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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 23, 2000
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Commission file number 1-12082
HANOVER DIRECT, INC.
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(Exact name of registrant as specified in its charter)
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DELAWARE 13-0853260
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(State of incorporation) (IRS Employer Identification No.)
1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY 07087
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(Address of principal executive offices) (Zip Code)
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(201) 863-7300
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(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 $0.66 2/3 per share: 213,772,946 shares outstanding as
of November 2, 2000.
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HANOVER DIRECT, INC.
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets - September 23, 2000 and December 25, 1999........................... 3
Condensed Consolidated Statements of Income (Loss) -
thirteen and thirty-nine weeks ended September 23, 2000 and September 25, 1999........................... 5
Condensed Consolidated Statements of Cash Flows -
thirty-nine weeks ended September 23, 2000 and September 25, 1999........................................ 6
Notes to Condensed Consolidated Financial Statements....................................................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................... 21
Item 2. Changes in Securities and Use of Proceeds............................................................. 21
Item 6. Exhibits and Reports on Form 8-K...................................................................... 22
Signature..................................................................................................... 23
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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<CAPTION>
SEPTEMBER 23, DECEMBER 25,
2000 1999
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ASSETS
Current Assets:
Cash and cash equivalents $ 1,517 $ 2,849
Accounts receivable, net 26,933 29,287
Inventories 74,131 54,816
Prepaid catalog costs 27,625 20,305
Deferred tax asset, net 3,300 3,300
Other current assets 3,043 2,935
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Total Current Assets 136,549 113,492
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Property and equipment, at cost:
Land 4,634 4,634
Buildings and building improvements 23,390 23,269
Leasehold improvements 9,990 9,491
Furniture, fixtures and equipment 58,667 53,863
Construction in progress 6,265 1,990
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102,946 93,247
Accumulated depreciation and amortization (52,308) (46,360)
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Property and equipment, net 50,638 46,887
Goodwill, net 15,946 16,336
Deferred tax asset, net 11,700 11,700
Other assets 1,776 3,004
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Total Assets $ 216,609 $ 191,419
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See notes to condensed consolidated financial statements.
3
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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<CAPTION>
SEPTEMBER 23, DECEMBER 25,
2000 1999
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LIABILITIES, REDEEMABLE PREFERRED STOCK
AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital lease obligations $ 4,414 $ 3,257
Accounts payable 65,275 63,549
Accrued liabilities 18,989 24,284
Customer prepayments and credits 4,844 4,412
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Total Current Liabilities 93,522 95,502
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Non-current Liabilities:
Long-term debt 35,839 39,578
Other liabilities 2,442 2,474
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Total Non-current Liabilities 38,281 42,052
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Total Liabilities 131,803 137,554
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Series A Cumulative Participating Preferred Stock, redeemable at $50 per
share ($70,000), 2,345,000 shares authorized, 1,400,000 shares issued,
at September 23, 2000 and none at December 25, 1999, with accretion (Note 6) 69,255 --
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Non-Redeemable Preferred Stock, Common Stock and Other Shareholders' Equity:
Series B Convertible Additional Preferred Stock, $10 stated value,
authorized, issued and outstanding: none at September 23, 2000 and
634,900 shares at December 25, 1999 -- 6,318
Common Stock, $0.66 2/3 par value, authorized 300,000,000 shares; issued
214,425,398 shares at September 23, 2000 and 211,519,511 shares at
December 25,1999 142,951 141,013
Capital in excess of par value 309,163 301,088
Accumulated deficit (432,783) (390,763)
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19,331 57,656
Less:
Treasury stock, at cost (652,552 shares at September 23, 2000 and
December 25, 1999) (1,829) (1,829)
Notes receivable from sale of Common Stock (1,951) (1,962)
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Total Non-Redeemable Preferred Stock, Common Stock and Other Shareholders'
Equity 15,551 53,865
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Total Liabilities, Redeemable Preferred Stock and
Shareholders' Equity $ 216,609 $ 191,419
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</TABLE>
See notes to condensed consolidated financial statements.
4
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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13 WEEKS ENDED 39 WEEKS ENDED
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SEPTEMBER 23, SEPTEMBER 25, SEPTEMBER 23, SEPTEMBER 25,
2000 1999 2000 1999
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Net revenues $ 140,381 $ 121,656 $ 413,937 $ 380,607
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Operating costs and expenses:
Cost of sales and operating expenses 97,207 76,117 281,584 240,645
Write-down/ (recovery) of inventory of
discontinued catalogs -- (1,511) -- (1,835)
Selling expenses 34,465 29,468 103,485 95,486
General and administrative expenses 19,178 16,068 56,105 46,397
Depreciation and amortization 1,933 2,314 6,871 6,858
--------- ----------- --------- ---------
152,783 122,456 448,045 387,551
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(Loss) from operations (12,402) (800) (34,108) (6,944)
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Interest expense, net 2,367 1,703 7,690 5,183
--------- ----------- --------- ---------
(Loss) before income taxes (14,769) (2,503) (41,798) (12,127)
Income tax provision 30 185 135 579
--------- ----------- --------- ---------
Net (loss) (14,799) (2,688) (41,933) (12,706)
Preferred stock dividends and accretion 1,146 159 1,233 476
--------- ----------- --------- ---------
Net (loss) applicable to common shareholders $ (15,945) $ (2,847) $ (43,166) $ (13,182)
========= =========== ========= =========
Net (loss) per share:
Net (loss) per share - basic and diluted $ (.07) $ (.01) $ (.20) $ (.06)
========= =========== ========= =========
Weighted average common shares outstanding -
basic and diluted (thousands) 213,773 210,843 213,085 210,641
========= =========== ========= =========
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See notes to condensed consolidated financial statements.
5
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
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FOR THE 39 WEEKS ENDED
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SEPTEMBER 23, SEPTEMBER 25,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (41,933) $ (12,706)
Adjustments to reconcile net (loss) to net cash (used)
by operating activities:
Depreciation and amortization, including deferred fees 8,932 8,681
Provision for doubtful accounts 2,686 1,733
Write-down/ (recovery) of inventory of discontinued catalogs -- (1,835)
Stock option compensation expense 3,962 2,192
Changes in assets and liabilities:
Accounts receivable (332) 3,464
Inventories (19,315) 3,647
Prepaid catalog costs (7,320) (9,132)
Accounts payable 1,726 (16,125)
Accrued liabilities (3,972) 7,366
Customer prepayments and credits 432 150
Other, net (28) (6,382)
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Net cash (used) by operating activities (55,162) (18,947)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (9,308) (3,251)
Proceeds from sale of Blue Ridge Associates 838 --
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Net cash (used) by investing activities (8,470) (3,251)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under Congress revolving loan facility 10,172 18,814
Net borrowings (payments) under Congress term loan facility 10,553 (1,125)
Redemption of Term Financing Facility (16,000) --
Redemption of Industrial Revenue Bonds (8,000) --
Payment of debt issuance costs (2,360) (1,487)
Net proceeds from issuance of Series A Cumulative Participating
Preferred Stock 68,109 --
Payment of Series B Convertible Additional Preferred Stock
dividends (920) --
Proceeds from issuance of Common Stock-exercise of Stock options 848 572
Other, net (102) (376)
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Net cash provided by financing activities 62,300 16,398
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Net decrease in cash and cash equivalents (1,332) (5,800)
Cash and cash equivalents at the beginning of the year 2,849 2,207
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Cash and cash equivalents at the end of the period $ 1,517 $ 6,407
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 5,754 $ 3,389
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Income taxes $ 264 $ 596
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Non-cash investing and financing activities:
Capital lease obligations $ 837 $ 407
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Redemption of Series B Convertible Additional Preferred Stock $ 6,349 $ --
========== ==========
Stock dividend/accretion-Series A Cumulative Participating Preferred Stock $ 1,146 $ --
========== ==========
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See notes to condensed consolidated financial statements.
6
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HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 25, 1999. 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 to the current year presentation.
2. RETAINED EARNINGS RESTRICTIONS
The Company is restricted from paying dividends on its Common Stock or
from acquiring its capital stock by certain debt covenants contained in
agreements to which the Company is a party.
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." As a net
loss was incurred for the periods reported in the accompanying condensed
consolidated statements of income (loss), the weighted average number of shares
used in the calculation for diluted net loss per share excludes stock options
and convertible preferred stock, the effects of which would be antidilutive.
4. SEGMENT REPORTING
The Company has two reportable segments according to the criteria
established by SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information": direct commerce and business-to-business ("B-to-B")
services. The direct commerce segment is comprised of the Company's portfolio of
branded specialty mail-order catalogs and connected Internet Web sites, as well
as its retail operations, all of which market products directly to the consumer.
Revenues for the direct commerce segment are derived primarily from the sale of
merchandise through the Company's catalogs, Internet Web sites and retail
outlets. Revenues for the direct commerce segment are also derived from the
Company's various upsell initiatives. The B-to-B services segment represents the
Company's e-commerce support and fulfillment operations. External revenues for
the B-to-B services segment are derived primarily from e-commerce transaction
services, such as order processing, customer care, and shipping and distribution
services initiated via the Internet. Inter-segment revenues for the B-to-B
services segment are derived from the performance of the aforementioned services
to the direct commerce segment in accordance with an intercompany services
agreement. These services are provided to the direct commerce segment whether
orders are placed through the Internet or through more traditional mail-in or
telephone call-in mediums.
7
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The Company's management reviews income (loss) from operations to
evaluate performance and allocate resources. Reportable segment data were as
follows (in thousands of dollars):
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RESULTS FOR THE 13 WEEKS DIRECT B-TO-B ELIMINATIONS/
ENDED SEPTEMBER 23, 2000: COMMERCE SERVICES ALL OTHER CONSOLIDATED
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Net revenues from external customers $ 133,598 $ 6,783 $ -- $ 140,381
Inter-segment revenues -- 26,090 (26,090) --
Income/ (Loss) from operations $ 4,258 $ (12,387) $ (4,273) $ (12,402)
Interest income/(expense) (1,661) (548) (158) (2,367)
--------- --------- --------- ---------
Income/ (Loss) before income taxes $ 2,597 $ (12,935) $ (4,431) $ (14,769)
========= ========= ========= =========
RESULTS FOR THE 13 WEEKS
ENDED SEPTEMBER 25, 1999:
Net revenues from external customers $ 119,923 $ 1,733 $ -- $ 121,656
Inter-segment revenues -- 23,379 (23,379) --
Income/ (Loss) from operations $ 2,640 $ (3,440) $ -- $ (800)
Interest income/(expense) (464) (1,239) -- (1,703)
--------- --------- --------- ---------
Income/ (Loss) before income taxes $ 2,176 $ (4,679) $ -- $ (2,503)
========= ========= ========= =========
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RESULTS FOR THE 39 WEEKS DIRECT B-TO-B ELIMINATIONS/
ENDED SEPTEMBER 23, 2000: COMMERCE SERVICES ALL OTHER CONSOLIDATED
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Net revenues from external customers $ 393,525 $ 20,412 $ -- $ 413,937
Inter-segment revenues -- 72,769 (72,769) --
Income/ (Loss) from operations $ 8,006 $ (31,062) $ (11,052) $ (34,108)
Interest income/(expense) (4,788) (2,188) (714) (7,690)
--------- --------- --------- ---------
Income/ (Loss) before income taxes $ 3,218 $ (33,250) $ 11,766 $ (41,798)
========= ========= ========= =========
RESULTS FOR THE 39 WEEKS
ENDED SEPTEMBER 25, 1999:
Net revenues from external customers $ 377,121 $ 3,486 $ -- $ 380,607
Inter-segment revenues -- 73,363 (73,363) --
Income/ (Loss) from operations $ 5,083 $ (12,027) $ -- $ (6,944)
Interest income/(expense) (1,343) (3,840) -- (5,183)
--------- --------- --------- ---------
Income/ (Loss) before income taxes $ 3,740 $ (15,867) $ -- $ (12,127)
========= ========= ========= =========
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Income/ (loss) from operations for the direct commerce segment for the
thirteen and thirty-nine week periods ended September 25, 1999 included income
of $1.5 million and $1.8 million, respectively, attributable to a 1999 partial
reversal of a 1998 charge for the write-down of discontinued catalog inventory.
8
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During the first quarter of 2000, the Company, as part of its
initiative to reposition itself as both a specialty direct marketer and as a
provider of B-to-B e-commerce transaction services, modified its business
segmentation, resulting in the reclassification of certain general and
administrative expenses from its direct commerce and B-to-B services segments to
the corporate level. Accordingly, the Company's "Eliminations/All Other"
category now includes these corporate operating expenses as well as
inter-segment eliminations, and non-reportable operating segments (primarily the
Company's Always in Style joint venture). Segmented income/(loss) from
operations for the thirteen and thirty-nine week periods ended September 25,
1999, on a pro-forma basis to reflect this modification, would have been $4.0
million and $7.7 million for the direct commerce segment, $(4.0) million and
$(12.6) million for the B-to-B services segment and $(0.8) million and $(2.0)
million for all other, respectively.
5. CONVERSION OF SERIES B CONVERTIBLE ADDITIONAL PREFERRED STOCK
In February 2000, all 634,900 outstanding shares of the Company's
Series B Convertible Additional Preferred Stock issued in connection with the
Company's 1995 acquisition of Aegis Safety Holdings Inc., publisher of The
Safety Zone catalog, were redeemed via the issuance of 2,193,317 shares of the
Company's Common Stock. The market value for the Company's shares on the date of
redemption was $2.75 per share. Additionally, the Company made a $0.9 million
cash payment for all unpaid cumulative preferred dividends.
6. ISSUANCE OF SERIES A CUMULATIVE PARTICIPATING PREFERRED STOCK
On August 24, 2000, the Company issued 1,400,000 shares of preferred
stock designated as Series A Cumulative Participating Preferred Stock (the
"Series A Preferred Stock") to Richemont Finance S.A., the holder of
approximately 48.2% of the Company's Common Stock, for $70.0 million. The Series
A Preferred Stock has a par value of $0.01 per share, and a liquidation
preference of $50.00 per share, and was recorded net of issuance costs of $1.9
million. The issuance costs will be accreted as a dividend over a five year
period ending on the mandatory redemption date. Dividends are cumulative and
accrue at an annual rate of 15%, or $7.50 per share, and are payable quarterly
either in cash or in-kind through the issuance of additional Series A Preferred
Stock. Cash dividend payments are required for dividend payment dates occurring
after February 1, 2004. As of September 23, 2000, the Company accreted dividends
of $1.1 million, and reserved 22,167 additional shares of Series A Preferred
Stock for the payment of such dividend. In-kind dividends and issuance cost
accretion are charged against additional paid-in capital, with a corresponding
increase in the carrying amount of the preferred stock. Cash dividends will also
be reflected as a charge to additional paid-in capital, however, no adjustment
to the carrying amount of the preferred stock will be made. The Series A
Preferred Stock is generally non-voting, except if dividends have been in
arrears and unpaid for four quarterly periods, whether or not consecutive. The
holder of the Series A Preferred Stock shall then have the exclusive right to
elect two directors of the Company until such time as all such cumulative
dividends accumulated on the Series A Preferred Stock have been paid in full.
Furthermore, the holder of the Series A Preferred Stock is entitled to receive
additional participating dividends in the event any dividends are declared or
paid, or any other distribution is made with respect to the Common Stock of the
Company. The additional dividends would be equal to the applicable percentage of
the amount of the dividends or distributions payable in respect of one share of
Common Stock. In the event of a liquidation or dissolution of the Company, the
holder of the Series A Preferred Stock shall be paid an amount equal to $50.00
per share of Series A Preferred Stock plus the amount of any accrued and unpaid
dividends, before any payments to other stockholders.
The Company may redeem the Series A Preferred Stock in whole at any
time and the holder of the Series A Preferred Stock may elect to cause the
Company to redeem all or any of such holder's Series A Preferred Stock under
certain circumstances involving a change of control, asset disposition or equity
sale. Mandatory redemption of the Series A Preferred Stock by the Company is
required on August 23, 2005 (the "Final Redemption Date") at a redemption price
of $50.00 per share of Series A Preferred Stock plus the amount of any accrued
and unpaid dividends. If, at the Final Redemption Date, the Company does not
have sufficient capital and surplus legally available to redeem all the
outstanding shares of the Series A Preferred Stock, the Company will be required
to take all measures permitted under the Delaware General Corporation Law to
increase the amount of its capital and surplus legally available and to redeem
as many shares of the Series A Preferred Stock as it may legally redeem.
Thereafter, as funds become available, the Company will be required to redeem as
many additional shares of the Series A Preferred Stock as it legally can, until
it has redeemed all remaining outstanding shares of the Series A Preferred
Stock.
9
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7. CONTINGENCIES
A class action lawsuit was commenced on March 3, 2000 entitled Edwin L.
Martin v. Hanover Direct, Inc. and John Does 1 through 10, bearing case no.
CJ2000-177, in the State Court of Oklahoma (District Court in and for Sequoyah
County). Plaintiff commenced the action on behalf of himself and a class of
persons who have at any time purchased a product from the Company and paid for
an "insurance charge." The complaint sets forth claims for breach of contract,
unjust enrichment, recovery of money paid absent consideration, fraud and a
claim under the New Jersey Consumer Fraud Act. The complaint alleges that the
Company charges its customers for delivery insurance even though, among other
things, the Company's common carriers already provide insurance and the
insurance charge provides no benefit to the Company's customers. Plaintiff also
seeks a declaratory judgment as to the validity of the delivery insurance. The
damages sought are (i) an order directing the Company to return to the plaintiff
and class members the "unlawful revenue" derived from the insurance charges,
(ii) declaring the rights of the parties, (iii) permanently enjoining the
Company from imposing the insurance charge, (iv) awarding threefold damages of
less than $75,000 per plaintiff and per class member, and (v) attorney's fees
and costs. The Company's motion to dismiss is pending and the discovery
commenced; the Company believes it has defenses against the claims, however, it
is too early to determine the outcome or range of potential settlement, which
could have a material impact on the Company's results of operations when settled
in a future period.
At the end of January 2000, the Company received a letter from the
Federal Trade Commission ("FTC") conducting an inquiry into the marketing of The
Shopper's Edge club to determine whether, in connection with such marketing, any
entities have engaged in (1) unfair or deceptive acts or practices in violation
of Section 5 of the FTC Act and/or (2) deceptive or abusive telemarketing acts
or practices in violation of the FTC's Telemarketing Sales Rule. The inquiry was
undertaken pursuant to the provisions of Sections 6, 9 and 10 of the FTC Act.
Following such an investigation, the FTC may initiate an enforcement action if
it finds "reason to believe" that the law is being violated. When there is
"reason to believe" that a law violation has occurred, the FTC may issue a
complaint setting forth its charges. If the respondent elects to settle charges,
it may sign a consent agreement (without admitting liability) by which it
consents to entry of a final order and waives all right to judicial review. If
the FTC accepts such a proposed consent, it places the order on the record for
sixty days of public comment before determining whether to make the order final.
The Company believes that it complied with all enumerated aspects of the
investigation. It has not received notice of an enforcement action or a
complaint against it.
Management believes these matters will not have a material impact on
the financial statements.
10
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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).
RESULTS OF OPERATIONS - THIRTEEN WEEKS ENDED SEPTEMBER 23, 2000 COMPARED WITH
THIRTEEN WEEKS ENDED SEPTEMBER 25, 1999
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<CAPTION>
13 WEEKS ENDED
---------------
SEPTEMBER 23, SEPTEMBER 25,
2000 1999
---- ----
<S> <C> <C>
Net revenues.................................................................. 100.0% 100.0%
Cost of sales and operating expenses.......................................... 69.2 62.6
Write-down/ (recovery) of inventory of discontinued catalogs ................. -- (1.2)
Selling expenses.............................................................. 24.5 24.2
General and administrative expenses........................................... 13.7 13.2
Depreciation and amortization................................................. 1.4 1.9
(Loss) from operations........................................................ (8.8)% (0.7)%
</TABLE>
Net (Loss). The Company reported a net loss of $(14.8) million or
$(.07) per share for the thirteen week period ended September 23, 2000 compared
with a net loss of $(2.7) million or $(.01) per share for the comparable period
in 1999. The per share amounts were calculated based on weighted average shares
outstanding of 213,773,193 and 210,843,167 for the current and prior year
periods, respectively. This increase in weighted average shares was due to the
February 2000 redemption of the Company's Series B Convertible Additional
Preferred Stock via the issuance of 2,193,317 shares of the Company's Common
Stock as well as shares issued in connection with the Company's stock option
plans.
Compared to the comparable period in 1999, the $12.1 million increase
in net loss was primarily due to:
(i) higher distribution and systems development costs primarily
related to the expansion of the Company's business-to-business
("B-to-B") e-commerce transaction services operation;
(ii) 1999 partial reversal of a 1998 charge for the write-down of
discontinued catalog inventory;
(iii) higher general and administrative expenses; and
(iv) higher interest expense,
partially offset by higher demand across most merchandise categories.
Net Revenues. Net revenues increased $18.7 million (15.4%) for the
thirteen week period ended September 23, 2000 to $140.4 million from $121.7
million for the comparable period in 1999. This increase was primarily due to
higher net revenues for the Company's core catalog offerings and the Company's
B-to-B e-commerce transaction services operation partly offset by 1999 net
revenues from the Company's discontinued catalogs. Net revenues from core
catalogs increased by $16.5 million (14.1%) due to higher demand across most
merchandise categories resulting from an increase in overall catalog
circulation. The Company circulated approximately 47 million catalogs during the
2000 period versus approximately 39 million catalogs for the comparable period
in 1999. The number of customers having made a purchase from the Company's
catalogs during the 12 months preceding September 23, 2000 remained at
approximately 4 million, consistent with the number at December 25, 1999. Net
revenues from discontinued catalogs during the thirteen week period ended
September 25, 1999 were $2.9 million.
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Net revenues for the Company's B-to-B e-commerce transaction services
increased by $5.1 million from $1.7 million during the 1999 period to $6.8
million for the thirteen week period ended September 23, 2000. This reflects the
1999 start-up and the 2000 expansion of the Company's B-to-B e-commerce
transaction services operation which provides Internet order processing,
customer care and shipping and distribution services on behalf of third-party
clients.
Cost of Sales and Operating Expenses. Cost of sales and operating
expenses increased to 69.2% of net revenues for the thirteen week period ended
September 23, 2000 compared to 62.6% of net revenues for the comparable period
in 1999. The increase was primarily due to higher distribution and systems
development costs, which included higher costs related to an increase in
headcount as well as higher consulting and facility/equipment rental expenses,
primarily related to the 2000 expansion of the Company's B-to-B e-commerce
transaction services operation. This expansion includes the addition of a new
fulfillment and distribution facility in Maumelle, Arkansas. Additionally, the
Company incurred higher merchandise postage expense related to order fulfillment
for the Company's catalog brands.
Write-down/ (Recovery) of Inventory of Discontinued Catalogs. During
1999, the Company liquidated inventory related to its discontinued Austad's,
Tweeds and Colonial Garden Kitchens catalog brands. This inventory was written
down to net realizable value during 1998 following the Company's decision to
terminate the catalog operations of these brands. The Company was able to
liquidate a substantial portion of this inventory by utilizing the various
liquidation vehicles at its disposal such as off-price merchants and special
sales catalogs. Of these, the Company was able to utilize special sales
catalogs, which provide higher cost recoveries, to a larger extent than
anticipated in 1998. Accordingly, $1.5 million of the 1998 write-down was
reversed and included in the Company's results for the thirteen week period
ended September 25, 1999.
Selling Expenses. Selling expenses increased to 24.5% of net revenues
for the thirteen week period ended September 23, 2000 from 24.2% for the
comparable period in 1999, primarily due to lower catalog productivity
attributable to an increase in overall circulation, including a 15% increase in
prospecting which traditionally carries lower response rates, as well as higher
paper costs. This was partially offset by a higher revenue base derived from the
expansion of the Company's B-to-B e-commerce transaction services operation.
General and Administrative Expenses. General and administrative
expenses were 13.7% of net revenues for the thirteen week period ended September
23, 2000 versus 13.2% of net revenues for the comparable period in 1999. This
increase was primarily due to higher personnel-related expenses and, in
addition, the Company incurred higher professional and consulting fees primarily
attributable to the split of the Company into two separate business units.
Depreciation and Amortization. Depreciation and amortization decreased
to 1.4% of net revenues for the thirteen week period ended September 23, 2000
compared to 1.9% of net revenues for the comparable period in 1999.
Loss from Operations. The Company's loss from operations increased by
$11.6 million to $(12.4) million for the thirteen week period ended September
23, 2000 from a loss of $(0.8) million for the comparable period in 1999. The
Company's results are comprised of the following segments:
- Direct Commerce: Income from operations of $4.3 million for the thirteen
week period ended September 23, 2000 compares to income from operations of
$2.6 million for the comparable period in 1999. The $1.7 million increase
was primarily due to higher demand across most merchandise categories. This
was partially offset by higher catalog costs, reflecting higher paper costs
as well as an increase in circulation, higher merchandise postage expense,
higher personnel-related expenses, and the 1999 partial reversal of a 1998
charge for the write-down of discontinued catalog inventory.
- B-to-B Services: Loss from operations of $(12.4) million for the thirteen
week period ended September 23, 2000 compares to a loss from operations of
$(3.4) million for the comparable period in 1999. The $9.0 million increase
was primarily due to higher distribution and systems development costs,
which included higher costs related to an increase in headcount as well as
higher consulting and facility/equipment rental expenses, primarily related
to the 2000 expansion of the Company's B-to-B e-commerce transaction
services operation. This expansion includes the addition of a new
fulfillment and distribution facility in Maumelle, Arkansas.
12
<PAGE> 13
- All Other: Loss from operations was $(4.3) million for the thirteen week
period ended September 23, 2000. This reflected the 2000 inclusion of $3.2
million of certain corporate level general and administrative expenses
($0.7 million of similar expenses were included in the direct commerce and
B-to-B services segments during 1999) and 2000 losses related to the
start-up of the Company's Always In Style joint venture. The 2000 general
and administrative expenses included higher personnel-related expenses and,
in addition, the Company incurred higher professional and consulting fees
primarily attributable to the split of the Company into two separate
business units.
Interest Expense, Net. Interest expense, net increased $0.7 million to
$2.4 million for the thirteen week period ended September 23, 2000 compared to
$1.7 million for the comparable period in 1999. The increase was primarily due
to higher average borrowings and interest rates during the 2000 period.
Income Taxes. The Company recorded a state tax provision of less than
$0.1 million for the thirteen week period ended September 23, 2000, compared to
a state tax provision of $0.2 million for the comparable period in 1999.
RESULTS OF OPERATIONS - THIRTY-NINE WEEKS ENDED SEPTEMBER 23, 2000 COMPARED WITH
THE THIRTY-NINE WEEKS ENDED SEPTEMBER 25, 1999
<TABLE>
<CAPTION>
39 WEEKS ENDED
---------------
SEPTEMBER 23, SEPTEMBER 25,
2000 1999
---- ----
<S> <C> <C>
Net revenues.................................................................. 100.0% 100.0%
Cost of sales and operating expenses.......................................... 68.0 63.2
Write-down/ (recovery) of inventory of discontinued catalogs ................. -- (0.5)
Selling expenses.............................................................. 25.0 25.1
General and administrative expenses........................................... 13.5 12.2
Depreciation and amortization................................................. 1.7 1.8
(Loss) from operations........................................................ (8.2)% (1.8)%
</TABLE>
Net (Loss). The Company reported a net loss of $(41.9) million or
$(.20) per share for the thirty-nine week period ended September 23, 2000
compared with a net loss of $(12.7) million or $(.06) per share for the
comparable period in 1999. The per share amounts were calculated based on
weighted average shares outstanding of 213,085,469 and 210,640,667 for the
current and prior year periods, respectively. This increase in weighted average
shares was due to the February 2000 redemption of the Company's Series B
Convertible Additional Preferred Stock via the issuance of 2,193,317 shares of
the Company's Common Stock as well as shares issued in connection with the
Company's stock option plans.
Compared to the comparable period in 1999, the $29.2 million increase
in net loss was primarily due to:
(i) higher distribution and systems development costs primarily related to
the expansion of the Company's B-to-B e-commerce transaction services
operation;
(ii) 1999 partial reversal of a 1998 charge for the write-down of
discontinued catalog inventory;
(iii) higher general and administrative expenses; and
(iv) higher interest expense,
partially offset by higher demand and margins across most merchandise
categories.
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<PAGE> 14
Net Revenues. Net revenues increased $33.3 million (8.8%) for the
thirty-nine week period ended September 23, 2000 to $413.9 million from $380.6
million for the comparable period in 1999. This increase was primarily due to
higher net revenues for the Company's core catalog offerings and the Company's
B-to-B e-commerce transaction services operation, partly offset by 1999 net
revenue from the Company's discontinued catalogs. Net revenues from core
catalogs increased by $34.1 million (9.5%) due to higher demand across most
merchandise categories resulting from an overall increase in catalog
circulation. The Company circulated approximately 206 million catalogs during
the 2000 period versus approximately 184 million catalogs during the 1999
period. Net revenues from discontinued catalogs during the thirty-nine week
period ended September 25, 1999 were $17.7 million.
Net revenues for the Company's B-to-B e-commerce transaction services
operation increased by $16.9 million from $3.5 million during the 1999 period to
$20.4 million for the thirty-nine week period ended September 23, 2000. This
reflects the 1999 start-up and the 2000 expansion of the Company's B-to-B
e-commerce transactions services operation which provides Internet order
processing, customer care and shipping and distribution services on behalf of
third-party clients.
Cost of Sales and Operating Expenses. Cost of sales and operating
expenses increased to 68.0% of net revenues for the thirty-nine week period
ended September 23, 2000 compared to 63.2% of net revenues for the comparable
period in 1999. The increase was primarily due to higher distribution and
systems development costs, which included higher costs related to an increase in
headcount as well as higher consulting and facility/equipment rental expenses,
primarily related to the expansion of the Company's B-to-B e-commerce
transaction services operation. This expansion includes the addition of a new
fulfillment and distribution facility in Maumelle, Arkansas. Additionally, the
Company incurred higher merchandise postage expense related to order fulfillment
for the Company's catalog brands. All of these items were partially offset by
higher catalog product margins due to a decrease in the Company's cost of
merchandise, a higher percentage of which is now internationally sourced at
lower costs.
Write-down/ (Recovery) of Inventory of Discontinued Catalogs. During
1999, the Company liquidated inventory related to its discontinued Austad's,
Tweeds and Colonial Garden Kitchens catalog brands. This inventory was written
down to net realizable value during 1998 following the Company's decision to
terminate the catalog operations of these brands. The Company was able to
liquidate a substantial portion of this inventory by utilizing the various
liquidation vehicles at its disposal such as off-price merchants and special
sales catalogs. Of these, the Company was able to utilize special sales
catalogs, which provide higher cost recoveries, to a larger extent than
anticipated in 1998. Accordingly, $1.8 million of the 1998 write-down was
reversed and included in the Company's results for the thirty-nine week period
ended September 25, 1999.
Selling Expenses. Selling expenses decreased to 25.0% of net revenues
for the thirty-nine week period ended September 23, 2000 from 25.1% for the
comparable period in 1999, primarily due to a higher revenue base derived from
the expansion of the Company's B-to-B e-commerce transaction services operation.
This was mostly offset by lower catalog productivity attributable to an increase
in overall circulation, including a 19% increase in prospecting which
traditionally carries lower response rates, as well as higher paper costs.
General and Administrative Expenses. General and administrative
expenses were 13.5% of net revenues for the thirty-nine week period ended
September 23, 2000 versus 12.2% of net revenues for the comparable period in
1999. This increase was primarily due to higher personnel-related expenses and a
higher provision for doubtful accounts. Additionally, the Company incurred
higher professional and consulting fees primarily attributable to the split of
the Company into two separate business units.
Depreciation and Amortization. Depreciation and amortization decreased
to 1.7% of net revenues for the thirty-nine week period ended September 23, 2000
compared to 1.8% of net revenues for the comparable period in 1999.
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<PAGE> 15
Loss from Operations. The Company's loss from operations increased by
$27.2 million to $(34.1) million for the thirty-nine week period ended September
23, 2000 from a loss of $(6.9) million for the comparable period in 1999. The
Company's results are comprised of the following segments:
- Direct Commerce: Income from operations of $8.0 million for the thirty-nine
week period ended September 23, 2000 compares to income from operations of
$5.1 million for the comparable period in 1999. The $2.9 million increase
was primarily due to higher demand and product margins across most
merchandise categories. This was partially offset by higher catalog costs,
reflecting higher paper costs as well as an increase in circulation, higher
merchandise postage expense, higher personnel-related expenses, and the
1999 partial reversal of a 1998 charge for the write-down of discontinued
catalog inventory.
- B-to-B Services: Loss from operations of $(31.1) million for the
thirty-nine week period ended September 23, 2000 compares to a loss from
operations of $(12.0) million for the comparable period in 1999. The $19.1
million increase was primarily due to higher distribution and systems
development costs, which included higher costs related to an increase in
headcount as well as higher consulting and facility/equipment rental
expenses, primarily related to the 2000 expansion of the Company's B-to-B
e-commerce transaction services operation. This expansion includes the
addition of a new fulfillment and distribution facility in Maumelle,
Arkansas. Additionally, the Company incurred a higher provision for
doubtful accounts.
- All Other: Loss from operations was $(11.1) million for the thirty-nine
week period ended September 23, 2000. This reflects the 2000 inclusion of
$8.9 million of certain corporate level general and administrative expenses
($1.9 million of similar expenses were included in the direct commerce and
B-to-B e-commerce transaction services segments during 1999) and 2000
losses related to the start-up of the Company's Always In Style joint
venture. The 2000 general and administrative expenses primarily included
higher personnel-related expenses and, in addition, the Company incurred
higher professional and consulting fees primarily attributable to the split
of the Company into two separate business units.
Interest Expense, Net. Interest expense, net increased $2.5 million to
$7.7 million for the thirty-nine week period ended September 23, 2000 compared
to $5.2 million for the comparable period in 1999. This increase was primarily
due to higher average borrowings and interest rates during the 2000 period.
Income Taxes. The Company recorded state tax provisions of $0.1 million
and $0.6 million for the thirty-nine week periods ended September 23, 2000 and
September 25, 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities. During the thirty-nine week
period ended September 23, 2000, net cash used by operating activities of $55.2
million was primarily due to net losses which, when adjusted for depreciation,
amortization and other non-cash items, used $26.4 million of operating cash.
Additionally, cash outflows resulted from a pre-holiday season increase in
inventory and prepaid catalog costs, and a decrease in accrued liabilities
primarily due to the payment of personnel-related obligations.
Net cash used by investing activities: During the thirty-nine week
period ended September 23, 2000, net cash used by investing activities of $8.5
million was primarily due to capital expenditures of $9.3 million, partly offset
by proceeds of $0.8 million from the sale of the Company's investment in Blue
Ridge Associates. The capital expenditures were primarily for new equipment
purchases for the Company's new fulfillment and distribution facility in
Maumelle, Arkansas, as well as computer hardware and software purchases to
upgrade the Company's information technology platform.
15
<PAGE> 16
Net cash provided by financing activities. During the thirty-nine week
period ended September 23, 2000, net cash provided by financing activities of
$62.3 million was primarily due to net proceeds of $68.1 million attributable to
the issuance of 1.4 million shares of Series A Cumulative Participating
Preferred Stock to Richemont Finance S.A., partly offset by a net decrease in
borrowings of $3.3 million and the payment of debt issuance costs of $2.4
million primarily related to the March 2000 refinancing of the Company's credit
facilities. During March 2000, the Company refinanced $24.0 million of
borrowings under the Term Financing Facility and Industrial Revenue Bonds with
additional borrowings under the Congress Credit Facility as discussed below.
Congress Credit Facility. On March 24, 2000, the Company amended its
credit facility with Congress Financial Corporation ("Congress") to provide the
Company with a maximum credit line, subject to certain limitations, of up to
$82.5 million (the "Congress Credit Facility"). The Congress Credit Facility, as
amended, expires on January 31, 2004 and is comprised of a revolving loan
facility, a $17.5 million Tranche A Term Loan and a $7.5 million Tranche B Term
Loan. Total cumulative borrowings, however, are subject to limitations based
upon specified percentages of eligible receivables and eligible inventory, and
the Company is required to maintain $3.0 million of excess credit availability
at all times. The Congress Credit Facility, as amended, is secured by all the
assets of the Company and places restrictions on the incurrence of additional
indebtedness and on the payment of common stock dividends. As of September 23,
2000, the Company had $38.5 million of borrowings outstanding under the amended
Congress Credit Facility comprised of $15.4 million under the revolving loan
facility, and $15.6 million and $7.5 million of Tranche A Term Loans and Tranche
B Term Loans, respectively. The Company may draw upon the amended Congress
Credit Facility to fund working capital requirements as needed.
The amended Congress Credit Facility replaced the original $65.0
million revolving line of credit facility with Congress as well as the Company's
$16.0 million Term Financing Facility and $8.0 million of Industrial Revenue
Bonds. Both the Term Financing Facility and the Industrial Revenue Bonds were
supported by letters of credit issued by UBS, AG and guaranteed by Richemont
Finance S.A., which letters of credit were scheduled to expire on March 31,
2000. The Company utilized $24.0 million of proceeds under the amended Congress
Credit Facility to reimburse UBS, AG for drawings on the letters of credit made
by the trustees of the Term Financing Facility and the Industrial Revenue Bonds,
both of which were required to be redeemed upon the expiration of the letters of
credit.
Richemont $10.0 Million Line of Credit Facility. From March 24, 2000
through August 24, 2000, the Company was a party to a $10.0 million unsecured
line of credit facility (the "Richemont $10.0 million Line of Credit") with
Richemont Finance S.A. The Richemont $10.0 million Line of Credit facility
provided the Company with financing from Richemont should the excess
availability under the Congress Credit Facility fall below $3.0 million.
Additionally, the Company could have borrowed up to $5.0 million under the
Richemont $10.0 million Line of Credit to pay trade creditors in the ordinary
course of business. On August 24, 2000, the Richemont $10.0 million Line of
Credit was terminated and all borrowings outstanding as of August 24, 2000 of
approximately $5.0 million, plus accrued and unpaid interest, were repaid and
retired from a portion of the net proceeds obtained from the issuance of the
Company's Series A Preferred Stock to Richemont.
Richemont $25.0 Million Line of Credit Facility. From March 1, 2000
through August 24, 2000, the Company was a party to a $25.0 million unsecured
line of credit facility (the "Richemont $25.0 million Line of Credit") with
Richemont which provided the Company with funding from Richemont to continue the
development and expansion of the Company's B-to-B e-commerce transaction
services operation. On August 24, 2000, the Richemont $25.0 million Line of
Credit was terminated and all borrowings outstanding as of August 24, 2000 of
approximately $25.0 million, plus accrued and unpaid interest, were repaid and
retired from a portion of the net proceeds obtained from the issuance of the
Company's Series A Preferred Stock to Richemont.
16
<PAGE> 17
Cumulative Participating Preferred Stock. On August 24, 2000, the
Company issued 1.4 million shares of Cumulative Participating Preferred Stock at
a share price equal to its liquidation value of $50.00 per share (the "Series A
Preferred Stock") to Richemont Finance S.A., obtaining proceeds of approximately
$68.1 million, net of issuance costs. Approximately $30.9 million of net
proceeds were used to repay and retire all borrowings outstanding under the
Richemont $25.0 million Line of Credit and the Richemont $10.0 million Line of
Credit facilities, plus accrued and unpaid interest, and, as a result, both the
Richemont $25.0 million Line of Credit and the Richemont $10.0 million Line of
Credit arrangements were terminated. The remaining net proceeds of approximately
$37.2 million were used to reduce debt levels under the Congress Credit Facility
to lower the Company's debt service costs. This resulted in an increase in
credit availability under the Congress Credit Facility that the Company may draw
upon when necessary to fund the continued development of its fulfillment and
distribution centers as well as to fund its working capital requirements.
Dividends are cumulative and accrue at an annual rate of 15%, or $7.50
per share, and are payable quarterly either in cash or in-kind through the
issuance of additional Series A Preferred Stock. As of September 23, 2000, the
Company had accrued dividends of $1.1 million, and has reserved 22,167
additional shares of Series A Preferred Stock for the payment of such dividends.
Cash dividend payments are required for dividend payment dates occurring after
February 1, 2004. Mandatory redemption of the Series A Preferred Stock by the
Company is required on August 23, 2005 (the "Final Redemption Date") at a
redemption price of $50.00 per share of Series A Preferred Stock plus the amount
of any accrued and unpaid dividends. If, at the Final Redemption Date, the
Company does not have sufficient capital and surplus legally available to redeem
all the outstanding shares of the Series A Preferred Stock, the Company will be
required to take all measures permitted under the Delaware General Corporation
Law to increase the amount of its capital and surplus legally available and to
redeem as many shares of the Series A Preferred Stock as it may legally redeem.
Thereafter, as funds become available, the Company will be required to redeem as
many additional shares of the Series A Preferred Stock as it legally can, until
it has redeemed all remaining outstanding shares of the Series A Preferred
Stock.
General. At September 23, 2000, the Company had $1.5 million in cash
and cash equivalents compared with $2.8 million at December 25, 1999. Working
capital and current ratios at September 23, 2000 were $43.0 million and 1.46 to
1 versus $18.0 million and 1.19 to 1 at December 25, 1999. Total cumulative
borrowings, including financing under capital lease obligations as of September
23, 2000 aggregated $40.3 million, $35.8 million of which is classified as
long-term. Remaining availability under the Congress Revolving Credit Facility
as of September 23, 2000 was $31.7 million ($33.2 million including cash on
hand). Capital commitments at September 23, 2000 totaled approximately $2.0
million principally for machinery and equipment for the Company's fulfillment/
distribution and telemarketing centers.
The Company has taken decisive actions to improve profitability and
enhance shareholder value. These include: 1) Realizing approximately $6.5
million in annual overhead savings through the elimination of approximately 90
FTE's during the third quarter of 2000; 2) ceasing additional funding of
startup initiatives as of the end of the 3rd quarter of this year; 3)
consolidating management of the mid-market and upscale home fashions business
under one President to increase vendor leverage and synergies across our two
largest businesses; and 4) reviewing additional potential cost reduction
opportunities.
The combination of revenue growth and cost reductions should result in
the Company achieving positive operating EBITDA cashflow in the 4th quarter of
2000, and for the entire fiscal year in 2001 and annually thereafter, excluding
any reserves associated with cost reduction actions developed and announced in
the future. The Company is currently developing a fiscal 2001 operating budget
which it will present to the Board of Directors for approval. In addition, the
Company continues to explore consolidation opportunities that will amortize
erizon's unabsorbed fixed and central costs, create competitive scale, and
build frontmover advantage in the third party fulfillment business.
Upon considering both the Company's internally generated cash flows and
cash requirements together with $31.7 million of borrowing availability under
the Congress Credit Facility as well as the initiatives discussed above, the
Company believes that it will be able to fund its ongoing cash requirements for
the foreseeable future.
SEASONALITY
The revenues and business for both the direct commerce and B-to-B
services operating segments are seasonal. The Company processes and ships more
catalog orders during the fourth quarter holiday season than in any other
quarter of the year. Many of the Company's clients for B-to-B e-commerce
transaction services experience similar seasonal trends resulting in increased
order processing during the holiday season. Accordingly, the Company recognizes
a disproportionate share of annual revenues during the last three months of the
year.
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<PAGE> 18
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" which the
Company is required to adopt at the beginning of fiscal year 2001. SFAS No. 133
establishes new accounting and reporting standards for derivative financial
instruments, including certain derivative instruments embedded in other
contracts, and hedging activities. The Company currently does not engage in
derivative and hedging activities, however, the effect, if any, on the Company's
financial statements has not yet been determined by the Company.
FORWARD LOOKING STATEMENTS
The following statements may be deemed to be forward looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995:
"The Company has taken decisive actions to improve profitability and
enhance shareholder value. These include: 1) Realizing approximately $6.5
million in annual overhead savings through the elimination of approximately 90
FTE's during the third quarter of 2000; 2) ceasing additional funding of
startup initiatives as of the end of the 3rd quarter of this year; 3)
consolidating management of the mid-market and upscale home fashions business
under one President to increase vendor leverage and synergies across our two
largest businesses; and 4) reviewing additional potential cost reduction
opportunities."
"The combination of revenue growth and cost reductions should result in
the Company achieving positive operating EBITDA cashflow in the 4th quarter of
2000, and for the entire fiscal year in 2001 and annually thereafter, excluding
any reserves associated with cost reduction actions developed and announced in
the future. The Company is currently developing a fiscal 2001 operating budget
which it will present to the Board of Directors for approval. In addition, the
Company continues to explore consolidation opportunities that will amortize
erizon's unabsorbed fixed and central costs, create competitive scale, and
build frontmover advantage in the third party fulfillment business."
"Upon considering both the Company's internally generated cash flows
and cash requirements together with $31.7 of borrowing availability under the
Congress Credit Facility as well as the initiatives discussed above, the
Company believes that it will be able to fund its ongoing cash requirements for
the foreseeable future."
CAUTIONARY STATEMENTS
The following material identifies important factors that could cause
actual results to differ materially from those in the forward looking statements
identified above:
A general deterioration of economic conditions in the United States
leading to a reduction in consumer spending generally, or specifically with
reference to the types of merchandise which the Company offers in its catalogs
or over the Internet, or which are offered by its third-party fulfillment
clients.
The failure of the Internet generally to achieve the projections made
for it with respect to growth of e-commerce or otherwise. The imposition of
regulatory, tax or other requirements with respect to Internet sales. Actual or
perceived technological difficulties or security issues with respect to
conducting e-commerce over the Internet generally or through the Company's
websites or those of its third-party fulfillment clients specifically.
A business failure of, or liquidity problems experienced by, one or
more of the Company's third-party fulfillment clients. The ability of the
Company to enter into new third-party fulfillment contracts and/or maintain
existing third-party fulfillment contracts.
The ability of the Company to equip and open its new fulfillment center
at the same time it is receiving inventory from customers who require
fulfillment services in time for the holiday selling season.
The ability of the Company to attract and retain senior and mid-level
management generally (including in the erizon sales force and in the management
of the catalogs) and specifically with the requisite experience in e-commerce or
Internet businesses.
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<PAGE> 19
The risk that key vendors or suppliers may reduce or withdraw trade
credit to the Company, convert the Company to a cash basis or otherwise change
credit terms, or require the Company to provide letters of credit to support its
purchase of inventory, increasing the Company's cost of capital and impacting
the Company's ability to obtain merchandise in a timely manner.
The inability of the Company to timely obtain and distribute
merchandise leading to an increase in backorders and cancellations.
An increase in postage, printing and paper prices and/or the inability
of the Company to reduce expenses generally as required.
The inability of the Company to access the capital markets due to
market conditions generally and the Company's business situation specifically.
Cost constraints and the inability to access sufficient additional
capital to maintain and upgrade the Company's information technology platform in
order to serve the e-commerce needs of companies doing business (or desiring to
do business) on the Internet.
The Company's dependence to date on Richemont and its affiliates for
financial support and the fact that they are not under any obligation whatsoever
to provide any additional support in the future.
19
<PAGE> 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
20
<PAGE> 21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7. Contingencies, of Notes to Condensed Consolidated Financial
Statements included in Part I, Item 1 of this report for a discussion of the
status of certain legal proceedings pending against the Company and its
subsidiaries.
ITEM 2. Changes in Securities and Use of Proceeds
(a) Not applicable.
(b) The rights of the holders of the Company's Common Stock, par value $0.66-2/3
per share, have been limited or qualified by the issuance of 1,400,000 shares of
the Company's Series A Cumulative Participating Preferred Stock (the "Series A
Preferred Stock") on August 24, 2000.
The Series A Preferred Stock has a par value of $0.01 per share and a
liquidation preference of $50.00 per share. Dividends are cumulative and accrue
at an annual rate of 15%, or $7.50 per share, and are payable quarterly either
in cash or in-kind through the issuance of additional Series A Preferred Stock.
Cash dividend payments are required for dividend payment dates occurring after
February 1, 2004. The Series A Preferred Stock is generally non-voting, except
if dividends have been in arrears and unpaid for four quarterly periods, whether
or not consecutive. The holder of the Series A Preferred Stock shall then have
the exclusive right to elect two directors of the Company until such time as all
such cumulative dividends accumulated on the Series A Preferred Stock have been
paid in full. Furthermore, the holder of the Series A Preferred Stock is
entitled to receive additional participating dividends in the event any
dividends are declared or paid on, or any other distribution is made with
respect to, the Common Stock of the Company. The additional dividends would be
equal to 6150% of the amount of the dividends or distributions payable in
respect of one share of Common Stock. In the event of a liquidation or
dissolution of the Company, the holders of the Series A Preferred Stock shall be
paid an amount equal to $50 per share of Series A Preferred Stock plus the
amount of any accrued and unpaid dividends, before any payments to other
stockholders.
The Company may redeem the Series A Preferred Stock in whole at any time and the
holders of the Series A Preferred Stock may elect to cause the Company to redeem
all or any of such holder's Series A Preferred Stock under certain circumstances
involving a change of control, asset disposition or equity sale. Mandatory
redemption of the Series A Preferred Stock by the Company is required on August
23, 2005 (the "Final Redemption Date") at a redemption price of $50 per share of
Series A Preferred Stock plus the amount of any accrued and unpaid dividends.
If, at the Final Redemption Date, the Company does not have sufficient capital
and surplus legally available to redeem all the outstanding shares of Series A
Preferred Stock, the Company will be required to take all measures permitted
under the Delaware General Corporation Law to increase the amount of its capital
and surplus legally available and to redeem as many shares of Series A Preferred
Stock as it may legally redeem. Thereafter, as funds become available, the
Company will be required to redeem as many additional shares of Series A
Preferred Stock as it legally can, until it has redeemed all remaining
outstanding shares of the Series A Preferred Stock.
(c) On August 24, 2000, the Company sold 1,400,000 shares of its Series A
Cumulative Participating Preferred Stock in a private placement (not involving
the use of underwriters or other placement agents) to Richemont Finance S.A., a
Luxembourg company which owns approximately 48.2% of the Company's outstanding
Common Stock ("Richemont"), for an aggregate purchase price of $70.0 million in
cash. There were no underwriting discounts or commissions related to such sale.
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<PAGE> 22
Such sale was exempt from the registration requirements of the Securities Act of
1933, as amended, by reason of Section 506 of Regulation D thereunder. The facts
relied upon to make such exemption available are that the Preferred Stock was
offered and sold to a single investor, Richemont, which is an accredited
investor, and the Company complied with the requirements of Rules 501 and 502
under Regulation D promulgated under the Act.
See also Item 2(b) above and Part I - Financial Information, Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - Cumulative Participating
Preferred Stock of this Quarterly Report on Form 10-Q.
(d) Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (EDGAR filing only).
(b) Reports on Form 8-K
On August 24, 2000, the Company filed a report on Form 8-K reporting,
pursuant to Item 5 of such form, the issuance of 1,400,000 shares of preferred
stock, designated as Series A Cumulative Participating Preferred Stock, to
Richemont Finance S.A., the Company's largest shareholder owning approximately
48.2% of the Company's common stock.
On October 19, 2000, the Company filed a report on Form 8-K reporting,
pursuant to Item 5 of such form, the resignations of Messrs. Basil P. Regan,
Shailesh J. Mehta and Howard M.S. Tanner from the Company's Board of Directors.
Furthermore, the Company reported that Mr. Eloy Michotte, a member of the
Executive Committee of Compagnie Financiere Richemont AG as well as a Director
of Richemont S.A., will be appointed to the Company's Board of Directors. Due to
these changes, the number of members of the Board of Directors will decrease
from 12 to 10.
On November 3, 2000, the Company filed a report on Form 8-K reporting,
pursuant to Item 5 of such form, information concerning its quarterly conference
call with management to review the third quarter 2000 results.
22
<PAGE> 23
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/ Brian C. Harriss
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Brian C. Harriss
Senior Vice-President and Chief Financial Officer
(On behalf of the Registrant and as principal financial officer)
Date: November 7, 2000
23
