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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 26, 1998
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: 210,718,923 shares outstanding as
of November 3, 1998.
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HANOVER DIRECT, INC.
FORM 10-Q
September 26, 1998
INDEX
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Page
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Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 26, 1998 and December 27, 1997................................. 3
Condensed Consolidated Statements of Income (Loss) - thirteen and
thirty-nine weeks ended September 26, 1998 and
September 27, 1997 ...................................................... 5
Condensed Consolidated Statements of Cash Flows - thirty-nine weeks ended
September 26, 1998 and September 27, 1997................................ 6
Notes to Condensed Consolidated Financial Statements - thirty-nine weeks
ended September 26, 1998 and September 27, 1997.......................... 7
Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations....................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 14
Part II - Other Information
Item 5. Other Information.................................................. 15
Item 6. Exhibits and Reports on Form 8-K .................................. 15
Signatures.................................................................. 16
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 26, 1998 AND DECEMBER 27, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 26, DECEMBER 27,
1998 1997
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,292 $ 14,758
Accounts receivable, net 21,817 17,684
Accounts receivable under financing agreement 17,694 21,918
Inventories 77,085 64,330
Prepaid catalog costs 25,457 20,684
Deferred tax asset, net 3,300 3,300
Other current assets 3,972 3,083
--------- ---------
Total Current Assets 152,617 145,757
--------- ---------
Property and equipment, at cost:
Land 4,634 4,909
Buildings and building improvements 22,610 16,486
Leasehold improvements 9,626 9,040
Furniture, fixtures and equipment 50,513 47,210
Construction in progress 280 4,519
--------- ---------
87,663 82,164
(35,920) (29,712)
--------- ---------
Accumulated depreciation and amortization
Net Property and Equipment 51,743 52,452
Goodwill, net 17,021 17,412
Deferred tax asset, net 11,700 11,700
Other assets, net 2,342 2,978
--------- ---------
Total Assets $ 235,423 $ 230,299
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
SEPTEMBER 26, 1998 AND DECEMBER 27, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 26, DECEMBER 27,
1998 1997
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<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital
lease obligations $ 2,133 $ 5,305
Accounts payable 54,813 58,799
Accrued liabilities 21,126 30,259
Customer prepayments and credits 3,150 3,824
--------- ---------
Total Current Liabilities 81,222 98,187
--------- ---------
Noncurrent Liabilities:
Long-term debt 55,265 32,668
Obligations under receivables financing 17,694 21,918
Capital lease obligations 38 67
Other 2,005 1,908
--------- ---------
Total Noncurrent Liabilities 75,002 56,561
--------- ---------
Total Liabilities 156,224 154,748
--------- ---------
Commitments and Contingencies
Shareholders' Equity:
Series B Preferred Stock, convertible, $.01 par
authorized and issued 634,900 shares in 1997 6,081 5,938
Common Stock, $.66 2/3 par value, authorized
225,000,000 shares; issued 204,441,538 shares
in 1997 and 210,705,589 shares in 1998 140,470 136,294
Capital in excess of par value 296,761 285,165
Accumulated deficit (360,139) (347,652)
--------- ---------
83,173 79,745
Less:
Treasury stock, at cost (686,283 shares in 1997
and 358,303 shares in 1998) (813) (968)
Notes receivable from sale of Common Stock (3,161) (3,226)
--------- ---------
Total Shareholders' Equity 79,199 75,551
--------- ---------
Total Liabilities and Shareholders' Equity $ 235,423 $ 230,299
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
-------------- --------------
SEPTEMBER 26 SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 123,417 $ 122,597 $ 382,514 $ 386,072
------------- ------------- ------------- -------------
Operating costs and expenses:
Cost of sales and operating expenses 76,863 80,369 239,223 252,971
Selling expenses 32,462 29,745 103,530 97,913
General and administrative expenses 12,498 11,967 38,708 38,042
Depreciation and amortization 2,357 2,193 7,147 6,304
------------- ------------- ------------- -------------
124,180 124,274 388,608 395,230
------------- ------------- ------------- -------------
Loss from operations (763) (1,677) (6,094) (9,158)
------------- ------------- ------------- -------------
Interest expense, net (1,823) (1,494) (5,500) (5,783)
Loss before income taxes (2,586) (3,171) (11,594) (14,941)
Income tax provision (250) (250) (750) (749)
------------- ------------- ------------- -------------
Net loss (2,836) (3,421) (12,344) (15,690)
Preferred stock dividends and accretion (158) (47) (438) (142)
------------- ------------- ------------- -------------
Net loss applicable to common shareholders $ (2,994) $ (3,468) $ (12,782) $ (15,832)
============= ============= ============= =============
Comprehensive income $ (2,994) $ (3,468) $ (12,782) $ (15,832)
============= ============= ============= =============
Basic and diluted net loss per share $ (.01) $ .02) $ (.06) $ (.09)
============= ============= ============= =============
Weighted average shares outstanding 207,909,428 200,329,521 205,226,872 167,906,290
============= ============= ============= =============
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
------------------------------
September 26, September 27,
1998 1997
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Cash flows from operating activities:
Net loss $(12,344) $(15,690)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization, including 8,622 7,938
deferred fees
Provisions for doubtful accounts 2,315 2,916
Recovery of investments previously written-off -- (1,020)
Compensation expense related to stock options 1,742 1,323
Changes in assets and liabilities, net of acquisitions:
Accounts receivable (6,448) 9,236
Inventories (12,755) (2,062)
Prepaid catalog costs (4,773) (4,479)
Other current assets (889) (1,204)
Accounts payable (3,986) (16,287)
Accrued liabilities (9,133) (4,820)
Customer prepayments and credits (674) (787)
-------- --------
Net cash used by operating activities (38,323) (24,936)
-------- --------
Cash flows from investing activities:
Acquisitions of property (5,716) (3,177)
Proceeds from sale of businesses and properties -- 642
Proceeds from recovery of investments previously
written off -- 1,020
Other, net -- 349
-------- --------
Net cash used by investing activities $ (5,716) $ (1,166)
-------- --------
Cash flows from financing activities:
Net borrowings (repayments) under Credit Facility $ 22,597 $(12,768)
Payments of debt and capital lease (3,201) (2,393)
obligations
Proceeds from issuance of Common Stock 497 40,134
Payment of debt issuance costs
Payment of stock issuance costs (1,195) --
Payment on notes receivable from sale of Common -- (3,073)
Stock 65 --
Proceeds from issuance in warrant exercise 13,640 --
Other, net 170 (53)
-------- --------
Net cash provided by financing activities 32,573 21,847
-------- --------
Net (decrease) increase in cash and cash (11,466) (4,255)
equivalents
Cash and cash equivalents at the beginning of the 14,758 5,173
-------- --------
year
Cash and cash equivalents at end of the period $ 3,292 $ 918
======== ========
Supplemental cash flow disclosures:
Interest paid $ 3,710 $ 2,665
======== ========
Income taxes paid $ 407 $ 699
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
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HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRTY-NINE WEEKS
ENDED SEPTEMBER 26, 1998 AND SEPTEMBER 27, 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 27, 1997. 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. NET LOSS PER SHARE
Net loss per share is computed using the weighted average number of common
shares outstanding in accordance with the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". The weighted
average number of shares used in the calculation for both basic and diluted net
loss excludes warrants, stock options and convertible preferred stock because a
net loss was incurred for the periods reported in the accompanying condensed
consolidated statements of income (loss).
4. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." This
Statement is effective for fiscal years beginning after June 15, 1999. As the
Company does not currently engage in derivative instruments and hedging
activities, this Statement is not expected to have an impact on the Company's
financial statements.
5. RESTRUCTURING
Restructuring reserves primarily are comprised of severance and facility
exit/relocation costs. The cost of employee severance includes termination
benefits for line and supervisory personnel in fulfillment, telemarketing, MIS,
merchandising and various levels of corporate and catalog management. Facility
exit/relocation costs are primarily related to the Company's decision to sublet
a portion of its Weehawken, NJ corporate facility and to consolidate its
distribution centers in Roanoke, VA. Reserves for restructuring costs
approximated $3.8 million and $5.4 million at September 26, 1998 and December
27, 1997, respectively, and are included in accrued liabilities in the
accompanying condensed consolidated balance sheets.
6. LONG-TERM DEBT
The Congress Facility is comprised of a revolving line of credit of up to
$65 million ("Congress
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Revolving Credit Facility") and term loans initially aggregating $10 million
("Revolving Term Notes"), expiring on January 31, 2001. On June 26, 1998, the
Company amended its agreement with Congress to increase the revolving term notes
to $12.0 million. At September 26, 1998, the Company had borrowings of $20.0
million under the Congress Revolving Credit Facility and $12.0 million in
Revolving Term Notes. The rates of interest related to the Congress Revolving
Credit Facility and Revolving Term Notes at September 26, 1998 were 8.75% and
9.0%, respectively. The face amount of unexpired documentary letters of credit
were $4.0 million at September 26, 1998 and $2.9 million at September 27, 1997.
Effective September 30, 1998 an agreement was reached with Congress to
increase the Revolving Term Notes to $14.7 million and the additional funds were
used to reduce the amount outstanding under the Congress Revolving Credit
Facility by $2.7 million.
The Congress Revolving Credit Facility is secured by all the assets of the
Company. Borrowings under the Congress Revolving Credit Facility are based on
percentages of eligible inventory and accounts receivable. The Congress
Revolving Credit Facility places limitations on the incurrence of additional
indebtedness and requires the Company to maintain minimum net worth and working
capital throughout the term of the agreement. At September 26, 1998 the Company
was in compliance with such covenants and remaining unused availability under
the Congress Revolving Credit Facility was $21.2 million.
7. STOCK BASED COMPENSATION PLANS
The Company accounts for its stock based compensation in accordance with
the fair value provisions of SFAS No. 123. Total compensation expense recognized
in the nine months ended September 26, 1998 and September 27, 1997 was
$1,742,000 and $1,323,000, respectively. Pursuant to the Company's 1996 Stock
Option Plan, there were 200,000 options granted to employees of the Company with
a weighted average exercise price of $2.87 per share during the thirteen-week
period ended September 26, 1998. The option exercise price is the fair market
value of a share of Common Stock as of the date of grant. Options expire seven
years from the date of grant and generally vest over three years. At September
26, 1998, there were 6,058,001 options outstanding with a weighted average
exercise price of $1.43 per share, of which 1,980,609 options are vested with a
weighted average exercise price of $.97 per share. The fair value of the options
granted during the thirteen-week period ended September 26, 1998 was estimated
on the date of grant using the Black-Scholes option pricing model with the
following assumptions: expected volatility of 55.88%; expected option life of
four years; risk-free interest rate of 5.35%; and no expected dividend. The
weighted average fair value of options granted under the 1996 Stock Option Plan
was $1.56 as of September 26, 1998.
During 1997, the Company granted, and the Compensation Committee
approved, nonqualified options to certain employees for the purchase of an
aggregate of 1,000,000 shares of the Company's Common Stock. The options become
vested over three years and expire in 2003. Pursuant to this special grant,
333,333 options vested in March 1998, of which 191,000 options have been
exercised as of September 26, 1998. These options have a weighted average
exercise price of $1.00.
There were no other changes to any of the provisions of any of the
Company's stock option plans during the nine months ended September 26, 1998.
8. RELATED PARTY TRANSACTIONS
Pursuant to the Joint Venture Agreement of NAR Group Limited among
Richemont Finance, S.A. ("Richemont"), Evansville Limited ("Evansville"), NAR
and Alan G. Quasha, whereby 87,606,072 shares of the Company's Common Stock were
distributed by NAR to Richemont, Evansville and Mr. Quasha. Richemont received
56,456,197 shares of Common Stock, Evansville received 30,713,770 shares of
Common Stock and Mr. Quasha received 436,098 shares of Common Stock. Upon
consummation of these
8
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transactions, Richemont owned approximately 47.46% of the Company's Common Stock
and NAR ceased to be the beneficial owner of more than 5% of the Company's
Common Stock. NAR and Quadrant Group Limited sold to Richemont for $4,757,350 in
cash warrants to acquire up to an aggregate of 5,646,490 additional shares of
Common Stock. On July 31,1998, Richemont exercised these warrants, with exercise
prices ranging from $1.95 to $2.59 per share, for a total exercise price of
$13,640,796. As a result of such exercise, Richemont owns approximately 48.88%
of the issued and outstanding Common Stock of the Company.
9
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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 periods indicated, the percentage
relationship to revenues of certain items in the Company's Condensed Statements
of Income (Loss).
Results of Operations - Thirteen-Weeks Ended September 26, 1998 Compared With
Thirteen-Weeks Ended September 27, 1997
<TABLE>
<CAPTION>
13 Weeks Ended
September 26, September 27,
1998 1997
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<S> <C> <C>
Revenues 100.0% 100.0%
Cost of sales and operating expenses 62.3 65.6
Selling expenses 26.3 24.3
General and administrative expenses 10.1 9.8
Depreciation and amortization 1.9 1.7
Loss from operations (.6) (1.4)
Interest expense, net (1.5) (1.2)
Net loss (2.3) (2.8)
</TABLE>
Net Income (Loss). The Company reported a net loss of $(2.8) million or
$(.01) per share for the thirteen-week period ended September 26, 1998 compared
with a net loss of $(3.4) million or $(.02) per share for the same period last
year. The per share amounts were calculated based on weighted average shares
outstanding of 207,909,428 and 200,329,521 for the current and prior year
periods, respectively. This increase in weighted average shares was primarily
due to the exercise of warrants on July 31, 1998, and the sale of 3.7 million
shares of common stock in November 1997.
The net loss for the thirteen-weeks ended September 26, 1998 was primarily
the result of the seasonality of the Company's business, an increase in selling
expenses and costs related to new marketing initiatives. Compared with the same
period last year, the decrease in net loss was primarily the result of (i)
improved product margin and the positive impact upsell promotions, and (ii) a
reduction in product delivery costs.
Revenues. Revenues increased to $123.4 million for the thirteen-week
period ended September 26, 1998 versus $122.6 million for the same period last
year. Revenues from continuing operations increased 1.1% or $1.3 million
compared to the same period last year. Revenues from discontinued catalogs
decreased by $.5 million for the thirteen-week period ended September 26, 1998
compared to the same period last year.
Operating Costs and Expenses. Cost of sales and operating expenses
decreased to 62.3% of revenues for the thirteen-week period ended September 26,
1998 compared to 65.6% for the same period last year. The Company realized
benefits from continued increases in product margin results due to improved
product sourcing and merchandise mix. Additionally, the order fill rate improved
during the third quarter of 1998 compared to the same period last year. The
Company also experienced productivity improvements in distribution activities.
Selling expenses increased to 26.3% of revenues in the third quarter of
1998 from 24.3% in the same period last year. This increase was primarily due to
an increase in the utilization of name list rentals, additional creative costs
and new marketing initiatives. The Company circulated 49.6 million catalogs
during the third quarter of 1998 versus 52.7 million catalogs for the same
period last year.
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General and administrative expenses were 10.1% of revenues for the third
quarter of 1998 versus 9.8% for the comparable period in 1997. General and
administrative costs reflect an increase in spending to support growth
initiatives.
Depreciation and amortization increased to 1.9% of revenues for the third
quarter of 1998 versus 1.8% for the comparable period in 1997. The increase is
primarily a result of fixed asset additions associated with the improvements in
the operation of the distribution center in Roanoke, Virginia.
Loss from Operations. The Company recorded a loss from operations of $.8
million for the third fiscal quarter of 1998 or (.6)% of revenues, compared to a
loss from operations of $1.7 million or (1.4)% of revenues for the same period
in 1997.
Interest Expense, Net. Interest expense, net during the third quarter of
1998 increased by $.3 million compared to the same period in the prior year due
to higher borrowings under the Congress Revolving Credit Facility.
Income Taxes. The Company recorded a state tax provision of $.25 million
in each of the thirteen week periods ended September 26, 1998 and September 27,
1997.
Results of Operations - Thirty-Nine Weeks Ended September 26, 1998 Compared With
Thirty-Nine Weeks Ended September 27, 1997
<TABLE>
<CAPTION>
39 Weeks Ended
September 26, September 27,
1998 1997
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<S> <C> <C>
Revenues 100.0% 100.0%
Cost of sales and operating expenses 62.5 65.5
Selling expenses 27.1 25.4
General and administrative expenses 10.1 9.9
Depreciation and amortization 1.9 1.6
Loss from operations (1.6) (2.4)
Interest expense, net (1.4) (1.5)
Net loss (3.2) (4.0)
</TABLE>
Net Income (Loss). The Company reported a net loss of $(12.3) million or
$(.06) per share for the thirty nine-week period ended September 26, 1998
compared to a net loss of $(15.7) million or $(.09) per share for the same
period last year. The per share amounts were calculated based on weighted
average shares outstanding of 205,226,872 and 167,906,290 for the current and
prior year periods, respectively. The increase in weighted average shares
outstanding is primarily due to a rights offering completed in June 1997.
The net loss for the thirty-nine weeks ended September 26, 1998 was
primarily the result of the seasonality of the Company's business in that the
sales generated in the first nine months of the year generally were not
sufficient to cover its fixed costs for such period. Compared to the same period
last year, the decrease in net loss was primarily the result of (i) improved
gross margins which resulted from a reduction in cost of merchandise, (ii) a
reduction in distribution costs which resulted from the consolidation of
distribution activities into its Roanoke, Virginia facility, (iii) a 1.4%
increased in revenues from continuing operations, and (iv) the positive impact
of upsell promotions. These cost savings and increased revenues from continuing
businesses were partially offset by an increase in selling expenses resulting
from increases in customer prospecting, paper prices and creative costs.
Revenues. Revenues decreased to $382.5 million for the thirty-nine week
period ended September 26, 1998 versus $386.1 million for the same period last
year. Revenues from continuing operations increased
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1.4% or $5.4 million compared to the same period last year. Revenues from
discontinued catalogs decreased by $8.2 million for the thirty-nine week period
ended September 26, 1998 versus the same period last year.
Operating Costs and Expenses. Year-to-date cost of sales and operating
expenses decreased to 62.5% of revenues versus 65.5% of revenues for the same
period in 1997. The Company realized continued gains in product margin due
to improved product sourcing and merchandise mix. Additionally, the order fill
rate improved compared to the same period last year resulting in savings in
product delivery costs. The Company has also experienced savings in the fixed
costs associated with telemarketing and distribution.
Selling expenses increased to 27.1% of revenues in the first nine months
of 1998 versus 25.4% in the same period of 1997. This increase is primarily due
to increased levels of prospecting for new customers, a general increase in the
price of paper used in the Company's catalog production as well as increased
costs associated with the creative design of certain of the Company's catalogs.
Year-to-date general and administrative expenses were 10.1% of revenues
for the first nine months of 1998 versus 9.9% for the comparable period in 1997.
General and administrative costs reflect a slight increase in spending as the
Company repositioned its spending to support growth initiatives.
Depreciation and amortization increased to 1.9% of revenues in the first
nine months of 1998 versus 1.6% for the comparable period in 1997. The increase
is primarily a result of fixed asset additions associated with improvements
being effected in the distribution center in Roanoke, Virginia.
Loss from Operations. For the thirty-nine week period ended September 26,
1998 the Company recorded a loss of $6.1 million or (1.6)% of revenues compared
to a loss from operations of $9.2 million or (2.4)% of revenues for the same
period in 1997.
Interest Expense, Net. Interest expense, net during the first nine months
of 1998 decreased by $.3 million compared to the same period in 1997, due
primarily to lower average borrowings under the Congress Revolving Credit
Facility during the first six months of the fiscal year.
Income Taxes. The Company recorded a state tax provision of $.75 million
in each of the thirty-nine week periods ended September 26, 1998 and September
27, 1997.
Liquidity and Capital Resources
At September 26, 1998, the Company had $3.3 million in cash and cash
equivalents, compared with $14.8 million at December 27, 1997. Working capital
and current ratio were $71.4 million and 1.9 to 1 versus $47.6 million and 1.48
to 1 at December 27, 1997. The $38.3 million of cash used in operations was used
primarily to fund deferred billing promotions, to improve the merchandise
in-stock position which resulted in improved initial fill rates, lower back
orders and increased inventory levels to fund a seasonal increase in catalog
costs, and to fund capital expenditures and seasonal operating losses for the
thirty-nine week period ended September 26, 1998.
On July 31, 1998, Richemont Finance S.A. acquired an aggregate of
5,646,490 additional shares of Common Stock of the Company pursuant to the
exercise of certain common stock purchase warrants with exercise prices ranging
from $1.95 to $2.59 per share and an aggregate total exercise price of
$13,640,796. As a result of such exercise, Richemont owns 102,790,657 shares
or 48.88% of the issued and outstanding Common Stock of the Company. The Company
used the proceeds from the warrant exercise to reduce the amounts outstanding
under its secured revolving credit facility with Congress Financial Corporation
(the "Credit Facility").
Revolver debt increased $1.7 million to $20.0 million during the quarter
to fund seasonal working capital requirements. Remaining availability under the
Credit Facility was $21.2 million at September 26, 1998.
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Effective September 30, 1998, the Company entered into an agreement with
Congress to increase the amount of the term loans authorized and outstanding by
$2.7 million. Such amount was used to reduce revolver debt which had been used
in August 1998 to pay off mortgages in a like amount on the Company's properties
in LaCrosse, Wisconsin.
The Company believes that the warrant exercise by Richemont, the Credit
Facility modifications and the Company's reduced operating losses have eased
vendor/creditor concerns about the Company's viability. The Company's ability to
continue to improve upon its prior year's performance and implement its business
strategy is critical to maintaining adequate liquidity.
Year 2000
The Company utilizes both systems housed primarily on its own computer
network and systems housed on the computers of third parties, such as its
vendors, to conduct its normal business activities. Some of the systems on its
network are proprietary and many are off the shelf programs acquired from
vendors. The Company has inventoried those information technology (IT) and
non-IT systems, including those with embedded chips, critical to its operations
and has received assurances from those developers, vendors and third parties
that those systems are, or will be prior to June 30, 1999, Year 2000 compliant.
The Company has commenced testing of its systems and intends to complete this
process and develop solutions to identified problems by December 31, 1998. As an
additional precaution, the Company is in the process of developing contingency
plans which are expected to be completed by March 31, 1999. The failure of one
or more critical systems to be Year 2000 compliant could have a material adverse
effect on the results of operations. The costs incurred to date to become Year
2000 compliant have not been material and, although the Company has not
completed its testing, the future costs related to this issue are not expected
to be material in the aggregate.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
14
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PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Effective November 9, 1998, Robert J. Vill joined the Company as Vice
President - Finance and Treasurer following the retirement of Edward J. O'Brien
as Senior Vice President and Treasurer effective November 5, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (EDGAR filing only).
(b) Reports on Form 8-K
Current Report on Form 8-K dated July 31, 1998 reporting under Item 5
Richemont's exercise of certain warrants to purchase common stock of the
Company.
15
<PAGE> 16
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)
Date: November 10, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER
DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AND
STATEMENTS OF INCOME FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE BY SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-26-1998
<PERIOD-END> SEP-26-1998
<CASH> 3,292
<SECURITIES> 0
<RECEIVABLES> 21,817
<ALLOWANCES> 2,058
<INVENTORY> 77,085
<CURRENT-ASSETS> 152,617
<PP&E> 87,663
<DEPRECIATION> (35,920)
<TOTAL-ASSETS> 235,423
<CURRENT-LIABILITIES> 81,222
<BONDS> 55,303
6,081
0
<COMMON> 140,470
<OTHER-SE> (67,352)
<TOTAL-LIABILITY-AND-EQUITY> 235,423
<SALES> 282,514
<TOTAL-REVENUES> 382,514
<CGS> 239,223
<TOTAL-COSTS> 388,608
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,315
<INTEREST-EXPENSE> 5,500
<INCOME-PRETAX> (11,594)
<INCOME-TAX> 750
<INCOME-CONTINUING> (12,344)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,344)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
