facility with Congress Financial
Corporation ("Congress Facility").
The Congress Facility is comprised of a revolving line of credit of up
to $65 million with a three year term and two year term loans aggregating $10
million ("Revolving Term Notes"). The amount that can be borrowed under the
Congress Facility is based on percentages of eligible inventory and accounts
receivable from time to time. The revolving line of credit carries an interest
rate of 1.25% above CoreStates' prime rate and the Revolving Term Notes carry an
interest rate of 1.5% above CoreStates' prime rate. The Congress Facility is
secured by all assets of the Company including customer mailing lists, and the
Company is required to maintain a minimum net worth of $80 million, as well as
working capital of $26 million. In addition, the Congress Facility places
limitations on the incurrence of additional indebtedness.
In October 1994, the Company consummated a five-year $80 million unsecured
revolving credit facility with a syndicate of banks (the "Credit Facility") led
by NationsBank of North Carolina, N.A. The Credit Facility provided for a $40
million revolving credit facility, a $20 million acquisition line and $20
million of 15 year Term Financing for certain capital expenditures ("Term
Financing Facility"). There was a $35 million sub-limit for letters of credit
under the Credit Facility.
The Company borrowed $10 million in each of 1994 and 1995 under the Term
Financing Facility. The rate of interest on the Term Financing Facility is based
on the equivalent rate of A-1 commercial paper existing at the time of each
borrowing. The face rate ranged from 5.85% to 6.30% and 5.73% to 6.02% at
December 31, 1994 and December 30, 1995. The Term Financing Facility requires
annual sinking fund payments of $1.0 million beginning October 1996 though
October 1999 and increasing to $1.6 million for each of the ten years
thereafter.
-26-
<PAGE> 27
The Credit Facility was terminated and amounts outstanding under the
revolving credit facility were repaid with the closing of the Congress Facility
in November 1995. The Term Financing Facility continues to be outstanding and in
effect under its original terms. All standby letters of credit issued under the
Credit Facility were replaced with letters of credit issued by Congress.
At December 30, 1995, the Company had no outstanding borrowings under the
revolving line of credit and $9.9 million outstanding under the Revolving Term
Notes. The rates of interest related to the revolving line of credit and Term
Notes were 9.50% and 9.75%, respectively, at December 30, 1995.
The face amount of unexpired documentary letters of credit at December 31,
1994 and December 30, 1995, were $7.2 million and $4.2 million, respectively. In
addition, the Company had issued $31.2 million and $28.5 million of standby
letters of credit at December 30, 1995 and December 31, 1994, respectively,
which in 1995 included $8.6 million related to the Industrial Revenue Bonds due
2003 and $20.3 million related to the Term Financing Facility.
The TAC Revolving Credit Facility was paid off with the proceeds from the
Congress Facility on February 16, 1996 and accordingly has been classified as a
long-term obligation.
8.75% Mortgage Note Payable due 2003 - TAC's 8.75% Mortgage Note
Payable is reflected as an obligation of the Company and consolidated
subsidiaries in consequence of the corporate reorganization, completed in
February 1996. Pursuant to the reorganization TAC's retail business was split
off to Mr. David Austad and certain of his family members, in exchange for their
32.5% interest in Austad (and a cash payment of $1.2 million, subject to certain
post-closing adjustments), and the Company became the owner of all the
outstanding capital shares of Austad. The 8.75% Mortgage Note Payable is secured
by the TAC warehouse and distribution facility in South Dakota. That facility's
operations have been largely transferred to other Company facilities and the
Company plans to sell the South Dakota property. The 8.75% Mortgage Note payable
is secured by the Austad's distribution facility. Monthly principal payments
amount to $.1 million per year with a final payment of $1.4 million due in March
2003.
Industrial Revenue Bonds due 2003 - The Industrial Revenue Bonds are
due on December 1, 2003 and are secured by the related assets purchased from the
proceeds of the bonds and by an irrevocable letter of credit in the amount of
$8.6 million. The obligations are guaranteed by the Company.
6% Mortgage Notes Payable due 1998 - In connection with The Company
Store acquisition, subsidiaries of the Company executed and delivered two
secured notes in the aggregate amount of $3.5 million with interest at 6% per
annum with principal and interest payments payable monthly on a fifteen-year
amortization schedule with the remaining balance due in August 1998. The
mortgage notes payable are non-recourse notes and are not guaranteed by the
Company. The mortgage notes payable are secured by the manufacturing and office
facilities of The Company Store.
9.25% Senior Subordinated Notes due 1998 - At December 30, 1995,
the Company has $14 million of 9.25% Senior Subordinated Notes due 1998 ("9.25%
Notes") outstanding.
In November 1995 Intercontinental Mining & Resources Incorporated ("IMR"),
an affiliate of NAR, purchased the 9.25% Notes from a third party in connection
with the refinancing of the indebtedness under the Congress Facility. The
Company paid NAR a commitment fee of $105,000 upon the signing of a repurchase
and option agreement and a fee of $210,000 (1.5% of the outstanding principal
amount of the 9.25% Notes acquired by IMR) upon the funding, as well as all
expenses incurred by NAR in performing its obligation.
-27-
<PAGE> 28
The Company also extended by two years the terms of the warrants to purchase
5,033,735 shares held by NAR and IMR to August 1, 1998. The Company recorded as
debt issuance costs, approximately $1.2 million, representing the fair value of
the warrant extensions AS DETERMINED USING THE BLACK SCHOLES MODEL. Such costs
are being amortized over the life of the 9.25% Notes. The Company has also
agreed to indemnify NAR against any and all claims or losses asserted against it
or incurred by it relating to the transactions contemplated by the repurchase
and option agreement.
In connection with IMR's purchase of the 9.25% Notes, the Company and IMR
agreed to amend the financial covenants contained in the Indenture relating to
the 9.25% Notes and to grant to the Trustee for such 9.25% Notes a second
priority security interest in the Company's customer and mailing lists. The
Company is required to maintain certain financial covenants with which it was in
compliance at December 30, 1995.
General - As a result of the replacement of the Credit Facility
and the purchase by IMR of the 9.25% Notes, the Company wrote off approximately
$1.8 million of unamortized debt issuance costs as an extraordinary item due to
the early extinguishment of debt.
At December 30, 1995, the aggregate annual principal and sinking fund
payments required on all long-term debt were as follows (in thousands): 1996 -
$2,286; 1997 - $10,176; 1998 - $19,868; 1999 - $1,076; 2000 - $1,649 and
thereafter - $24,514.
8. CAPITAL STOCK
Public Offering - In April 1994, the Company completed a public
offering (the "Public Offering") of 8,045,296 shares of Common Stock for
proceeds of approximately $47.5 million, net of expenses.
6% Series A Convertible Additional Preferred Stock - In December 1993,
in connection with the Company's acquisition of Tweeds, Inc. ("Tweeds"), the
Company entered into an exchange agreement with a major vendor of Tweeds. Under
the exchange agreement, the Company issued 234,900 shares of its 6% Series A
Convertible Additional Preferred Stock ("6% Preferred Stock") for an installment
note, dated March 29, 1993, as amended, in the amount of approximately $2.4
million previously issued by Tweeds. Dividends began accruing on September 30,
1993.
The 6% Preferred Stock is convertible into Common Stock of the Company
over a three year period in equal amounts on September 30, 1994, 1995 and 1996.
The conversion price is an amount equal to the average of the per share closing
prices for the five trading days preceding the conversion dates. The Company
converted the first and second equal portions of the 234,900 issued shares of
the 6% Preferred Stock into 189,818 and 427,785 shares of Common Stock on
September 30, 1994 and September 29, 1995, respectively. The Company elected to
pay cash dividends of $.1 million related to the September 1994 conversion.
Series B Convertible Additional Preferred Stock - In February
1995, the Company issued 634,900 shares of its Class B Convertible Additional
Preferred Stock ("Series B Stock") to acquire the remaining 80% of the
outstanding common stock of Aegis Safety Holdings, Inc. ("Aegis"), publisher of
The Safety Zone catalog. The Series B Stock has a stated value of $10 per share.
Non-cumulative dividends will accrue and be paid at 5% per annum during each of
the first three years if Aegis attains at least $1 million in earnings before
interest and taxes each year. In years four and five, dividends are cumulative
will accrue and be paid at 7% per annum and are not contingent on the
achievement of any earnings target. Dividends will not be paid in 1995 based on
The Safety Zone catalog's 1995 operating results.
-28-
<PAGE> 29
The Series B Stock is convertible at any time, at $6.66 per share,
subject to antidilution, at the option of the holder and is convertible at the
Company's option if the market value of the Company's Common Stock is greater
than $6.66 per share, subject to antidilution, for 20 trading days in any
consecutive 30 day trading period or at the holder's option from time to time.
If, after five years, the Series B Stock is not converted, it is mandatorily
redeemable, at the Company's option, in cash or for 952,359 shares of the
Company's Common Stock provided the market value of the stock is at least $6.33
per share, subject to antidilution. If the market value of the Company's Common
Stock does not meet this minimum, the redemption rate is subject to adjustment
which would increase the number of shares for which the Series B Stock is
redeemed.
The fair value of the Series B Stock, which is based on an independent
appraisal, is $.9 million less than the stated value. This discount is being
amortized over a five year period and resulted in a charge of $.2 million to
preferred stock dividends in the statement of income for 1995.
Warrants - The warrants outstanding at December 30, 1995 are as
follows:
<TABLE>
<CAPTION>
WARRANTS EXERCISE EXPIRATION
ISSUED PRICE DATE
-------- -------- ----------
<S> <C> <C> <C>
1,541,301 $2.42 8/01/98
3,157,884 2.91 8/01/98
334,550 2.19 8/01/98
---------
5,033,735
=========
</TABLE>
All of the above issued warrants are held by NAR and its affiliates.
As previously discussed, the Company issued to Sears a performance
warrant to purchase up to 7 million shares of Common Stock in 1999. This
performance warrant is not reflected in the above table.
General - At December 30, 1995, there were 93,452,768 shares of Common
Stock, 78,300 shares of 6% Preferred Stock and 634,900 shares of Series B Stock
outstanding. Additionally, an aggregate of 15,087,471 shares of Common Stock
were reserved for issuance pursuant to (i) the exercise of outstanding options
(265,000), (ii) the exercise of outstanding warrants (12,033,735), (iii) the
Executive Equity Incentive Plan (1,021,170), (iv) the Restricted Stock Award
Plan (275,700), and (v) the All Employee Equity Investment Plan (1,491,866).
In October 1995, the 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
options, as opposed to the Company's current method, which measures compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees".
The Company has not as yet decided whether they will adopt SFAS No. 123 for
financial statement purposes, however at a minimum they will be required
disclose in their footnotes to financial statements, additional information
relating to the Company's various stock-based employee benefit plans and the
Company's pro forma net income and earnings per share, as if the options granted
were expensed at their estimated fair value at the time of grant. If the Company
decides to adopt SFAS No. 123 for financial statement purposes, an additional
expense will be recorded; however, the Company has not as yet calculated the
impact of the adoption.
-29-
<PAGE> 30
Dividend Restrictions - The Company is restricted from paying
dividends on its Common Stock or from acquiring its capital stock by certain
debt covenants contained in agreements to which the Company is a party.
9. EMPLOYEE BENEFIT PLANS
Stock Option Plan - Pursuant to the Company's Stock Option Plan
(the "Plan"), an aggregate of 2,830,519 shares were approved for issuance to
employees and consultants of the Company. The option price and the periods over
which an option is exercisable are specified by the Compensation Committee of
the Board of Directors.
Options expire five years from the date of grant and generally vest
over three to four years. Payment for shares purchased upon the exercise of an
option shall be in cash or stock of the Company. If paid in cash, a partial
payment may be made with the remainder in installments evidenced by promissory
notes at the discretion of the Compensation Committee.
Changes in options outstanding and options available for grant,
expressed in numbers of shares, are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Options outstanding,
beginning of period 603,765 365,250 496,050
Granted - 162,000 70,000
Exercised - (1,000) -
Expired (214,165) (20,700) (334,050)
Canceled (24,350) (9,500) (142,000)
---------- ---------- ---------
Options outstanding,
end of period 365,250 496,050 90,000
========== ========== =========
Options exercisable,
end of period 365,250 334,050 20,000
========== ========== =========
Available for grant of
options, end of period 1,583,833 1,452,033 1,858,083
========== ========== =========
</TABLE>
The option prices and amounts are: $1.75 - 20,000 shares, $2.25 -
50,000 shares and $3.50 - 20,000 shares.
In June 1994, one director was granted non-qualified options to
purchase 55,000 shares at an exercise price of $6.125 per share which expire in
2000. In September 1992, six directors were granted options to purchase 20,000
shares each, at the market price, which at the time was $1.75 per share. These
option grants were approved at the 1993 Annual Meeting of Shareholders and the
options expire in 1997. The table above does not include these option grants.
Hanover Direct, Inc. Savings Plan - The 401(k) Savings and Retirement
Plan (the "401(k) Plan") allows eligible employees to contribute a percentage of
their annual compensation to the 401(k) Plan. The Company makes matching
contributions of one-third of the employees' pre-tax contributions. Participants
may invest contributions in various investment funds, in addition to a
guaranteed investment fund or in the Company's Common Stock.
-30-
<PAGE> 31
The Company's contributions charged to expense for 1993, 1994 and 1995
were approximately $431,000, $608,000 and $556,000, respectively.
Supplemental Retirement Plan - The Supplemental Retirement Plan (the
"Retirement Plan") allows eligible employees to make contributions to a trust
where the contributions are invested by the trust for each participant in a tax
free money market fund. The Company makes matching contributions. Company
contributions charged to expense in 1993, 1994 and 1995 amounted to
approximately $130,000, $192,000 and $222,000, respectively.
The Retirement Plan permits eligible employees to contribute up to 4%
of their salary. The Company matches all participant contributions, up to 50% of
their contributions with a cap of 2%. The Retirement Plan is not tax-qualified
under the applicable provisions of the Internal Revenue Code of 1986, as
amended.
Incentive Compensation Plan - Bonus arrangements with certain
executives and key employees generally provide for additional compensation based
upon the attainment of certain profit levels, as well as other performance
measures. These bonuses approximated an aggregate of $.4 million, $1.1 million
and $1.5 million in 1993, 1994 and 1995, respectively. Under the bonus plan, 25%
of the bonus is deferred and payable in cash or restricted stock that vests over
a three year period.
Executive Equity Incentive Plan - In December 1992, the Board of
Directors adopted the 1993 Executive Equity Incentive Plan (the "Incentive
Plan"). The Incentive Plan was approved by shareholders at the 1993 Annual
Meeting. Pursuant to the Incentive Plan, options to purchase shares of the
Company's Common Stock will be granted from time to time by the Compensation
Committee of the Board of Directors to selected executives of the Company or its
affiliates. For each such option granted, the selected executive will receive
the right to purchase on a specified date (the "Tandem Investment Date") a
number of shares of the Company's Common Stock ("Tandem Shares") equal to
one-half the maximum number of shares of the Company's Common Stock covered by
such option. An aggregate of 2,400,000 shares of the Company's Common Stock have
been reserved for issuance under the Incentive Plan. Company financing is
available under the Incentive Plan to pay for the purchase price of the Tandem
Shares.
-31-
<PAGE> 32
Changes in shares, options outstanding and options available for grant,
expressed in numbers of shares, for the Incentive Plan are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Shares outstanding beginning of period 663,830 753,830
Shares purchased 663,830 90,000 143,333
Shares canceled -- -- (20,000)
--------- --------- ----------
Shares outstanding
end of period 663,830 753,830 877,163
--------- --------- ----------
Options outstanding,
beginning of period -- 1,101,000 1,073,836
Options granted 1,327,660 180,000 286,666
Options canceled (226,660) (207,164) (339,332)
--------- --------- ----------
Options outstanding,
end of period 1,101,000 1,073,836 1,021,170
--------- --------- ----------
Total shares and options
outstanding, end of period 1,764,830 1,827,666 1,898,333
========= ========= =========
Available for grant of
options and shares, end of period 635,170 572,334 501,667
========= ========= =========
</TABLE>
The purchase prices per share of the Company's Common Stock upon
exercise of stock options are as follows: $1.75 - 30,000 shares, $2.25 - 33,333
shares, $2.50 - 676,505 shares, $2.63 -50,000 shares, $2.75 - 133,332 shares,
$3.00 - 20,000 shares, $3.89 - 20,000 shares and $4.50 - 58,000 shares. Options
granted under the Incentive Plan become exercisable three years after the dates
of grant and expire six years from the dates of grant. The purchase price shall
be paid in full at the time of purchase in cash or shares of the Company's
Common Stock valued at their fair market value or in a combination thereof. The
difference between the Option Price and the fair market value of the Common
Stock on the Tandem Investment Dates is being amortized over the three-year
period in which the options become exercisable. The amount of amortization
charged to expense was approximately $170,000, $137,000 and $72,000 for 1993,
1994 and 1995, respectively, net of forfeitures.
Changes to the notes receivable related to the Incentive Plan are as
follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Notes receivable balance beginning of period - $1,424,000 $1,522,000
Additions $1,707,000 328,000 229,000
Payments (283,000) (230,000) (100,000)
----------- ----------- -----------
Notes receivable end of period $1,424,000 $1,522,000 $1,651,000
=========== =========== ===========
</TABLE>
Under the terms of the Incentive Plan, the purchase price for shares is
based upon the market price at the date of purchase, and payment is made in the
form of a 20% cash down payment and a six year note that bears interest at the
mid-term applicable federal rate, as determined by the Internal Revenue Service,
as of the month of grant of such shares. The Incentive Plan participants
purchased shares at prices ranging from $1.75 to $4.50 with the Company
accepting notes bearing interest at rates ranging from 5.35% to 7.75%.
Restricted Stock Award Plan - In December 1992, the Board of
Directors adopted the 1993 Restricted Stock Award Plan (the "Restricted Stock
Plan"). Each full-time or permanent part-time employee of the
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<PAGE> 33
Company or its affiliates selected by the Compensation Committee who holds a key
position that the Compensation Committee shall have been designated for
eligibility in the Restricted Stock Plan, has attained the age of 18, has
performed at least 12 months of continuous service with the Company or an
affiliate of the Company and is not covered by a collective bargaining agreement
may participate in the Restricted Stock Plan. Pursuant to the Restricted Stock
Plan, the Compensation Committee from time to time may award shares of the
Company's Common Stock ("Award Shares") to such participants. The Award Shares
received by such participants are not transferable (other than by will or the
laws of descent and distribution) until the vesting date or when such
participant attains the age of 65, dies or becomes permanently disabled, and are
subject to forfeiture in the event the participant ceases to be an employee
prior to that date. An aggregate of 500,000 shares of the Company's Common Stock
have been reserved for issuance under the Restricted Stock Plan. During 1993,
224,300 shares were awarded to participants aggregating $785,000. Such amount is
being amortized over a three-year vesting period. The amount of amortization
charged to expense was approximately $188,000 in 1993, $292,000 in 1994 and
$219,000 in 1995, net of forfeitures.
All Employee Equity Investment Plan - In December 1992, the Board of
Directors adopted the 1993 All Employee Equity Investment Plan (the "Investment
Plan"). Such plan was approved by the shareholders at the 1993 Annual Meeting.
Each full-time or permanent part-time employee of the Company or its affiliates
who has attained the age of 18, has met certain standards of continuous service
with the Company or an affiliate of the Company and is not covered by a
collective bargaining agreement may participate in the Investment Plan.
An eligible employee will be granted a right to purchase a specific
number of shares of the Company's Common Stock by the Compensation Committee,
based on the eligible employee's salary level. The purchase price of the
Company's Common Stock in the Investment Plan shall be the average market value
of a share of the Company's Common Stock during the 20 days prior to the first
day of the subscription period, less a 40% discount. The shares received by such
participants are not transferable (other than by will or the laws of descent and
distribution) until the vesting date or when such participant attains the age of
65, dies or becomes permanently disabled, and are subject to forfeiture in the
event the participant ceases to be an employee prior to that date. The employees
who choose to participate in the Investment Plan vest in their shares equally
over a three-year period beginning with the first anniversary of the day
subsequent to the final day of the subscription period or when they reach the
age of 65, die or become permanently disabled. An aggregate of 2,000,000 shares
of the Company's Common Stock have been reserved for issuance under the
Investment Plan.
Changes in shares outstanding and available for grant, expressed in
numbers of shares for the Investment Plan are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Shares outstanding, beginning of period 211,883 380,563
Shares purchased 223,508 260,124 216,931
Forfeited 11,625 91,444 89,360
--------- --------- ---------
Shares outstanding end of period 211,883 380,563 508,134
========= ========= =========
Shares available for grant, end of period 1,788,117 1,619,437 1,491,866
========= ========= =========
</TABLE>
-33-
<PAGE> 34
The difference between the market price and the discounted price
aggregated approximately $.4 million, $.4 million and $.2 million in 1993, 1994
and 1995, respectively. These amounts have been reduced by approximately $46,000
in 1993, $226,000 in 1994 and $181,000 in 1995 which have been charged to
amortization expense.
10. INCOME TAXES
At December 30, 1995, the Company had net operating loss carryforwards
("NOLs") totalling $162.5 million, which expire as follows: In the year 2001 -
$17.3 million, 2003 - $14.6 million, 2004 - $14.3 million, 2005 - $20.6 million,
2006 - $46.9 million, 2007 - $27.7 million and 2010 - $21.1 million. The Company
also has $1 million of general business tax credit carryforwards that expire in
2000 through 2009. The Company's available NOLs for tax purposes consists of
$91.4 million of NOLs subject to a $4 million annual limitation under Section
382 of the Internal Revenue Code of 1986 and $71.2 million of NOLs not subject
to a limitation.
The unused portion of the $4 million annual limitation for any year may
be carried forward to succeeding years to increase the annual limitation for
those succeeding years. In addition, the Company's entire $91.4 million of NOLs,
subject to the limitation, may be used to offset future taxable income generated
by July 1996 from built-in gains (generally, taxable income from the sale of
appreciated assets held by the Company at the date of its change in ownership in
July 1991) without reference to the limitation.
SFAS 109 requires that the future tax benefit of such NOLs be recorded
as an asset to the extent that management assesses the utilization of such NOLs
to be "more likely than not". In 1992 management determined that, based upon the
conversion of interest-bearing debentures to equity, the issuance of additional
Common Stock, the disposal of unprofitable discontinued restaurant operations,
the Company's history of prior operating earnings in the direct marketing
business and its expectations for the future, the operating income of the
Company will, more likely than not, be sufficient to utilize $30 million of
deductible temporary differences and NOLs prior to their expiration. In making
such determination, the Company adjusted 1992 income by eliminating interest
expense related to retired debt and assumed that such adjusted 1992 income level
could be obtained in each of the next three years. The Company maintained a
consistent adjusted income level in 1993. In 1994, the Company continued the
practice of estimating the NOLs that it could utilize over the subsequent three
years and estimated that it would be able to utilize up to $43 million of NOLs
over the next three years based on the pre-tax income of the most recent two
years. Despite incurring an additional $21.1 million NOL in 1995, management
believes that the Company will be able to utilize up to $43 million of NOLs over
the next three years based upon the Company's assessment of numerous factors,
including its future operating plans and its pre-tax income in 1993 and 1994 and
its 1995 NOL.
For the year ended January 1, 1994, the Company recognized an
additional deferred tax asset of $.6 million, reflecting the effect of the
increase in the Federal corporate income tax rate (from 34% to 35%). For the
year ended December 31, 1994, the Company reduced its valuation allowance by
$4.4 million, reflecting the increase in management's assessment of the future
utilization of the Company's NOLs and deductible temporary differences. For the
year ended December 30, 1995, the Company maintained its deferred tax asset of
$15 million (net of a valuation allowance of $48.5 million). Management believes
that the $15 million net deferred tax asset represents a reasonable estimate of
the future utilization of the NOLs and will continue to routinely evaluate the
likelihood of future profits and the necessity of future adjustments to the
deferred tax asset valuation allowance.
-34-
<PAGE> 35
Realization of the future tax benefits 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 NOLs
and reversals of temporary differences.
The Company's Federal income tax provision was $5.9 million in 1993,
$4.2 million in 1994 and zero in 1995. The 1994 provision was offset by
utilization of the NOLs. In addition, the Company recognized the $4.4 million
benefit in 1994 discussed above. The Company's provision for state income taxes
was $.5 million in 1993, $.9 million in 1994 and $1.0 million in 1995.
The following is reconciliation of the Company's net income for financial
statement purposes to taxable income (loss) for the years ended January 1, 1994,
December 31, 1994 and December 30, 1995 (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Net income (loss) . . . . . . . . . . . . . . $17,337 $14,838 ($30,230)
Income tax provision (benefit) . . . . . . . (130) (3,509) 1,003
------- ------- -------
Income (loss) before income taxes . . . . . . 17,207 11,329 (29,227)
------- ------- -------
Differences between income before taxes
for financial statement purposes and
taxable income:
State income taxes . . . . . . . . . . . . . (501) (860) (1,003)
Utilization of carryovers . . . . . . . . . . (2,543) (12,652) -
Differences attributable to subsidiary not
included in Company's tax return . . . . . . (313)
Permanent differences. . . . . . . . . . . . 28 717 1,223
Net change in temporary
differences . . . . . . . . . . . . . . . . (14,191) 1,466 8,190
------- ------- --------
(17,207) (11,329) 8,097
------- ------- --------
Taxable income (loss) . . . . . . . . . . . . $ - $ - ($21,130)
======= ======= ========
</TABLE>
-35-
<PAGE> 36
The components of the net deferred tax asset at December 30, 1995 are
as follows (in millions):
<TABLE>
<CAPTION>
Non-
Current current Total
------- ------- -----
<S> <C> <C> <C>
Federal tax NOL and business tax credit
carryforwards . . . . . . . . . . . . . . . . . . . . $ -- $57.9 $57.9
Allowance for doubtful accounts . . . . . . . . . . . . 1.7 -- 1.7
Inventories . . . . . . . . . . . . . . . . . . . . . . 1.5 -- 1.5
Prepaid catalog costs . . . . . . . . . . . . . . . . . (1.8) -- (1.8)
Excess of net assets of acquired business . . . . . . . -- (1.4) (1.4)
Accrued liabilities . . . . . . . . . . . . . . . . . . 2.3 -- 2.3
Customer prepayments and credits . . . . . . . . . . . 1.7 -- 1.7
Tax basis in net assets of discontinued operations
in excess of financial statement amount . . . . . . . 0.6 -- 0.6
Other -- 1.0 1.0
------ ----- -----
Deferred tax asset . . . . . . . . . . . . . . . . . . 6.0 57.5 63.5
Valuation allowance . . . . . . . . . . . . . . . . . . (2.7) (45.8) (48.5)
------ ----- -----
Deferred tax asset, net ............................... $ 3.3 $11.7 $15.0
====== ===== =====
</TABLE>
The Company has established a valuation allowance for a portion of the
deferred tax asset, due to the limitation on the utilization of the NOLs and its
estimate of the future utilization of the NOLs.
The Company's tax returns for years subsequent to 1984 have not been
examined by the Internal Revenue Service ("IRS"). Availability of the NOLs might
be challenged by the IRS upon examination of such returns which could affect the
availability of the NOLs. The Company believes, however, that IRS challenges
that would limit the utilization of the NOLs will not have a material adverse
effect on the Company's financial position.
Total tax expense for each of the three fiscal years presented differ
from the amount computed by applying the Federal statutory tax rate due to the
following:
<TABLE>
<CAPTION>
1993 1994 1995
PERCENT PERCENT PERCENT
OF PRE-TAX OF PRE-TAX OF PRE-TAX
INCOME INCOME (LOSS)
---------- ---------- ----------
<S> <C> <C> <C>
Tax (benefit) at Federal statutory rate . . . . . . . . . . 35.0% 35.0% (35.0%)
State and local taxes . . . . . . . . . . . . . . . . . . . 1.9 4.9 2.2
Effect of Federal rate change on deferred tax asset . . . . (3.7) - -
Reversal of valuation allowance . . . . . . . . . . . . . - (38.5) -
Net increase in (reversal of) temporary differences . . . .
Deferred compensation and incentive plans . . . . . (5.1) 11.4 -
Loss on asset disposals . . . . . . . . . . . . . . (5.2) - -
Depreciation and amortization . . . . . . . . . . . (2.7) (3.5) (5.4)
Other (each less than 5%) . . . . . . . . . . . . . (15.9) (10.4) 15.1
Utilization of contribution and NOL carryover . . . . . . . (5.4) (39.1) -
Tax NOLs for which no benefit could be recognized - - 25.3
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 2.2 1.2
----- ------ ----
(0.8%) (31.0%) 3.4%
===== ====== ====
</TABLE>
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<PAGE> 37
11. LEASES
Certain leases to which the Company is a party provide for payment of real
estate taxes and other expenses. Most leases are operating leases and include
various renewal options with specified minimum rentals. Rental expense for
operating leases related to continuing operations were as follows (in
thousands):
<TABLE>
<CAPTION>
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Minimum rentals $ 9,458 $ 13,572 $13,070
</TABLE>
Future minimum lease payments under noncancellable operating and capital
leases relating to continuing operations that have initial or remaining terms in
excess of one year, together with the present value of the net minimum lease
payments as of December 30, 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING LEASES LEASES
----------- ------ ------
<S> <C> <C> <C>
1996 . . . . . . . . . . . . . . . . . . . . . . . $ 9,815 $1,659
1997 . . . . . . . . . . . . . . . . . . . . . . . 7,722 1,396
1998 . . . . . . . . . . . . . . . . . . . . . . . 6,075 432
1999 . . . . . . . . . . . . . . . . . . . . . . . 5,296 20
2000 . . . . . . . . . . . . . . . . . . . . . . . 4,736 -
Thereafter . . . . . . . . . . . . . . . . . . . . 35,391 -
-------- ------
Total minimum lease payments . . . . . . . . . . . 69,035 3,507
Less amount representing interest (a) . . . . . . ========
274
------
Present value of minimum lease payments (b) . . . $3,233
======
</TABLE>
(a) Amount necessary to reduce net minimum lease payments to present value
calculated at the Company's incremental borrowing rate at the inception of the
leases.
(b) Reflected in the balance sheet as current and noncurrent capital lease
obligations of $628,000 and $1,196,000 at December 31, 1994 and $1,260,000 and
$1,973,000 at December 30, 1995, respectively.
The future minimum lease payments under noncancellable leases that
remain from the discontinued restaurant operations as of December 30, 1995 are
as follows: 1996 - $.8 million; 1997 - $.8 million; 1998 - $.8 million; 1999 -
$.8 million; 2000 - $.8 million; and thereafter $3.3 million. The above amounts
exclude annual sublease income of $1.0 million from subleases which have the
same expiration as the underlying leases.
In connection with the Company's investment in Blue Ridge, a subsidiary
of the Company is contingently liable with respect to the lease obligation
related to the apparel distribution center in Roanoke, Virginia. The Company
does not guarantee the indebtedness associated with the Roanoke apparel center
held by Blue Ridge Associates.
12. RELATED PARTY TRANSACTIONS
At December 30, 1995, current and former officers and executives of the
Company owed the Company approximately $2.2 million of which approximately $1.7
million relates to receivables under the Executive Equity Incentive Plan. These
amounts due to the Company bear interest at rates ranging from 5.35% to 7.75%
-37-
<PAGE> 38
and are due from 1999 to 2001. The remaining $.5 million is due on demand from
two officers of the Company and bears interest at rates ranging from 6.0% to
7.96%.
Since January 1993, pursuant to a consulting arrangement, a subsidiary
of NAR renders management consulting, business advisory and investment banking
services to the Company for an annual fee of $750,000. NAR will not collect such
a fee in 1996 as no such services are being performed.
At December 30, 1995, NAR owned approximately 50% of the Company's
outstanding Common Stock and would own 53% upon exercising all of their
outstanding warrants.
13. COMMITMENTS AND CONTINGENCIES
On or about September 2, 1994, a complaint was filed in the United
States District Court for the District of New Jersey by Veronica Zucker, an
individual who allegedly purchased shares of Common Stock of the Company in the
public offering completed on April 7, 1994, against the Company, all of its
directors, certain of its officers, Sun Life Insurance Company of America,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Alex. Brown & Sons,
Incorporated. The complaint, which purports to be filed on behalf of a class of
all persons who purchased the Common Stock of the Company in the public offering
or thereafter through and including August 14, 1994, seeks to recover monetary
damages the class has allegedly suffered as a result of certain alleged false
and materially misleading statements contained in the Company's public offering
prospectus dated March 30, 1994. In lieu of an answer, defendants filed a motion
to dismiss the complaint in its entirety for failure to state a claim upon which
relief can be granted. On May 23, 1995, the United States District Court for the
District of New Jersey dismissed the plaintiff's claim, with prejudice, for
failure to state a claim upon which relief could be granted. On June 22, 1995,
plaintiff filed a notice of appeal of the May 23, 1995 decision to the United
States Court of Appeal for the Third Circuit. The appeal was submitted on the
briefs on March 11, 1996. On March 26, 1996, the Court rendered its decision
affirming the District Court's decision.
The Company is involved in other various routine lawsuits of a nature
which are deemed customary and incidental to its business. In the opinion of
management, the ultimate disposition of such actions will not have a material
adverse effect on the Company's financial position or results of operations.
The imposition of a sales and use tax collection obligation on
out-of-state catalog companies in states to which they ship products was the
subject of a case decided in 1994 by the United States Supreme Court. While the
Court reaffirmed an earlier decision that allowed direct marketers to make sales
into states where they do not have a physical presence without collecting sales
taxes with respect to such sales, the Court further noted that Congress has the
power to change this law. The Company believes that it collects sales tax in all
jurisdictions where it is currently required to do so.
In connection with certain discontinued restaurant transactions, the
Company remains contingently liable with respect to lease obligations for 9
restaurant properties, should the buyers fail to perform under the agreements.
The future minimum lease payments as of December 30, 1995 are as follows (in
thousands): 1996 - $336; 1997 - $278; 1998 - $192; 1999 - $192; 2000 - $143; and
thereafter $403.
14. SUBSEQUENT EVENTS
In March 1996 the Company announced that the Board of Directors had
voted to conduct a rights offering for $40 million of the Company's Common Stock
after completion of the first quarter. The rights will
-38-
<PAGE> 39
be exercisable at a price to be determined at the time of commencement of the
rights offering equal to 75% of the then-current market price, but not less than
$1.00 nor more than $1.50 per share. NAR Group Limited, the Company's majority
shareholder, will receive rights entitling it to purchase approximately 50% of
the shares to be offered in the rights offering and has agreed to exercise such
rights. In addition, NAR has agreed to standby and purchase all shares not
subscribed by common shareholders and will receive a fee as a result. The
proceeds of the rights offering will be used by the Company to repay the 9.25%
Senior Subordinated Notes due on August 1, 1998 held by an affiliate of NAR, and
for other general corporate purposes, including repaying outstanding
indebtedness under its revolving credit facility. At such time the Company will
record an extraordinary expense related to the early extinguishment of this
debt, representing the write-off of the unamortized debt issuance costs of
approximately $1.4 million.
In February 1996, the Company announced that Rakesh K. Kaul was named
President and Chief Executive Officer and elected to the Board of Directors
effective March 7, 1996. Mr. Kaul has most recently served as Vice Chairman and
Chief Operating Officer of Fingerhut Companies, Inc.
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(in thousands, except per share amounts)
1994
<S> <C> <C> <C> <C>
Revenues $179,226 $185,113 $178,282 $226,263
Gross profit 64,942 70,243 62,407 84,815
Income from operations 4,258 4,145 1,159 6,413
-------- -------- -------- --------
NET INCOME 3,144 2,843 640 8,211
Preferred stock dividends (35) (35) (41) (23)
-------- -------- -------- --------
Net income applicable to
Common Shareholders $ 3,109 $ 2,808 $ 599 $ 8,188
======== ======== ======== ========
Net income per share $ 0.04 $ 0.03 $ 0.01 $ 0.09
======== ======== ======== ========
</TABLE>
-39-
<PAGE> 40
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(in thousands, except per share amounts)
1995
<S> <C> <C> <C> <C>
Revenues $176,592 $182,774 $169,175 $221,227
Gross profit 62,905 63,003 54,285 79,565
Loss from operations (4,147) (5,988) (6,042) (6,442)
-------- -------- -------- --------
NET LOSS (4,903) (7,490) (9,586) (8,011)
Preferred stock dividends (45) (59) (66) (70)
-------- -------- -------- --------
Net loss applicable to
Common Shareholders $ (4,948) $ (7,549) $ (9,652) $ (8,081)
======== ======== ======== ========
Net loss per share $ (0.05) $ (0.08) $ (0.10) $ (0.09)
======== ======== ======== ========
</TABLE>
-40-
<PAGE> 41
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
* * *
(c) See Exhibit Index
* * *
-42-
<PAGE> 42
10-K
SCHEDULE II
HANOVER DIRECT
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 30, 1995, DECEMBER 31,
1994 AND JANUARY 1, 1994
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
ADDITIONS
----------------------------------
BALANCE AT CHARGED TO CHARGED TO OTHER BALANCE AT
BEGINNING OF COSTS AND ACCOUNTS DESCRIBE DEDUCTIONS END OF
DESCRIPTION PERIOD EXPENSES DESCRIBE PERIOD
1995:
<S> <C> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL
ACCOUNTS RECEIVABLE, CURRENT $3,912,000 4,796,000 (4) 42,000 (1) 4,762,000 $3,988,000
RESERVES FOR DISCONTINUED
OPERATIONS 1,668,000 (2) 29,000 1,639,000
RESERVE FOR SALES RETURNS 6,023,000 103,602,000 (2) 104,090,000 5,535,000
DEFERRED TAX ASSET VALUATION
ALLOWANCE 38,600,000 (7) 9,900,000 48,500,000
1994:
ALLOWANCE FOR DOUBTFUL
ACCOUNTS RECEIVABLE, CURRENT 4,244,000 3,931,000 (1) 4,263,000 3,912,000
RESERVES FOR DISCONTINUED
OPERATIONS 2,558,000 (2) 890,000 1,668,000
RESERVE FOR SALES RETURNS 4,911,000 114,665,000 (2) 113,553,000 6,023,000
DEFERRED TAX ASSET VALUATION
ALLOWANCE 49,700,000 11,100,000 38,600,000
1993:
ALLOWANCE FOR DOUBTFUL 6,386,000 3,676,000 (4) 134,000 (1) 5,952,000 4,244,000
ACCOUNTS RECEIVABLES,
CURRENT
RESERVES FOR DISCONTINUED
OPERATIONS 3,464,000 (2) 906,000 2,558,000
RESERVE FOR SALES RETURNS 3,901,000 80,665,000 (2) 79,655,000 4,911,000
DEFERRED TAX ASSET VALUATION
ALLOWANCE 53,000,000 (5) 2,600,000 (3) 5,900,000 49,700,000
</TABLE>
- ---------------------------------------------------------
(1) Accounts written off.
(2) Utilization of reserves.
(3) Utilization of valuation allowance.
(4) Represents acquired allowance for doubtful accounts receivable.
(5) Represents available NOL's and the effect of the increase in corporate tax
rates from 34% to 35%.
(6) Represents decrease due to: utilization of valuation allowance and
recognition of NOL's estimated to be utilized by future operating results.
(7) Represents the increase in the valuation allowance offset by an increase in
the gross tax asset.
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
Date: July 16, 1996 By: s/Rakesh K. Kaul
---------------------------------------
Rakesh K. Kaul, Director
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated and on the date indicated below.
Principal Financial Officer:
s/Wayne P. Garten
--------------------------------
Wayne P. Garten
Executive Vice President and
Chief Financial Officer
Board of Directors:
s/Ralph Destino s/Edmund R. Manwell
-------------------------------- ------------------------------
Ralph Destino, Director Edmund R. Manwell, Director
s/J. David Hakman s/Alan G. Quasha
-------------------------------- ------------------------------
J. David Hakman, Director Alan G. Quasha, Director
s/S. Lee Kling s/Geraldine Stutz
-------------------------------- ------------------------------
S. Lee Kling, Director Geraldine Stutz, Director
s/Theodore H. Kruttschnitt s/Jeffrey Laikind
-------------------------------- ------------------------------
Theodore H. Kruttschnitt, Director Jeffrey Laikind, Director
s/Elizabeth Valk Long s/Robert F. Wright
-------------------------------- ------------------------------
Elizabeth Valk Long, Director Robert F. Wright, Director
Date: July 16, 1996
-43-
<PAGE> 44
EXHIBIT INDEX
11 COMPUTATION OF PER SHARE EARNINGS
-44-
<PAGE> 1
EXHIBIT 11
<TABLE>
<CAPTION>
(In 000's, except per share
amounts)
TWELVE MONTHS ENDED
DEC. 30, DEC. 31,
1995 1994
---- ----
<S> <C> <C>
Income (loss) before extraordinary item $(28,153) $14,838
Extraordinary item (1,837) --
-------- -------
Net income (loss) (29,990) 14,838
Preferred stock dividends (240) (135)
-------- -------
Net income (loss) applicable to Common Shareholders
(30,230) 14,703
Average shares of common stock outstanding during the period 93,030 90,207
Incremental shares from assumed exercise of stock options
(primary) 665 3,078
Total shares used to calculate PEPS* 93,030 93,285
Primary earnings per share before extraordinary item $(0.30) $0.16
Extraordinary item (0.02) --
-------- -------
Primary earnings per share $(0.32) $0.16
Average shares of common stock outstanding during the period 93,030 90,207
Incremental shares from assumed exercise of stock options
(fully diluted) 665 3,078
Total shares used to calculate FDEPS* 93,030 93,285
Fully diluted earnings per share before extraordinary item
$(0.30) $0.16
Extraordinary item (0.02) --
-------- -------
Fully diluted earnings per share $(0.32) $0.16
Average shares of common stock outstanding during the period 93,030 90,207
Basic earnings per share $(0.32) $0.16
</TABLE>
* Per APB 15, when a net loss is reported, exercise or conversion is not to be
assumed.
-45-
