<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 29, 1997
Commission file number 1-12082
HANOVER DIRECT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-0853260
(State of incorporation) (IRS Employer Identification No.)
1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY 07087
(Address of principal executive offices) (Zip Code)
(201) 863-7300
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES X NO
----- -----
Common stock, par value $.66 2/3 per share: 144,371,983 shares
outstanding as of May 8, 1997.
<PAGE> 2
HANOVER DIRECT, INC.
FORM 10-Q
MARCH 29, 1997
INDEX
Page
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - December 28, 1996 and
March 29,1997 ............................................. 3
Condensed Consolidated Statements of Income (Loss) - thirteen
weeks ended March 30, 1996 and March 29, 1997 ............. 5
Condensed Consolidated Statements of Cash Flows - thirteen
weeks ended March 30, 1996 and March 29, 1997 ............. 6
Notes to Condensed Consolidated Financial Statements for the
thirteen weeks ended March 30, 1996 and March 29, 1997 .... 8
Item 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations ............. 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk ............................................... 17
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K ..................... 18
Signatures .................................................... 19
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 28, 1996 AND MARCH 29, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 28, MARCH 29,
1996 1997
--------- ---------
ASSETS
Current Assets:
<S> <C> <C>
Cash and cash equivalents $ 5,173 $ 1,510
Accounts receivable, net 29,399 14,984
Accounts receivable under financing agreement -- 24,723
Inventories 67,610 63,852
Prepaid catalog costs 23,401 25,404
Deferred tax asset, net 3,300 3,300
Other current assets 3,148 4,325
--------- ---------
Total Current Assets 132,031 138,098
--------- ---------
Property and equipment, at cost:
Land 4,797 4,754
Buildings and building improvements 16,554 15,947
Leasehold improvements 9,956 8,223
Furniture, fixtures and equipment 34,603 45,000
Construction in progress 8,315 861
--------- ---------
74,225 74,785
Accumulated depreciation and amortization (22,523) (24,126)
--------- ---------
Net Property and Equipment 51,702 50,659
Goodwill, net 17,901 17,771
Deferred tax asset, net 11,700 11,700
Other assets, net 7,493 5,106
--------- ---------
Total Assets $ 220,827 $ 223,334
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE> 4
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 28, 1996 AND MARCH 29, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 28, MARCH 29,
1996 1997
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt
and capital lease obligations $ 11,452 $ 10,979
Obligations under receivable financing -- 24,723
Accounts payable 79,587 59,657
Accrued liabilities 37,782 35,379
Customer prepayments and credits 4,717 3,706
----------- -----------
Total Current Liabilities 133,538 134,444
----------- -----------
Noncurrent Liabilities:
Long-term debt 53,255 61,973
Capital lease obligations 482 361
Other 1,812 1,543
----------- -----------
Total Noncurrent Liabilities 55,549 63,877
----------- -----------
Total Liabilities 189,087 198,321
----------- -----------
Commitments and Contingencies
Shareholders' Equity:
Series B Preferred Stock, convertible, $.01
par value, authorized and issued 634,900
shares in 1996 and 1997 5,748 5,795
Common Stock, $.66 2/3 par value, authorized
225,000,000 shares; issued 145,039,915
shares in 1996 and 1997 96,693 96,693
Capital in excess of par value 270,097 270,007
Accumulated deficit (336,586) (343,255)
----------- -----------
35,952 29,240
Less:
Treasury stock, at cost (392,017 shares in
1996 and 1997) (813) (813)
Notes receivable from sale of Common Stock (3,399) (3,414)
----------- -----------
Total Shareholders' Equity 31,740 25,013
----------- -----------
Total Liabilities and Shareholders' Equity $ 220,827 $ 223,334
=========== ===========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
13 Weeks Ended
--------------
March 30, March 29,
1996 1997
---- ----
<S> <C> <C>
REVENUES $ 165,527 $ 129,725
------------- -------------
OPERATING COSTS AND EXPENSES:
Cost of sales and operating expenses 108,438 86,062
Write-down of inventory of discontinued catalogs 1,100 --
Selling expenses 45,391 33,590
General and administrative expenses 15,333 12,274
Depreciation and amortization 2,998 2,138
------------- -------------
173,260 134,064
------------- -------------
INCOME (LOSS) FROM OPERATIONS (7,733) (4,339)
------------- -------------
Interest expense (1,663) (2,034)
Interest income 169 --
------------- -------------
(1,494) (2,034)
------------- -------------
INCOME (LOSS) BEFORE INCOME TAXES (9,227) (6,373)
Income tax provision (250) (248)
------------- -------------
NET INCOME (LOSS) (9,477) (6,621)
Preferred stock dividends and accretion (59) (48)
------------- -------------
Net income (loss) applicable to common shareholders $ (9,536) $ (6,669)
============= =============
Net income (loss) per share $ (.10) $ (.05)
============= =============
Weighted average shares outstanding 93,493,937 144,647,898
============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
13 WEEKS ENDED
------------------------
MARCH 30, MARCH 29,
1996 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (9,477) $ (6,621)
Adjustments to reconcile net (loss) to net cash (used)
by operating activities:
Depreciation and amortization, including deferred fees 3,406 2,634
Provisions for doubtful accounts 1,021 900
Other (34) (15)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (2,564) 12,562
Inventories (8,198) 3,758
Prepaid catalog costs (3,565) (2,003)
Other assets 299 (224)
Accounts payable (1,586) (19,930)
Accrued liabilities (1,041) (1,269)
Customer prepayments and credits 875 (1,011)
-------- --------
NET CASH (USED) BY OPERATING ACTIVITIES (20,864) (11,219)
-------- --------
Cash flows from investing activities:
Acquisitions of property (980) (750)
Proceeds from sale of businesses and properties 1,164 --
Proceeds from sale of securities 474 --
Other, net 37 541
-------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $ 695 $ (209)
-------- --------
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE> 7
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
13 WEEKS ENDED
-----------------------
MARCH 30, MARCH 29,
1996 1997
-------- -------
<S> <C> <C>
Cash flows from financing activities:
Net borrowings under Credit Facility $ 22,092 $ 8,769
Payments of long-term debt and capital lease obligations (662) (645)
Proceeds from issuance of Common Stock 104 --
Payment of debt issuance costs (356) (90)
Other, net (941) (269)
-------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 20,237 7,765
-------- -------
Net (decrease) increase in cash and cash equivalents 68 (3,663)
Cash and cash equivalents at the beginning of the year 2,682 5,173
-------- -------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 2,750 $ 1,510
======== =======
Supplemental cash flow disclosures:
Interest paid $ 1,474 $ 1,350
======== =======
Income taxes paid $ 362 $ 401
======== =======
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 8
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THIRTEEN WEEKS ENDED MARCH 30, 1996 AND MARCH 29, 1997 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with the instructions for Form 10-Q
and, therefore, do not include all information and footnotes necessary for a
fair presentation of financial condition, results of operations and cash flows
in conformity with generally accepted accounting principles. Reference should be
made to the annual financial statements, including the footnotes thereto,
included in the Hanover Direct, Inc. (the "Company") Annual Report on Form 10-K
for the fiscal year ended December 28, 1996. In the opinion of management, the
accompanying unaudited interim condensed consolidated financial statements
contain all material adjustments, consisting of normal recurring accruals,
necessary to present fairly the financial condition, results of operations and
cash flows of the Company and its consolidated subsidiaries for the interim
periods. Operating results for interim periods are not necessarily indicative of
the results that may be expected for the entire year. Certain prior year amounts
have been reclassified to conform with the current year presentation.
2. RETAINED EARNINGS RESTRICTIONS
The Company is restricted from paying dividends at any time on its
Common Stock or from acquiring its capital stock by certain debt covenants
contained in agreements to which the Company is a party.
3. EARNINGS PER SHARE
Net income (loss) per share - Net income (loss) per share was computed
using the weighted average number of shares outstanding. Due to the net loss for
the thirteen weeks ended March 30, 1996 and March 29, 1997, warrants, stock
options and convertible preferred stock are excluded from the calculations of
both primary and fully diluted earnings per share.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
Subsequent to December 28, 1996, the Financial Accounting Standards
Board issued SFAS No. 128, "Earnings Per Share." This statement establishes
standards for computing and presenting earnings per share ("EPS"), replacing the
presentation of currently required primary EPS with a presentation of Basic EPS.
For entities with complex capital structures, the statement requires the dual
presentation of both Basic EPS and Diluted EPS on the face of the statement of
operations. Under this new standard, Basic EPS is computed based on weighted
average shares outstanding and excludes any potential dilution. Diluted EPS
reflects potential dilution from the exercise or conversion of securities into
common stock or from other contracts to issue common stock and is similar to the
currently required fully diluted EPS. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods, and earlier application is not permitted. When adopted, the Company
will be required to restate its EPS data for all periods presented. The Company
does not expect the impact of the adoption of this statement to be material to
previously reported EPS amounts.
Effective January 1, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 125 ("SFAS") "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. These
standards are based on consistent application of a financial-components approach
that focuses on control. Under that approach, after a transfer of financial
assets, an entity recognizes the financial and servicing assets it
8
<PAGE> 9
controls and the liabilities it has incurred, derecognizes financial assets when
control has been surrendered, and derecognizes liabilities when extinguished.
This statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings. The
adoption of this statement resulted in the recognition of approximately $24.7
million of additional accounts receivable and associated short-term debt. This
adjustment was required based on the terms of the Company's agreement with an
unrelated third party for the sale and servicing of accounts receivable. The
provisions of this pronouncement are to be applied prospectively, from
January 1, 1997. Retroactive application is not permitted, however, the amount
of adjustment at December 28, 1996 would also have been a recognition of an
additional $24.7 million in both receivables and the associated receivable
financing obligation.
5. RIGHTS OFFERING
The Company announced in March 1997 that the Board of Directors had
voted to conduct a rights offering (the "1997 Rights Offering") for $50 million
of the Company's Common Stock. On April 29, 1997, the Company commenced the 1997
Rights Offering. Holders of record of the Company's Common Stock and Series B
Convertible Additional Preferred Stock as of April 28, 1997, the record date,
are eligible to participate in the offering. The rights are exercisable at a
price of $.90 per share. Shareholders received 0.38 rights for each share of
Common Stock held and 0.57 rights for each share of Series B Convertible
Additional Preferred Stock held as of the record date. The 1997 Rights Offering
9
<PAGE> 10
will expire on May 30, 1997 and is scheduled to close on June 6, 1997. The
Company has registered 55,595,556 shares of the Company's Common Stock to be
issued upon exercise of the rights with the Securities and Exchange Commission
for the 1997 Rights Offering.
Richemont S.A. ("Richemont"), a Luxemborg public company, which is an
affiliate of Compagnie Financiere Richemont A.G. ("CFR"), a Swiss public
company, who maintains a joint venture with North American Resources Group
Limited (NAR) with the family of Alan G. Quasha, a Director and Chairman of the
Board of Hanover Direct, Inc., entered into a standby purchase agreement, to
purchase, at the subscription price, any shares not subscribed for in the 1997
Rights Offering. The Company has agreed to pay, in cash, to Richemont, on the
Closing Date of the 1997 Rights Offering, an amount equal to 1% of the aggregate
offering price of the aggregate number of shares issuable upon completion of the
1997 Rights Offering other than with respect to the shares of Common Stock held
by NAR or its affiliates plus an amount equal to one-half of one percent of the
aggregate number of shares acquired by NAR upon exercise of their rights
(less 11,111,111 shares of Common Stock or such greater number of shares as NAR
or its affiliates shall acquire upon exercise of their Rights) (collectively,
the Standby Fee) plus an amount equal to 4% of the aggregate offering price in
respect to all unsubscribed shares (Take-Up Fee). In order to facilitate vendor
shipments and to permit the commencement of the Company's plan to consolidate
certain of its warehousing facilities, Richemont advanced $30 million as of
April 23, 1997 against its commitment to purchase all of the unsubscribed
shares pursuant to the standby purchase agreement. The Company has executed a
subordinated promissory note in the amount of $30 million to evidence this
indebtedness (the "Richemont Promissory Note").
On April 26, 1997, NAR irrevocably agreed with the Company, subject to
and upon the consummation of the 1997 Rights Offering, to exercise certain
of the rights distributed to it for the purchase of 11,111,111 shares of
Common Stock that have an aggregate purchase price of approximately $10 million.
NAR agreed to pay for and the Company agreed to accept as payment for the
exercise of such rights the surrender by NAR of the principle amount due under
the IMR Promissory Note dated September 1996 in the principal amount of $10
million and cancellation thereof (Note 6).
The gross cash proceeds from the 1997 Rights Offering of $40 million
(after giving effect to the acquisition and exercise by NAR of rights having an
aggregate purchase price of $10 million to be paid for by surrender and
cancellation of the $10 million IMR Promissory Note ) will be used to repay the
$30 million principal amount outstanding under the Richemont Promissory Note and
the balance of the proceeds will be used for working capital and general
corporate purposes, including to repay amounts, if any, outstanding under the
Company's Credit Facility with Congress.
6. RELATED PARTY TRANSACTIONS
In December 1996, the Company finalized its agreement (the
"Reimbursement Agreement") with Richemont Finance S.A. that provided the Company
with approximately $27.9 million of letters of credit through Swiss Bank
Corporation, New York Branch, to replace letters of credit which were issued
under the Credit Facility with Congress. These letters of credit were issued for
$8.6 million related to the Company's Industrial Revenue Bonds due 2003 and
$19.3 million related to the Company's Term Financing Facility with Congress.
The letters of credit will expire on February 18, 1998 and carry an interest
rate of 3.5% above the prime rate, currently 11.75%, payable to Richemont
quarterly on amounts drawn under the letters of credit. In the event that the
Company has not paid in full, by the expiration date, any outstanding balances
under the letters of credit, Richemont shall have the option, exercisable at any
time prior to payment in full of all amounts outstanding under the letters of
credit to convert such amount into Common Stock of the Company at the mean of
the bid and ask prices of the Company's Common Stock on November 8, 1996, or the
mean of the bid and ask prices of the Company's Common Stock on each of the
thirty days immediately prior to the date of exercise of the conversion
privilege. The Reimbursement Agreement is subordinate to the Credit Facility
with Congress.
NAR and its affiliates hold warrants to purchase 5,646,490 shares of
the Company's Common
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Stock at prices ranging from $1.95 to $2.59 per share. The warrant agreements
under which these warrants were granted contain antidilution provisions which
will increase the warrants held by NAR and reduce the exercise prices at which
the warrants are exercisable upon the completion of the 1997 Rights Offering.
In September 1996, Intercontinental Mining & Resources Incorporated, an
affiliate of NAR ("IMR"), loaned the Company $10 million as evidenced by a
subordinated promissory note in the amount of $10 million (the "IMR Promissory
Note"). Such loan bears interest at prime plus 1 1/2%, was due on November 14,
1996 and, if not repaid before May 15, 1997, is convertible at the option of IMR
into shares of Common Stock at the lower of the fair market value at the date
the note was issued or the then current fair market value thereof. The IMR
Promissory Note is subordinate to the Credit Facility and is excluded from the
calculation of the consolidated working capital covenant under the Credit
Facility. The Company agreed to accept as payment for the exercise of rights to
purchase 11,111,111 shares of Common Stock by NAR the principle amount due under
the IMR Promissory Note (Note 5).
Richemont entered into a standby purchase agreement with the Company,
to purchase, at the subscription price, any shares not subscribed for in the
1997 Rights Offering (Note 5).
7. LONG-TERM DEBT
In November 1995, the Company entered into a three year, $75 million
secured revolving Credit Facility (the "Credit Facility") with Congress
Financial Corporation ("Congress"). Pursuant to the terms of the Credit
Facility, the Company is required to maintain minimum net worth and working
capital levels. In addition, the Credit Facility places limitations on the
Company's ability to incur additional indebtedness. Due to the Company's
financial condition in 1996, the Company was in default of certain of the
covenants related to the Credit Facility. The Company received waivers for the
December 1996 events of default under the Credit Facility related to the working
capital and net worth covenants as of and through December 28,1996. In addition,
the Company received a waiver for any event of default relating to the material
adverse change provision that was in effect through and including December 28,
1996. Congress also agreed to establish new minimum levels related to these
covenants. The working capital and net worth covenants for fiscal 1997 are as
follows (in 000's):
<TABLE>
<CAPTION>
WORKING CAPITAL (AS DEFINED) AMOUNT
---------------------------- ------
<S> <C> <C>
January through May 1997 $ (5,000)
June through November 1997 $(10,000)
December 1997 and thereafter $(20,000)
NET WORTH AMOUNT
--------- ------
January through May 1997 $ 14,000
June 1997 and thereafter $ 11,500
</TABLE>
Upon the closing of the 1997 Rights Offering and each succeeding
period, the above stated minimum working capital and net worth covenants shall
be increased by $10 million.
The Company had $22.5 million and $13.7 million of borrowings
outstanding under the revolving line of credit and $8.6 million and $8.9 million
outstanding under the revolving term notes at March 29, 1997 and December 28,
1996, respectively. The revolving term notes are due in November 1997. The
Company had $9.1 million and $26.0 million of unused borrowing capacity under
the Credit Facility at March 29, 1997 and December 28, 1996, respectively. The
rates of interest related to the revolving line of credit and term notes were
9.75% and 10.0%, respectively, at March 29, 1997.
The face amounts of unexpired documentary letters of credit under the
Credit Facility were $9.1 million and $4.5 million at March 29, 1997 and
December 28, 1996, respectively. In addition, $27.9 million of standby letters
of credit were outstanding at March 29, 1997.
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, the percentage
relationship to revenues of certain items in the Company's Condensed
Consolidated Statements of Income (Loss).
<TABLE>
<CAPTION>
13 Weeks Ended
March 30, March 29,
1996 1997
---- ----
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of sales and operating expenses 65.5 66.3
Write-down of inventory of
discontinued catalogs .7 -
Selling expenses 27.4 25.9
General and administrative expenses 9.3 9.5
Depreciation and amortization 1.8 1.7
Income (loss) from operations (4.7) (3.4)
Interest expense, net (.9) (1.6)
Net income (loss) (5.7%) (5.1%)
</TABLE>
RESULTS OF OPERATIONS
THIRTEEN-WEEKS ENDED MARCH 29, 1997 COMPARED WITH THIRTEEN-WEEKS ENDED MARCH 30,
1996
Net Income (Loss). The Company reported a net loss of $(6.6) million or
$(.05) per share for the thirteen-week period ended March 29, 1997 compared to a
net loss of $(9.5) million or $(.10) per share for the same period last year.
The per share amounts were calculated based on weighted average shares
outstanding of 144,647,898 and 93,493,937 for the current year and prior year
periods, respectively. This increase in weighted average shares outstanding was
due to a $50 million rights offering completed in August 1996.
The decrease in net loss was primarily the result of: (i) reduced
circulation to prospects and to customers other than core customers and
increased circulation to core customers with core products which resulted in
improved response rates and lower selling expenses; and (ii) reduced general and
administrative expenses due to the Company's cost reduction plan.
As a result of the Company's operating losses in 1996, the Company
formulated a 1997 business plan which would improve profit margins through
improved inventory management and reduce operating expenses by reducing fixed
costs. The Company continued to experience tightened vendor credit in the first
quarter of 1997 due to the 1996 operating losses. This continued to affect the
Company's ability to obtain merchandise on a timely basis. In order to alleviate
the Company's temporary working capital shortfall and provide the Company with
the necessary time to implement its business plan, the Company entered into a
financial transaction with Richemont which provided for a $30 million advance
related to the 1997 Rights Offering. The $30 million advance was received on
April 23, 1997 and provided the Company with the ability to reduce its back
order levels and begin to obtain merchandise on a more timely basis.
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Revenues. Revenues decreased 21.6% for the thirteen week period ended
March 29, 1997 to $129.7 million from $165.5 million for the same period in
1996. Revenues generated by continuing catalogs decreased approximately 7% to
$122.6 million in the 1997 period from $131.6 million for the prior year period.
Revenues generated by the discontinued catalogs decreased 79% to $7.1 million in
the 1997 period. The Company circulated 64 million catalogs during the 1997
period which represents a 35% reduction from the prior year. Continuing catalog
circulation decreased 13% from the prior year as part of the Company's plan to
more effectively target its circulation.
The following table summarizes the Company's revenues and the percent
to total revenues, for the fiscal periods indicated, for each business unit; all
revenues are net of returns:
<TABLE>
<CAPTION>
13 Weeks Ended
March 29, March 29, March 30, March 30,
1997 1997 1996 1996
Revenues Percent of Revenues Percent of
Business Unit (in thousands) Total Revenues (in thousands) Total Revenues
- ------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Home Fashions -
Mid-Market $ 34.5 26.6% $ 44.2 26.7%
Upscale 26.8 20.7 22.2 13.4
General merchandise 18.8 14.5 20.1 12.2
Women's Apparel 17.1 13.2 16.4 9.9
Men's Apparel 13.8 10.6 17.8 10.8
Gifts 11.6 8.9 10.8 6.5
--------------- ------------- ------------- -------------
Total Continuing 122.6 94.5 131.5 79.5
Discontinued 7.1 5.5 34.0 20.5
--------------- -------------- ------------- -------------
Total Company $ 129.7 100.0% $ 165.5 100.0%
=============== ============== ============= =============
</TABLE>
Revenues from the Home Fashions - Mid-Market group decreased 22% to
$34.5 million for the thirteen week period ended March 29, 1997 from $44.2
million for the same period in the prior year. Domestications' revenues
decreased in the current year period due to a planned 18% decline in circulation
and a 6% increase in order cancellations which mainly resulted from the
Company's inability to fill 1996 back orders on a timely basis. Revenues from
the Home Fashions - Upscale group increased 21% to $26.8 million due to a 29%
increase in circulation and increased average order size. These increases were
partially offset by a decrease in response rates. The General Merchandise
group's revenues decreased 6% due mainly to a planned decrease in Colonial
Gardens Kitchen's revenues which were partially offset by an increase in
Improvements' revenues. The decrease in Colonial Gardens Kitchen's revenues was
due to a 44% decrease in circulation, lower response rates and a decrease in
average order size. Revenues from the Women's Apparel group increased due to
increased response rates and average order size. The Men's Apparel group's
revenues decreased 23% due to a planned 34% decrease in circulation which was
partially offset by increased response rates and average order size. Revenues
generated by the Gifts group increased 7% to $11.6 million mainly due to
increased volume at the Gump's retail store and increased response rates of the
Gump's By Mail catalog.
Revenues from the catalogs discontinued in 1995 and the discontinued
Sears venture decreased by $26.9 million to $7.1 million for the thirteen week
period ended March 29, 1997.
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<PAGE> 14
Operating Costs and Expenses. Cost of sales and operating expenses
increased to 66.3% of revenues for the thirteen-week period ended March 29, 1997
compared to 65.5% of revenues for the same period in 1996. The total expense
decreased $22.4 million to $86.1 million for the thirteen-week period ended
March 29, 1997. The increase in this expense as a percentage of revenues is due
to the Company's fixed fulfillment cost structure which has remained relatively
constant from period to period. The Company anticipates further reductions in
these costs as part of the previously discussed restructuring plan which the
Company intends to continue to implement throughout 1997. The impact of the
fixed fulfillment cost structure was partially offset by improved product gross
profit margins as the Company began to implement its previously announced plan
to focus more on its core customers with core products. The Company has begun
to realize the benefits of its recent improvements to its fulfillment
operations as variable fulfillment costs decreased as a percentage of sales
from period to period.
The write-down of inventory of discontinued catalogs totaled $1.1
million in the thirteen-week period ended March 30, 1996 compared to no such
charges in the current period. The 1996 write-downs were required as the Company
experienced significantly lower recovery rates on liquidation of the remaining
inventory for the discontinued Simply Tops and One 212 catalogs than had been
anticipated.
Selling expenses decreased to 25.9% of revenues in the first quarter of
1997 from 27.4% for the same period last year. The total expense decreased $11.8
million to $33.6 million for the thirteen-week period ended March 29, 1997 as a
result of a 35% decrease in catalog circulation.
General and administrative expenses were 9.5% of revenues for the
thirteen-weeks period ended March 29, 1997, compared to 9.3% of revenues for the
same period in 1996. The total expense decreased $3.0 million to $12.4 million
during the current year period as the Company began to implement its plan to
reduce fixed overhead expenses.
Depreciation and amortization decreased to 1.7% of revenues for the
thirteen week period ended March 29, 1997 from 1.8% of revenues for the same
period in 1996. The total expense decreased $.9 million or 29% as a result of
the Company's decision to write-off certain intangible assets and close certain
of its facilities at the end of the 1996 fiscal year.
Income (Loss) from Operations. The Company recorded a loss from
operations of $(4.3) million for the thirteen-week period ended March 29, 1997,
or (3.3)% of revenues, compared to a loss from operations of $(7.7) million for
the same period in 1996, or (4.7)% of revenues.
The decrease in loss from operations was the result of the Company's
plan to decrease circulation by focusing more on its most profitable customers
and on proven merchandise. Variable fulfillment costs also improved in the
current period as inefficiencies in the Company's Roanoke fulfillment center
were corrected during fiscal 1996. These factors contributed to an improved
profit margin which was partially offset by the Company's fixed cost structure
which remained relatively constant when comparing the current period to the same
period last year. The Company's new operating plan also resulted in lower
selling expense and increased response rates. The Company's plan to reduce its
fixed overhead expenses resulted in decreased general and administrative
expenses.
Interest Expense, Net. Interest expense, net increased $.5 million for
the thirteen-week period ended March 29, 1997 from $1.5 million for the same
period in the prior year due to the Company's increased borrowings related to
the Company's increased working capital requirements.
Income Taxes. In assessing the realizability of the $15 million net
deferred tax asset, the Company has considered numerous factors, including its
future operating plans. The Company believes that the $15 million net deferred
tax asset represents a reasonable, conservative estimate of the future
utilization of the tax NOLs. The Company will continue to evaluate the
likelihood of future profit and the necessity of future adjustments to the
deferred tax asset valuation allowance. The Company recorded a state tax
provision of $.3 million in each of the thirteen-week periods ended March 29,
1997 and March 30, 1996.
14
<PAGE> 15
LIQUIDITY AND CAPITAL RESOURCES
Working Capital. At March 29, 1997, the Company had $1.5 million in
cash and cash equivalents, compared to $5.2 million at December 28, 1996.
Working capital and the current ratio were $3.7 million and 1.03 to 1 at March
29, 1997 versus ($1.5) million and .99 to 1 at December 28, 1996. The $11.2
million of cash used in operations in the first thirteen weeks of 1997 was
primarily used to fund operating losses, reduce accounts payable and to fund a
seasonal increase in prepaid catalog costs. The cash used in operations was
provided by reductions in accounts receivable and inventory and through
additional borrowings under the Credit Facility.
As a result of the Company's continued operating losses in 1996, the
Company experienced tightened vendor credit and increased levels of debt. Order
cancellation rates increased and negatively affected initial fulfillment which
resulted in an increase in split shipments and higher customer inquiry calls in
1996 and the first quarter of 1997. As a result of these factors, the Company
decided in late 1996 that it was necessary to obtain relief under its credit
facility and to investigate an equity infusion. In December 1996, the Company
closed its agreement with Richemont Finance S.A. that provided the Company with
approximately $28 million of letters of credit to replace letters of credit
which were issued under the Credit Facility with Congress. Although this
agreement provided the Company added liquidity, its timing, on December 19,
1996, had minimal effect on reducing back orders in 1996. Therefore these back
orders carried over to the first quarter of 1997 and caused an increase in
order cancellation rates in the period. When the final 1996 results became
known to the Company, it concluded such results would have a further negative
impact on the Company's ability to conduct business on normal trade terms.
Therefore, the Company decided it was necessary to obtain an equity infusion
which would restore the Company's equity base and provide the Company with
additional liquidity.
On March 26, 1997, the Company announced that it intended to distribute
subscription rights to subscribe for and purchase additional shares of Common
Stock to holders of record of the Company's Common Stock and Series B
Convertible Additional Preferred Stock (the "1997 Rights Offering"). The
Company's registration statement was filed with the SEC on April 14, 1997 and
declared effective on April 29, 1997. The rights are exercisable at a price of
$.90 per share. NAR has agreed to apply $10 million of the Company's
indebtedness to acquire $10 million of the Company's Common Stock pursuant to
the 1997 Rights Offering. Richemont has agreed to purchase all shares of Common
Stock which have not been subscribed for and purchased by shareholders other
than NAR in the 1997 Rights Offering. On April 23, 1997, Richemont advanced $30
million against its commitment to purchase all of the unsubscribed shares. In
connection with the agreement, the Company named two Richemont representatives
to its Board of Directors and Executive Committee. The Rights Offering is
scheduled to close on June 6, 1997.
At March 29, 1997, the Company had outstanding $11.0 million of current
borrowings. This balance includes $8.6 million of term notes under the Credit
Facility due in November 1997. The Company had amounts outstanding under the
Credit Facility of $22.5 million at March 29, 1997 and $13.7 million at December
28, 1996. The $30 million advance received from Richemont in April 1997 was used
to satisfy certain vendor obligations and to reduce the outstanding borrowings
under the Credit Facility. As of May 9, 1997, $9.5 million of borrowings were
outstanding under the Credit Facility and remaining availability was $19.0
million.
In December 1996, the Company received waivers for events of default
under the Credit Facility with Congress. In addition, Congress and the Company
agreed to new working capital and net worth covenants for fiscal 1997. The
Company believes that the 1997 Rights Offering together with the Credit
Facility covenant modifications will ease vendor/creditor concerns about the
Company's viability and that upon the conclusion of the 1997 Rights Offering,
it will be able to gradually return to more normal trade terms with its
suppliers and will be able to obtain sufficient merchandise on a
15
<PAGE> 16
timely basis to satisfy customer demand; however, there can be no assurance to
these affects. The Company's ability to continue to improve upon its prior
year's performance and implement its business strategy, including realignment of
its business units and expense reductions, is critical to maintaining adequate
liquidity.
The Company experiences seasonality in its working capital requirements
and fluctuations in the revolving Credit Facility with peak borrowing
requirements normally occurring during the first and fourth quarters of the
year.
The Company is required to maintain certain financial covenants related
to the Credit Facility with Congress with which the Company is in compliance at
March 29, 1997.
Operating Plan. In December 1996, the Company began an operational
realignment plan that it believes will better enable it to capitalize on its
internal strengths. The Company is continuing to move to a decentralized
structure whereby the individual catalogs will better be able to manage their
resources and capitalize on business opportunities. This plan provides for each
catalog's management team to be responsible for its financial results, working
capital resources and future business investment needs. The Company believes
that this structure will result in better management of vendor relationships,
inventories and working capital.
Infrastructure Investments. The Company's plan to restructure its
catalog's into strategic business units and concentrate its mailing efforts on
profitable customers is expected to result in excess capacity throughout its
fulfillment centers. Therefore, the Company intends to consolidate certain of
its fulfillment operations into its new Roanoke fulfillment center. This will
require a capital investment of approximately $5.5 million during 1997.
The Company continued its management information systems upgrade in the
first quarter of 1997. The system was operational in all of the Company's
catalogs as of April 1997.
Effect of Inflation and Cost Increases. The Company normally
experiences increased costs of sales and operating expenses as a result of the
general rate of inflation in the economy. Operating margins are generally
maintained through internal cost reductions and operating efficiencies and
then through selection of appropriate mail-order merchandise, 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 United States Postal Service ("USPS"), with catalog mailing
and product shipment expenses representing approximately 17% of revenues in the
first thirteen weeks of 1997. Paper costs represented approximately 6% of
revenues for the same period. The Company anticipates a paper price increase in
the second half of 1997.
16
<PAGE> 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
NONE.
17
<PAGE> 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Earnings (Loss) Per Share.
27 Financial Data Schedule (EDGAR filing only).
(b) Reports on Form 8-K
NONE.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANOVER DIRECT, INC.
Registrant
By: /s/ Larry J. Svoboda
---------------------
Larry J. Svoboda
Senior Vice-President and Chief Financial Officer
(on behalf of the Registrant and as principal financial officer)
May 13, 1997
19
<PAGE> 1
HANOVER DIRECT, INC.
COMPUTATION OF EARNINGS (LOSS) PER SHARE
(In 000's, except per share amounts)
<TABLE>
<CAPTION>
13 WEEKS ENDED
MARCH 30, MARCH 29,
1996 1997
-------- ---------
<S> <C> <C>
Net income (loss) before extraordinary item $(9,477) $ (6,621)
Preferred stock dividends (59) (48)
------- --------
Net income (loss) applicable to common
shareholders $(9,536) $ (6,669)
======= ========
Average shares of common stock
outstanding during the period 93,494 144,648
Total shares used to calculate PEPS* 93,494 144,648
Primary earnings per share $ (.10) $ (.05)
======= ========
Average shares of common stock
outstanding during the period 93,494 144,648
Total shares used to calculate FDEPS* 93,494 144,648
Fully diluted earnings per share $ (.10) $ (.05)
======= ========
Average shares of common stock
outstanding during the period 93,494 144,648
Basic earnings per share $ (.10) $ (.05)
======= ========
</TABLE>
- --------------------------------------
*Per APB 15, when a net loss is reported, exercise or conversion of stock
options is not to be assumed.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER
DIRECT, INC AND SUBSIDIARIES CONDENSED CONSOLIDTAED BALANCE SHEETS AND
STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 29, 1997 AND IS QUALIFIED
IN ITS ENTIRETY, EXCEPT FOR GROSS ACCOUNTS RECEIVABLE AND THE ALLOWANCE FOR
DOUBTFUL ACCOUNTS, BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1997
<PERIOD-END> MAR-29-1997
<CASH> 1,510
<SECURITIES> 0
<RECEIVABLES> 14,984
<ALLOWANCES> (5,239)
<INVENTORY> 63,852
<CURRENT-ASSETS> 138,098
<PP&E> 74,785
<DEPRECIATION> (24,126)
<TOTAL-ASSETS> 223,334
<CURRENT-LIABILITIES> 134,444
<BONDS> 61,973
5,795
0
<COMMON> 96,693
<OTHER-SE> (4,227)
<TOTAL-LIABILITY-AND-EQUITY> 223,334
<SALES> 129,725
<TOTAL-REVENUES> 129,725
<CGS> 86,062
<TOTAL-COSTS> 134,064
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,034
<INCOME-PRETAX> (248)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,621)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,621)
<EPS-PRIMARY> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
