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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1994
Commission file number 1-12082
HANOVER DIRECT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-0853260
(State of incorporation) (I.R.S. Employer Identification No.)
1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY 07087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 863-7300
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
-------------------------------- ---------------------
Common Stock, $.66 2/3 Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K._____
As of March 15, 1995 the aggregate market value of the voting stock held by
non-affiliates of the registrant was $106 million (based on the closing price of
the Common Stock on the American Stock Exchange on March 15, 1995).
As of March 15, 1995 the registrant had 92,816,843 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10, 11, 12 and 13.
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P A R T I
ITEM 1. BUSINESS
GENERAL
Hanover Direct, Inc. (the "Company") is a leading direct specialty
retailer that publishes a portfolio of branded specialty catalogs offering home
fashion, general merchandise and apparel. The Company's home fashion catalogs
include Domestications(R), the nation's leading specialty home textile catalog,
and The Company Store(R), an upscale direct marketer of down comforters and
other down and related products for the home. The Company also publishes
Gump's(R), the well-known San Francisco retailer and a leading upscale catalog
marketer of exclusive gifts, which opened its new retail store in downtown San
Francisco in March 1995. The Company is a market leader in the kitchenware
segment with Colonial Garden Kitchens(R), a leading specialty catalog featuring
work saving and lifestyle enhancing items for the kitchen and home, and Kitchen
& Home(sm), introduced in 1994, a highly focused upscale kitchen and home
product catalog. In apparel, the Company's portfolio includes Tweeds(R), the
European inspired women's fashion catalog, and International Male(R), an
authority for unique men's fashions with an international flair.
In 1994, the Company further expanded its catalog offerings by entering
into a venture with Sears, Roebuck and Co. ("Sears") in which the Company mails
several versions of its catalogs to the more than 20 million mail order and
credit card customers of Sears. In 1994, the Company generated revenues of
$71 million and operating income of $2.9 million from this venture.
During 1994, the Company mailed approximately 377 million catalogs and
had total revenues of approximately $769 million and operating income of $16.0
million. The Company maintains a proprietary customer list currently containing
more than 19 million names of customers who have made purchases from at least
one of the Company's catalogs within the past 36 months. Over 7 million of the
names on the list represent customers who have made purchases from at least one
of the Company's catalogs within the last 12 months.
In early 1995, the Company acquired Improvements (R), a leading
do-it-yourself home improvement catalog featuring home aid accessories,
Leichtung Workshops (R), a woodworking and hobby catalog featuring tools, wood
products and accessories, and The Safety Zone (R), a direct marketer of safety,
prevention and protection products.
The Company is incorporated in Delaware with its principal executive
office at 1500 Harbor Boulevard, Weehawken, New Jersey 07087. The Company's
telephone number is (201) 863-7300. NAR Group Limited, a British Virgin Islands
corporation (together with its affiliates, "NAR"), owns approximately 51% of the
Company's common stock. NAR, a private investment holding company, is a joint
venture between the family of Alan G. Quasha, a Director and the Chairman of the
Board of the Company, and Compagnie Financiere Richemont A.G., a Swiss public
company engaged in
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luxury goods, tobacco and other businesses. The Company is a successor in
interest to The Horn & Hardart Company, a restaurant company founded in 1911,
and Hanover House Industries, Inc., founded in 1934.
THE COMPANY'S CATALOGS
Each of the Company's specialty catalogs targets distinct market
segments offering a focused assortment of merchandise designed to meet the needs
and preferences of its target customers. Through market research and ongoing
testing of new products and concepts, each catalog determines its own
merchandise strategy, including the appropriate price points, service levels,
mailing plans and presentation of its products. The Company is continuing its
development of exclusive or private label products in a number of its catalogs,
including Domestications, Tweeds and The Company Store, to further enhance the
brand identity of the catalog.
The Company's specialty catalogs typically range in size from 32 to 100
pages with four to six new editions per year depending on the seasonality and
fashion content of the products offered. Each edition may be mailed several
times each season with variations in format and content. Each catalog employs
the services of an outside creative agency or has its own creative staff which
is responsible for the design, layout, copy, feel and theme of the book.
Generally, the initial sourcing of new merchandise for a catalog begins two to
six months before the catalog is mailed.
The Company's operations are divided into two main groups, Non-Apparel
and Apparel. Revenues and the percent of total revenues for 1993 and 1994 for
each group are set forth below:
1993 1994
1993 PERCENT OF 1994 PERCENT OF
REVENUES (A) TOTAL REVENUES REVENUES (A) TOTAL REVENUES
-------------- -------------- ------------- --------------
(IN THOUSANDS) (IN THOUSANDS)
NON-APPAREL $483,876 75% $599,408 78%
APPAREL $158,635 25% $169,476 22%
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TOTAL COMPANY $642,511 100% $768,884 100%
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(a) Revenues are net of returns.
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NON-APPAREL GROUP.
The catalogs comprising the Non-Apparel Group are as follows:
Domestications is the nation's leading specialty home textile catalog
and the preferred fashion decorating source book for today's value-oriented and
style-conscious consumer. Domestications features sheets, towels, comforters,
tablecloths, draperies and other items for the home, and offers coordinated
decorating ideas for the home at value prices. Domestications is also mailed to
Sears customers under the name Show Place.
The Company Store is an upscale direct marketer of down comforters and
other down and related products for the home. The Company Store also features
designer brand name sheets, towels and other bedding accessories.
Colonial Garden Kitchens features work saving and lifestyle enhancing
items for the kitchen and home. Colonial Garden Kitchens is also mailed to Sears
customers under the name Great Kitchens.
Kitchen & Home features upscale kitchen and home products.
Gump's is the well-known San Francisco retailer and a leading upscale
catalog marketer of exclusive gifts. In March 1995, Gump's relocated its retail
store to a landmark building in downtown San Francisco, offering comprehensive
collections of antique and contemporary jewelry and gifts.
Tapestry is a value-oriented home accessories catalog featuring
flatware, dinnerware, furniture, rugs and other home decorating items. Tapestry
is also mailed to Sears customers under the name Right Touch.
Hanover House, the Company's oldest catalog, features gifts, seasonal,
household and novelty items.
Mature Wisdom caters to the needs of older customers and features
fashions, health care products and other items for easier living.
Improvements, acquired in January 1995, is a leading do-it-yourself
home improvement catalog featuring home improvement accessories.
Leichtung Workshops, acquired in January 1995, is a woodworking and
hobby catalog featuring tools, wood products and accessories.
The Safety Zone, acquired in February 1995, is a direct marketer of
safety, protection and prevention products.
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APPAREL GROUP.
The catalogs comprising the Apparel Group are as follows:
Tweeds is a European inspired women's fashion catalog featuring relaxed
fashions uniquely designed by its in-house staff.
Silhouettes is a women's fashion catalog featuring every day,
workout, special occasion and career fashions in sizes 14 to 26.
Simply Tops is a source for unique apparel, supplying moderate-priced
clothing to women interested in embellished clothing that makes a statement.
One 212, introduced in 1994, is a women's fashion catalog featuring
upscale clothing with a distinctly modern, cosmopolitan look designed by its
in-house staff.
Essence By Mail is the original catalog featuring women's fashions and
home decorating items reflecting African-American culture. It is a 50% joint
venture with Essence Communications Inc., publisher of Essence magazine. This
catalog will be discontinued after the Summer 1995 mailing.
International Male is an authority for unique men's fashion with an
international flair.
Undergear is a leader in activewear, workout wear and fashion underwear
for men.
RECENT ACQUISITIONS AND VENTURES
Sears. In January 1994, the Company entered into a licensing agreement
with the direct marketing subsidiary of Sears to produce specialty catalogs for
the more than 20 million mail order and credit card customers of Sears. The
catalogs currently being mailed under the program are based on existing Company
catalogs and contain a title page with the Sears name and logo. The specialty
catalogs include: Show Place, based on the Domestications catalog, Great
Kitchens, based on the Colonial Garden Kitchens catalog, and Right Touch, based
on the Tapestry catalog. The Sears agreement has an initial three-year term and
continues thereafter unless terminated by either party on various grounds,
including the Company's failure to meet various operational performance
standards. Profits and losses from this licensing agreement are shared between
the parties on an equal basis. The Company also issued to Sears a performance
warrant to purchase up to 7 million shares of the Company's Common Stock in
1999, at an exercise price of $10.57 per share, subject to certain revenue and
profit thresholds.
Improvements and Leichtung Workshops. In January 1995, the Company
acquired substantially all of the assets of Leichtung, Inc., the publisher of
Improvements, a leading do-it-yourself home improvement catalog, and Leichtung
Workshops, a woodworking and hobby catalog,
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for a total cash purchase price of approximately $12 million and the assumption
of certain liabilities.
The Safety Zone. In February 1995, the Company acquired the remaining
80% of the outstanding capital stock it did not already own of Aegis Safety
Holdings, Inc. ("Aegis"), a direct marketer of safety, prevention and protection
products through The Safety Zone catalog. The purchase price was $6.3 million,
stated value, of the Company's Series B Convertible Additional Preferred Stock
("Series B Stock"). The Series B Stock is convertible into the Company's Common
Stock at $6.66 per share, subject to anti-dilution, and will pay a 5% dividend
in each of the first three years if Aegis has earnings before interest and taxes
of at least $1 million in each year, and a 7% dividend in years four and five.
The Series B Stock is subject to mandatory redemption in cash or common stock at
the Company's option on the fifth anniversary of issuance. If the Company elects
to redeem the Series B Stock in Company Common Stock, additional shares may be
issued if the Company's Common Stock is below a certain value.
Tiger Direct. In February 1995, the Company entered into an agreement
by which, upon closing of the transaction, it agreed to make an $8 million
investment in Tiger Direct, Inc. ("Tiger") and to provide certain strategic
services to Tiger. Tiger is a direct marketer of computer software, peripherals
and CD-ROM hardware and software. Upon consummation of the transactions, the
Company will be issued either a convertible debenture or convertible preferred
stock (if authorized) and warrants for its investment. The debenture will pay
interest at a rate of 10% per year for three years, payable in shares of Tiger
common stock, and will be convertible into a new class of Tiger convertible
preferred stock (subject to Tiger shareholder approval), with dividends payable
at 10% per year for three years, also payable in shares of Tiger common stock.
Tiger will also issue warrants to the Company to purchase additional stock over
a three year period at prices ranging from $1.20 to $1.50 per share. If the
debenture or the preferred stock is converted, the warrants are exercised and
the dividend shares are fully issued, the Company will own approximately 42%
of Tiger's outstanding common stock. The Company will have the right to acquire
additional shares of common stock in the open market, up to a total of 50.1%,
during a five year standstill period. The Company will be permitted to
nominate four of Tiger's seven directors for five years. The Company is also
providing a short-term secured working capital line to Tiger, up to a maximum
of $3 million. All outstanding short-term indebtedness under this working
capital line will be repaid when the transaction closes or within one year from
termination if the transaction does not close.
MARKETING AND DATABASE MANAGEMENT
The Company maintains one of the largest proprietary customer lists in
the industry currently containing more than 19 million names of customers who
have purchased from one of the Company's catalogs within the past 36 months. The
list contains name, gender, residence and historical transaction data. This
database is selectively enhanced with demographic, socioeconomic, lifestyle and
purchase behavior overlays from other sources.
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The Company utilizes proprietary modeling and sophisticated
segmentation analysis, on a catalog by catalog basis, to devise catalog
marketing and circulation strategies that are intended to maximize the
contribution by customer by catalog. This analysis is the basis for the
Company's determination of which of the Company's catalogs (and how frequently)
will be mailed to a particular customer, as well as the promotional incentive
content of the catalog(s) such customer receives.
In addition to mailing to customers currently in its database, the
Company has an ongoing prospect acquisition program designed to attract new
customers on a cost effective basis. The primary source of new customers for the
Company's catalogs is lists rented from other mailers and compilers. Prior to
mailing to these non-proprietary lists, the lists are edited using statistical
segmentation tools to enhance their probable performance. Other sources of new
customers include space advertisements and promotional inserts in outbound
merchandise packages.
TELEMARKETING AND CUSTOMER SERVICE
The Company designs its service standards to exceed customers'
expectations and supports this with an unconditional merchandise guarantee.
Under the Company's return policy, a customer may return merchandise for a
refund, exchange or replacement if not satisfied for any reason.
In 1994, the Company received approximately 70% of its orders through
its toll-free telephone service which offers customer access seven days per
week, 24 hours per day. The Company has created a telephone network to link its
three primary telemarketing facilities in Hanover, Pennsylvania, Roanoke,
Virginia and La Crosse, Wisconsin. The Company's telemarketing facilities
utilize state-of-the-art telephone switching equipment which enables the Company
to route calls between telemarketing centers and thus provide prompt customer
service. Satellite telemarketing centers are also located in San Diego,
California and Cleveland, Ohio.
The Company trains its telemarketing service representatives to be
courteous, efficient and knowledgeable about the Company's products.
Telemarketing service representatives generally receive 40 hours of training in
selling products, services, systems and communication skills through simulated
as well as actual phone calls. A substantial portion of the evaluation of
telemarketing service representatives' performance is based on how well the
representative meets customer service standards. While primarily trained with
product knowledge to serve customers of one or more specific catalogs,
telemarketing service representatives also receive cross-training that enables
them to take overflow calls from other catalogs. The Company utilizes customer
surveys as an important measure of customer satisfaction.
The Company's computerized database provides its telemarketing service
representatives with information concerning a customer's previous orders,
permitting the service representative to establish a personalized dialogue with
the customer. In some cases telemarketing service representatives are provided
selling information which they are trained to use to describe promotional items.
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DISTRIBUTION
The Company maintains a primary distribution center in Hanover,
Pennsylvania and two in Roanoke, Virginia. The Company's facilities processed
approximately 14 million packages in 1994. The Company's plan is to maximize
efficiencies in merchandise handling and distribution by consolidation of the
warehousing and distribution of like items in specific fulfillment centers. In
1994, the Company substantially completed the consolidation of its women's
apparel catalogs, all of which are now fulfilled from the Company's Roanoke
apparel facility. Also in 1994, the Company completed construction of a 530,000
square foot state-of-the-art home fashions warehouse and distribution facility
on a separate site in Roanoke. This facility is projected to cost approximately
$17 million, of which $12.4 million was incurred in 1994. This facility will
handle all of Domestications' fulfillment needs. Single item orders are
currently being shipped from this facility, which will be fully operational in
the second half of 1995. The Company will also complete the consolidation of
Gump's fulfillment operations from DeSoto, Texas to Hanover, Pennsylvania,
where all giftware, other hardgoods and men's apparel are fulfilled, by
April 1995.
The Company mails its catalogs through the United States Postal Service
("USPS") utilizing pre-sort, bulk mail and other discounts. Most of the
Company's packages are shipped through the USPS. Effective January 1, 1995, the
USPS increased postage rates by approximately 14% to 18%. Overall, catalog
mailing and package shipping costs approximated 16% of the Company's net
revenues in 1994. The Company obtains rate discounts from the USPS by
automatically weighing each parcel and sorting and trucking packages to a number
of USPS drop points throughout the country. Some packages are shipped using a
consolidator for less frequently used drop points. The Company also uses
United Parcel Service, Federal Express and other delivery services.
PURCHASING
The Company's large sales volume permits it to achieve a variety of
purchasing efficiencies, including the ability to obtain prices and terms that
are more favorable than those available to smaller companies. Major goods and
services used by the Company are purchased or leased from selected suppliers by
its central buying staff. These goods and services include: paper, catalog
printing and printing related services such as order forms and color
separations, communication systems including telephone time and switching
devices, packaging materials, expedited delivery services, computers and
associated network software and hardware. The Company's objective is to achieve
favorable "total costs" reflecting a long-term mutual commitment by the Company
and each supplier for competitive rates and terms as well as the quality, future
maintenance, replacement and modification needs of the Company.
The Company's telephone telemarketing costs (both inbound and outbound
calls) are typically contracted for on a three year basis. The Company generally
enters into annual agreements for paper and printing with a limited number of
suppliers. These agreements permit periodic price increases or decreases based
on prevailing market conditions, changes in supplier costs and continuous
productivity improvements. For 1994, paper costs approximated 7% of the
Company's
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net revenues. In 1995, paper costs are expected to rise approximately 20% to 30%
due to increasing demand, rising costs of pulp, increased manufacturing costs,
and a lack of new manufacturing plants to meet increasing demand.
The Company believes it has developed and maintains strong
relationships with suppliers for key goods and services.
MANAGEMENT INFORMATION SYSTEMS
The Company is continuing to upgrade its management information systems
by implementing new integrated software and migrating from a centralized
mainframe to mid-range mini-computers. The migration of the Company's business
applications is an important part of the Company's overall systems plan which
defines the mid- and long-term systems and computing strategy for the Company.
In 1994 the Company purchased, and in 1995 is continuing to modify and install,
on a catalog by catalog basis, integrated systems for use in managing all phases
of the Company's operations. These systems have been designed to meet the
Company's requirements as a high volume publisher of multiple catalogs. The
Company brought several catalogs on line in 1994, and expects to bring
additional catalogs on-line through early 1996, when the Company expects to
complete the project. As of December 31, 1994, the Company invested
approximately $9.1 million in such systems. The Company currently estimates that
the total cost to install and implement the new systems, including the cost of
dedicated internal personnel, will be approximately $15 million.
CREDIT MANAGEMENT
Several of the Company's catalogs, including Domestications,
International Male and Gump's, offer their own credit cards. The Company also
offers, for use with almost all catalogs, the Hanover Shop At Home credit card.
The Company has a three year $75 million credit facility with General Electric
Credit Corporation ("GECC") which provides for the sale and servicing of
accounts receivable originating from the Company's revolving credit cards.
GECC's servicing responsibilities include credit processing, collections,
billing/payment processing, reporting and credit card issuance.
INVENTORY MANAGEMENT
The Company's inventory management strategy is designed to maintain
inventory levels that provide optimum in-stock positions while maximizing
inventory turnover rates and minimizing the amount of unsold merchandise at the
end of each season. The Company manages inventory levels by monitoring sales and
fashion trends and making purchasing adjustments as necessary and by promotional
sales. Additionally, the Company sells excess inventory in its special sale
catalogs, its outlet stores and to jobbers.
The Company acquires products for resale in its catalogs from numerous
domestic and foreign vendors. No single source supplied more than 5% of the
Company's products in 1994. The Company's vendors are selected based on their
ability to reliably meet the Company's production
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and quality requirements, as well as their financial strength and willingness to
meet the Company's needs on an ongoing basis.
EMPLOYEES
The Company currently employs approximately 3,300 persons on a full
time basis and approximately 600 persons on a part time basis. Approximately 150
employees at one of the Company's subsidiaries are represented by a union. The
Company believes its relations with its employees are good.
SEASONALITY
Although the Company experiences quarterly variations in sales, such
variations are due primarily to fluctuations in circulation levels rather than
seasonality and are further ameliorated by the Company's diversified portfolio
of catalogs. The Company traditionally mails more catalogs in the second half of
the year.
COMPETITION
The mail order catalog business is highly competitive. The Company
believes that the principal bases upon which it competes are quality, value,
service, product offerings, catalog design, convenience, efficiency and safety.
The Company's catalogs compete with other mail order catalogs, both specialty
and general, and retail stores, including department stores, specialty stores
and discount stores. Competitors also exist in each of the Company's catalog
specialty areas of women's fashions, home furnishings, general merchandise, and
men's fashions. A number of the Company's competitors have substantially greater
financial, distribution and marketing resources than the Company. However, the
Company believes that the recent substantial growth in the costs of doing
business in the direct marketing industry, especially with respect to the
increased costs of paper and postal expenses, may cause a consolidation in the
industry as smaller catalogs face the difficult cost increases.
TRADEMARKS
Each of the Company's catalogs has its own federally registered
trademark. The Company also owns numerous trademarks, copyrights and service
marks on its logos, products and catalog offerings. The Company has also
protected various trademarks internationally. The Company vigorously protects
such marks and believes there is substantial goodwill associated with them.
Essence is a trademark used by the Company under license by Essence
Communications, Inc. Show Place, Great Kitchens, and Right Touch are trademarks
of Sears.
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GOVERNMENT REGULATION
The Company is subject to Federal Trade Commission regulations
governing its advertising and trade practices, Consumer Product Safety
Commission and Food and Drug Administration regulations governing the safety of
the products it sells in its catalogs and other regulations relating to the sale
of merchandise to its customers. The Company is also subject to the Department
of Treasury-Customs regulations with respect to any goods it imports. To date,
such governmental regulations have not had a material adverse effect on the
Company's business.
The imposition of a sales and use tax collection obligation on
out-of-state catalog companies in states to which they ship products was the
subject of a case decided in 1994 by the United States Supreme Court. While the
Court reaffirmed an earlier decision that allowed direct marketers to make sales
into states where they do not have a physical presence without collecting sales
taxes with respect to such sales, the Court further noted that Congress has the
power to change this law. The Company believes that it collects sales tax in all
jurisdictions where it is currently required to do so.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in a modern
84,700-square-foot facility in Weehawken, New Jersey. The facility houses
merchandising and marketing personnel, an art department including photographic
studios, catalog production personnel and corporate and administrative offices.
The Weehawken facility is leased for a 15-year term expiring in 2005.
The Company operates warehouse and fulfillment facilities in two
principal locations: Roanoke, Virginia, for home fashions and women's apparel,
and Hanover, Pennsylvania, for giftware, other hardgoods and men's apparel.
In Roanoke, the Company owns a newly constructed 530,000 square-foot
state-of-the-art home fashions distribution center. The facility was
substantially completed in December 1994 and is expected to become fully
operational in the second half of 1995. This facility will handle all of
Domestications' fulfillment needs. Also in Roanoke, the Company leases its
175,000 square-foot apparel distribution and telemarketing center from a
partnership in which it owns a 50% interest.
In Hanover, the Company owns a distribution center of approximately
265,000 square feet and leases a telemarketing and administrative office
facility of 123,000 square feet, and a warehouse facility of 433,000 square
feet. Renewal terms through 2009 remain on the first lease; the second lease
expires November 30, 1995 and is expected to be extended for an additional
period.
In addition to these principal facilities, the Company leases
administrative facilities for men's apparel in San Diego, California and for
women's apparel in Edgewater, New Jersey. The San Diego facility also serves
as a telemarketing and customer service facility for men's apparel. The Company
also operates a telemarketing and fulfillment facility in Cleveland, Ohio for
the Improvements and Leichtung Workshops catalogs.
In La Crosse, Wisconsin, the Company also owns a 150,000 square-foot
home fashions manufacturing and assembly facility and a 58,000 square-foot
telemarketing and customer service facility, and leases a warehouse and
fulfillment center of 185,000 square feet under a short-term lease.
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The Company's principal retail operations consist of the newly
relocated Gump's retail store, which occupies approximately 30,000 square feet
in a building in downtown San Francisco, California. The Gump's facility, which
is leased pursuant to a 15-year lease, also includes administrative offices for
retail and mail order functions.
The Company also operates and leases 7 outlet stores at various
locations.
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The following chart lists each of the Company's principal properties:
APPROXIMATE CATALOG
LOCATION STATUS SQUARE FOOTAGE USE
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Warehouse and
Fulfillment Centers:
Hanover, PA Leased 433,000 (a)
Hanover, PA Leased/Owned 265,000 (a) and (b)
Roanoke, VA Owned 530,000 Domestications
Roanoke, VA Leased 175,000 Women's Apparel(c)
La Crosse, WI Leased 185,000 The Company Store
Corporate and
Administrative Offices:
San Diego, CA Leased 30,000 Men's Apparel(d)
San Francisco, CA Leased 15,000 Gump's(e)
Edgewater, NJ Leased 65,000 Women's Apparel
Weehawken, NJ Leased 85,000 Corporate Headquarters
Cleveland, OH Leased/Owned 40,000 Leichtung Workshops
and Improvements(f)
Telemarketing and
Customer Service:
Hanover, PA Leased 123,000 (a)
La Crosse, WI Owned 58,000 The Company Store
Roanoke, VA Leased 175,000 Women's Apparel(c)
Beachwood, OH Leased 7,800 Leichtung Workshops
and Improvements
Retail Stores:
San Francisco, CA Leased 30,000 Gump's
Tysons Corner, VA Leased 1,700 The Safety Zone
San Diego, CA Leased 3,800 International Male
West Hollywood, CA Leased 3,600 International Male
Manufacturing
and Assembly:
La Crosse, WI Owned 150,000 The Company Store
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(a) Used for Gump's, Colonial Garden Kitchens, Kitchen & Home, Tapestry,
Hanover House, Mature Wisdom and Men's Apparel.
(b) The building is owned by the Company and the property is subject to a
ground lease.
(c) Telemarketing and warehouse/fulfillment functions are all located and
performed at the one facility. Square footage stated represents the
entire facility.
(d) Also a telemarketing center for Men's Apparel.
(e) Retail and office space are all located at the one facility. Square
footage stated represents allocations to corporate/administrative,
and retail and retail storage space.
(f) Acquired in connection with the Leichtung, Inc. acquisition in January
1995. The building is owned by the Company and the property is subject
to a ground lease.
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ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine lawsuits of a nature which
is deemed customary and incidental to its businesses. In the opinion of
management, the ultimate disposition of such actions will not have a material
adverse effect on the Company's financial position or results of operations.
On or about September 2, 1994, a complaint was filed in the United
States District Court for the District of New Jersey by Veronica Zucker, an
individual who allegedly purchased shares of Common Stock of the Company in
the public offering completed on April 7, 1994, against the Company, all
of its directors, certain of its officers, Sun Life Insurance Company of
America, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Alex. Brown &
Sons, Incorporated. The complaint, which purports to be filed on behalf of a
class of all persons who purchased the Common Stock of the Company in the public
offering or thereafter through and including August 14, 1994, seeks to recover
monetary damages the class has allegedly suffered as a result of certain alleged
false and material misleading statements contained in the Company's public
offering prospectus dated March 30, 1994. In lieu of an answer, defendants have
filed a motion to dismiss the complaint in its entirety for failure to state a
claim upon which relief can be granted. The motion is scheduled to be heard by
the Court on April 10, 1995. The Company and its directors and executive
officers believe they have meritorious defenses to the Complaint and intend to
defend the matter vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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P A R T II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on the American Stock Exchange (Symbol:
HNV). The following table sets forth, for the periods shown, the high and low
sale prices of the Common Stock reported on the American Stock Exchange
Composite Tape.
HIGH LOW
-------- -------
1993
First Quarter $ 4 $ 2 1/16
Second Quarter 4 1/2 2 3/4
Third Quarter 5 1/2 4 1/6
Fourth Quarter 7 5/8 4 1/2
1994
First Quarter $ 7 7/8 $ 6
Second Quarter 7 1/8 3 15/16
Third Quarter 4 15/16 3 3/4
Fourth Quarter 4 3/8 3 3/8
The Company is limited from paying dividends at any time on its Common
Stock beyond 25% of the consolidated net income of the then preceding four
quarter period or from acquiring in excess of one million shares of its Common
Stock by the most restrictive debt covenants contained in debt agreements to
which the Company is a party.
As of March 15, 1995, there were approximately 4,567 holders of record
of Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data for each of the years
indicated:
1990 1991 1992 1993 1994
--------- ---------- ---------- ---------- ----------
(in thousands, except share and per share data)
INCOME STATEMENT DATA:
REVENUES $555,770 $623,650 $586,562 $642,511 $768,884
Operating (loss) income 10,190 (26,078) 14,402 19,076 15,975
Interest expense, net . . . . . . . . 11,426 18,341 13,135 2,757 2,813
Other income (expense) . . . . . . . - (6,437) - 888 (1,833)
Income (loss) from continuing
operations . . . . . . . . . . . . . . (2,136) (51,081) 1,048 17,337 14,838
(Loss) from discontinued operations . . . (115,921) (21,119) - - -
-------- -------- -------- -------- --------
Income (loss) before extraordinary
items and cumulative effect of
accounting change for income taxes . . . (118,057) (72,200) 1,048 17,337 14,838
Extraordinary items . . . . . . . . . . . 2,146 6,915 9,201 - -
Cumulative effect of accounting
change for income taxes . . . . . . . . - - 10,000 - -
-------- -------- -------- -------- --------
NET INCOME (LOSS) . . . . . . . . . . . . (115,911) (65,285) 20,249 17,337 14,838
Preferred stock dividends . . . . . . . . - (466) (3,197) (4,093) (135)
-------- -------- -------- -------- --------
Net income (loss) applicable to
common shareholders . . . . . . . . . . ($115,911) ($65,751) $ 17,052 $ 13,244 $ 14,703
========= ======== ======== ======== ========
Per Share:
Income (loss) from continuing
operations . . . . . . . . . . . . . . ($ .15) ($ 3.16) ($ .06) $ .17 $ .16
(Loss) from discontinued operations . . (8.24) (1.30) - - -
-------- -------- -------- -------- --------
Income (loss) before extraordinary
items . . . . . . . . . . . . . . . . . (8.39) (4.46) (.06) .17 .16
Extraordinary items . . . . . . . . . . . .15 .43 .24 - -
Cumulative effect of accounting
change for income taxes . . . . . . . . - - .26 - -
-------- -------- -------- -------- --------
Net (loss) income . . . . . . . . . . . . ($ 8.24) ($ 4.03) $ .44 $ .17 $ .16
========= ======== ======== ======== ========
Weighted average number
of shares outstanding:
Primary . . . . . . . . . . . . . . . 14,068,460 16,287,723 38,467,015 75,625,330 93,285,190
========== ========== ========== ========== ==========
Fully diluted . . . . . . . . . . . . . . 14,068,460 16,287,723 38,467,015 77,064,131 93,285,190
========== ========== ========== ========== ==========
BALANCE SHEET DATA
(END OF PERIOD):
Working capital (deficit) . . . . . . . . $ 8,913 ($37,636) $ 31,566 $ 25,180 $ 58,501
Total assets . . . . . . . . . . . . . . 234,761 162,800 134,352 188,838 262,246
Total debt . . . . . . . . . . . . . . . 155,649 127,918 43,362 36,160 37,915
Preferred stock of subsidiary . . . . . . - 35,247 32,842 - -
Shareholders' (deficit) equity . . . . . (61,484) (113,632) (19,758) 45,868 109,725
There were no cash dividends declared on Common Stock in any of the periods.
See Notes to Consolidated Financial Statements.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, the percentage
relationship to revenues of certain items in the Company's Consolidated
Statements of Income:
Fiscal Year
--------------------------------------------
1992 1993 1994
-------- -------- --------
Revenues 100.0% 100.0% 100.0%
Cost of sales and operating expenses . . . . . . . . . . 65.1 63.6 63.3
Selling expenses . . . . . . . . . . . . . . . . . . . . 23.6 24.6 25.7
General and administrative expenses . . . . . . . . . . . 8.9 8.9 9.0
Income from operations . . . . . . . . . . . . . . . . . 2.5 3.0 2.1
Interest expense, net . . . . . . . . . . . . . . . . . 2.2 .4 .4
Other income/(expense) . . . . . . . . . . . . . . . . . - .1 (.2)
Net income . . . . . . . . . . . . . . . . . . . . . . . 3.5% 2.7% 1.9%
RESULTS OF OPERATIONS
1994 COMPARED WITH 1993
Net Income. The Company reported net income of $14.8 million or $.16
per share for the year ended December 31, 1994, compared to net income of $17.3
million or $.17 per share in 1993. Per share amounts are expressed after
deducting preferred dividends of $.1 million in 1994 and $4.1 million in 1993.
The weighted average number of shares outstanding increased approximately 21%
to 93,285,190 shares for the year ended December 31, 1994, compared to
77,064,131 shares for the same period in 1993, primarily due to the public
offering and the conversion of certain preferred stocks.
Revenues. Revenues increased $126 million, or 20%, from $643 million
in 1993 to $769 million in 1994. This significant increase in revenues was
primarily a result of an increase of $48 million from the Company's venture
with Sears and increased revenues of $88 million from Gump's, The Company Store
and Tweeds which were acquired in the second half of 1993 ("the 1993
acquisitions"). Revenues from catalogs discontinued in 1993 were $20 million
in 1993 and $1 million in 1994.
Revenues were negatively impacted in 1994 by an increase in customer
returns from approximately 13.1% of shipped sales in 1993 to 14.9% of shipped
sales in 1994. The increased returns were generated by new product categories
and the Company implemented measures that reduced the rate of returns in the
second half of 1994.
Non-Apparel continuing catalog revenues increased $122 million, or
26%, from $477 million in 1993 to $599 million in 1994. The Company's venture
with Sears generated increased Non-Apparel revenues of $46 million from 1993 to
1994, while revenues generated by Gump's and The Company Store increased $57
million from 1993 to 1994. The remainder of the Non-Apparel revenue increase
was primarily due to increased revenues related to Domestications, and the
new Kitchen & Home catalog. Revenues from discontinued catalogs were $7
million and $.2 million in 1993 and 1994, respectively.
Apparel continuing catalog revenues increased $23 million, or
approximately 16%, from $146 million in 1993 to $169 million in 1994. This
increase was primarily due to a $31 million increase in the revenues of Tweeds
which was acquired in the fourth quarter of 1993. Women's Apparel continuing
catalog revenues increased 6% which is mainly attributable to Silhouettes and
One 212, while Men's Apparel revenues decreased 16% as the group discontinued
an
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underperforming catalog in 1993 and focused on its profitable segments.
Revenues from discontinued apparel catalogs were $13 million and $.5 million in
1993 and 1994, respectively.
Operating Costs and Expenses. Cost of sales and operating expenses as
a percentage of revenues decreased from 63.6% in 1993 to 63.3% in 1994. The
decrease is primarily attributable to higher overall profit margins and lower
fulfillment costs, as partially offset by higher delivery costs in 1994 based
on sales mix.
Selling expenses increased from 24.6% of revenues for the year ended
January 1, 1994 to 25.7% of revenues for the year ended December 31, 1994 as
the Company increased catalog circulation 17% in an effort to increase the
number of active customers on its mailing lists in anticipation of the 1995
postal rate increase. The response to this prospecting program was less than
anticipated which resulted in higher selling expense. Overall demand from the
new customer acquisition program was soft principally in the Non-Apparel
catalogs, particularly in Domestications, where prospecting was heaviest. The
Company mailed approximately 377 million catalogs in 1994.
General and administrative expenses increased from 8.9% of revenues in
1993 to 9.0% of revenues in 1994 due primarily to a $.7 million increase in the
amortization of mailing lists and goodwill related to the 1993 acquisitions.
General and administration expenses increased $11.8 million, or 21%, from 1993
to 1994 due primarily to the 1993 acquisitions.
Income from Operations. Income from operations decreased from $19.1
million in 1993, or 3.0% of revenues, to $16.0 million in 1994, or 2.1% of
revenues. Losses from discontinued catalogs were $3.9 million in 1993 compared
to $.1 million in 1994.
Non-Apparel income from operations decreased $5.7 million from $25.9
million in 1993 to $20.2 million in 1994. This decrease was mainly due to the
previously-mentioned lower response rates to the Company's customer acquisition
program. Non-Apparel income from operations was also impacted by a loss of
$2.1 million in 1994 compared to break even results in 1993 related to the
Gump's retail operations due to the temporary relocation of its retail store
prior to the move to its new location in March 1995.
Apparel income from operations increased $3.1 million from a $3.6
million loss in 1993 to a $.5 million loss in 1994. The Men's Apparel income
from operations increased $3.3 million from a loss of $1.4 million in 1993 to
income of $1.9 million in 1994 as a result of overhead reductions and
increased response rates. The Women's Apparel income from operations increased
$1.0 million excluding losses of $.5 million and $1.6 million in 1993 and 1994,
respectively, from the start-up of a new catalog. Apparel income from
operations for discontinued catalogs was a loss of $4.3 million in 1993 and
income of $.2 million in 1994.
The Company's venture with Sears generated $1.4 million of income from
operations in 1993 versus $2.9 million in 1994.
Interest Income (Expense). Interest expense decreased approximately
$1.4 million from $4.9 million in 1993 to $3.5 million in 1994. This decrease
was the result of the Company using the proceeds of the public offering to pay
down its revolving line of credit in April 1994, thus reducing borrowing
requirements throughout the remainder of 1994. In addition, the Company
experienced lower interest rates upon entering into a new credit agreement in
October 1994. The Company's long-term debt increased $2.5 million from 1993 to
1994. Interest income decreased $1.5 million from $2.2 million in 1993 to $.7
million in 1994, due to interest income related to a Federal income tax refund
received in 1993.
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Other Income (Expense). Other income decreased $2.7 million from
income of $.9 million in 1993 to a loss of $1.8 million in 1994. The income of
$.9 million in 1993 represents a settlement of a claim in bankruptcy. The loss
in 1994 is comprised of $2.5 million of charges due to losses on investments
and advances as partially offset by other income of $.7 million.
Income Taxes. The Company recorded a Federal income tax benefit of
$4.4 million in 1994 based on its estimate of the amount of net operating loss
carryfowards ("NOLs") that can be utilized in the future. Federal income tax
provisions of $5.9 million and $4.2 million, respectively, were offset by the
utilization of NOLs in 1993 and 1994. The Company's state tax provision was
$.5 million and $.9 million in 1993 and 1994, respectively.
Shareholders' Equity. The number of shares of Common Stock
outstanding increased by 9,804,663 in 1994 due to: i) 8,045,296 shares issued
in connection with the Public Offering, ii) 1,309,207 shares issued in
connection with a cashless exchange upon the exercise of certain warrants and
iii) 450,160 shares issued in connection with the Company's equity and
incentive plans, the exchange of the 6% Series A Convertible Preferred Stock
(the "6% Preferred Stock") and other activities. At December 31, 1994, there
were 92,737,840 shares of Common Stock outstanding compared to 82,933,177
shares of Common Stock outstanding at January 1, 1994.
The dividends of $.1 million in 1994 represent dividend requirements
on the 6% Preferred Stock issued in September 1993 while the dividends of $4.1
million in 1993 represent dividend requirements on the 7.5% Preferred Stock and
the Class B Preferred Stock, both of which were converted into Common Stock in
the fourth quarter of 1993.
1993 COMPARED WITH 1992
Net Income. The Company reported net income of $17.3 million or $.17
per share for the year ended January 1, 1994, compared to net income of $1.0
million (before extraordinary items and cumulative effect of accounting change)
or a loss of $.06 per share in 1992. Net income for 1992 after extraordinary
items and cumulative effect of accounting change was $20.2 million or $.44 per
share. Per share amounts are expressed after deducting preferred dividends of
$3.2 million in 1992 and $4.1 million in 1993.
Revenues. Revenues increased 9.5% from $587 million in 1992 to $643
million in 1993. The higher revenues were due to a 10% increase in revenues
relating to continuing catalogs, which include the initial test marketing of
the Sears venture which began in mid-1993 and resulted in the Sears Agreement
in January 1994. Additionally, approximately $47 million of the increase was
generated by the acquisition of Gump's, The Company Store and Tweeds in the
second half of 1993. Revenues from discontinued catalogs were $63 million and
$20 million in 1992 and 1993, respectively.
Non-Apparel revenues increased 23% from $395 million in 1992 to $484
million in 1993. This increase was a result of $38 million of revenues
generated by Gump's and The Company Store which were acquired in the third
quarter of 1993 and a 14% increase in revenues related to continuing catalogs.
Substantially all of the increase in revenues from continuing catalogs is
related to Domestications, Colonial Garden Kitchens and Tapestry, of which
approximately 40% was attributable to the Sears venture. Revenues from
discontinued catalogs (assuming such catalogs were discontinued at the
beginning of 1992) were $10 million and $7 million in 1992 and 1993,
respectively.
Apparel revenues declined 17% from $192 million in 1992 to $159
million in 1993. Revenues from discontinued catalogs were $53 million and $13
million in 1992 and 1993, respectively, while continuing catalog revenues
declined by 2% from 1992. Additionally, the acquisition of Tweeds in the
fourth quarter of 1993 contributed $9 million to revenues. As discussed below,
the Company restructured its Apparel catalogs.
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21
The Company mailed approximately 322 million catalogs in 1993, a 13%
increase over 1992, with variations in mailing strategies and volumes amongst
the catalogs. Additionally, the Company was able to increase its average order
size by 9%. Revenues also improved as the Company reduced its order
cancellation and return rates compared to 1992, principally as a result of
improving its in-stock inventory position.
Operating Costs and Expenses. Cost of sales and operating expenses as
a percentage of revenues decreased from 65.1% in 1992 to 63.6% in 1993. The
improvement was attributable to an increase in product margin due to changes in
the sales mix as well as lower inventory markdowns in 1993 and lower shipping
costs due to more efficient shipping methods. Shipping costs were also
positively impacted by fewer split-shipments due to the improved in-stock
inventory position.
Selling expenses increased from 23.6% of revenues in 1992 to 24.6% of
revenues in 1993 and represented an increase of $19.3 million. This increase
was due to lower response rates, related principally to an aggressive customer
acquisition campaign primarily in Domestications (which increased the size of
its 12 month customer list by 14%) and from the addition of the selling
expenses for the Gump's retail store. Selling expenses include catalog
creation and mailing costs and rentals of mailing lists from third parties, as
well as retail selling expenses.
General and administrative expenses represented 8.9% of revenues in
1992 and 1993. Such expenses increased $5.3 million, or 10.2%, from 1992 to
1993, including $5.8 million of expenses for the three companies acquired in
1993. General and administrative expenses were reduced by lower bad debt
expense and lower credit card commissions, offset by increases in merchandise
and marketing personnel.
Income from Operations. Income from operations increased from $14.4
million in 1992, or 2.5% of revenues, to $19.1 million in 1993, or 3.0% of
revenues. Income from operations excluding the discontinued catalogs was $24.6
million in 1992 (comprised of $21.9 million and $2.7 million for Non-Apparel
and Apparel, respectively) compared to $26.7 million in 1993 (comprised of
$25.8 million and $.9 million for Non-Apparel and Apparel, respectively). Of
this, the three companies acquired in 1993 generated income from operations of
$3 million. Losses from discontinued catalogs were $9.0 million in 1992
compared to $4.3 million in 1993.
The restructuring of the Apparel catalogs continued in 1993 as the
catalog mix was changed further, with two catalogs being discontinued and the
acquisition of Tweeds. In order to improve operating results, each Apparel
catalog is being more sharply focused on its target audience and overhead and
circulation levels for certain catalogs were reduced.
Interest and Other Income (Expense). Interest expense decreased
approximately $8.5 million from $13.4 million in 1992 to $4.9 million in 1993,
due to the Company's financial restructuring which began in the fourth quarter
of 1991 and included a debt reduction of $67 million from the beginning of 1992
to the end of 1993. Interest income was $2.2 million in 1993, an increase of
$1.9 million from 1992, due primarily to the interest portion of a Federal
income tax refund received in fiscal 1993.
Other income of $.9 million in 1993 represents a settlement of a claim
in bankruptcy from a brokerage firm with which the Company had previously had a
contract.
Income Taxes. In 1992 the Company adopted Statement of Financial
Accounting Standards No. 109 - Accounting for Income Taxes ("SFAS 109"). In
accordance with this statement, the Company recognized a deferred tax asset of
$10 million reflecting the cumulative effect of this accounting change for the
estimated future benefit expected to be realized from the utilization of net
operating loss carryforwards ("NOLs") and deductible temporary differences.
The deferred tax asset consisted of a $63 million gross deferred tax asset less
a $53 million valuation allowance that was established to reflect the annual
limitation on the utilization of certain of the NOLs and an
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assumed limitation on the utilization of the remaining deferred tax asset.
Realization of the future tax benefits is dependent on the Company's ability to
generate taxable income within the carryforward period. Future levels of
operating income and taxable income are dependent, in part, upon general
economic conditions, competitive pressures on sales and margins, and other
factors beyond the Company's control.
In 1992 management determined that, based on the successful completion
of the financial restructuring, future operating income of the Company would be
sufficient to utilize $30 million of deductible timing differences and NOLs
prior to their expiration. At January 1, 1994, the Company had $147 million of
NOLs and has maintained the $30 million amount of expected future operating
income that will more likely than not utilize the NOLs prior to their
expiration. Management believes that, although the 1993 operating results
might justify a higher amount, in view of its history of operating losses, the
$30 million represents a reasonable conservative estimate of the future
utilization of the NOLs and the Company will continue to evaluate the
likelihood of future profit and the necessity of future adjustments to the
deferred tax asset valuation allowance.
The Federal income tax provision was $5.9 million in 1993 which was
offset by the utilization of certain NOLs. In addition, the Revenue
Reconciliation Act of 1993 raised the 1993 corporate income tax rate from 34%
to 35%, and, as a result, the Company recognized an additional deferred tax
benefit of $.6 million in 1993. In addition, the Company recorded a state tax
provision of $.2 million in 1992 and $.5 million in 1993.
Shareholders' Equity. The number of shares of Common Stock
outstanding increased by 13,396,345 in 1993 due to: i) 1,150,733 shares issued
in connection with the Company's equity and incentive plans, ii) 2,615,928
shares issued in connection with the acquisitions of Gump's, The Company Store
and Tweeds, iii) 2,278,128 shares issued upon the conversion of the 7.5%
Preferred Stock, iv) 18,937,169 shares issued in connection with the exchange
of the Class B Preferred Stock and Class B Common Stock (of which 12,270,503
shares were exchanged) and v) 684,890 shares issued as dividends on the Class B
Preferred Stock. At January 1, 1994, there were 82,933,177 shares of Common
Stock outstanding compared to 69,536,832 shares outstanding at December 26,
1992.
The dividends of $3.2 million in 1992 and $4.1 million in 1993
represent dividend requirements on the two preferred stocks. These preferred
stocks were converted into Common Stock in 1993, which resulted in the
elimination of future dividends.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $2.6 million and $24.1 million in cash and cash
equivalents at the end of January 1, 1994 and December 31, 1994, respectively.
Working capital and the current ratio were $25.2 million and 1.23 to 1 at
January 1, 1994 versus $58.5 million and 1.51 to 1 at December 31, 1994.
The primary sources of cash in 1994 were the $49.3 million of proceeds
from the issuance of Common Stock, $10.0 million of proceeds from the issuance
of debt, a $10.5 million increase in accounts payable, and operating profits.
Cash was used primarily to support increases of: i) $23.9 million in capital
expenditures, ii) $8.1 million in investments and advances, iii) $6.2 million
in accounts receivable, and iv) $8.2 million in prepaid catalog costs. The
Company also used $8.0 million to pay down various debt obligations during
1994.
The Company experiences seasonality in its working capital
requirements and fluctuations in the revolving credit facility will occur,
usually within the first and fourth quarters of the year.
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Public Offering of Common Stock. In April 1994, the Company
consummated a public offering of 8,045,296 shares of its Common Stock resulting
in proceeds net of expenses of approximately $47.5 million. The Company has
used the net proceeds to reduce outstanding indebtedness, to fund certain
infrastructure investments and for general corporate purposes. In April 1994,
the Company repaid $6 million of the $20 million of 9.25% Notes and paid down
the then existing revolving credit facility using the proceeds of the public
offering.
Infrastructure Investments. In 1994, the Company substantially
completed the construction of a fulfillment center on a 53 acre site in
Roanoke, Virginia to primarily support the Domestications catalog. The center
is projected to cost $17 million. As of December 31, 1994, the Company had
incurred costs of approximately $12.4 million in the construction of this
facility. The Company began partial shipping and receiving activities in the
first quarter of 1995 and anticipates that the facility will be fully
operational in the second half of 1995. The Company expects that its
operating margins will be negatively impacted in the first half of 1995 as it
incurs costs in connection with the start-up and relocation of distribution
activities to the facility in Roanoke, Virginia and the consolidation of other
facilities.
The Company is upgrading its management information systems at a total
cost estimated to be approximately $15 million. The new system began
successful operation in two of the Company's catalogs during the second half of
1994 and the Company expects the roll out of the system to the rest of its
catalogs through early 1996. The Company expects to incur certain duplicate
system costs during a period in 1995 as they transition to the new computer
system. As of December 31, 1994, the Company had incurred costs of
approximately $9.1 million as part of this plan, including capitalized leases
aggregating $2.4 million and internal costs of $1.7 million related to
production of this new system that have been capitalized. The Company will
begin to amortize all system costs as the system becomes operational in 1995.
As of December 31, 1994, the Company was concluding the construction
of the new Gump's retail store and began operation of the new store in March
1995. As of December 31, 1994, the Company had incurred costs of approximately
$6.1 million for this store. The total estimated cost of the project is
approximately $8 million.
Financing. The Company entered into a new $80 million credit facility
(the "Credit Facility") during the fourth quarter of 1994. This agreement
replaces the $52.5 million secured revolving working capital facility
previously in place. The Company obtained funding of approximately $10 million
in November 1994 and intends to draw an additional $10 million in 1995 under
the Credit Facility. As part of the Credit Facility, $20 million of the $80
million is reserved for making future acquisitions (the "Acquisition Facility")
and an additional $20 million is reserved for funding capital expenditures. As
of December 31, 1994, the total amount outstanding under the Credit Facility
was $10 million. The Company expects to experience lower financing costs in
the future as a result of the Credit Facility.
The Credit Facility requires the Company to maintain certain financial
covenants on a quarterly basis. The Company and the Lenders under the Credit
Facility have amended the applicable agreements to, among other things, ease
the requirements in certain financial covenants, increase the interest rate
payable by the Company under certain circumstances and require the Lenders
initial consent for certain investments and acquisitions.
The indenture under which the $14 million of the 9.25% Notes were
issued also requires the Company to maintain certain financial covenants on a
quarterly basis. As of December 31, 1994, the Company was not in compliance
with one of the covenants under these 9.25% Notes, for which it has received a
waiver from the holder of the notes. The Company and the holder of the Notes
have amended the covenants in the Indenture to reduce certain financial
standards contained in the covenants. The covenants will revert in the first
quarter of 1996 to those in effect prior to the amendment.
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The Company's $75 million agreement related to the sale and servicing
of accounts receivable originating from the Company's revolving credit card is
expected to be renegotiated by December 1995. The Company has begun
negotiations with several parties and anticipates that any new agreement would
generate improved cash flows and cost savings.
The Company believes that is has sufficient capital to support the
growth of its business and infrastructure investments.
Investments and Acquisitions. In 1994, the Company invested in debt
and equity securities of two companies and also made cash advances to one of
the companies. As of December 31, 1994, these investments and advances include
$2.7 million of convertible debt securities of Regal Communications, Inc.
("Regal") and $2.3 million of advances to Boston Publishing Company, Inc.
("BPC") which are carried at net realizable values of $1.7 million and $1.2
million, respectively, at December 31, 1994. During 1994, both Regal and BPC
filed for protection under Chapter 11 of the United States bankruptcy laws.
While the Company believes that it has recorded a conservative estimate of the
realizable value of these assets, certain actions of the bankruptcy proceedings
are outside the control of the Company and future events could occur that would
require the Company to re-evaluate the assets.
In January 1995, the Company purchased substantially all of the assets
of Leichtung, Inc. for approximately $12 million in cash and the assumption of
certain liabilities.
In February 1995, the Company acquired Aegis Safety Holdings, Inc.
("Aegis") for 634,900 shares of Class B Convertible Preferred Stock that has a
stated value of $6.3 million. The Company had previously owned 20% of the
outstanding common stock of Aegis.
In March 1995, the Company entered into an agreement, by which, upon
closing of the transaction, it agreed to make an $8 million investment in Tiger
Direct, Inc. ("Tiger") and provide certain strategic services to Tiger. The
Company can increase its investment to $17.7 million upon the conversion of: i)
a debenture or preferred stock, ii) the interest or dividends on such
convertible instruments and iii) exercisable warrants. The Company would
increase its ownership percentage to 42% if all of the above are converted into
Tiger common stock. The Company anticipates using the Acquisition Facility to
fund this investment. The Company is also providing a temporary short-term
secured working capital line of credit to Tiger up to a maximum of $3 million.
All outstanding short-term indebtedness related to this facility will be repaid
when the transaction closes or one year from the date the purchase agreement
is terminated.
The Company continues to analyze other potential acquisitions of
catalog companies and currently intends to use substantially all of the $20
million Acquisition Facility.
Effects of Inflation and Cost Increases. The Company normally
experiences increased costs of sales and operating expenses as a result of the
general rate of inflation in the economy. Operating margins are generally
maintained through selective price increases where market conditions permit.
The Company's inventory is mailorder merchandise which undergoes sufficiently
high turnover so that the costs of goods sold approximates replacement cost.
Because sales are not dependent upon a particular supplier or product brand,
the Company can adjust product mix to mitigate the effects of inflation on its
overall merchandise base.
The Company mails its catalogs and ships most of its merchandise
through the United States Postal Service ("USPS"), with catalog mailing and
product shipment expenses representing approximately 16% of revenues in 1994.
In January 1995, the USPS increased postage rates by approximately 14% to 18%.
The Company is also experiencing record price increases in 1995 for paper that
is used in the production of its catalogs as the paper industry has announced a
series of significant increases. Paper costs represented approximately 7% of
revenues in
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1994. These cost increases and the duplicate costs associated with the
consolidation of the distribution facilities and the transition to the new
system discussed earlier will adversely impact the Company's margins and
earnings particularly in the first half of 1995.
As a result, the Company has implemented a plan to reduce its expense
structure by $8 million through overhead reductions and consolidation of
warehouse facilities. The Company also expects to reduce catalog circulation
from 1994 levels and to increase the productivity of the mailings.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Hanover Direct, Inc.:
We have audited the accompanying consolidated balance sheets of
Hanover Direct, Inc. (a Delaware corporation) (successor to The Horn & Hardart
Company, see Note 1 to the Consolidated Financial Statements) and subsidiaries
as of January 1, 1994 and December 31, 1994, and the related consolidated
statements of income, shareholders' (deficit) equity and cash flows for each of
the three fiscal years in the period ended December 31, 1994. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hanover Direct,
Inc. and subsidiaries as of January 1, 1994 and December 31, 1994, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended December 31, 1994 in conformity with generally
accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the index
to financial statement schedule is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
New York, New York
February 21, 1995
26
27
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of January 1, 1994 and December 31, 1994
JANUARY 1, DECEMBER 31,
1994 1994
---------- ------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,583 $ 24,053
Accounts receivable, net of allowance for doubtful
accounts of $2,509 in 1993 and $2,730 in 1994 19,043 25,247
Inventories 80,429 83,653
Prepaid catalog costs 25,571 33,725
Deferred tax asset, net 2,975 3,200
Other current assets 1,858 2,658
-------- --------
Total Current Assets 132,459 172,536
-------- --------
Property and Equipment, at cost
Land 1,171 1,917
Buildings and building improvements 7,862 7,994
Leasehold improvements 6,242 6,807
Furniture, fixtures and equipment 22,551 24,103
Construction in progress 3,042 21,358
-------- --------
40,868 62,179
Accumulated depreciation and amortization (18,341) (19,708)
-------- --------
Property and Equipment, net 22,527 42,471
-------- --------
Goodwill 18,463 19,026
Deferred tax asset, net 7,656 11,800
Investments and advances - 6,000
Other assets, net 7,733 10,413
-------- --------
Total Assets $188,838 $262,246
======== ========
See Notes to Consolidated Financial Statements.
27
28
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
As of January 1, 1994 and December 31, 1994
JANUARY 1, DECEMBER 31,
1994 1994
---------- ------------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital
lease obligations $ 2,024 $ 812
Accounts payable 78,905 89,366
Accrued liabilities 21,319 20,215
Customer prepayments and credits 5,031 3,642
--------- ---------
Total Current Liabilities 107,279 114,035
--------- ---------
Noncurrent Liabilities:
Long-term debt 32,313 35,907
Capital lease obligations 1,823 1,196
Other 1,555 1,383
--------- ---------
Total Noncurrent Liabilities 35,691 38,486
--------- ---------
Total Liabilities 142,970 152,521
--------- ---------
Shareholders' Equity:
6% Preferred Stock, convertible, $10 stated value,
authorized 5,000,000 shares; issued 234,900 shares
in 1993 and 156,600 shares in 1994 2,378 1,589
Common Stock, $.66 2/3 par value, authorized
150,000,000 shares; issued 83,136,542 shares in
1993 and 92,978,234 shares in 1994 55,423 61,985
Capital in excess of par value 209,834 253,210
Accumulated deficit (215,805) (201,102)
--------- ---------
51,830 115,682
Less:
Treasury stock, at cost (1,120,032 shares in 1993
and 1,157,061 shares in 1994) (3,130) (3,345)
Notes receivable from sale of Common Stock (1,774) (1,912)
Deferred compensation (1,058) (700)
--------- ---------
Total Shareholders' Equity 45,868 109,725
--------- ---------
Total Liabilities and Shareholders' Equity $ 188,838 $262,246
========= ========
See Notes to Consolidated Financial Statements.
28
29
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For The Years Ended December 26, 1992, January 1, 1994 and December 31, 1994
1992 1993 1994
--------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUES $586,562 $642,511 $768,884
-------- -------- --------
Operating costs and expenses:
Cost of sales and operating expenses 381,716 408,387 486,477
Selling expenses 138,494 157,811 197,436
General and administrative expenses 51,950 57,237 68,996
-------- -------- --------
572,160 623,435 752,909
-------- -------- --------
INCOME FROM OPERATIONS 14,402 19,076 15,975
Interest expense (13,379) (4,925) (3,544)
Interest income 244 2,168 731
Other income (expense) - 888 (1,833)
-------- -------- --------
Income before income taxes 1,267 17,207 11,329
Income tax provision (benefit) 219 (130) (3,509)
-------- -------- --------
Income before extraordinary items and
cumulative effect of accounting change 1,048 17,337 14,838
Extraordinary items 9,201 - -
Cumulative effect of accounting change for
income taxes 10,000 - -
-------- -------- --------
NET INCOME 20,249 17,337 14,838
Preferred stock dividends (3,197) (4,093) (135)
-------- -------- --------
Net income applicable to Common
Shareholders $ 17,052 $ 13,244 $ 14,703
======== ========= ========
Net income (loss) per share:
Income (loss) before extraordinary items
and cumulative effect of accounting change $ (0.06) $ 0.17 $ 0.16
Extraordinary items 0.24 - -
Cumulative effect of accounting change for
income taxes 0.26 - -
-------- -------- --------
Net income per share $ 0.44 $ 0.17 $ 0.16
======== ======== ========
See Notes to Consolidated Financial Statements.
29
30
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 26,1992, JANUARY 1, 1994, AND DECEMBER 31,1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Preferred Stock Preferred Stock Preferred Stock
Class B 8% Cumulative 7.5% Cumulative Series A, 6.0%
Shares Amount Shares Amount Shares Amount
-----------------------------------------------------------------
Balance at December 28, 1991 0 $0 0 $0 0 $0
Net income applicable to common shareholders
Issuance of Common Stock to and redemption of
Class B Common Stock by NAR
Issuance of Class B Common Stock
Amortization of deferred compensation
Issuance of Common Stock in
connection with Rights Offering
14% Exchange Offer
7.5% Exchange Offer
Stock Dividend to NAR
Issuance of Common Stock
Transfer of ESOP shares to treasury
-----------------------------------------------------------------
Balance at December 26, 1992 0 $0 0 $0 0 $0
Net income applicable to common shareholders
Mergers of H & H & THC into Hanover Direct, Inc. 40,000 25,516 569,532 7,158
Exchange of Class B 8 % Preferred and Common Stock (40,000) (25,516)
Conversion of 7.5% Preferred Stock (569,532) (7,158)
Issuance of Preferred Stock 234,900 2,342
Stock dividends 36
Amortization of deferred compensation
Issuance of Common Stock
-----------------------------------------------------------------
Balance at January 1, 1994 0 $0 0 $0 234,900 $2,378
Net income applicable to common shareholders
Exercise of warrants
Shares issued in Stock Offering
Preferred stock dividends (6)
Conversion of one-third of the 6% Preferred Stock (78,300) (783)
Conversion of note payable
Issuance of Common Stock for Employee Benefit Plans, net
-----------------------------------------------------------------
Balance at December 31, 1994 0 $0 0 $0 156,600 $1,589
=================================================================
Capital
Class B Common Stock Common Stock in Excess
$.01 par value $.66 2/3 par value of Par
Shares Amount Shares Amount Value
-----------------------------------------------------
Balance at December 28, 1991 13,333,334 $133 16,094,321 $10,728 $135,612
Net income applicable to common shareholders
Issuance of Common Stock to and redemption of
Class B Common Stock by NAR (13,333,334) (133) 20,000,000 13,334 24,146
Issuance of Class B Common Stock 12,270,503 123 410
Amortization of deferred compensation
Issuance of Common Stock in
connection with Rights Offering 14,396,798 9,603 11,086
14% Exchange Offer 4,099,625 2,733 5,123
7.5% Exchange Offer 3,448,840 2,299 5,773
Stock Dividend to NAR (3,764)
Issuance of Common Stock 115,000 77 (237)
Transfer of ESOP shares to treasury
-----------------------------------------------------
Balance at December 26, 1992 12,270,503 $123 58,154,584 $38,774 $178,149
Net income applicable to common shareholders
Mergers of H & H & THC into Hanover Direct, Inc.
Exchange of Class B 8 % Preferred and Common Stock (12,270,503) (123) 18,937,169 12,625 13,014
Conversion of 7.5% Preferred Stock 2,278,128 1,519 5,639
Issuance of Preferred Stock
Stock dividends (438)
Amortization of deferred compensation
Issuance of Common Stock 3,766,661 2,505 13,470
-----------------------------------------------------
Balance at January 1, 1994 0 $0 83,136,542 $55,423 $209,834
Net income applicable to common shareholders
Exercise of warrants 1,309,207 873 (873)
Shares issued in Stock Offering 8,045,296 5,364 42,136
Preferred stock dividends
Conversion of one-third of the 6% Preferred Stock 189,818 126 657
Conversion of note payable 13,945 9 162
Issuance of Common Stock for Employee Benefit Plans, net 283,426 190 1,294
-----------------------------------------------------
Balance at December 31, 1994 0 $0 92,978,234 $61,985 $253,210
=====================================================
Notes
Receivable
From Sale
Accum. Treasury Stock of Common Deferred
(Deficit) Shares Amount Stock Comp. Total
-------------------------------------------------------------------
Balance at December 28, 1991 ($246,101) (2,169,899) ($11,601) $0 ($2,403) ($113,632)
Net income applicable to common shareholders 17,052 17,052
Issuance of Common Stock to and redemption of
Class B Common Stock by NAR 37,347
Issuance of Class B Common Stock 533
Amortization of deferred compensation 607 607
Issuance of Common Stock in
connection with Rights Offering 20,689
14% Exchange Offer 7,856
7.5% Exchange Offer 45,006 393 8,465
Stock Dividend to NAR 601,233 5,249 1,485
Issuance of Common Stock (160)
Transfer of ESOP shares to treasury (646,053) (1,211) 1,211 0
-------------------------------------------------------------------
Balance at December 26, 1992 ($229,049) (2,169,713) ($7,170) $0 ($585) ($19,758)
Net income applicable to common shareholders 13,244 13,244
Mergers of H & H & THC into Hanover Direct, Inc. 32,674
Exchange of Class B 8 % Preferred and Common Stock 0
Conversion of 7.5% Preferred Stock 0
Issuance of Preferred Stock 2,342
Stock dividends 684,890 2,946 2,544
Amortization of deferred compensation 599 599
Issuance of Common Stock 364,791 1,094 (1,774) (1,072) 14,223
-------------------------------------------------------------------
Balance at January 1, 1994 ($215,805) (1,120,032) ($3,130) ($1,774) ($1,058) $45,868
Net income applicable to common shareholders 14,703 14,703
Exercise of warrants 0
Shares issued in Stock Offering 47,500
Preferred stock dividends (6)
Conversion of one-third of the 6% Preferred Stock 0
Conversion of note payable 171
Issuance of Common Stock for Employee Benefit Plans, net (37,029) (215) (138) 358 1,489
-------------------------------------------------------------------
Balance at December 31, 1994 ($201,102) (1,157,061) ($3,345) ($1,912) ($700) $109,725
===================================================================
See Notes to Consolidated Financial Statements
31
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 26, 1992, January 1, 1994 and December 31, 1994
1992 1993 1994
--------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . $ 20,249 $ 17,337 $ 14,838
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation and amortization . . . . . . . . . . . 5,188 4,122 6,499
Noncash portion of extraordinary gains. . . . . . . (9,201) - -
Noncash portion of cumulative effect of an
accounting change . . . . . . . . . . . . . . . . (10,000) - -
Provision for losses on notes receivable and
marketable securities . . . . . . . . . . . . . . - - 2,121
Deferred transaction costs . . . . . . . . . . . . - - (837)
Deferred taxes . . . . . . . . . . . . . . . . . . - (631) (4,369)
Other, net . . . . . . . . . . . . . . . . . . . . 368 (33) 43
Changes in assets and liabilities, net of effects of
acquired businesses and dispositions of assets:
Payment for repurchase of mail order customer
receivables . . . . . . . . . . . . . . . . . . . (35,301) - -
Net proceeds from sale of mail order
customer receivables . . . . . . . . . . . . . . 37,008 - -
Accounts receivable, net . . . . . . . . . . . . . 13,321 8,907 (6,204)
Inventories . . . . . . . . . . . . . . . . . . . . (9,854) (12,081) (3,424)
Prepaid catalog costs . . . . . . . . . . . . . . . 9,470 (5,305) (8,154)
Other current assets . . . . . . . . . . . . . . . (671) 282 (1,220)
Accounts payable . . . . . . . . . . . . . . . . . (17,292) 24,530 10,518
Accrued liabilities . . . . . . . . . . . . . . . . (12,821) (10,650) 185
Dividend payable . . . . . . . . . . . . . . . . . - 886 -
Customer prepayments and credits . . . . . . . . . (3,508) 684 (1,389)
-------- -------- ---------
Net cash provided (used) by operating activities . . . (13,044) 28,048 8,607
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash . . . . . . . . . . . . . 5,765 - -
Acquisitions of property and equipment . . . . . . . (1,431) (4,239) (23,856)
Purchase of businesses . . . . . . . . . . . . . . . - (100) -
Net proceeds from sales of property . . . . . . . . . 17,256 - -
Purchase of convertible debt securities . . . . . . . - - (2,693)
Investments in affiliates . . . . . . . . . . . . . . - - (3,183)
Advances . . . . . . . . . . . . . . . . . . . . . . - - (2,300)
Other, net . . . . . . . . . . . . . . . . . . . . . - (313) (3,293)
-------- --------- --------
Net cash provided (used) by investing activities . . . 21,590 (4,652) (35,325)
-------- --------- --------
See Notes to Consolidated Financial Statements.
31
32
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 26, 1992, January 1, 1994 and December 31, 1994
1992 1993 1994
-------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under revolving credit facility . . . $ - $(20,965) $ (230)
Proceeds from issuance of debt . . . . . . . . . . 9,583 20,000 10,000
Net proceeds from issuance of Preferred
Stock and Class B Common Stock . . . . . . . . . 27,533 - -
Payments of long-term debt and capital lease
obligations . . . . . . . . . . . . . . . . . . . (68,720) (19,856) (8,015)
Proceeds from Rights Offering . . . . . . . . . . . 19,748 - -
Cash dividends paid . . . . . . . . . . . . . . . . - (890) (1,027)
Payment of debt issuance costs . . . . . . . . . . (825) (1,560) (1,458)
Repurchase of Common Stock . . . . . . . . . . . . - - (215)
Proceeds from issuance of Common Stock . . . . . . - 912 49,305
Other, net . . . . . . . . . . . . . . . . . . . . - (1,007) (172)
-------- -------- --------
Net cash provided (used) by financing activities . . (12,681) (23,366) 48,188
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . (4,135) 30 21,470
Cash and cash equivalents at the beginning of
the year . . . . . . . . . . . . . . . . . . . . . 6,688 2,553 2,583
-------- -------- --------
Cash and cash equivalents at end of the year . . . . $ 2,553 $ 2,583 $ 24,053
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid . . . . . . . . . . . . . . . . . . . $ 12,547 $ 4,883 $ 2,923
Income taxes paid . . . . . . . . . . . . . . . . . $ 226 $ 71 $ 701
See Notes to Consolidated Financial Statements.
32
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 26, 1992, JANUARY 1, 1994 AND DECEMBER 31, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Merger - Hanover Direct, Inc. ("HDI") was formed in connection with
the September 8, 1993 merger (the "Merger") involving HDI, The Horn & Hardart
Company ("H&H") and The Hanover Companies ("THC"), a wholly-owned subsidiary of
H&H. The Merger consisted of the merger of H&H into HDI, followed by the
merger of THC into HDI. The financial statements of THC had previously been
included in the consolidated financial statements of H&H.
The Merger was consummated by (i) the exchange to holders of shares of
H&H Common Stock shares of HDI Common Stock, (ii) the exchange to holders of
shares of THC 7.5% Preferred Stock shares of HDI's 7.5% Preferred Stock, and
(iii) the exchange to holders of shares of THC Class B Preferred Stock shares
of HDI's Class B Preferred Stock, each such distribution being on a one-
for-one-basis.
The Merger was accounted for similarly to a pooling-of-interests and,
accordingly, HDI's Consolidated Financial Statements include the results of H&H
and THC for all applicable periods presented.
Principles of Consolidation - The Consolidated Financial Statements
include the accounts of HDI and all subsidiaries (the "Company"). Intercompany
transactions and balances have been eliminated. Certain prior year amounts
have been reclassified to conform to the current year presentation.
Fiscal Year - The Company operates on a 52/53 - week fiscal year. The
years ended December 26, 1992 and December 31, 1994 were 52 - week years. The
year ended January 1, 1994 was a 53 - week year.
Inventories - Inventories consist principally of merchandise held for
resale and are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
Prepaid Catalog Costs - Costs related to mail order catalogs and
promotional material are amortized over their estimated productive lives, not
exceeding six months.
Depreciation and Amortization - Depreciation and amortization of
property and equipment are provided on the straight-line method over the
following lives: buildings and building improvements, 30 years; furniture,
fixtures and equipment, 3-10 years; and leasehold improvements, over the lower
of the estimated useful lives or the terms of the related leases. Expenditures
for maintenance and repairs are charged to operations as incurred; major
improvements are capitalized.
Purchased software costs of $3.6 million at December 31, 1994 included
in Construction in progress relate to the Company's new management information
systems. Capitalized development costs of $5.5 million are included in Other
assets as of December 31, 1994. All such costs will be amortized over a five
year period commencing in 1995 when the system is operational.
Goodwill - Excess of cost over the net assets of acquired businesses
is being amortized on a straight-line basis over periods up to forty years.
Accumulated amortization was $3.9 million and $4.5 million at January 1, 1994
and December 31, 1994, respectively. On an on-going basis, the Company
assesses the carrying value and the economic useful life of the goodwill based
on the acquired businesses' prior and future operating results and estimated
net cashflows.
33
34
Mailing Lists - The costs of acquired mailing lists are amortized
over a five year period. Mailing lists, included in Other assets, amounted to
$2.5 million at January 1, 1994 and December 31, 1994 and are carried net of
accumulated amortization of $.2 million and $.7 million, respectively.
Accounting for Income Taxes - The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109 -
Accounting for Income Taxes ("SFAS 109").
Cash and Cash Equivalents - For purposes of the Consolidated
Statements of Cash Flows, the Company considers all highly liquid temporary
investments with an original maturity of less than ninety days as cash
equivalents.
Net Income Per Share - Net income per share was computed using the
weighted average number of common shares outstanding. The weighted average
number of shares used in the calculation for both primary and fully diluted net
income per share in 1992 and 1994 were 38,467,015 and 93,285,190 shares,
respectively. For 1993 the weighted average number of shares for primary and
fully diluted net income per share were 75,625,330 and 77,064,131 shares,
respectively. Common share equivalents for purposes of net income per share
consist of stock options and warrants.
Supplemental Earnings Per Share - Assuming that the rights offering
and exchange offers discussed in Notes 2 and 7 had been consummated at the
beginning of fiscal year 1992, the weighted average number of shares outstanding
would have been 68,795,471, and earnings per share for 1992 would have been $.09
per share and $.37 per share, respectively.
Assuming that the conversion of the 7.5% Preferred Stock and the
exchange of the Class B 8% Preferred Stock and the Class B Common Stock
discussed in Note 8 had been consummated at the beginning of fiscal year 1993,
the weighted average number of shares outstanding for primary and fully diluted
earnings per share for 1993 would have been 84,408,807 and 85,847,608 and
earnings per share for 1993 would have been $.21 and $.20, respectively.
Supplemental Disclosure of Noncash Activities
1992 1993 1994
------- -------- --------
(IN THOUSANDS)
Exchange of THC 8% cumulative Preferred Stock
and issuance of 20,000,000 shares of THC Common Stock . . . . . . . . $ 35,847 $ - $ -
======== ======== ========
Exchange of 7.5% Convertible Subordinated and 14%
Senior Subordinated Debentures for THC Common
Stock and THC 7.5% Preferred Stock . . . . . . . . . . . . . . . . . . $ 30,475 $ - $ -
======== ======== ========
Dividend on Class B 8% Preferred Stock paid in THC Common
Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 2,508 $ -
======== ======== ========
Exchange of 8% Class B Preferred Stock and 7.5%
Convertible Preferred Stock for HDI Common Stock . . . . . . . . . . . $ - $ 32,674 $ -
======== ======== ========
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . . $ - $ 2,541 $ -
======== ======== ========
Other equity issuances and exchanges . . . . . . . . . . . . . . . . . $ - $ 4,990 $ 1,823
======== ======== ========
Acquisition of businesses:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . $ - $ 38,578 $ -
Fair value of liabilities assumed . . . . . . . . . . . . . . . . . . - (26,180) -
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . - (12,298) -
--------- -------- --------
Net cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 100 $ -
======== ======== ========
34
35
2. TRANSACTIONS WITH NAR GROUP LIMITED
In October 1991, the Company's shareholders approved several
transactions among the Company, THC and NAR Group Limited ("NAR") pursuant to
which NAR acquired 13,333,334 shares of Class B Common Stock of the Company
and 40,000 shares of 8% Cumulative Preferred Stock of THC (the "Hanover
Preferred Stock"), for an aggregate purchase price of $40 million. The
purchase price was paid by the surrender by NAR of $15.1 million principal
amount of the Company's 7.5% Convertible Subordinated Debentures due March 1,
2007 (valued under the Purchase Agreement at $7.5 million) plus $31.3 million
in cash. NAR also received warrants to purchase 1,210,901 shares of the
Company's Common Stock at exercise prices ranging from $4.00 to $5.25 per share
and expiring in five years. The exercise prices were subsequently adjusted to
prices ranging from $2.19 to $2.42 per share in accordance with the
anti-dilution provisions of the warrant agreements. A working capital line of
credit of approximately $30 million had previously been made available to the
Company in July 1991 by a subsidiary of NAR and was repaid in May, 1993.
In July 1992, the Company and NAR entered into a Definitive Agreement,
the terms of which were subsequently approved by the Company's shareholders on
September 23, 1992, at which time the following transactions were consummated:
- NAR exchanged its 40,000 shares of the Hanover Preferred Stock and
13,333,334 shares of the Class B Common Stock for 20 million shares of
Common Stock of the Company.
- NAR purchased 12,270,503 shares of the Company's Class B Common Stock
and 40,000 shares of a newly-created Class B 8% Cumulative Preferred
Stock (the "Class B Preferred Stock"), for an aggregate purchase price
of $28.4 million. Pursuant to the terms of the Preferred Stock, the
Company had the right to require the exchange of the Hanover Preferred
Stock and the Class B Common Stock into 18,937,169 shares of Common
Stock at any time after the date on which the per-share closing price
had been greater than $6.00 for 20 consecutive trading days.
- The Company conducted a rights offering (the "Rights Offering") in
which the Company's shareholders (other than NAR) subscribed to
7,636,905 shares of Common Stock at $1.50 per share for an aggregate
of $11.5 million. NAR purchased the remaining 6,759,893 shares not
subscribed to for $1.50 per share for an aggregate amount of
approximately $10 million. NAR received a standby commitment fee of
$177,000 and an underwriting fee of $405,000 representing 4% of the
offering price of all shares it purchased that were not purchased by
other shareholders in the Rights Offering.
On January 1, 1994, the Company exercised its right to require the
exchange of the 40,000 shares of Class B Preferred Stock and the 12,270,503
shares of Class B Common Stock for 18,937,169 shares of Common Stock.
3. ACQUISITIONS AND INVESTMENTS
ACQUISITIONS - The Company made the following acquisitions in 1993:
Gump's - In July 1993, the Company acquired substantially all of the
mail order and retail assets of Gump's, Inc. ("Gump's"), an upscale catalog
marketer of exclusive gifts and the legendary San Francisco retailer. The
consideration given for the assets acquired was $13.2 million and consisted of
$6.9 million in cash and 1,327,330 shares of Common Stock valued at $4.78 per
share or $6.3 million. The $6.9 million of cash used for the purchase of the
assets was comprised of (i) proceeds of the sale of Gump's accounts receivable
aggregating $2.8 million; (ii) $2.6 million of Gump's cash acquired by the
Company as part of the assets acquired; and (iii) $1.5 million of additional
credit under the Company's revolving credit facility, as amended.
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The Company Store - In August 1993, the Company acquired certain
assets of Company Store Holdings, Inc. and subsidiaries ("The Company Store"),
a direct marketer of down comforters, other down products and home furnishings.
The consideration given for the assets acquired was $7 million and consisted of
(i) 516,824 shares of the Company's Common Stock, valued at $4.64 per share or
$2.4 million, and (ii) two promissory notes in the aggregate principal amount
of $1.1 million issued by a subsidiary of the Company, with interest thereon at
six percent (6%) per annum due on October 31, 1994 and $3.5 million principal
amount of secured notes issued by certain subsidiaries of the Company with
interest thereon at six percent (6%) per annum, with principal and interest
payments payable monthly on a fifteen-year amortization, with the remaining
balance due and payable on August 31, 1998.
Tweeds - In September 1993, the Company acquired all of the
outstanding shares of Tweeds, Inc., a well-known, European- inspired women's
fashion catalog. The purchase price was $8.8 million and consisted of: (i) $.1
million in cash; (ii) 771,774 shares of the Company's Common Stock, valued at
$4.60 per share or $3.6 million; and (iii) the assumption of $5.1 million of
liabilities.
Accounting for Acquisitions - The acquisitions of Gump's, The Company
Store and Tweeds have been accounted for using the purchase method of
accounting with goodwill of approximately $11.4 million recorded, based upon
the fair values of the net assets acquired and liabilities assumed. In
addition, the Company recorded $2.5 million representing the fair value of
acquired mailing lists. In accordance with the purchase method of accounting,
the Company updated its estimates of the fair value of the net assets acquired
and increased goodwill by $1.2 million in 1994. The operating results of the
acquired companies are included in consolidated net income from their
respective dates of acquisition.
The following represents the unaudited pro forma results of operations
for the years ended December 26, 1992 and January 1, 1994, as if these three
acquisitions had occurred at the beginning of fiscal year 1992.
(In thousands, except per share amounts)
(UNAUDITED)
1992 1993
-------- --------
Revenues $733,454 $723,749
======== ========
Income (loss) before extraordinary
items and cumulative effect of accounting
change for income taxes $ (3,720) $ 10,160
======== ========
Income applicable to
common shareholders $ 12,284 $ 6,067
======== ========
Per Share:
Income (loss) per share before extraordinary
item and cumulative effect of accounting
change for income taxes $ (.17) $ .08
Extraordinary items .23 -
Cumulative effect of accounting change
for income taxes .24 -
-------- --------
Net income $ .30 $ .08
======== ========
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The pro forma information does not purport to be indicative of the
results that actually would have been obtained if the operations were combined
during the periods presented, and is not intended to be a projection of future
results or trends.
INVESTMENTS AND ADVANCES - Investments and advances in the
accompanying Consolidated Balance Sheet include the following:
The Safety Zone - In September 1993, the Company acquired 20% of the
outstanding common stock of Aegis Safety Holdings, Inc. ("Aegis"), a direct
marketer of safety and anti-hazard products through The Safety Zone catalog.
The consideration for the investment was the provision by the Company of
certain catalog fulfillment and financial services to Aegis at the Company's
cost until August 1998, subject to certain early termination provisions. The
Company also agreed to extend a secured working capital line of up to $1.0
million to Aegis. In September 1994, the working capital line was
restructured due to the violation by Aegis of certain debt covenants. The
covenants were modified through December 31, 1994 and the Company increased the
amount of allowable unsecured advances. The investment in Aegis was accounted
for using the equity method of accounting and the Company recorded an equity
loss of $.1 million in 1994. The Company has outstanding advances of $.7
million to Aegis as of December 31, 1994. In February 1995, the Company
acquired all of the outstanding common stock of Aegis.
Blue Ridge Associates - In January 1994, the Company purchased for
$1.1 million a 50% interest in Blue Ridge Associates ("Blue Ridge"), a
partnership which owns the apparel distribution center in Roanoke, Virginia.
This investment is accounted for by the equity method of accounting. The
Company made annual rent payments to the partnership totaling $.7 million in
1994 as part of a 15 year lease through 2008. The Company has recorded $.1
million in income for its portion of the partnership income in 1994. At
December 31, 1994, the Company's investment in Blue Ridge was $1.1 million.
Boston Publishing Company - In February 1994, the Company entered into
an agreement with Boston Publishing Company, Inc. ("BPC") whereby the Company
acquired a 20% equity interest and agreed to provide certain catalog related
services to BPC. The Company also provided BPC with a secured three-year
revolving credit facility of up to $3 million, a $.75 million short-term
loan, and a $.5 million five-year convertible note.
On August 3, 1994, BPC filed for protection under Chapter 11 of the
United States bankruptcy laws. As of December 31, 1994, the Company had
advanced $2.3 million to BPC, all of which was loaned prior to the filing of
the bankruptcy petition. Of the $2.3 million, $1.2 million was loaned under
the revolving credit facility, $.6 million was loaned under the short-term loan
and $.5 million was loaned under the five-year convertible note. Subsequent to
the Chapter 11 filing, the Company loaned an additional $.8 million under a
$1.0 million court-approved debtor-in-possession financing (the "DIP
Financing").
As of December 31, 1994, BPC had repaid the outstanding DIP Financing
balance. The assets of BPC have been pledged to secure $1.2 million of the
pre-petition advances and the Company has written off the unsecured portion.
The Company believes that the assets of BPC are sufficient to secure repayment
of the Company's secured loans to BPC. The investment in BPC is accounted for
using the equity method of accounting. The Company has outstanding advances to
BPC of $1.2 million as of December 31, 1994.
Regal Communications, Inc. - During 1994, the Company invested
approximately $2.7 million in convertible debt securities of Regal
Communications, Inc. ("Regal"). It was the Company's intention to hold these
debt securities as a long-term investment and in the future obtain certain
operating subsidiaries of Regal in exchange for these debt securities. As a
result, the Company carried the investment as a long-term investment during
1994. On September 23, 1994, Regal filed for protection under Chapter 11 of the
United States bankruptcy laws. The Company, in accordance with SFAS 115,
established a valuation allowance in the shareholders' equity section of the
Consolidated
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Balance Sheet to record temporary fluctuations in the value of the securities
based on market prices. At September 30, 1994, the valuation allowance was
$1.8 million.
In the fourth quarter of 1994, the Company ceased considering the
exchange of the securities for an equity position and instead began negotiations
as part of the Creditors Committee for an overall settlement. The Company
recorded a non-operating expense of $1.0 million in 1994 reflecting its estimate
of the probable outcome of the settlement. The estimates include valuations of
several subsidiaries of Regal and certain contract rights and claims, as well as
Regal's operating status at the assumed time of dissolution. The Company's net
investment in Regal was $1.7 million as of December 31, 1994.
4. SEARS LICENSING AGREEMENT
In January 1994, the Company entered into a licensing agreement (the
"Sears Agreement") with the direct marketing subsidiary of Sears Roebuck and
Co. ("Sears") to produce specialty catalogs for customers of the recently
discontinued Sears catalog. The specialty catalogs include: Show Place, based
on the Domestications catalog, Great Kitchens, based on the Colonial Garden
Kitchens catalog, Beautiful Style, based on the Silhouettes catalog and Right
Touch, based on the Tapestry catalog. The Sears Agreement has an initial
three-year term and continues thereafter unless terminated by either party.
Profits and losses from the venture are shared between the parties on an equal
basis.
The Company also issued to Sears a performance warrant to purchase 3.5
million shares of Common Stock in 1999 if the licensed business with Sears has
revenues of at least $250 million and earnings before interest and taxes
("EBIT") of at least $30 million in 1998. Alternately, Sears will be entitled
to purchase 7 million shares of Common Stock in 1999 if the licensed business
with Sears has revenues of at least $500 million and EBIT of at least $60
million in 1998. If neither of these goals are achieved, the performance
warrant will expire unexercised in 1999. The Sears specialty catalogs
generated revenues of $71 million and EBIT of $2.9 million in 1994. The
Company will be required to value the performance warrant at such time as it is
deemed to have become measurable for accounting purposes because the required
events have become probable or have occurred (which may be prior to the date
the warrant is exercisable under the Sears Agreement) (the "Measurement Date").
The value would be the difference, if any, between the closing market price of
the Common Stock at the Measurement Date and the exercise price of the
performance warrant, multiplied by the applicable number of shares. The value
would be amortized from the Measurement Date through 1998 and would be subject
to change each reporting period based on the closing market price of the Common
Stock as of such reporting date. The warrant exercise price is $10.57 per
share. Through 1994, no charges have been required to be recorded in
connection with the warrants. The Company is obligated to meet various
operational performance standards and if the Company is unable to meet these
standards, Sears would be entitled to terminate the agreement. The Company
also has the right to terminate the agreement in certain circumstances,
including if Sears fails to comply with any material provision of the Sears
Agreement.
5. ACCOUNTS RECEIVABLE, NET
The Company currently maintains an agreement with an unrelated third
party which provides for the sale and servicing of accounts receivable
originating from the Company's revolving credit card. The Company remains
obligated to repurchase uncollectible accounts pursuant to the recourse
provisions of the agreement and is required to maintain a specified percentage
of all outstanding receivables sold under the program as a deposit with the
third party to secure its obligations under the agreement.
At January 1, 1994 and December 31, 1994, the uncollected balances
under this program were $47.0 million and $45.9 million, respectively, of which
$13.0 million and $11.5 million, respectively, represent deposits under the
agreement which are included in Accounts receivable. The total reserve balance
maintained for the repurchase of
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uncollectible accounts was $3.1 million and $2.3 million at January 1, 1994 and
December 31, 1994, respectively, of which $1.7 million and $1.2 million,
respectively, are included in Accrued liabilities and the remaining balance is
included in the allowance for doubtful accounts.
Receivables sold under this agreement are considered financial
instruments with off-balance sheet risk as defined in Statement of Financial
Accounting Standards No. 105. Because the Company's sales are primarily made
to individual customers located throughout the United States, the Company
believes there are no concentrations of credit risks.
6. ACCRUED LIABILITIES
Accrued liabilities consists of the following (in thousands):
JANUARY 1, DECEMBER 31,
1994 1994
---------- ------------
Reserve for future sales returns . . . . . . . . . . . . . . $ 4,911 $ 6,023
Compensation . . . . . . . . . . . . . . . . . . . . . . 3,642 3,923
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 888 1,330
Reserve for repurchase of accounts receivable
sold with recourse . . . . . . . . . . . . . . . . . . . . 1,735 1,180
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,143 7,759
------- -------
$21,319 $20,215
======= =======
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
JANUARY 1, DECEMBER 31,
1994 1994
---------- ------------
Credit Facility:
Revolving . . . . . . . . . . . . . . . . . . . . . . . . . $ 230 $ -
Term . . . . . . . . . . . . . . . . . . . . . . . . . . . - 10,000
Industrial Revenue Bonds with variable interest rates
averaging 3.7% in 1993 and 4.5% in 1994 due 2003 . . . . . 8,000 8,000
6% Notes Payable due 1994 . . . . . . . . . . . . . . . . . . 1,100 -
6% Mortgage Notes Payable due 1998 . . . . . . . . . . . . . 3,452 3,300
9.25% Senior Subordinated Notes due 1998 . . . . . . . . . . 20,000 14,000
7 1/2% Convertible Subordinated Debentures due 2007 . . . . . 751 751
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 40
------- -------
33,589 36,091
Less current portion . . . . . . . . . . . . . . . . . . . . 1,276 184
------- -------
Noncurrent portion . . . . . . . . . . . . . . . . . . . . . $32,313 $35,907
======= =======
Revolving Credit Facility - In May 1993, the Company consummated a
three-year, $40 million credit facility with a financial institution, replacing
the previous facility with a subsidiary of NAR that had been entered into in
1991. The facility provided for cash borrowings and letters of credit based on
eligible inventory. The interest rate on the funds borrowed under this
facility was the prime rate plus two percent per annum. Subsequent to May 5,
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1993, the Company amended this facility to include Gump's, The Company Store
and Tweeds as borrowers under the agreement and the limit was increased to
$52.5 million. The facility was guaranteed by the Company and was secured by
inventory and other assets of its principal operating subsidiaries.
In October 1994, the Company consummated a five-year $80 million
unsecured revolving credit facility with a syndicate of banks (the "Credit
Facility") led by NationsBank of North Carolina, N.A., replacing the Company's
$52.5 million credit facility. The Credit Facility provides for a $20 million
sub-facility to be utilized exclusively for acquisitions. The $20 million
sub-facility would be reduced by $5 million per year if it is not used for its
intended purpose. The Credit Facility also provides that $20 million of a $35
million sublimit for letters of credit is to be used as security for term
financing for certain capital expenditures (the "Term Financing Facility").
The rate of interest on the revolving portion of the Credit Facility is
calculated based on the Base Rate of NationsBank of North Carolina, N.A. or by
a LIBOR formula. The rate is also contingent on the length of the borrowing
which can range from 30 to 180 days. At December 31, 1994, the rate for a 90
day borrowing would have approximated 7%.
The Company is required to maintain certain ratios of earnings to fixed
charges and funded indebtedness to earnings as defined in the Credit Agreement
and has a limitation on the issuance of additional indebtedness. The Company
and the Lenders under the Credit Facility have amended the applicable
agreements to, among other things, ease the requirements in certain financial
covenants, increase the interest rate payable by the Company under certain
circumstances and require the Lenders initial consent for certain investments
and acquisitions.
In November 1994, the Company borrowed $10 million from the $20 million
Term Financing Facility. The rate of interest on the Term Financing Facility
will be based on the equivalent rate of A-1 commercial paper existing at the
time of each borrowing. This rate will fluctuate as the borrowing is remarked
as it matures throughout the term of 15 years. At December 31, 1994, the face
rate ranged from 5.85% to 6.30%.
The Term Financing Facility requires annual sinking fund payments of $.5
million beginning October 1996 through October 1999 and increasing to $.8
million for each of the ten years thereafter, for each $10 million borrowed
under this facility.
The face amount of unexpired documentary letters of credit at January 1,
1994 and December 31, 1994 were $5.7 million and $7.2 million, respectively.
In addition, the Company had issued $28.5 million of standby letters of credit
at December 31, 1994 which included $3.3 million related to the Gump's retail
store, $8.6 million related to the Industrial Revenue Bonds due 2003 and $10.1
million related to the Term Financing Facility.
Industrial Revenue Bonds due 2003 - The Industrial Revenue Bonds are due
on December 1, 2003 and are secured by the related assets purchased from the
proceeds of the bonds and by an irrevocable letter of credit in the amount of
$8.6 million. The obligations are guaranteed by the Company.
6% Mortgage Notes Payable due 1998 - In connection with The Company Store
acquisition, subsidiaries of the Company executed and delivered two secured
notes in the aggregate amount of $3.5 million with interest at 6% per annum
with principal and interest payments payable monthly on a fifteen-year
amortization with the remaining balance due in August 1998. The mortgage notes
payable are non-recourse notes and are not guaranteed by the Company. The
mortgage notes payable are secured by the manufacturing and office facilities
of The Company Store.
9.25% Senior Subordinated Notes due 1998 - In August 1993, the Company
issued $20 million of 9.25% Senior Subordinated Notes due 1998 ("9.25% Notes")
in a private placement with an insurance company. The Company utilized the
funds to retire approximately $14 million of other subordinated debt. The
Company redeemed $6 million of the 9.25% Notes without penalty in April 1994.
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The 9.25% Notes mature in August 1998, and require quarterly interest
payments. The 9.25% Notes require the Company to maintain certain financial
covenants on a quarterly basis. As of December 31, 1994, the Company was not
in compliance with one of the covenants under the 9.25% Notes for which it had
received a waiver. The Company and the holder of the Notes have amended the
covenants in the Indenture to reduce certain financial standards contained in
the covenants. The covenants will revert in the first quarter of 1996 to those
in effect prior to the amendment.
7 1/2% Convertible Subordinated Debentures due 2007 - In September 1992,
the Company consummated an exchange offer with holders of these debentures,
pursuant to which the Company issued 40,500 shares of its Common Stock and
13,500 shares of its 7.5% Preferred Stock (hereinafter defined) in exchange for
$540,000 of the debentures that were tendered. This resulted in an
extraordinary gain of $.3 million in 1992.
In November 1992, the Company, with the consent of a majority of holders
of these debentures, amended the indenture to allow, for the 30 day period
ending on December 4, 1992, the holders of the debentures to be able to convert
their debentures into Common Stock at a conversion price of $3.33 per share
instead of $10.31 per share. As a result, the Company converted approximately
$11.4 million of these debentures into 3,408,340 shares of Common Stock and
recorded an extraordinary gain of approximately $1.6 million in 1992 based on
the fair market value of the shares issued.
General - At December 31, 1994, the aggregate annual principal and
sinking fund payments required on all long-term debt were as follows (in
thousands): 1995 - $184; 1996 - $688; 1997 - $681; 1998 - $17,287; 1999 - $500
and thereafter - $16,751.
8. CAPITAL STOCK
On September 8, 1993, HDI was formed through a series of mergers
involving H&H and THC (see Note 1).
Registration - In July 1993, the Company filed a Registration Statement on
Form S-3 with the Securities and Exchange Commission registering 3,750,000
shares of the Company's Common Stock for the purpose of the Gump's acquisition
and future business combination or reserved transactions. As of December 31,
1994, 3,299,187 shares have been issued or reserved for this purpose.
Exchanges of Stock - In December 1993, the Company converted all of its
outstanding 7.5% Preferred Stock into 2,278,128 shares of Common Stock. The
holders of the 7.5% Preferred Stock were paid all outstanding dividends in
cash. Each share was convertible into four shares of Common Stock at the time
on which the per-share closing price of the Common Stock on the American Stock
Exchange exceeded $6.00 for 20 trading days in a consecutive 30 day trading
period, which occurred on November 11, 1993.
On January 1, 1994, 12,270,503 shares of Class B Common Stock and 40,000
shares of Class B Preferred Stock were exchanged for 18,937,169 shares of
Common Stock. Dividends on the Class B Preferred Stock aggregated $3.3 million
in fiscal 1993 and were paid through the issuance of 684,890 shares of Common
Stock and $693,000 in cash.
Public Offering - In April 1994, the Company completed a public offering
(the "Public Offering") of 8,045,296 shares of Common Stock for proceeds of
approximately $47.5 million, net of expenses. Also, in connection with the
Public Offering, Sun Life Insurance Company of America ("Sun Life") exercised
1,960,245 warrants and purchased 1,309,207 shares in a net-issue cashless
exchange, of which 654,604 shares were sold in the Public Offering with the
Company not receiving any of proceeds related to these shares.
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6% Series A Convertible Preferred Stock - On December 10, 1993, in
connection with the Company's acquisition of Tweeds, the Company entered into
an exchange agreement with a major vendor of Tweeds. Under the exchange
agreement, the Company issued 234,900 shares of its 6% Series A Convertible
Preferred Stock (6% Preferred Stock) for an installment note, dated March 29,
1993, as amended, in the amount of approximately $2.4 million previously issued
by Tweeds. Dividends began accruing on September 30, 1993.
The 6% Preferred Stock is convertible into Common Stock of the Company
over a three-year period in equal amounts on September 30, 1994, 1995 and 1996.
The conversion price is an amount equal to the average of the per share closing
prices for the five trading days preceding the conversion dates. On September
30, 1994, the Company converted one-third of the 234,900 outstanding shares of
6% Preferred Stock into 189,818 shares of Common Stock and paid dividends of
$.1 million.
The 6% Preferred Stock has a stated value of $10 per share and has a
liquidation preference in an amount equal to the stated value of each share of
the 6% Preferred Stock plus accrued dividends or $1,589,000 at December 31,
1994. The Company has the right to redeem the 6% Preferred Stock at its stated
value plus accrued dividends, payable in cash.
Warrants - The warrants outstanding at December 31, 1994 are as
follows:
WARRANTS EXERCISE EXPIRATION
ISSUED PRICE DATE
--------- -------- ----------
1,541,301 $ 2.42 5/08/96
3,157,884 2.91 7/08/96
334,550 2.19 7/10/96
---------
5,033,735
=========
All of the above issued warrants are held by NAR and affiliates.
As previously discussed, the Company issued to Sears a performance
warrant to purchase up to 7 million shares of Common Stock in 1999. This
performance warrant is not reflected in the above table.
General - At December 31, 1994, there were 92,737,840 shares of
Common Stock and 156,600 shares of 6% Series A Preferred Stock outstanding.
Additionally, an aggregate of 16,211,644 shares of Common Stock were reserved
for issuance pursuant to (i) the exercise of outstanding options (621,050), (ii)
the exercise of outstanding warrants (12,033,735), (iii) the Executive Equity
Incentive Plan (1,646,170), (iv) the Restricted Stock Award Plan (292,152), and
(v) the All Employee Equity Investment Plan (1,618,537).
Dividend Restrictions - The Company is limited from paying dividends
at any time on its Common Stock beyond 25% of the consolidated net income of
the then preceding four quarters or from acquiring in excess of one million
shares of its Common Stock under the most restrictive debt covenants contained
in agreements to which the Company is a party.
9. EMPLOYEE BENEFIT PLANS
Stock Option Plan - Pursuant to the Company's Stock Option Plan (the
"Plan"), an aggregate of 2,830,519 shares were approved for issuance to
employees and consultants of the Company. The option price and the periods
over which an option is exercisable are specified by the Compensation Committee
of the Board of Directors.
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Options expire five years from the date of grant and generally vest
over three to four years. Payment for shares purchased upon the exercise of an
option shall be in cash or stock of the Company. If paid in cash, a partial
payment may be made with the remainder in installments evidenced by promissory
notes at the discretion of the Compensation Committee.
Changes in options outstanding and options available for grant,
expressed in number of shares, are as follows:
1992 1993 1994
-------- --------- ---------
Options outstanding,
beginning of period 945,965 603,765 365,250
Granted - - 162,000
Exercised - - (1,000)
Expired (164,200) (214,165) (20,700)
Cancelled (178,000) (24,350) (9,500)
--------- --------- ---------
Options outstanding,
end of period 603,765 365,250 496,050
========= ========= =========
Options exercisable,
end of period 502,675 365,250 334,050
========= ========= =========
Available for grant of
options, end of period 1,345,318 1,583,833 1,452,033
========= ========= =========
The option prices range from $2.75 per share to $5.00 per share, with
amounts as follows: $2.75 - 200,000 shares, $3.50 - 162,000 shares and $5.00 -
134,050 shares.
Prior to 1992, three directors were granted non-qualified options
outside of the Plan to purchase a total of 50,000 shares. Of these options
45,000 shares expired in 1994 and the remaining 5,000 shares expire in 1995 at
an option price of $5.00 per share. The table above does not include these
option grants.
In September 1992, six directors were granted options to purchase
20,000 shares each, at the market price, which at that time was $1.75 per
share. These option grants were approved at the 1993 annual meeting of
shareholders and the options expire in 1997. In June 1994, one director was
granted options to purchase 55,000 shares at an exercise price of $6.125 per
share. These options expire in 2000. The table above does not include these
option grants.
Hanover Direct, Inc. Savings Plan - The 401(K) Savings Plan (the
"401(k) Plan") allows eligible employees to contribute a percentage of their
annual compensation to the 401 (k) Plan. The Company makes matching
contributions of one-third of the employees' pre-tax contributions. Participants
may invest contributions in various investment funds, in addition to a
guaranteed investment fund or in the Company's Common Stock.
The Company's contributions charged to expense for 1992, 1993 and 1994
were $265,000, $431,000 and $608,000, respectively.
Supplemental Retirement Plan - The Supplemental Retirement Plan (the
"Retirement Plan") allows eligible employees to make contributions to a trust
where the contributions are invested by the trust for each participant in a tax
free money market fund. The Company makes matching contributions. Company
contributions charged to expense in 1992, 1993 and 1994 amounted to $179,000,
$130,000 and $192,000, respectively.
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The Retirement Plan permits eligible employees to contribute up to 4%
of their salary. The Company matches all participant contributions, up to the 4%
threshold. The Retirement Plan is not tax-qualified under the applicable
provisions of the Internal Revenue Code of 1986, as amended.
Incentive Compensation Plan - Bonus arrangements with certain
executives and key employees generally provide for additional compensation based
upon the attainment of certain profit levels, as well as other performance
measures. These bonuses approximated an aggregate of $1.6 million, $.4 million
and $1.1 million in 1992, 1993 and 1994, respectively. Under the bonus plan, 25%
of the bonus is paid in restricted stock that vests over a three year period. In
fiscal 1994, 11,467 shares were issued, net of forfeitures, in connection with
the Incentive Compensation Plan.
Executive Equity Incentive Plan - In December 1992, the Board of
Directors adopted the 1993 Executive Equity Incentive Plan (the "Incentive
Plan"). The Incentive Plan was approved by shareholders at the 1993 Annual
Meeting. Pursuant to the Incentive Plan, options to purchase shares of the
Company's Common Stock will be granted from time to time by the Compensation
Committee of the Board of Directors to selected executives of the Company or its
affiliates. For each such option granted, the selected executive will receive
the right to purchase on a specified date (the "Tandem Investment Date") a
number of shares of the Company's Common Stock ("Tandem Shares") equal to
one-half the maximum number of shares of the Company's Common Stock covered by
such option. An aggregate of 2,400,000 shares of the Company's Common Stock have
been reserved for issuance under the Incentive Plan. Company financing is
available under the Incentive Plan to pay for the purchase price of the Tandem
Shares.
The Company granted 1,327,660 options in 1993 and 180,000 options in
1994, of which 226,666 and 207,164 were cancelled in 1993 and 1994,
respectively. The purchase prices per share of the Company's Common Stock upon
exercise of stock options range from $2.50 to $4.94 (Option Price), with amounts
as follows: $2.50 - 795,830 shares, $3.00 - 20,000 shares, $3.89 - 20,000
shares, $4.25 - 100,000 shares, $4.50 - 58,000 shares and $4.94 - 80,000 shares.
Options granted under the Incentive Plan become exercisable three years after
the dates of grant and expire six years from the dates of grant. The purchase
price shall be paid in full at the time of purchase in cash or shares of the
Company's Common Stock valued at their fair market value or in a combination
thereof. The difference between the Option Price and the fair market value of
the Common Stock on the Tandem Investment Dates aggregated $601,000 and is being
amortized over the three-year period that the options become exercisable.
Forfeitures have reduced this amount by approximately $103,000 through December
31, 1994. The amount of amortization charged to expense was $170,000 and
$137,000 for 1993 and 1994, respectively, net of forfeitures.
Employees purchased 663,830 and 90,000 shares in 1993 and 1994,
respectively, at prices ranging from $3.125 to $4.94. Total consideration given
for the shares purchased was $2,133,100 in 1993 and $410,000 in 1994. The
employees paid $710,000 in 1993 and $312,000 in 1994 and the Company accepted
notes which bear interest at rates ranging from 3.96% to 7.05% in the principal
amounts of $1,707,000 in 1993 and $328,000 in 1994. Employees repaid $283,000
and $230,000 during 1993 and 1994, respectively.
Restricted Stock Award Plan - In December 1992, the Board of
Directors adopted the 1993 Restricted Stock Award Plan (the "Restricted Stock
Plan"). Each full-time or permanent part-time employee of the Company or its
affiliates selected by the Compensation Committee who holds a key position that
the Compensation Committee shall have designated for eligibility in the
Restricted Stock Plan, has attained the age of 18, has performed at least 12
months of continuous service with the Company or an affiliate of the Company,
and is not covered by a collective bargaining agreement, may participate in the
Restricted Stock Plan. Pursuant to the Restricted Stock Plan, the Compensation
Committee from time to time may award shares of the Company's Common Stock
("Award Shares") to such participants. The Award Shares received by such
participants are not transferable (other than by will or the laws of descent and
distribution) until the vesting date or when such participant attains the age of
65, dies, or
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becomes permanently disabled, and are subject to forfeiture in the event the
participant ceases to be an employee prior to that date. An aggregate of 500,000
shares of the Company's Common Stock have been reserved for issuance under the
Restricted Stock Plan. During 1993, 224,300 shares were awarded to participants
aggregating $785,000. Such amount is being amortized over a three-year vesting
period. The amount of amortization charged to expense was $188,000 in 1993 and
$292,000 in 1994, net of forfeitures.
All Employee Equity Investment Plan - In December 1992, the Board of
Directors adopted the 1993 All Employee Equity Investment Plan (the "Investment
Plan"). Such plan was approved by the shareholders at the 1993 Annual Meeting.
Each full-time or permanent part-time employee of the Company or its affiliates
who has attained the age of 18, has met certain standards of continuous service
with the Company or an affiliate of the Company and is not covered by a
collective bargaining agreement may participate in the Investment Plan.
An eligible employee shall be granted a right to purchase a specific
number of shares of the Company's Common Stock by the Compensation Committee,
based on the eligible employee's salary level. The purchase price of the
Company's Common Stock in the Investment Plan shall be the average market value
of a share of the Company's Common Stock during the 20 days prior to the first
day of the subscription period, less a 40% discount. The shares received by such
participants are not transferable (other than by will or the laws of descent and
distribution) until the vesting date or when such participant attains the age of
65, dies or becomes permanently disabled, and are subject to forfeiture in the
event the participant ceases to be an employee prior to that date. The employees
who choose to participate in the Investment Plan become vested in their shares
equally over a three-year period beginning with the first anniversary of the day
subsequent to the final day of the subscription period or when they reach the
age of 65, die or become permanently disabled. An aggregate of 2,000,000 shares
of the Company's Common Stock have been reserved for issuance under the
Investment Plan.
Employees purchased 211,883 shares at a price of $2.32 in 1993, 85,865
shares at $3.73 in February 1994 and 117,146 shares at $3.34 in August 1994. In
1994, 33,431 shares were forfeited and 64,706 shares became vested related to
the 1993 purchases. The difference between the market price and the discounted
price which aggregated $422,000 in 1993, $292,000 in February 1994 and $92,000
in August 1994, net of forfeitures is being amortized over the three year
period the participants become vested in their shares. The amount of
amortization charged to expense was $46,000 in 1993 and $226,000 in 1994.
10. INCOME TAXES
At December 31, 1994, the Company had net operating loss carryfowards
("NOLs") totalling $136 million, which expire as follows: In the year 2001 - $12
million, 2003 - $14 million, 2004 - $14 million, 2005 - $21 million, 2006 - $47
million and 2007 - $28 million. The Company also has $1.7 million of general
business tax credit carryforwards that expire in 1998 through 2003. The
Company's available NOLs for tax purposes consists of $86 million of NOLs
subject to a $4 million annual limitation under Section 382 of the Internal
Revenue Code of 1986 and $50 million of NOLs not subject to a limitation.
The unused portion of the $4 million annual limitation for any year may
be carried forward to succeeding years to increase the annual limitation for
those succeeding years. In addition, the Company's entire $86 million of NOLs
subject to the limitation may be used to offset future taxable income generated
by July 1996 from built-in gains (generally, taxable income from the sale of
appreciated assets held by the Company at the date of its change in ownership in
July 1991) without reference to the limitation.
SFAS 109 requires that the future tax benefit of such NOLs be recorded
as an asset to the extent that management assesses the utilization of such NOLs
to be "more likely than not". In 1992 management determined, based upon the
conversion of interest-bearing debentures to equity, the issuance of additional
Common Stock, the disposal of unprofitable discontinued restaurant operations,
the Company's history of prior operating earnings in the
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direct marketing business and its expectations for the future, that the
operating income of the Company will, more likely than not, be sufficient to
utilize $30 million of deductible temporary differences and NOLs prior to their
expiration. In making such determination, the Company adjusted 1992 income by
eliminating interest expense related to retired debt and assumed that such
adjusted 1992 income level could be obtained in each of the next three years.
The Company maintained a consistent adjusted income level in 1993. In 1994, the
Company continued the practice of estimating the NOLs that it could utilize over
the subsequent three years and estimated that it would be able to utilize up to
$43 million of NOLs over the next three years based on the pre-tax income of the
most recent two years.
As a result of the determination noted above, for the year ended
December 26, 1992, the Company recognized a deferred tax asset of $10 million
(net of a valuation allowance of $53 million), reflecting the cumulative effect
of the accounting change for the benefit expected to be realized from the
utilization of NOLs and deductible temporary differences. For the year ended
January 1, 1994, the Company recognized an additional deferred tax asset of $.6
million, reflecting the effect of the increase in the Federal corporate income
tax rate (from 34% to 35%). For the year ended December 31, 1994, the Company
reduced its valuation allowance by $4.4 million, reflecting the increase in
management's assessment of the future utilization of the Company's NOLs and
deductible temporary differences.
Realization of the future tax benefits is dependent on the Company's
ability to generate taxable income within the carryforward period and the
periods in which net temporary differences reverse. Future levels of operating
income and taxable income are dependent upon general economic conditions,
competitive pressures on sales and margins, postal and other delivery rates, and
other factors beyond the Company's control. Accordingly, no assurance can be
given that sufficient taxable income will be generated for utilization of NOLs
and reversals of temporary differences.
The Company's Federal income tax provision was zero in 1992, $5.9
million in 1993 and $4.2 million in 1994. The 1993 and 1994 provisions were
offset by utilization of the NOLs. In addition, the Company recognized the $4.4
million benefit in 1994 discussed above. The Company's provision for state
income taxes consists of $.2 million in 1992, $.5 million in 1993 and $.9
million in 1994.
A reconciliation of the Company's net income for financial statement
purposes to taxable income (loss) for the years ended December 26, 1992, January
1, 1994 and December 31, 1994 is as follows (in thousands):
1992 1993 1994
-------- -------- --------
Net income . . . . . . . . . . . . . . . . . . $ 20,249 $ 17,337 $ 14,838
Income tax provision (benefit) . . . . . . . 219 (130) (3,509)
-------- -------- --------
Income before income taxes . . . . . . . . . . 20,468 17,207 11,329
-------- -------- --------
Differences between income before taxes
for financial statement purposes and
taxable income:
Cumulative effect of accounting
change for income taxes . . . . . . . . . . (10,000) - -
State income taxes . . . . . . . . . . . . . (219) (501) (860)
Utilization of carryovers . . . . . . . . . . - (2,543) (12,652)
Permanent differences. . . . . . . . . . . . 3,687 28 717
Net change in temporary
differences . . . . . . . . . . . . . . . . (41,678) (14,191) 1,466
-------- -------- --------
(48,210) (17,207) 11,329
-------- -------- --------
Taxable income (loss) . . . . . . . . . . . . $(27,742) $ - $ -
======== ======== ========
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The components of the net deferred tax asset at December 31, 1994 are
as follows (in millions):
Non-
Current current Total
------- ------- ------
Federal tax NOL and business tax credit
carryforwards . . . . . . . . . . . . . . . . . . . . $ - $ 49.4 $ 49.4
Allowance for doubtful accounts . . . . . . . . . . . . .9 - .9
Prepaid catalog costs . . . . . . . . . . . . . . . . . (0.9) - (0.9)
Excess of net assets of acquired business . . . . . . . - (2.1) (2.1)
Accrued liabilities . . . . . . . . . . . . . . . . . . 3.9 - 3.9
Tax basis in net assets of discontinued operations
in excess of financial statement amount . . . . . . . .9 - .9
Other . . . . . . . . . . . . . . . . . . . . . . . - 1.5 1.5
----- ------ ------
Deferred Tax Asset . . . . . . . . . . . . . . . . . . 4.8 48.8 53.6
Valuation allowance . . . . . . . . . . . . . . . . . (1.6) (37.0) (38.6)
----- ------ ------
Deferred Tax Asset, net . . . . . . . . . . . . . . . $ 3.2 $ 11.8 $ 15.0
===== ====== ======
The Company has established a valuation allowance for a portion of the
deferred tax asset, due to the limitation on the utilization of the NOLs and its
estimate of the future utilization of the NOL's.
The Company's tax returns for years subsequent to 1984 have not been
examined by the Internal Revenue Service ("IRS"). Availability of the NOLs might
be challenged by the IRS upon examination of such returns which could affect the
availability of NOLs. The Company believes, however, that IRS challenges that
would limit the utilization of NOLs will not have a material adverse effect on
the Company's financial position.
Total tax expense for each of the three fiscal years presented differ
from the amount computed by applying the Federal statutory tax rate due to the
following:
1992 1993 1994
PERCENT PERCENT PERCENT
OF PRE-TAX OF PRE-TAX OF PRE-TAX
INCOME INCOME INCOME
---------- ---------- ----------
Tax at Federal statutory rate . . . . . . . . . . . . . 34.0% 35.0% 35.0%
Cumulative effect of accounting change for
income taxes . . . . . . . . . . . . . . . . . . . . . (16.6) - -
State and local taxes . . . . . . . . . . . . . . . . . 1.1 1.9 4.9
Effect of Federal rate change on deferred tax asset . . . - (3.7) -
Stock issuance expenses . . . . . . . . . . . . . . . . . 5.5 - -
Reversal of valuation allowance . . . . . . . . . . . . - - (38.5)
Net reversal of temporary differences . . . . . . . . . . (69.2) (28.9) 4.5
Utilization of contribution and NOL carryover . . . . . . - (5.4) (39.1)
Tax NOLs for which no benefit could be recognized 46.1 - -
Other . . . . . . . . . . . . . . . . . . . . . . . . 0.2 0.3 2.2
---- ------ ------
1.1% (0.8%) (31.0%)
==== ====== ======
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11. LEASES
Certain leases to which the Company is a party provide for payment of real
estate taxes and other expenses. Most leases are operating leases and include
various renewal options with specified minimum rentals. Rental expense for
operating leases related to continuing operations were as follows (in
thousands):
1992 1993 1994
-------- -------- --------
Minimum rentals $ 8,910 $ 9,458 $ 13,572
======== ======== ========
Future minimum lease payments under noncancellable operating and capital
leases relating to continuing operations, that have initial or remaining terms
in excess of one year, together with the present value of the net minimum lease
payments as of December 31, 1994, are as follows (in thousands):
OPERATING CAPITAL
YEAR ENDING LEASES LEASES
----------- --------- -------
1995 . . . . . . . . . . . . . . . . . . . . . . . $10,227 $ 732
1996 . . . . . . . . . . . . . . . . . . . . . . . 7,283 698
1997 . . . . . . . . . . . . . . . . . . . . . . . 5,885 536
1998 . . . . . . . . . . . . . . . . . . . . . . . 5,179 24
1999 . . . . . . . . . . . . . . . . . . . . . . . 4,774 -
Thereafter . . . . . . . . . . . . . . . . . . . . 36,592 -
------- ------
Total minimum lease payments . . . . . . . . . . . $69,940 1,990
=======
Less amount representing interest (a) . . . . . . 166
------
Present value of minimum lease payments (b) . . . $1,824
======
(a) Amount necessary to reduce net minimum lease payments to present value
calculated at the Company's incremental borrowing rate at the inception of the
leases.
(b) Reflected in the balance sheet as current and noncurrent capital lease
obligations of $748,000 and $1,823,000 at January 1, 1994, and $628,000 and
$1,196,000 at December 31, 1994, respectively.
The future minimum lease payments under noncancellable leases that
remain from the discontinued restaurant operations as of December 31, 1994 are
as follows: 1995 - $1.7 million; 1996 - $1.5 million; 1997 - $1.5 million; 1998
- $1.4 million; 1999 - $1.4 million; and thereafter $13.4 million. The above
amounts exclude annual sublease income of $1.8 million from subleases which have
the same expiration as the underlying leases.
In connection with the Company's investment in Blue Ridge, a subsidiary
of the Company is contingently liable with respect to the lease obligation
related to the apparel distribution center in Roanoke, Virginia.
12. RELATED PARTY TRANSACTIONS
In each of 1992, 1993 and 1994, approximately $85,000 was paid each
year for the rental of property pursuant to an operating lease to a partnership
in which the wife of Jack E. Rosenfeld is a partner.
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At December 31, 1994, Company officers and executives owed the Company
approximately $1.7 million of which approximately $1.6 million relates to
receivables under the Executive Equity Incentive Plan. These amounts due to the
Company bear interest at rates ranging from 3.96% to 7.05% and are due in 1999
and 2000. The remaining $.1 million is due on demand from two officers of the
Company and bears interest at 6%.
Since January 1993, pursuant to a consulting arrangement, a subsidiary
of NAR renders management consulting, business advisory and investment banking
services to the Company for an annual fee of $750,000.
At December 31, 1994, NAR owned 51% of the Company's outstanding Common
Stock.
In connection with the transactions discussed in Note 2, and as a
condition thereto, the Company entered into an employment agreement (the
"Employment Agreement") with Jack E. Rosenfeld, President, Chief Executive
Officer and a director of the Company. The Employment Agreement provides for (1)
a base salary of $500,000 per year; (2) a payment to a trust on behalf of Mr.
Rosenfeld of 916,667 shares of Common Stock all of which are vested and (3) the
grant of registration rights under the Securities Act of 1933 for shares of
Common Stock owned by Mr. Rosenfeld. NAR has entered into an agreement with Mr.
Rosenfeld pursuant to which he may purchase from NAR prior to October 25, 1996,
1,213,605 shares of Common Stock at $2.00 per share and an additional 1,213,605
shares of Common Stock at $1.50 per share plus 10% per year through the exercise
period.
13. COMMITMENTS AND CONTINGENCIES
The Company is obligated under various employment contracts with key
executives extending through 1996. The aggregate payments due under such
contracts is $2.1 million.
On or about September 2, 1994, a complaint was filed in the United
States District Court for the District of New Jersey by Veronica Zucker, an
individual who allegedly purchased shares of Common Stock of the Company in the
public offering completed on April 7, 1994, against the Company, all of its
directors, certain of its officers, Sun Life Insurance Company of America,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Alex. Brown & Sons,
Incorporated. The complaint, which purports to be filed on behalf of a class of
all persons who purchased the Common Stock of the Company in the Public
Offering or thereafter through and including August 14, 1994, seeks to recover
monetary damages the class has allegedly suffered as a result of certain
alleged false and material misleading statements contained in the Company's
public offering prospectus dated March 30, 1994. In lieu of an answer,
defendants have filed a motion to dismiss the complaint in its entirety for
failure to state a claim upon which relief can be granted. The Company and its
directors and executive officers believe they have meritorious defenses to the
Complaint and intend to defend the matter vigorously. The motion is scheduled
to be heard by the Court on April 10, 1995.
In May 1992 the United States Supreme Court reaffirmed an earlier
decision which allowed direct marketing companies to make sales into states
where they do not have a physical presence without collecting sales taxes with
respect to those sales. The Court, however, noted that Congress has the power to
change this law. Forty-six states plus the District of Columbia have sales or
use taxes or authorize local governmental units to impose sales or use taxes.
The Company sells merchandise in all fifty states plus the District of Columbia.
Various states are increasing their efforts by various means, including lobbying
Congress, to impose on direct marketers the burden of collecting sales and use
taxes on the sale of products shipped to state residents. The imposition of a
sales and use tax collection obligation on the Company in states to which it
ships products would result in additional administrative expense to the Company
and higher costs to its customers for the same merchandise currently being
purchased by them. This may have a negative effect on customer response rates
and revenue levels, thereby negatively affecting the Company's
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sales and profitability. Under the law as it presently exists, the Company
believes that it collects sales tax in all jurisdictions that it is required to
do so.
The Company is involved in other various routine lawsuits of a nature
which are deemed customary and incidental to its business. In the opinion of
management, the ultimate disposition of such actions will not have a material
adverse effect on the Company's financial position or results of operations.
In connection with certain discontinued restaurant transactions, the
Company remains contingently liable with respect to lease obligations for 10
restaurant properties, should the buyers fail to perform under the agreements.
The future minimum lease payments as of December 31, 1994 are as follows (in
thousands): 1995 - $445; 1996 - $366; 1997 - $278; 1998 - $192; 1999 - $192; and
thereafter $546.
14. SUBSEQUENT EVENTS
Leichtung, Inc. - In January 1995, the Company acquired
substantially all of the assets of Leichtung, Inc., a direct marketer of
wood-working and home improvement tools and related products, sold under the
Leichtung Workshops and Improvements names, for a purchase price of
approximately $12 million in cash and the assumption of certain liabilities. As
of December 31, 1994, the Company had made payments of $1.3 million in
connection with this acquisition which are included in Investments and advances.
The Safety Zone - In February 1995, the Company acquired the remaining
80% of the outstanding stock of Aegis through the issuance of 634,900 shares of
a newly-created Class B Convertible Preferred Stock ("Series B Stock") with a
stated value of $10 per share. Dividends on the Series B Stock will accrue at
the rate of 5% per annum during each of the first three years of this agreement
provided Aegis attains at least $1 million in earnings before interest and
taxes each year. Dividends are not cumulative during this period. After the end
of this three year period, dividends will accrue at a rate of 7% per annum in
years four and five. The Series B Stock is convertible at the Company's option
if the market value of the Company's Common Stock is greater than $6.66 for 20
trading days in any 30 consecutive day trading period. If after five years the
Series B Stock is not converted, it must then be converted into 952,359 shares
of the Company's Common Stock provided the market value of the stock is at
least $6.33 per share. If the market value of the Company's Common Stock does
not meet this minimum, then the conversion is subject to an antidilution
provision which would increase the number of shares to equal a market value of
$6,028,432.
The Company will account for these acquisitions using the purchase
method of accounting.
Tiger Direct - In February 1995, the Company entered into an
agreement, by which, upon closing of the transaction, it agreed to make an $8
million investment in Tiger Direct, Inc. ("Tiger") and to provide certain
strategic services to Tiger. The Company will be permitted to nominate four of
Tiger's seven directors. Tiger is a direct marketer of computer software,
peripherals and CD-ROM hardware and software. If the transaction is
consummated, the Company will issue either a convertible debenture or preferred
stock and warrants for its investment. The debenture will pay interest at a
rate of 10% per year for three years, payable in shares of Tiger common stock,
and is convertible into a new class of Tiger convertible preferred stock
(subject to Tiger shareholder approval) whose dividends are also payable at 10%
per year for three years, also payable in shares of Tiger common Stock. Tiger
will also issue warrants to the Company to purchase additional stock over a
three-year period at prices ranging from $1.20 to $1.50 per share. If the
debenture is converted, the Company will own approximately 21.6% of Tiger's
outstanding common stock. If the warrants are also exercised and the interest
and dividend shares are fully issued, the Company will increase its ownership
percentage to approximately 42% of Tigers's outstanding common stock. The
Company also has the right to acquire additional shares of common stock in the
open market, up to a total of 50.1%. The Company is subject to a five year
standstill. The Company is providing a temporary short-term secured
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working capital line of credit to Tiger, up to a maximum of $3 million. All
outstanding short-term indebtedness related to this facility will be repaid when
the transaction closes or one year from the date the purchase agreement is
terminated. The Company will account for this investment using the equity method
of accounting upon conversion of the debt to equity.
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15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(in thousands, except per share amounts)
1993
Revenues $121,565 $144,319 $147,890 $228,737
Gross profit 43,585 52,578 51,233 86,728
Income from operations 2,937 3,963 3,056 9,120
NET INCOME 2,477 4,356 2,492 8,012
Preferred stock dividends (1,000) (1,005) (1,006) (1,082)
-------- -------- -------- --------
Net income applicable to
Common Shareholders $ 1,477 $ 3,351 $ 1,486 $ 6,930
======== ======== ======== ========
Net income per share $ .02 $ .05 $ .02 $ .09
======== ======== ======== ========
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(in thousands, except per share amounts)
1994
Revenues $179,226 $185,113 $178,282 $226,263
Gross profit 64,942 70,243 62,407 84,815
Income from operations 4,258 4,145 1,159 6,413
NET INCOME 3,144 2,843 640 8,211
Preferred stock dividends (35) (35) (41) (23)
-------- -------- -------- --------
Net income applicable to
Common Shareholders $ 3,109 $ 2,808 $ 599 $ 8,188
======== ======== ======== ========
Net income per share $ 0.04 $ 0.03 $ 0.01 $ 0.09
======== ======== ======== ========
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
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P A R T III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors.
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
(b) Identification of Executive Officers.
TITLE AND OTHER OFFICE HELD
NAME AGE INFORMATION(A) SINCE
----------------- --- ------------------------------------------ -----------
Jack E. Rosenfeld 56 Chief Executive Officer, 1990
President and Director. Mr.
Rosenfeld served as Executive
Vice President of the Company
from May 1988 until October 1990.
He was elected to the Board of
Directors in 1974.
Michael P. Sherman 42 Executive Vice President, 1990
Corporate Affairs, General
Counsel and Secretary. Mr. Sherman
joined the Company in 1983 and was
elected Vice President-Assistant Secretary
in the same year. From 1986 to 1990,
Mr. Sherman held the position of
Senior Vice President, General
Counsel and Secretary.
Wayne P. Garten 42 Executive Vice President and 1990
Chief Financial Officer. From
1989 to 1990, Mr. Garten
held the position of Senior
Vice President and Chief Financial
Officer. He joined the Company
in 1983, was elected Vice
President in 1984 and was
elected Vice President-Finance
in 1989.
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55
Edward J. O'Brien 51 Senior Vice President and 1991
Treasurer. Mr. O'Brien joined the
Company in 1986 and was elected
Vice President in 1988.
David E. Ullman 37 Vice President, Controller. 1992
Mr. Ullman joined the Company in
1991 and was elected Vice President
in 1992. Prior to joining the
Company, Mr. Ullman was with
Arthur Andersen & Co. for ten
years, most recently as a manager in
the Audit and Business Advisory
Group.
-------------
(a) All references to dates and positions held by such executive officers
prior to September 1993 refer to the Company's predecessor, The Horn &
Hardart Company ("H&H"). H&H merged with and into the Company in
September 1993, with the Company surviving.
Pursuant to the Company's By-Laws, its officers are chosen annually by
the Board of Directors and hold office until their respective successors are
chosen and qualified.
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ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
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P A R T IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report.
PAGE NO.
--------
1. Report of Independent Public Accountants 26
Hanover Direct, Inc. and Subsidiaries Financial
Statements
Consolidated Balance Sheets as of January 1, 1994 27
and December 31, 1994
Consolidated Statements of Income for the 29
three years ended December 31, 1994
Consolidated Statements of Shareholders' (Deficit) 30
Equity for the three years ended December 31, 1994
Consolidated Statements of Cash Flows for the three 31
years ended December 31, 1994
Notes to Consolidated Financial Statements 33
Supplementary Data:
Selected quarterly financial information (unaudited) 52
for the two fiscal years ended December 31, 1994
2. Index to Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts 60
Schedules other than that listed above are omitted because
they are not applicable or the required information is
shown in the financial statements or notes thereto.
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3. Exhibits
The exhibits required by Item 601 of Regulation S-K
filed as part of, or incorporated by reference in, this report
are listed in the accompanying Exhibit Index.
(b) Reports on Form 8-K
Current Report on Form 8-K dated October 26, 1994 reporting the
Company's third quarter financial results under Item 5 -
Other Events.
(c) Exhibits required by Item 601 of Regulation S-K.
See Exhibit Index.
(d) Financial Statement Schedules
See (a) 2. above.
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SCHEDULE II
HANOVER DIRECT, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, JANUARY 1, 1994 AND DECEMBER 26, 1992
-----------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-----------------------------------------------------------------------------------------------------------------------
Additions
--------------------------------
Balance at Charged to
beginning Charged to costs other accounts Deductions - Balance at
Description of period and expenses describe describe end of period
------------------------------------------------------------------------------------------------------------------------
1994:
---------------------------------
Allowance for doubtful
accounts receivable, current $ 4,244,000 $3,931,000 (1) $4,263,000 $3,912,000
Reserves for
discontinued operations 2,558,000 (2) 890,000 1,668,000
Deferred tax asset
valuation allowance 49,700,000 (7) 11,100,000 38,600,000
Allowance for net unrealized
losses on convertible
debt securities 1,000,000 1,000,000
1993:
---------------------------------
Allowance for doubtful
accounts receivable, current $ 6,386,000 3,676,000 (5) $134,000 (1) $5,952,000 $4,244,000
Reserves for
discontinued operations 3,464,000 (2) 906,000 2,558,000
Deferred tax asset
valuation allowance 53,000,000 (6) 2,600,000 (4) 5,900,000 49,700,000
1992:
---------------------------------
Allowance for doubtful
accounts receivable, current 7,040,000 6,024,000 (1) 6,678,000 6,386,000
Reserves for
discontinued operations 11,185,000 (2) 7,721,000 3,464,000
Deferred tax asset
valuation allowance (3) 53,000,000 53,000,000
-----------------------------------------------------------------------------------------------------------------------
(1) Accounts written-off.
(2) Utilization of reserves.
(3) The Company adopted SFAS 109 effective December 29, 1991.
(4) Utilization of valuation allowance.
(5) Represents acquired allowance for doutful accounts receivable.
(6) Represents increase in available NOLs and the effect of the increase in
corporate tax rates from 34% to 35%.
(7) Represents decrease due to: utilization of valuation allowance and
recognition of NOLs estimated to be utilized by future operating results.
60
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
Date: March 28, 1995 By:s/Jack E. Rosenfeld
Jack E. Rosenfeld, Director
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
Principal Financial Officer:
s/Wayne P. Garten
Wayne P. Garten
Executive Vice President and
Chief Financial Officer
Board of Directors:
s/Ralph Destino s/Edmund R. Manwell
Ralph Destino, Director Edmund R. Manwell, Director
s/J. David Hakman s/Alan G. Quasha
J. David Hakman, Director Alan G. Quasha, Director
s/S. Lee Kling s/Geraldine Stutz
S. Lee Kling, Director Geraldine Stutz, Director
s/Theodore H. Kruttschnitt s/Jeffrey Laikind
Theodore H. Kruttschnitt Jeffrey Laikind, Director
Director
s/Robert F. Wright
s/Elizabeth Valk Long Robert F. Wright, Director
Elizabeth Valk Long, Director
Date: March 28, 1995
59
61
ITEM 10. EXHIBIT INDEX
EXHIBIT NUMBER
ITEM 601 OF DESCRIPTION OF DOCUMENT AND INCOR- PAGE
REGULATION S-K PORATION REFERENCE WHERE APPLICABLE NO.
-------------- ------------------------------------------------------------ ----
2.1 Asset Purchase Agreement dated as of December 1, 1994 among the
Company, LWI Holdings, Inc., Bankers Trust Company, Leichtung,
Inc. and DRI Industries, Inc. FILED HEREWITH.
2.2 Stock Purchase Agreement dated as of February 16, 1995 among the
Company, Hanover Holdings, Inc., Aegis Safety Holdings, Inc., F.L.
Holdings, Inc., Roland A. E. Franklin, Martin E. Franklin, Jonathan
Franklin, Floyd Hall, Frederick Field, Homer G. Williams, Frank
Martucci, Norm Thompson Outfitters, Inc. and Capital Consultants,
Inc., (as agent)(collectively, the "Aegis Sellers"). FILED HEREWITH.
3.1 Certificate of Incorporation. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended January
1, 1994.
3.2 Certificate of Amendment of the Company's Certificate of
Incorporation together with Certificate of Designation of
Series A Convertible Additional Preferred Stock. Incorporated
by reference to the Company's Annual Report on Form 10-K for
the year ended January 1, 1994.
3.3 By-laws. Incorporated by reference to the Company's Registration
Statement on Form S-4 filed on April 16, 1993, Registration No.
33-6152.
3.4 Certificate of Designation of Series B Convertible Additional
Preferred Stock of the Company. FILED HEREWITH.
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62
4.1 Indenture between the Company and First Trust National
Association, as Trustee, dated as of August 17, 1993.
Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended January 1, 1994.
4.2 Registration Rights Agreement dated as of August 17, 1993 by
and between the Company's and Sun Life Insurance Company of
America. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended January 1, 1994.
4.3 Warrant Agreement dated as of October 25, 1991 between the
Company* and NAR Group Limited ("NAR"). Incorporated by
reference to the Company's* Current Report on Form 8-K
dated October 25, 1991.
4.4 Registration Rights Agreement dated as of July 8,1991 among
the Company*, NAR and Intercontinental Mining & Resources
Limited ("IMR"). Incorporated by reference to the Company's*
Current Report on Form 8-K Dated July 10, 1991.
4.5 Warrant Agreement dated as of January 1, 1994 between the
Company and Sears Shop At Home Services, Inc. ("Sears"). FILED
HEREWITH.
4.6 Registration Rights Agreement dated as of February 16, 1995
among the Company and the Aegis Sellers. FILED HEREWITH.
10.1 1978 Stock Option Plan, as amended. Incorporated by reference
to the Company's* Annual Report on Form 10-K for the fiscal
year ended December 28, 1991.
10.2 Stock Purchase Agreement dated as of July 8, 1991 between the
Company* and NAR. Incorporated by reference to the Company's*
Current Report on Form 8-K dated July 10, 1991.
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63
10.3 Agreement dated as of December 21, 1992 among the Company*,
Hanover Direct Pennsylvania, Inc. ("HDPI"), Brawn of
California, Inc. ("Brawn") and General Electric Capital
Corporation ("GECC"). Incorporated by reference to the
Company's* Annual Report on Form 10-K for the fiscal year
ended December 26, 1992.
10.4 Amendment to the Account Purchase Agreement dated as of July
12, 1993 among the Company*, HDPI, Brawn and GECC.
Incorporated by reference to the Company's* Current Report on
Form 8-K dated July 12, 1993.
10.5 Credit Facilities and Reimbursement Agreement dated as of
October 12, 1994 ("Credit Agreement") among the Company
NationsBank of North Carolina, N.A. ("NationsBank"), as agent
for the Lenders, and the Lenders from time to time a party to
the Credit Agreement. FILED HEREWITH.
10.6 Revolving Credit and Term Loan Agreement dated as of October
12, 1994 ("Loan Agreement") among the Company, NationsBank, as
agent for the Lenders, and the Lenders from time to time a
party to the Loan Agreement. FILED HEREWITH.
10.7 Form of Stock Option Agreement between the Company* and
certain Directors of the Company, as amended. Incorporated by
reference to the Company's* Annual Report on Form 10-K for the
fiscal year ended December 28, 1991.
10.8 Executive Employment Agreement dated as of October 25, 1991
among the Company* and Jack E. Rosenfeld. Incorporated by
reference to the Company's Current Report on Form 8-K dated
October 25, 1991.
10.9 Stock Option Agreement dated as of January 1, 1992 between the
Company* and Jack E. Rosenfeld, as amended. Incorporated by
reference to the Company's* Annual Report on Form 10-K for the
fiscal year ended December 26, 1992.
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64
10.10 Registration Rights Agreement dated as of October 25, 1991
between the Company* and Jack E. Rosenfeld. Incorporated by
reference to the Company's* Current Report on Form 8-K dated
October 25, 1991.
10.11 Employment Agreement dated as of October 14, 1991 between the
Company* and Michael P. Sherman. Incorporated by reference to
the Company's* Current Report on Form 8-K dated October 25,
1991.
10.12 Amendment No. 1 to the Employment Agreement dated as of June
18, 1993 between the Company and Michael P. Sherman.
Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended January 1, 1994.
10.13 Registration Rights Agreement dated as of October 14, 1991
between the Company* and Michael P. Sherman. Incorporated by
reference to the Company's* Current Report on Form 8-K dated
October 25, 1991.
10.14 Employment Agreement dated as of October 14, 1991, between the
Company* and Wayne P. Garten. Incorporated by reference to the
Company's* Current Report on Form 8-K dated October 25, 1991.
10.15 Amendment No. 1 to the Employment Agreement dated as of June
18, 1993 between the Company and Wayne P. Garten. Incorporated
by reference to the Company's Annual Report on Form 10-K for
the year ended January 1, 1994.
10.16 Registration Rights Agreement dated as of October 14, 1991
between the Company* and Wayne P. Garten. Incorporated by
reference to the Company's* Current Report on Form 8-K dated
October 25, 1991.
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65
10.17 Form of Indemnification Agreement among the Company* and each
of the Company's directors and executive officers.
Incorporated by reference to the Company's* Current Report on
Form 8-K dated October 25, 1991.
10.18 Letter Agreement dated May 5, 1989 among the Company*,
Theodore H. Kruttschnitt, J. David Hakman and Edmund R.
Manwell. Incorporated by reference to the Company's* Current
Report on Form 8-K dated May 10, 1989.
10.19 Hanover Direct, Inc. Savings Plan as amended. Incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended January 1, 1994.
10.20 Restricted Stock Plan. Incorporated by reference to the
Company's* Registration Statement on Form S-8 filed on
February 24, 1993, Registration No. 33-58760.
10.21 All Employee Equity Investment Plan. Incorporated by reference
to the Company's* Registration Statement on Form S-8 filed on
February 24, 1993, Registration No. 33-58756.
10.22 Executive Equity Incentive Plan. Incorporated by reference to
the Company's* Registration Statement on Form S-8 filed on
February 24, 1993, Registration No. 33-58758.
10.23 Form of Supplemental Retirement Plan. Incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended January 1, 1994.
10.24 License Agreement dated as of January 1, 1994 between Hanover
Ventures, Inc. and Sears. Incorporated by reference to the
Company's Current Report on Form 8-K dated January 1, 1994.
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66
21.1 Subsidiaries of the Registrant. FILED HEREWITH.
23.1 Consent of Independent Public Accountants. FILED HEREWITH.
27.1 Financial Data Schedule. FILED HEREWITH.**
-------------
* Hanover Direct, Inc., a Delaware corporation, is the successor by
merger to The Horn & Hardart Company and The Hanover Companies.
** EDGAR filing only.
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