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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 MARCH 25, 2000
Commission file number 1-12082
HANOVER DIRECT, INC.
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(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
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(Address of principal executive offices) (Zip Code)
(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 $.66 2/3 per share: 213,438,195 shares outstanding as of
May 1, 2000.
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HANOVER DIRECT, INC.
TABLE OF CONTENTS
Part I - Financial Information Page
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Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 25, 2000 and December 25, 1999.......................................... 3
Condensed Consolidated Statements of Income (Loss) - thirteen weeks ended
March 25, 2000 and March 27, 1999............................................. 5
Condensed Consolidated Statements of Cash Flows - thirteen weeks ended
March 25, 2000 and March 27, 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................ 16
Part II - Other Information
Item 1. Legal Proceedings......................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders....................... 17
Item 6. Exhibits and Reports on Form 8-K.......................................... 18
Signature.............................................................................. 19
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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)
MARCH 25, DECEMBER 25,
2000 1999
----------- --------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,376 $ 2,849
Accounts receivable, net 26,820 29,287
Inventories 55,892 54,816
Prepaid catalog costs 24,702 20,305
Deferred tax asset, net 3,300 3,300
Other current assets 2,950 2,935
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Total Current Assets 117,040 113,492
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Property and equipment, at cost:
Land 4,634 4,634
Buildings and building improvements 23,289 23,269
Leasehold improvements 9,687 9,491
Furniture, fixtures and equipment 55,798 53,863
Construction in progress 473 1,990
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93,881 93,247
Accumulated depreciation and amortization (48,586) (46,360)
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Property and equipment, net 45,295 46,887
Goodwill, net 16,205 16,336
Deferred tax asset, net 11,700 11,700
Other assets 1,824 3,004
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Total Assets $192,064 $191,419
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See notes to condensed consolidated financial statements.
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(IN THOUSANDS OF DOLLARS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
MARCH 25, DECEMBER 25,
2000 1999
----------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Short-term borrowings $ 5,000 $ --
Current portion of long-term debt and capital lease obligations 3,707 3,257
Accounts payable 59,673 63,549
Accrued liabilities 24,317 24,284
Customer prepayments and credits 4,741 4,412
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Total Current Liabilities 97,438 95,502
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Non-current Liabilities:
Long-term debt 50,690 39,578
Other liabilities 2,477 2,474
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Total Non-current Liabilities 53,167 42,052
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Total Liabilities 150,605 137,554
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Shareholders' Equity:
Series B Convertible Additional Preferred Stock, $10 stated
value, authorized, issued and outstanding: none at March 25,
2000 and 634,900 shares at December 25, 1999 -- 6,318
Common Stock, $.66 2/3 par value, authorized 300,000,000 shares;
issued 213,961,498 shares at March 25, 2000 and 211,519,511
shares at December 25,1999 142,641 141,013
Capital in excess of par value 306,907 301,088
Accumulated deficit (404,298) (390,763)
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45,250 57,656
Less:
Treasury stock, at cost (652,552 shares at March 25, 2000 and
December 25, 1999) (1,829) (1,829)
Notes receivable from sale of Common Stock (1,962) (1,962)
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Total Shareholders' Equity 41,459 53,865
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Total Liabilities and Shareholders' Equity $ 192,064 $191,419
========== ==========
See notes to condensed consolidated financial statements.
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
FOR THE 13 WEEKS ENDED
---------------------------------
MARCH 25, MARCH 27,
2000 1999
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Net Revenues $ 130,150 $ 127,714
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Operating costs and expenses:
Cost of sales and operating expenses 88,230 81,904
Selling expenses 31,967 31,946
General and administrative expenses 17,853 14,447
Depreciation and amortization 2,459 2,301
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140,509 130,598
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(Loss) from operations (10,359) (2,884)
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Interest expense, net 3,014 1,147
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(Loss) before income taxes (13,373) (4,031)
Income tax provision 75 193
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Net (loss) (13,448) (4,224)
Preferred stock dividends 87 159
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Net (loss) applicable to common shareholders $(13,535) $ (4,383)
========= =========
Net (loss) per share:
Net (loss) per share - basic and diluted $ (.06) $ (.02)
========= =========
Weighted average common shares outstanding -
basic and diluted (thousands) 211,930 210,445
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See notes to condensed consolidated financial statements.
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
(UNAUDITED)
FOR THE 13 WEEKS ENDED
--------------------------
MARCH 25, MARCH 27,
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(13,448) $ (4,224)
Adjustments to reconcile net (loss) to net cash (used)
by operating activities:
Depreciation and amortization, including deferred fees 4,143 2,616
Provision for doubtful accounts 784 807
Compensation expense related to stock options 797 799
Changes in assets and liabilities:
Accounts receivable 1,683 3,023
Inventories (1,076) 5,099
Prepaid catalog costs (4,397) (5,156)
Accounts payable (3,876) (20,490)
Accrued liabilities 1,356 (201)
Customer prepayments and credits 329 519
Other, net 26 (429)
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Net cash (used) by operating activities (13,679) (17,637)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of property and equipment (623) (404)
Proceeds from sale of Blue Ridge Associates 838 --
--------- ---------
Net cash provided (used) by investing activities 215 (404)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under Congress revolving loan facility $ 23,252 $ 9,915
Net borrowings (payments) under Congress term loan facility 12,325 (375)
Borrowings under Richemont line of credit facility 5,000 --
Redemption of Term Financing Facility (16,000) --
Redemption of Industrial Revenue Bonds (8,000) --
Payment of debt issuance costs (1,899) --
Proceeds from issuance of Common Stock 301 22
Series B Convertible Additional Preferred Stock dividends (920) --
Other, net (68) (118)
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Net cash provided by financing activities 13,991 9,444
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Net decrease in cash and cash equivalents 527 (8,597)
Cash and cash equivalents at the beginning of the year 2,849 12,207
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Cash and cash equivalents at the end of the period $ 3,376 $ 3,610
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 1,488 $ 801
========= ---------
Income taxes $ 88 $ 374
========= =========
Non-cash investing and financing activities:
Capital lease obligations $ 84 $ 82
========= =========
Redemption of Series B Convertible Additional Preferred Stock $ 6,349 $ --
========= =========
See notes to condensed consolidated financial statements.
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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 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 Standard ("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 both basic and diluted net loss per share excludes
stock options and convertible preferred stock.
4. DISPOSITION OF BLUE RIDGE ASSOCIATES
In February 2000, the Company sold its 50% partnership interest in
Blue Ridge Associates ("Blue Ridge"), a partnership that owned an apparel
distribution center in Roanoke, VA, to the holder, an unrelated third party, of
the other 50% for $0.8 million. Since the proceeds approximated the Company's
carrying value of its investment in Blue Ridge, no gain or loss on sale was
recognized.
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5. 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. 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
that are provided to both third parties and the direct commerce segment. The
B-to-B services segment provides the aforementioned services to the direct
commerce segment in accordance with an intercompany service agreement.
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):
RESULTS FOR THE 1ST QUARTER DIRECT B-TO-B ELIMINATIONS/
ENDED MARCH 25, 2000: COMMERCE SERVICES ALL OTHER CONSOLIDATED
---------------- ----------------- ---------------- -----------------
Revenues from External Customers $ 123,604 $ 6,546 $ -- $ 130,150
Inter-segment Revenues -- 23,098 (23,098) --
Income/ (Loss) from Operations (275) (7,773) (2,311) (10,359)
Interest Income/(Expense) (1,518) (1,100) (396) (3,014)
---------------- ----------------- ---------------- -----------------
Income/ (Loss) before Income Taxes $ (1,793) $ (8,873) $ (2,707) $ (13,373)
================ ================= ================ =================
RESULTS FOR THE 1ST QUARTER
ENDED MARCH 27, 1999:
Revenues from External Customers $ 127,013 $ 701 $ -- $ 127,714
Inter-segment Revenues -- 25,017 (25,017) --
Income/ (Loss) from Operations 706 (3,590) -- (2,884)
Interest Income/(Expense) (294) (853) -- (1,147)
---------------- ----------------- ---------------- -----------------
Income/ (Loss) before Income Taxes $ 412 $ (4,443) $ -- $ (4,031)
================ ================= ================ =================
During the first quarter of 2000, the Company, as part of its ongoing
strategic 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 1999, on a pro-forma basis to reflect this modification, would
have been $1.4 million for the direct commerce segment, $(3.5) million for the
B-to-B services segment and $(0.8) million for all other.
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6. 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
payment for all unpaid cumulative preferred dividends.
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 has filed a motion to dismiss.
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 Section 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.
8. CHANGES IN MANAGEMENT AND EMPLOYMENT AGREEMENTS
The Company entered into a new Executive Employment Agreement, dated as of
March 6, 2000, with Rakesh K. Kaul, the President and Chief Executive Officer of
the Company (the "Employment Agreement"). The Employment Agreement provides for
a three-year evergreen term commencing on March 6, 2000, at a base salary of
$597,300 per year. The base salary is subject to review on an annual basis. On
each annual anniversary, the Employment Agreement will automatically be extended
for an additional year unless either party has given at least 90 days prior
notice of non-renewal. The Employment Agreement also provides that the Board of
Directors, in its discretion, may assign Mr. Kaul to be Chief Executive Officer
of erizon, Inc. under certain circumstances.
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The Employment Agreement provides for Mr. Kaul's participation in the
2000 Short-Term Incentive Plan for Rakesh K. Kaul. That plan provides for an
annual bonus of between 0% and 150% of Mr. Kaul's base salary, depending on the
attainment of various performance objectives as determined in accordance with
the objective formula or standards adopted by the Compensation Committee as part
of the performance goals for each such year.
The Employment Agreement also provides for Mr. Kaul's participation in
the 2000 Long-Term Incentive Plan for Rakesh K. Kaul. That plan provides Mr.
Kaul with an option to purchase 6% of the common stock of erizon, Inc. (with
protection against dilution through erizon, Inc.'s first round of Board-approved
equity, convertible debt or similar financing) at the fair market value on the
date of grant, with the option vesting in equal parts over four years and
expiring ten years following the date of grant (the "erizon Option"). The plan
also provides for the modification to an option, granted to Mr. Kaul pursuant to
a stock option agreement dated August 23, 1996 and expiring on March 7, 2006, to
purchase 2,000,000 shares of Common Stock of the Company (the "Closing Price
Option"). The option is now subject to a three-year vesting schedule, provided
that it shall vest and become immediately exercisable upon satisfaction of the
condition that the closing price of the Common Stock of the Company has attained
an average of $4.50 per share during any period of 91 consecutive calendar days
commencing after August 23, 1996 and ending on or before March 7, 2002. The
Closing Price Option also provides that within thirty days after the Closing
Price Option vests with respect to all or a portion of the shares of Common
Stock underlying such option, the Company shall pay Mr. Kaul an additional cash
amount equal to the number of shares of Common Stock with respect to which such
option has vested on such vesting date, multiplied by the excess of (i) the
lesser of the per share option price of such shares or the fair market value on
such vesting date of a share of Common Stock, over (ii) $1.03.
The modifications to the vesting and exercise terms of the Closing
Price Option provided for within the new Employment Agreement for Rakesh K. Kaul
will result in an additional charge for stock compensation expense of
approximately $3.2 million over the three-year vesting period commencing March
6, 2000 or earlier upon achievement of the stock price target in the Closing
Price Option. Furthermore, the Company expects additional stock compensation
expense charges for the granting of the options to purchase 6% of the Common
Stock of erizon, Inc. Based upon a preliminary valuation, the compensation
associated with the erizon Option is estimated in the range of $3.5 million to
$4.0 million, with such costs to be charged over the four-year vesting period
commencing on March 6, 2000. The amounts herein are subject to adjustment based
upon the final valuation of the option.
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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).
13 WEEKS ENDED
-----------------------------------
MARCH 25, MARCH 27,
2000 1999
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Net Revenues 100% 100%
Cost of sales and operating expenses 67.8 64.1
Selling expenses 24.6 25.0
General and administrative expenses 13.7 11.3
Depreciation and amortization 1.9 1.8
(Loss) from operations (8.0) (2.2)
Interest expense, net (2.3) (0.9)
Net (loss) (10.3)% (3.3)%
RESULTS OF OPERATIONS - THIRTEEN-WEEKS ENDED MARCH 25, 2000 COMPARED WITH THE
THIRTEEN-WEEKS ENDED MARCH 27, 1999
Net (Loss). The Company reported a net loss of $(13.4) million or
$(.06) per share for the thirteen-weeks ended March 25, 2000 compared with a net
loss of $(4.2) million or $(.02) per share for the comparable period last year.
The per share amounts were calculated based on weighted average shares
outstanding of 211,929,722 and 210,444,784 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 last year, the $9.2 million increase
in net loss was primarily due to:
(i) higher losses resulting from the Company's e-commerce related strategic
initiatives;
(ii) higher personnel related expenses; and
(iii) higher interest expense/debt issuance costs,
partially offset by higher demand for the Company's core catalog offerings.
Revenues. Revenues increased $2.4 million (1.9%) for the thirteen-week
period ended March 25, 2000 to $130.1 million from $127.7 million for the
comparable period in 1999. This increase was primarily due to higher revenues
for the Company's core catalog offerings and revenues from the Company's third
party business-to-business ("B-to-B") e-commerce services operation partly
offset by 1999 revenue from the Company's discontinued catalogs. Revenues from
core catalogs increased by $4.9 million (4.1%) due to higher demand for most
merchandise offerings. The number of customers having made a purchase from the
Company's catalogs during the 12 months preceding March 25, 2000 remained at
approximately 4 million, consistent with the number at December 25, 1999, and
the Company circulated approximately 71 million catalogs during the 2000 period
versus approximately 69 million catalogs during the 1999 period. First quarter
1999 revenues from catalogs that were discontinued during 1999 were $8.3
million.
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First quarter 2000 revenues for the Company's B-to-B e-commerce
services operation increased by $5.8 million from $0.7 million in 1999 to $6.5
million for the first quarter 2000. This reflects an increase in the third party
client base for the Company's Internet order processing, customer care and
shipping and distribution services.
Cost of Sales and Operating Expenses. Cost of sales and operating
expenses increased to 67.8% of revenues for the thirteen weeks ended March 25,
2000 compared to 64.1% of revenues for the comparable period in 1999. The
increase is primarily due to higher distribution and systems development costs,
which include higher consulting and facility/equipment rental expenses primarily
related to the Company's strategic initiative to expand the infrastructure of
its B-to-B services operation, and higher postage expense. This is partially
offset by a decrease in the Company's cost of merchandise, a higher percentage
of which is now internationally sourced at lower costs, and the inclusion of
lower margin discontinued catalogs in the 1999 results.
Selling Expenses. Selling expenses decreased to 24.6% of revenues for
the thirteen weeks ended March 25, 2000 from 25.0% for the comparable period in
1999, primarily due to a higher revenue base derived from the Company's B-to-B
services operation as well as lower catalog preparation costs. This was
partially offset by lower catalog productivity primarily due to an increase in
prospecting which traditionally has lower response rates.
General and Administrative Expenses. General and administrative
expenses were 13.7% of revenues for the thirteen weeks ended March 25, 2000
versus 11.3% of revenues for the comparable period in 1999. The 2.4% increase
reflects higher professional and consulting fees attributable to the Company's
e-commerce related strategic initiatives, and higher personnel related expenses.
Depreciation and Amortization. Depreciation and amortization increased
to 1.9% of revenues for the thirteen weeks ended March 25, 2000 from 1.8% for
the comparable period in 1999.
Loss from Operations. The Company's loss from operations increased by
$7.5 million to $(10.4) million for the thirteen-weeks ended March 25, 2000 from
a loss of $(2.9) for the comparable period in 1999. The Company's results are
comprised of the following segments:
- - Direct Commerce: Loss from operations of $(0.3) million for the
thirteen-weeks ended March 25, 2000 compares to income from operations
of $0.7 million for the thirteen-weeks ended March 27,1999. The $1.0
million decrease is primarily due to higher merchandise postage, the
introductory costs of the Turiya and Company Kids catalogs, and
Internet advertising test programs, partially offset by higher demand
for the Company's core catalog offerings.
- - Business-to-Business ("B-to-B") Services: Loss from operations of
$(7.8) million for the thirteen-weeks ended March 25, 2000 compares to
a loss from operations of $(3.6) million for the thirteen-weeks ended
March 27,1999. The $4.2 million increase is primarily due to higher
distribution and systems development costs (including higher consulting
and facility/equipment rental expenses) primarily related to the
Company's strategic initiative to expand the infrastructure of its
B-to-B services operation. This was partly offset by higher earnings
resulting from an increase in Internet order processing, customer care
and shipping and distribution services provided to the Company's
expanded third party Internet client base.
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- - All Other: Loss from operations of $(2.3) million for the
thirteen-weeks ended March 25, 2000. This reflects the 2000 inclusion
of $1.8 million of certain corporate level general and administrative
expenses ($0.8 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 include higher
professional fees related to the Company's continuing strategic
initiative to reposition itself as two separate business units, and
higher personnel related expenses.
Interest Expense, Net. Interest expense, net increased $1.9 million to
$3.0 million for the thirteen weeks ended March 25, 2000 compared to the same
period last year. This was due to debt issuance costs related to the March 2000
refinancing of the Company's credit facilities and higher average borrowings
outstanding during 2000.
Income Taxes. The Company recorded state tax provisions of $0.1 million
and $0.2 million for the thirteen-week periods ended March 25, 2000 and March
27, 1999, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations: During the thirteen weeks ended March 25,
2000, net cash used by operating activities of $13.7 million was primarily due
to the funding of net losses incurred as a result of necessary spending for the
continuing development and expansion of the Company's B-to-B services
infrastructure. Cash was also used to fund an increase in prepaid catalog costs
resulting from a planned increase in catalog circulation.
Net cash provided by investing activities: During the thirteen weeks
ended March 25, 2000, net cash provided by investing activities of $0.2 million
was primarily due to proceeds of $0.8 million from the sale of the Company's
investment in Blue Ridge Associates, partly offset by capital expenditures of
$0.6 million. The capital expenditures were primarily for computer hardware and
software in order to increase the functionality and capacity of the Company's
integrated e-commerce systems platform.
Net cash provided by financing activities: During the thirteen weeks
ended March 25, 2000, net cash provided by financing activities of $14.0 million
was primarily due to a net increase in total borrowings of $16.6 million. The
additional borrowings were primarily used to fund the continuing development and
expansion of the Company's business-to-business ("B-to-B") services operation,
the payment of debt issuance costs of $1.9 million related to the March 2000
refinancing of the Company's credit facilities, and the payment of $0.9 million
of cumulative dividends to the holders of the Series B Convertible Additional
Preferred Stock. During March 2000, the Company utilized $24.0 million of
borrowings under the amended Congress Credit Facility to reimburse UBS, AG for
drawings on the letters of credit, which were due to expire on March 31, 2000,
made by the trustees of the Term Financing Facility and the Industrial Revenue
Bonds (see below). The Company also borrowed $5.0 million under the Richemont
$25.0 million unsecured line of credit facility to fund its B-to-B services
operation (see below).
At March 25, 2000, the Company had $3.4 million in cash and cash
equivalents compared with $2.8 million at December 25, 1999. Working capital and
current ratios at March 25, 2000 were $19.6 million and 1.20 to 1 versus $18.0
million and 1.19 to 1 at December 25, 1999.
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On March 24, 2000, the Company amended its credit facility with
Congress Financial Corporation ("Congress") to provide the Company with a
maximum credit line 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 assets of the Company and places restrictions on the
incurrence of additional indebtedness and on the payment of common stock
dividends. Additionally, the Company is subject to certain financial covenants
requiring it to maintain minimum levels of net worth and working capital, and
achieve specified quarterly Earnings/(Loss) Before Interest, Taxes, Depreciation
and Amortization ("EBITDA") targets.
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 SA ("Richemont"), a 48.2% beneficial owner of the Company's common
stock, 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.
As of March 25, 2000, the Company had $53.3 million of borrowings
outstanding under the Congress Credit Facility comprised of $28.4 million under
the revolving loan facility, and $17.4 million and $7.5 million of Tranche A
Term Loans and Tranche B Term Loans, respectively. The Company may draw upon the
Congress Credit Facility to fund working capital requirements as needed.
On March 24, 2000, the Company entered into a $10.0 million unsecured
line of credit facility (the "Richemont $10.0 million Line of Credit") with
Richemont Finance SA ("Richemont"). The maximum amount available to be drawn
under the Richemont $10.0 million Line of Credit (the "Maximum Amount") was
initially $10.0 million and will be reduced on a dollar-for-dollar basis for
each dollar of equity contributed to the Company or any of its subsidiaries
after March 24, 2000 by Richemont or any subsidiary or affiliate of Richemont.
If the excess availability under the Congress Credit Facility is less than $3.0
million, the Company will be required to borrow under the Richemont $10.0
million Line of Credit, and pay to Congress, the amount such that the excess
availability under the Congress Credit Facility after the such payment will be
$3.0 million. The Company may also borrow under the Richemont $10.0 million Line
of Credit up to $5.0 million to pay trade creditors in the ordinary course of
business. The Richemont $10.0 million Line of Credit will remain in place until
the Congress Credit Facility is terminated or the Maximum Amount is reduced to
zero. As of March 25, 2000, there were no borrowings outstanding under the
Richemont $10.0 million Line of Credit.
On March 1, 2000, the Company entered in a $25.0 million unsecured line
of credit facility (the "Richemont $25.0 million Line of Credit") with Richemont
to obtain the necessary funding from Richemont to continue the development and
expansion of the Company's B-to-B services operation. The Richemont $25.0
million Line of Credit will mature on the earlier of December 30, 2000 or the
date on which Richemont makes an equity infusion in the Company or any of the
Company's subsidiaries (such earlier date, the "Maturity Date"). As of March 25,
2000, there were $5.0 million of borrowings outstanding under the Richemont
$25.0 million Line of Credit.
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Total cumulative borrowings, including financing under capital lease
obligations as of March 25, 2000, aggregated $59.4 million, $50.7 million of
which is classified as long-term. Remaining availability under the Company's
credit facilities as of March 25, 2000 was $34.7 million ($38.1 million
including cash on hand). The Company anticipates that it will be able to satisfy
its ongoing cash requirements for the foreseeable future, primarily with cash
flow from operations, supplemented by borrowings under the Congress and
Richemont facilities. Events that may impact this include, but are not limited
to, future events that may have the effect of reducing available cash balances
(such as unexpected operating losses, or increased capital or other
expenditures), as well as future circumstances that might reduce or eliminate
the availability of external financing.
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 4th quarter holiday season than in any other portion
of the year. Many of the Company's e-tail clients experience similar seasonal
trends resulting in increased order processing during the holiday season.
Accordingly, the Company, taken as a whole, recognizes a disproportionate
share of annual revenue during the last three months of the year.
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. The effect, if any, on the Company's
financial statements has not yet been determined by the Company.
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ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 7. Contingencies, of the Notes to the Condensed Consolidated
Financial Statements included in Part I, Item 1 of this report for a discussion
of legal proceedings pending against the Company and its subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 2000 annual meeting of stockholders was held in New York, New York
on May 4, 2000. 129,401,128 shares of Common Stock, or 60.6% of the outstanding
shares, were represented in person or by proxy.
1. The following twelve directors were elected to a one-year term expiring
in 2001.
NUMBER OF SHARES
----------------------------------------
FOR WITHHELD
----------------------------------------
Ralph Destino 128,948,390 452,738
J. David Hakman 128,948,390 452,738
Rakesh K. Kaul 128,946,640 454,488
June R. Klein 128,948,123 453,005
Kenneth Krushel 128,948,390 452,738
Theodore H. Kruttschnitt 128,948,290 452,838
Shailesh J. Mehta 128,947,972 453,156
Jan P. du Plessis 128,948,390 452,738
Alan G. Quasha 128,948,390 452,738
Basil P. Regan 128,947,972 453,156
Howard M. S. Tanner 128,948,390 452,738
Robert F. Wright 128,948,390 452,738
2. Proposal to ratify - The 1999 Stock Option Plan for Directors:
118,202,452 shares voted in favor; 10,934,266 shares voted against; and
264,410 shares abstained.
3. Proposal to ratify - The 2000 Management Stock Option Plan: 118,972,058
shares voted in favor; 10,158,276 shares voted against; and 270,794
shares abstained.
4. Proposal to ratify - The 2000 Short-Term Incentive Plan for Rakesh K.
Kaul: 126,647,099 shares voted in favor; 2,488,138 shares voted
against; and 265,891 shares abstained.
5. Proposal to ratify - The 2000 Long-Term Incentive Plan for Rakesh K.
Kaul: 124,848,536 shares voted in favor; 4,270,328 shares voted
against; and 282,264 shares abstained.
6. Proposal to approve an amendment to the Stock Option Agreement dated
August 23, 1996 with Rakesh K. Kaul: 125,889,237 shares voted in favor;
3,226,002 shares voted against; and 285,889 shares abstained.
7. The proposal to approve Arthur Andersen LLP as independent accountants
for fiscal year 2000: 128,929,786 shares voted in favor; 248,836 shares
voted against; and 222,506 shares abstained.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Intentionally Omitted.
10.2 Unsecured Line of Credit and Promissory Note dated March 1, 2000 given
by the Company to Richemont Finance, S.A. ("Richemont").
10.3 Employment Agreement dated as of March 6, 2000 between the Company and
Rakesh K. Kaul.
10.4 Fifteenth Amendment to Loan and Security Agreement dated as of March
24, 2000 by and among Congress Financial Corporation ("Congress"),
Hanover Direct Pennsylvania , Inc. ("HDPA"), Brawn of California, Inc.
("Brawn"), Gump's By Mail, Inc. ("Gump's By Mail"), Gump's Corp.
("Gump's"), LWI Holdings, Inc. ("LWI"), Hanover Direct Virginia, Inc.
("HDVA"), Hanover Realty Inc. ("Hanover Realty"), The Company Store
Factory, Inc., The Company Office, Inc., Keystone Internet Services,
Inc., Tweeds, LLC, Silhouettes, LLC, Hanover Company Store, LLC and
Domestications, LLC.
10.5 Subordination Agreement dated as of March 24, 2000, between Congress
and Richemont.
10.6 Credit Agreement, dated as of March 24, 2000, by and among the Company,
HDPA, Brawn, Gump's By Mail, Gump's, LWI, HDVA, Keystone Internet
Services, Inc., Tweeds, LLC, Silhouettes, LLC, Hanover Company Store,
LLC, Domestications, LLC and Richemont.
10.7 Subordination Agreement dated as of March 24, 2000, between Congress
and Richemont.
10.8 Letter Agreement, dated as of March 24, 2000, between Richemont and
Congress.
10.9 Amended and Restated Stock Option Agreement dated as of April 14, 2000
between the Company and Rakesh K. Kaul.
10.10 Stock Option Agreement dated as of April 14, 2000 between erizon, Inc.
and Rakesh K. Kaul.
10.11 Hanover Direct, Inc. Key Executive Thirty-Six Month Compensation
Continuation Plan.
10.12 Hanover Direct, Inc. Key Executive Twenty-Four Month Compensation
Continuation Plan.
27 Financial Data Schedule.
(b) Reports on Form 8-K
On March 10, 2000, the Company filed a report on Form 8-K relating to
the election of Basil P. Regan, a beneficial owner of approximately 20% of the
Company's Common Stock, to the Company's Board of Directors. The election of Mr.
Regan resulted in an increase in the number of members of the Board of Directors
from 11 to 12.
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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/ Brian C. Harriss
-------------------------------
Brian C. Harriss
Senior Vice-President and Chief Financial Officer
(On behalf of the Registrant and as principal financial officer)
Date: May 9, 2000
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