<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 27, 1999
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: 210,550,296 shares outstanding as of
May 6, 1999.
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HANOVER DIRECT, INC.
FORM 10-Q
MARCH 27, 1999
INDEX
Page
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 27, 1999 and December 26, 1998.....................................3
Condensed Consolidated Statements of Income (Loss) - thirteen weeks
ended March 27, 1999 and March 28, 1998 .................................5
Condensed Consolidated Statements of Cash Flows - thirteen weeks ended
March 27, 1999 and March 28, 1998........................................6
Notes to Condensed Consolidated Financial Statements - thirteen weeks
ended March 27, 1999 and March 28, 1998..................................7
Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations.......................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........12
Part II - Other Information
Item 4. Exhibits and Reports on Form 8-K ..................................13
Signatures.................................................................14
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 27, 1999 AND DECEMBER 26, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 27, DECEMBER 26,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 3,610 $ 12,207
Accounts receivable, net 18,907 22,737
Accounts receivables under financing agreement 17,660 18,998
Inventories 57,223 62,322
Prepaid catalog costs 21,189 16,033
Deferred tax asset, net 3,300 3,300
Other current assets 2,814 2,402
--------- ---------
Total Current Assets 124,703 137,999
--------- ---------
Property and equipment, at cost:
Land 4,634 4,634
Buildings and building improvements 22,724 22,724
Leasehold improvements 9,248 9,303
Furniture, fixtures and equipment 51,581 51,193
Construction in progress 265 113
--------- ---------
88,452 87,967
Accumulated depreciation and amortization (39,982) (37,884)
--------- ---------
Net Property and Equipment 48,470 50,083
Goodwill, net 16,727 16,890
Deferred tax asset, net 11,700 11,700
Other assets, net 1,889 2,198
--------- ---------
Total Assets $ 203,489 $ 218,870
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
MARCH 27, 1999 AND DECEMBER 26, 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 27, DECEMBER 26,
1999 1998
--------- ---------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital lease obligations $ 2,602 $ 2,573
Accounts payable 44,104 64,594
Accrued liabilities 22,011 22,212
Customer prepayments and credits 5,210 4,691
--------- ---------
Total Current Liabilities 73,927 94,070
--------- ---------
Non-current Liabilities:
Long-term debt 46,824 37,288
Obligations under receivable financing 17,660 18,998
Other 2,073 2,044
--------- ---------
Total Noncurrent Liabilities 66,557 58,330
--------- ---------
Total Liabilities 140,484 152,400
--------- ---------
Shareholders' Equity:
Series B Preferred Stock, convertible, $.01 par value,
authorized and issued 634,900 shares 6,175 6,128
Common Stock, $.66 2/3 par value, authorized
225,000,000 shares; issued 210,807,854 and
210,785,688 shares at March 27, 1999 and December 140,539 140,524
26, 1998, respectively
Capital in excess of par value 298,557 297,751
Accumulated deficit (378,198) (373,815)
--------- ---------
67,073 70,588
Less:
Treasury stock, at cost (358,303 shares at March 27, 1999 and
December 26, 1998) (813) (813)
Notes receivable from sale of Common Stock (3,255) (3,305)
--------- ---------
Total Shareholders' Equity 63,005 66,470
--------- ---------
Total Liabilities and Shareholders' Equity $ 203,489 $ 218,870
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
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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
MARCH 27, MARCH 28,
1999 1998
------------- -------------
<S> <C> <C>
Revenues $ 127,714 $ 124,535
------------- -------------
Operating costs and expenses:
Cost of sales and operating expenses 81,904 78,701
Selling expenses 31,946 33,988
General and administrative expenses 14,447 12,473
Depreciation and amortization 2,301 2,337
------------- -------------
130,598 127,499
------------- -------------
Loss from operations (2,884) (2,964)
------------- -------------
Interest expense, net (1,147) (1,435)
------------- -------------
Loss before income taxes (4,031) (4,399)
Income tax provision (193) (250)
------------- -------------
Net loss (4,224) (4,649)
Preferred stock dividends and accretion (159) (122)
------------- -------------
Net loss applicable to common shareholders $ (4,383) $ (4,771)
============= =============
Comprehensive income $ (4,383) $ (4,771)
============= =============
Basic and diluted net loss per share $ (.02) $ (.02)
============= =============
Weighted average shares outstanding 210,444,784 203,788,774
============= =============
</TABLE>
5
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
13 WEEKS ENDED
MARCH 27, MARCH 28,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,224) $ (4,649)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization, including 2,616 2,745
deferred fees
Provisions for doubtful accounts 807 1,091
Compensation expense related to stock options 799 590
Changes in assets and liabilities:
Accounts receivable 3,023 487
Inventories 5,099 (2,554)
Prepaid catalog costs (5,156) (6,474)
Accounts payable (20,490) (5,715)
Accrued liabilities (201) (6,511)
Customer prepayments and credits 519 (336)
Other, net (429) (562)
-------- --------
Net cash used by operating activities (17,637) (21,888)
-------- --------
Cash flows from investing activities:
Acquisitions of property and equipment (404) (2,517)
-------- --------
Cash flows from financing activities:
Net proceeds under Credit Facility $ 9,915 $ 13,187
Payments of debt and capital lease obligations (433) (447)
Proceeds from issuance of Common Stock 22 45
Other, net (60) (930)
-------- --------
Net cash provided by financing activities 9,444 11,855
-------- --------
Net decrease in cash and cash equivalents (8,597) (12,550)
Cash and cash equivalents at the beginning of the year 12,207 14,758
-------- --------
Cash and cash equivalents at the end of the period $ 3,610 $ 2,208
======== ========
Supplemental cash flow disclosures:
Interest paid $ 801 $ 998
======== ========
Income taxes paid $ 374 $ 324
======== ========
</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 THIRTEEN WEEKS
ENDED MARCH 27, 1999 AND MARCH 28, 1998
(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 26, 1998. 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 per share 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. RESTRUCTURING RESERVES
The remaining restructuring reserves established in 1996 are primarily
comprised of facility exit/relocation costs. 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. Remaining reserves for restructuring costs approximated $2.9
million and $3.3 million at March 27, 1999 and December 26, 1998, respectively,
and are included in accrued liabilities in the accompanying condensed
consolidated balance sheets.
5. LONG-TERM DEBT
The Company's long-term credit arrangement with Congress Financial
Corporation is comprised of a revolving line of credit of up to $65 million
("Congress Revolving Credit Facility") and term loans aggregating $14 million
("Revolving Term Notes") expiring on January 31, 2001. At March 27, 1999, the
Company had borrowings of $9.9 million under the Congress Revolving Credit
Facility and $13.7 million in Revolving Term Notes. The rates of interest
related to the Congress Revolving Credit Facility and Revolving Term Notes at
March 27, 1999 were 8.25% and 7.72%, respectively. The face amount of unexpired
documentary letters of credit were approximately $4 million at both March 27,
1999 and March 28, 1998.
7
<PAGE> 8
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 March 27, 1999, the Company was
in compliance with such covenants and remaining unused availability under the
Congress Revolving Credit Facility was $26.9 million.
The term of the outstanding letters of credit issued and the related
guarantee by Richemont Finance S.A. of $25.8 million was recently extended from
March 30, 1999 to March 31, 2000.
6. SEGMENT INFORMATION
Beginning in 1999, the Company will have two operating segments: Brand
Marketing and Web Services. This represents a change from 1998, when the Company
operated only in one segment - direct marketing. In March 1999, the Company
decided to reposition its operations into two separate units, each representing
the overall strategic initiatives of the Company. The Brand Marketing division
will primarily be comprised of the Company's branded portfolio of specialty
catalogs and related retail operations and the Company's e-commerce web site
portfolio relating to each of the Company's catalogs. The Web Services division
will be comprised of the Company's Internet marketing services group, its
telemarketing and fulfillment operations, information systems platform and
corporate administration. Revenues for the Brand Marketing division will be
derived primarily from the sale of merchandise through the Company's catalog and
related e-commerce offerings. Other sources of revenue will include various
upsell initiatives and other catalog related revenue. Revenue for the Web
Services division will be comprised of charges to the Brand Marketing division
pursuant to intercompany service agreements, and revenues in connection with the
Company's fulfillment services and e-commerce services provided to third
parties.
Because the decision to realign the Company, as described above, was only
made during the quarter ended March 27, 1999, as of such date, all the necessary
steps to formally separate the business units had not been completed, and as
such no segment information is available to be presented.
8
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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 27, MARCH 28,
1999 1998
----- -----
<S> <C> <C>
Revenues 100.0% 100.0%
Cost of sales and operating expenses 64.1 63.2
Selling expenses 25.0 27.3
General and administrative expenses 11.3 10.0
Depreciation and amortization 1.8 1.9
Loss from operations (2.2) (2.4)
Interest expense, net (.9) (1.2)
Net loss (3.3)% (3.7)%
</TABLE>
RESULTS OF OPERATIONS
THIRTEEN-WEEKS ENDED MARCH 27, 1999 COMPARED WITH THIRTEEN-WEEKS ENDED MARCH 28,
1998
Net Loss. The Company reported a net loss of ($4.2) million or $(.02) per
share for the thirteen-weeks ended March 27, 1999 compared with a net loss of
$(4.6) million or $(.02) per share for the same period last year. The per share
amounts were calculated based on weighted average shares outstanding of
210,444,784 and 203,788,774 for the current year and prior year period,
respectively. This increase in weighted average shares was due to an exercise of
warrants in July 1998 by Richemont Finance S. A.
The net loss for the thirteen-weeks ended March 27, 1999 was primarily the
result of the seasonality of the Company's business, as well as increased costs
(of approximately $2.5 million) related to the Company's strategic initiatives
(see Note 6 "Segment Information") offset by the reduction in operating losses
associated with the discontinuance of noncore catalogs. The seasonality of the
Company's business is such that the sales volumes achieved in the first quarter
of the year are not sufficient to cover its fixed costs for such period.
Compared to the comparable period last year, the decrease in net loss was
primarily due to:
(i) better catalog productivity
(ii) improved upsell program
(iii) improved merchandise in-stock position (lower back orders) and
(iv) improved postage and distribution costs
partially offset by,
(i) costs related to strategic initiatives and
(ii) aggressive disposal of non core catalog inventories
Revenues. Revenues increased 2.6% for the thirteen-week period ended March
27, 1999 to $127.7 million from $124.5 million for the same period in 1998.
Revenues from continuing operations increased by 8.1%. The Company circulated
69.3 million catalogs during the 1999 period versus 74.5 million catalogs in the
prior year period. Revenues from discontinued operations decreased to $8.5
million from $14.3 million in the prior year period.
9
<PAGE> 10
Operating Costs and Expenses. Cost of sales and operating expenses
increased to 64.1% of revenues for the thirteen-week period ended March 27, 1999
compared to 63.2% of revenues for the same period in 1998. These results reflect
a decrease in product margins as a result of higher merchandise and freight
costs and aggressive disposal of non core catalog inventories. These cost
increases were partially offset by realized savings in outbound postage expense
due to improved initial fill performance by most of the Company's catalogs, as
well as an improvement in distribution costs which resulted from the
consolidation of distribution activities into the Company's distribution center
in Roanoke, Virginia.
Selling expenses decreased to 25.0% of revenues in the first quarter of
1999 from 27.3% in the same period in 1998. This decrease reflects improved
catalog productivity as a result of more targeted circulation strategies as well
as the repositioning of non-core catalogs to e-commerce.
The number of customers having made a purchase in the preceding 12 months
remained at approximately 4 million, consistent with December 26, 1998.
General and administrative expenses were 11.3% of revenues for the first
quarter of 1999 versus 10.0% for the comparable period in 1998. General and
administrative costs reflect higher marketing, legal and MIS costs primarily
related to strategic initiatives.
Depreciation and amortization decreased to 1.8% of revenues for the first
quarter of 1999 versus 1.9% for the comparable period in 1998.
Loss from Operations. The Company recorded a loss from operations of
$(2.9) million for the first quarter ended March 27, 1999 or (2.2%) of revenues,
compared to a loss from operations of $(3.0) million for the same period in 1998
or (2.4%) of revenues.
Interest Expense, Net. Interest expense, net decreased $.3 million in the
first quarter of 1999 compared to the same period last year as a result of the
Company's improved liquidity and reduced borrowing requirements.
Income Taxes. The Company recorded a state tax provision of $.2 million
and $.3 million in each of the thirteen-week periods ended March 27, 1999 and
March 28, 1998, respectively.
LIQUIDITY AND CAPITAL RESOURCES
At March 27, 1999 the Company had $3.6 million in cash and cash
equivalents compared with $12.2 million at December 26, 1998. Working capital
and current ratio were $50.8 million and 1.69 to 1 at March 27, 1999 versus
$43.9 million and 1.47 to 1 at December 26, 1998. Net cash used in operations
during the quarter ended March 27, 1999 of $17.6 million was primarily the
result of significant payments made to suppliers (to ensure a consistent flow of
product during the first half of 1999), which improved the merchandise in-stock
position, resulting in higher fill rates and reduced backorder levels, and the
result of necessary spending for the Company's strategic initiatives. Cash was
also used to fund a seasonal increase in catalog costs. This cash spending was
partially offset by the reduction of inventory levels as a result of higher fill
rates and related sales increases, and by the Company's more aggressive
liquidation strategy during the period. In addition, significant cash
collections from customers and from the Company's upsell activities mitigated
the impact of the cash spending during the period. The Company also incurred
capital expenditures of $404,000.
The Company utilized $9.9 million of borrowings under the Congress
Revolving Credit Facility to fund seasonal working capital requirements. This
amount was less than the $13.2 million of borrowings in the comparable period
during the prior year primarily due to lower inventory carrying levels. The
total amount outstanding under the Congress Revolving Credit Facility at March
27, 1999 was $9.9 million, compared with $0 at December 27, 1998. Remaining
availability under the Congress Revolving Credit Facility at March 27, 1999 was
$26.9 million.($30.5 million including cash on hand).
10
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In March 1999 Richemont agreed to extend its letter of credit guarantee to
March 31, 2000. As consideration for this transaction, the Company agreed to pay
Richemont a facility fee of 9.5% of the principal amount of each letter of
credit.
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.
11
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ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
none.
12
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (EDGAR filing only).
(b) Reports on Form 8-K
none.
13
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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: May 11, 1999
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER
DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AND
STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 27, 1999 AND IS QUALIFIED
IN IT ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-27-1999
<PERIOD-END> MAR-27-1999
<CASH> 3,610
<SECURITIES> 0
<RECEIVABLES> 21,082
<ALLOWANCES> (2,175)
<INVENTORY> 57,223
<CURRENT-ASSETS> 124,703
<PP&E> 88,452
<DEPRECIATION> (39,982)
<TOTAL-ASSETS> 203,489
<CURRENT-LIABILITIES> 73,927
<BONDS> 0
6,175
0
<COMMON> 140,539
<OTHER-SE> (83,709)
<TOTAL-LIABILITY-AND-EQUITY> 203,489
<SALES> 127,714
<TOTAL-REVENUES> 127,714
<CGS> 81,904
<TOTAL-COSTS> 48,694
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (2,884)
<INTEREST-EXPENSE> (1,147)
<INCOME-PRETAX> (4,031)
<INCOME-TAX> ( 193)
<INCOME-CONTINUING> (4,224)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,224)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
