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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 27, 1997
Commission file number 1-12082
HANOVER DIRECT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-0853260
(State of incorporation) (IRS Employer Identification No.)
1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY 07087
(Address of principal executive offices) (Zip Code)
(201) 863-7300
(Telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
Common stock, par value $.66 2/3 per share: 200,055,302 shares outstanding as of
November 4, 1997.
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HANOVER DIRECT, INC.
FORM 10-Q
SEPTEMBER 27, 1997
INDEX
Page
Part I - Financial Information
Item 1. Financial Statements Condensed Consolidated Balance Sheets -
December 28, 1996 and September 27, 1997 ......................... 3
Condensed Consolidated Statements of Income (Loss) - thirteen and
thirty-nine weeks ended September 28, 1996 and September 27, 1997 .. 5
Condensed Consolidated Statements of Cash Flows - thirty-nine weeks
ended September 28, 1996 and September 27, 1997 .................... 6
Notesto Condensed Consolidated Financial Statements for the thirteen
and thirty-nine weeks ended September 28, 1996 and
September 27, 1997 ................................................. 8
Item 2. Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations ................................ 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk ... 23
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders .......... 24
Item 6. Exhibits and Reports on Form 8-K ............................ 24
Signatures ........................................................... 25
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 28, 1996 AND SEPTEMBER 27, 1997
(UNAUDITED)
(IN THOUSANDS)
December 28, September 27,
1996 1997
------------ -------------
ASSETS
Current Assets:
Cash and cash equivalents $ 5,173 $ 918
Accounts receivable, net 29,399 17,247
Accounts receivable under financing agreement -- 20,279
Inventories 67,610 69,672
Prepaid catalog costs 23,401 27,880
Deferred tax asset, net 3,300 3,300
Other current assets 3,148 4,352
--------- ---------
Total Current Assets 132,031 143,648
--------- ---------
Property and equipment, at cost:
Land 4,797 4,883
Buildings and building improvements 16,554 15,862
Leasehold improvements 9,956 8,050
Furniture, fixtures and equipment 34,603 47,741
Construction in progress 8,315 866
--------- ---------
74,225 77,402
Accumulated depreciation and amortization (22,523) (28,051)
--------- ---------
Net Property and Equipment 51,702 49,351
Goodwill, net 17,901 17,542
Deferred tax asset, net 11,700 11,700
Other assets, net 7,493 3,770
--------- ---------
Total Assets $ 220,827 $ 226,011
========= =========
See Notes to Condensed Consolidated Financial Statements.
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
DECEMBER 28, 1996 AND SEPTEMBER 27, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
December 28, September 27,
1996 1997
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital lease obligations $ 11,452 $ 12,189
Accounts payable 79,587 63,300
Accrued liabilities 37,782 33,603
Customer prepayments and credits 4,717 3,930
--------- ---------
Total Current Liabilities 133,538 113,022
--------- ---------
Noncurrent Liabilities:
Long-term debt 53,255 27,693
Obligations under receivable financing -- 20,279
Capital lease obligations 482 146
Other 1,812 1,848
--------- ---------
Total Noncurrent Liabilities 55,549 49,966
--------- ---------
Total Liabilities 189,087 162,988
--------- ---------
Commitments and Contingencies
Shareholders' Equity:
Series B Preferred Stock, convertible, $.01 par value,
authorized and issued 634,900 shares in 1996 and 1997 5,748 5,890
Common Stock, $.662/3 par value, authorized 225,000,000 shares;
issued 145,039,915 shares in 1996 and 200,329,521 shares in 1997 96,693 133,814
Capital in excess of par val4ue 270,097 279,968
Accumulated deficit (336,586) (352,417)
--------- ---------
35,952 67,255
Less:
Treasury stock, at cost (392,017 shares in 1996 and 1997) (813) (813)
Notes receivable from sale of Common Stock (3,399) (3,419)
--------- ---------
Total Shareholders' Equity 31,740 63,023
--------- ---------
Total Liabilities and Shareholders' Equity $ 220,827 $ 226,011
========= =========
See Notes to Condensed Consolidated Financial Statements.
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Unaudited)
(In thousands, except share and per share amounts) 13 Weeks Ended 39 Weeks Ended
-------------- ---------------
September 28, September 27, September 28, September 27,
1996 1997 1996 1997
---- ---- ---- ----
Revenues $ 156,732 $ 122,597 $ 502,454 $ 386,072
----------- ----------- ----------- -----------
Operating costs and expenses:
Cost of sales and operating expenses 115,580 80,369 344,301 252,971
Write-down of inventory of discontinued catalogs -- -- 1,100 --
Special charges 300 -- 300 --
Selling expenses 44,842 29,745 142,259 97,913
General and administrative expenses 18,775 11,967 48,407 38,042
Depreciation and amortization 2,856 2,193 9,337 6,304
----------- ----------- ----------- -----------
182,353 124,274 545,704 395,230
----------- ----------- ----------- -----------
Loss from operations (25,621) (1,677) (43,250) (9,158)
----------- ----------- ----------- -----------
Interest expense (2,683) (1,494) (6,766) (5,783)
Interest income 123 -- 338 --
----------- ----------- ----------- -----------
(2,560) (1,494) (6,428) (5,783)
----------- ----------- ----------- -----------
Loss before income taxes (28,181) (3,171) (49,678) (14,941)
Income tax provision (250) (250) (750) (749)
----------- ----------- ----------- -----------
Net loss before extraordinary item (28,431) (3,421) (50,428) (15,690)
Extraordinary item (1,134) -- (1,134) --
----------- ----------- ----------- -----------
Net loss (29,565) (3,421) (51,562) (15,690)
Preferred stock dividends and accretion (59) (47) (177) (142)
----------- ----------- ----------- -----------
Net loss applicable to common shareholders $ (29,624) $ (3,468) $ (51,739) $ (15,832)
=========== =========== =========== ===========
Net loss per share:
Loss before extraordinary item $ (0.25) $ (0.02) $ (0.51) $ (0.09)
Extraordinary item (0.01) 0.00 (0.01) 0.00
----------- ----------- ----------- -----------
Net loss per share $ (0.26) $ (0.02) $ (0.52) $ (0.09)
=========== =========== =========== ===========
Weighted average shares outstanding 114,251,875 200,329,521 100,365,678 167,906,290
=========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements.
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
39 WEEKS ENDED
--------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
---- ----
Cash flows from operating activities:
Net (loss) $(51,562) $(15,690)
Adjustments to reconcile net (loss) to net cash (used)
by operating activities:
Depreciation and amortization, including deferred fees 10,559 7,938
Provisions for doubtful accounts 3,447 2,916
Recovery of investments previously written-off -- (1,020)
Extraordinary loss-early extinguishment of debt 1,134 --
Other 27 --
Changes in assets and liabilities:
Accounts receivable 1,553 9,236
Inventories (7,200) (2,062)
Prepaid catalog costs (3,096) (4,479)
Other assets 893 (1,204)
Accounts payable (646) (16,287)
Accrued liabilities (2,854) (4,820)
Customer prepayments and credits (1,305) (787)
-------- --------
NET CASH (USED) BY OPERATING ACTIVITIES (49,050) (26,259)
-------- --------
Cash flows from investing activities:
Acquisitions of property (8,306) (3,177)
Proceeds from sale of businesses and properties 1,164 642
Proceeds from recovery of investments previously written-off 662 1,020
Other, net (10) 1,672
-------- --------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $ (6,490) $ 157
-------- --------
See Notes to Condensed Consolidated Financial Statements.
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HANOVER DIRECT, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
39 WEEKS ENDED
--------------
SEPTEMBER 28, SEPTEMBER 27,
1996 1997
------------- -------------
Cash flows from financing activities:
Net borrowings (repayments) under Credit Facility $ 12,413 $(12,768)
Proceeds from issuance of debt 35,000 --
Payments of long-term debt and capital lease obligations (40,946) (2,393)
Proceeds from issuance of Common Stock 50,504 40,134
Payment of stock issuance costs -- (3,073)
Payment of debt issuance costs (384) --
Other, net (876) (53)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 55,711 21,847
-------- --------
Net (decrease) increase in cash and cash equivalents 171 (4,255)
Cash and cash equivalents at the beginning of the year 2,682 5,173
-------- --------
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 2,853 $ 918
======== ========
Supplemental cash flow disclosures:
Interest paid $ 5,203 $ 2,665
======== ========
Income taxes paid $ 670 $ 699
======== ========
Supplemental disclosure of non-cash investing and financing activities:
Exchange of NAR Promissory Note for equity $ -- $ 10,000
======== ========
Issuance of Common Stock for notes receivable $ 2,034 $ --
======== ========
Exchange of 6% Preferred Stock for Common Stock $ 830 $ --
======== ========
See Notes to Condensed Consolidated Financial Statements.
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HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE
THIRTEEN AND THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER
28, 1996 (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited interim condensed consolidated financial
statements have been prepared in accordance with the instructions for Form 10-Q
and, therefore, do not include all information and footnotes necessary for a
fair presentation of financial condition, results of operations and cash flows
in conformity with generally accepted accounting principles. Reference should be
made to the annual financial statements, including the footnotes thereto,
included in the Hanover Direct, Inc. (the "Company") Annual Report on Form 10-K
for the fiscal year ended December 28, 1996. In the opinion of management, the
accompanying unaudited interim condensed consolidated financial statements
contain all material adjustments, consisting of normal recurring accruals,
necessary to present fairly the financial condition, results of operations and
cash flows of the Company and its consolidated subsidiaries for the interim
periods. Operating results for interim periods are not necessarily indicative of
the results that may be expected for the entire year. Certain prior year amounts
have been reclassified to conform with the current year presentation.
2. RETAINED EARNINGS RESTRICTIONS
The Company is restricted from paying dividends at any time on its
Common Stock or from acquiring its capital stock by certain debt covenants
contained in agreements to which the Company is a party.
3. EARNINGS PER SHARE
Net income (loss) per share - Net income (loss) per share was computed
using the weighted average number of shares outstanding. Due to the net loss for
the thirteen and thirty-nine weeks ended September 28, 1996 and September 27,
1997, warrants, stock options and convertible preferred stock are excluded from
the calculations of both primary and fully diluted earnings per share.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
Effective January 1, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 125 ("SFAS"), "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. The adoption
of this statement resulted in the recognition of approximately $20.3 million of
additional accounts receivable and associated long-term debt at September 27,
1997. The provisions of this pronouncement are to be applied prospectively, from
January 1, 1997. Retroactive application is not permitted; however, the amount
of adjustment at December 28, 1996 would also have been a recognition of an
additional $24.7 million in both receivables and the associated receivable
financing obligation.
Subsequent to December 28, 1996, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 128, "Earnings Per Share." This statement
establishes standards for computing and presenting earnings per share ("EPS"),
replacing the presentation of currently required primary EPS with a presentation
of Basic EPS. SFAS No. 128 is effective for financial statements issued for
periods ending
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after December 15, 1997, including interim periods, and earlier application is
not permitted. When adopted, the Company will be required to restate its EPS
data for all periods presented. The Company does not expect the impact of the
adoption of this statement to be material to previously reported EPS amounts.
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. The statement requires all items that are required to be recognized
under accounting standards as components of comprehensive income to be reported
in a financial statement that is displayed with the same prominence as other
financial statements. The statement is effective for fiscal years beginning
after December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company does not
anticipate that the adoption of this statement will result in any significant
items of comprehensive income.
Additionally, in June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." This statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. Specifically, the
statement requires a public enterprise to report a measure of segment profit or
loss, certain specific revenue and expense items, and segment assets and also to
provide reconciliation to corresponding amounts in the entity's general-purpose
financial statements. This statement is effective for financial statements for
periods beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. The Company is
still assessing the impact of this statement on its financial statement
disclosure.
5. RESTRUCTURING
In December 1996, the Company recorded special charges aggregating
approximately $36.7 million. These charges included severance of approximately
$3.2 million and facility exit/relocation costs and fixed asset write-offs of
approximately $11.5 million related to the Company's plan to reduce fixed
overhead costs and consolidate certain of its facilities. In addition, the
Company's review of the impairment of its long-lived assets of certain of its
under-performing catalogs led to a write-off of approximately $22.0 million.
Severance - The cost of employee severance includes termination
benefits and is expected to be completed by the end of 1997. These costs are
recorded in accrued liabilities in the accompanying consolidated balance sheets
and are $.7 million and $3.2 million at September 27, 1997 and December 28,
1996, respectively.
Facility Exit/Relocation Costs and Fixed Asset Write-Offs - These costs
are primarily the result of the Company's decision to relocate certain of its
corporate operations, and consolidate its distribution centers into its Roanoke
home fashion distribution center. Approximately $5.8 million and $6.3 million of
these costs are recorded in accrued liabilities in the accompanying consolidated
balance sheets at September 27, 1997 and December 28, 1996, respectively.
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Impairment of Long-Lived Assets - The Company considers a history of
catalog operating losses to be its primary indicator of potential impairment.
Assets are grouped and evaluated for impairment at the lowest level for which
there are identifiable cash flows that are independent of the cash flows of
other groups of assets. The Company has identified the appropriate grouping of
assets to be individual catalogs, except where certain catalogs are a part of a
group that, together, generate joint cash flows. The assets are deemed to be
impaired if a forecast of undiscounted future operating cash flows is less than
the carrying amounts. The loss is measured as the amount by which the carrying
amount of the assets exceeds its fair value. The Company generally measures fair
value by discounting estimated future cash flows. Considerable management
judgment is necessary to estimate discounted future cash flows and, accordingly,
actual results could vary significantly from such estimates.
6. INVESTMENTS
During 1994, the Company invested approximately $2.7 million in
convertible debt securities of Regal Communications, Inc. ("Regal"). In
September 1994, Regal filed for protection under Chapter 11 of the United States
Bankruptcy Code. As of December 1996, the Company had written-off the entire
investment balance as the decline in fair value was considered an other than
temporary impairment. In the third quarter of 1997, the Company received
approximately $1 million related to distributions made by Regal. This amount is
recorded as income in the period and is included in general and administrative
expenses in the accompanying Condensed Consolidated Statements of Income (Loss).
7. RIGHTS OFFERING
The Company commenced a $50 million rights offering (the "1997 Rights
Offering") on April 29, 1997. Holders of record of the Company's Common Stock
and Series B Convertible Additional Preferred Stock as of April 28, 1997, the
record date, were eligible to participate in the 1997 Rights Offering. The 1997
Rights Offering expired on May 30, 1997, with 55,654,623 rights to purchase
shares exercised, and it closed on June 6, 1997.
Richemont Finance S.A., ("Richemont"), a Luxemborg public company,
entered into a standby purchase agreement to purchase all shares not subscribed
to by shareholders of record at the subscription price. Richemont purchased
40,687,970 shares in the 1997 Rights Offering and, as a result, then owned
approximately 20.3% of the Company. The Company paid in cash, from the proceeds
of the 1997 Rights Offering, to Richemont on the closing date approximately $1.8
million which represented an amount equal to 1% of the aggregate offering price
of the aggregate number of shares issuable upon closing of the 1997 Rights
Offering other than with respect to the shares of Common Stock held by NAR Group
Limited ("NAR) or its affiliates plus an amount equal to one-half of one percent
of the aggregate number of shares acquired by NAR upon exercise of their rights
(Standby Fee) plus an amount equal to 4% of the aggregate offering price in
respect to all unsubscribed shares (Take-Up Fee).
On April 26, 1997, NAR irrevocably agreed with the Company, subject to
and upon the consummation of the 1997 Rights Offering, to exercise certain of
the rights distributed to it for the purchase of 11,111,111 shares of Common
Stock that had an aggregate purchase price of approximately $10 million. NAR
agreed to pay for and the Company agreed to accept as payment for the exercise
of such rights the surrender by NAR of the principal amount due under the IMR
Promissory Note dated September 1996 in the principal amount of $10 million and
cancellation thereof (Note 8).
In order to facilitate vendor shipments and to permit the commencement
of the Company's plan to consolidate certain of its warehousing facilities,
Richemont, S.A. advanced $30 million as of April 23, 1997
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against its commitment to purchase all of the unsubscribed shares pursuant to
the standby purchase agreement. The Company has executed a subordinated
promissory note in the amount of $30 million to evidence this indebtedness (the
"Richemont Promissory Note").
The gross cash proceeds from the 1997 Rights Offering of $40 million
(after giving effect to the acquisition and exercise by NAR of rights ha ving
an aggregate purchase price of $10 million which were paid for by surrender and
cancellation of the $10 million IMR Promissory Note) were used to repay the $30
million principal amount outstanding under the Richemont Promissory Note and
the balance of the proceeds were used for working capital and general corporate
purposes, including repayment of amounts outstanding under the Company's three
year, $75 million secured revolving Credit Facility (the "Credit Facility")
with Congress Financial Corporation ("Congress").
8. RELATED PARTY TRANSACTIONS
In December 1996, the Company finalized its agreement with Richemont
that provided the Company with approximately $27.9 million of letters of credit
through Swiss Bank Corporation, New York Branch. These letters of credit
issued in the amount of $8.6 million and relate to the Company's Industrial
Revenue Bonds due 2003 while $19.3 million related to the Company's Term
Financing Facility with Congress. As of October 1, 1997, the Company had paid
down $1 million of the underlying debt, reducing the Swiss Bank letters of
credit to approximately $26.9 million. The letters of credit carry an interest
rate of 3.5% above the prime rate, currently 11.75%, payable to Richemont
quarterly on amounts drawn under the letters of credit and were to expire on
February 18, 1998. In October 1997, Richemont agreed in principle to extend its
guarantee to March 30, 1999. As consideration for this transaction the Company
will pay to Richemont a fee of 4% of the $26.9 million letters of credit
outstanding. The extension is subject to the approval of Congress and Swiss
Bank, as well as certain other conditions.
In September 1996, Intercontinental Mining & Resources Incorporated, an
affiliate of NAR ("IMR"), loaned the Company $10 million as evidenced by a
subordinated promissory note in the amount of $10 million (the "IMR Promissory
Note"). The Company accepted as payment for the subscription price related to
the exercise of rights to purchase 11,111,111 shares of Common Stock by NAR the
principal amount due under the IMR Promissory Note (Note 7) and such note has
been cancelled.
9. LONG-TERM DEBT
In November 1995, the Company entered into the Credit Facility with
Congress. Pursuant to the terms of the Credit Facility, the Company is required
to maintain minimum net worth and working capital levels. In addition, the
Credit Facility places limitations on the Company's ability to incur additional
indebtedness. Due to the Company's financial condition in 1996, the Company was
in default of certain of the covenants related to the Credit Facility. The
Company received waivers for the December 1996 events of default under the
Credit Facility related to the working capital and net worth covenants as of
and through December 28,1996. In addition, the Company received a waiver for
any event of default relating to the material adverse change provision that was
in effect through and including December 28, 1996. Congress also agreed to
establish new minimum levels related to these covenants. The working capital
and net worth covenants for fiscal 1997 are as follows (in 000's):
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WORKING CAPITAL (AS DEFINED) AMOUNT
---------------------------- --------
January through May 1997 $ (5,000)
June through November 1997 $ 0
December 1997 and thereafter $(10,000)
NET WORTH AMOUNT
--------- --------
January through May 1997 $ 14,000
June 1997 and thereafter $ 21,500
The Company had $.9 million and $8.1 million of borrowings outstanding
under the revolving line of credit and $8.1 million and $8.9 million outstanding
under the revolving term notes at September 27, 1997 and December 28, 1996,
respectively. The revolving term notes were originally due in November 1997. In
October 1997, Congress agreed to extend the revolving term notes to November
1998. The Company will continue to make principal payments of approximately $.1
million each month. The Company had $27.5 million and $26 million of unused
borrowing capacity under the Credit Facility at September 27, 1997 and December
28, 1996, respectively. The rates of interest related to the revolving line of
credit and term notes were 9.75% and 10.0%, respectively, at September 27, 1997.
The face amount of unexpired documentary letters of credit under the
Credit Facility were $3.0 million and $4.5 million at September 27, 1997 and
December 28, 1996, respectively. In addition, the Company is required to
reimburse Richemont in connection with liabilities under the $26.9 million of
standby letters of credit at September 27, 1997 which were issued by Richemont
and are held by Swiss Bank Corporation, New York Branch.
10. INCOME TAXES
At September 27, 1997, the Company had a net deferred tax asset of $15
million, including a deferred tax asset valuation allowance of approximately $52
million, which was recorded in prior years primarily relating to the realization
of certain net operating loss carry-forwards ("NOLs"). As of December 28, 1996,
the Company had $241.2 million of NOLs. Realization of the future tax benefits
associated with the NOLs is dependent on the Company's ability to generate
taxable income within the carry-forward 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 all of the NOLs and
reversals of temporary differences.
In assessing the realizability of the $15 million net deferred tax
asset, the Company has considered numerous factors, including its future
operating plans. Management believes that the $15 million net deferred tax asset
represents a reasonable, conservative estimate of the future utilization of the
NOL's. The Company will continue to routinely evaluate the likelihood of future
profits and the necessity of future adjustments to the deferred tax asset
valuation allowance.
11. ACCOUNTING FOR STOCK BASED COMPENSATION
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," which the Company adopted in fiscal 1996. During the
thirty-nine week period ended September 27, 1997, the Company recorded a charge
of $1.1 million related to the adoption of this standard. The fair
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value of each option granted is estimated on the date of grant using the
Black-Scholes option-pricing model. The model requires the Company to make
estimates regarding risk free interest rate, expected lives, expected volatility
and expected dividends. No change in estimates or assumptions regarding these
items were made in the current period.
The fair value of each option granted during the nine months ended
September 27, 1997 is estimated at the date of grant using the Black-Scholes
option-pricing model utilizing expected volatility calculations based on
historical data (45.00% - 56.20%) and risk free rates based on U.S. government
strip bonds on the date of grant with maturities equal to the expected option
term (6.33% - 6.80%). The expected lives are equal to the option terms and no
dividends are assumed.
Included in the Executive Equity Incentive Plan table on the following
page are 3,020,000 options related to the C.E.O. Tandem Plan. The Stock Option
Plan table consists of options related to the Company's 1978 Option Plan, 1996
Option Plan, C.E.O. NAR Option Plan, C.E.O. Closing Price Option Plan and the
C.E.O. Performance Year Option Plan.
A summary of the status of the Company's two stock option plans as of
December 28, 1996 and September 27, 1997 and changes during the periods ending
on those dates is as follows:
EXECUTIVE EQUITY INCENTIVE PLAN
DECEMBER 28, SEPTEMBER 27,
------------ -------------
1996 1997
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
Options outstanding beginning of
period 1,021,170 $ 2.66 3,660,498 $ 1.26
Options granted 3,370,000 $ 1.14 54,000 $ 1.00
Options forfeited (730,672) $ 2.68 (70,498) $ 2.59
--------- ---------
Options outstanding end of period 3,660,498 $ 1.26 3,644,000 $ 1.23
========= =========
Options exercisable end of period 173,832 $ 2.56 130,000 $ 2.58
========= =========
Options exercised end of period -- --
Weighted average fair value of
options granted during the year $ 0.76 $ 0.60
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STOCK OPTION PLANS
DECEMBER 28, SEPTEMBER 27,
------------ -------------
1996 1997
---- ----
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ -------- ------ --------
Options outstanding beginning of
period 90,000 $2.42 8,025,000 $1.17
Options granted 7,955,000 $1.16 2,855,000 $1.05
Options forfeited (20,000) $3.50 (915,000) $1.02
--------- ---------
Options outstanding end of period 8,025,000 9,965,000 $1.09
========= =========
Options exercisable end of period 23,333 $2.11 397,500 $1.21
========= =========
Options exercised end of period - -
Weighted average fair value of $ 0.56 $ 0.68
options granted during the year
12. SUBSEQUENT EVENTS
In November 1997, the Company announced that SMALLCAP World Fund, Inc.
("SMALLCAP"), a mutual fund and substantial investor in the Company, agreed to
purchase 3.7 million shares of the Company's Common Stock at $1.41 per share for
an aggregate purchase price of approximately $5.2 million in a private
placement. This transaction was consummated on November 6, 1997. These shares
are restricted and have not been registered under the Securities Act of 1933, as
amended. The Company has also entered into a registration rights agreement with
SMALLCAP that calls for the Company to use its best efforts to effect the
registration of such shares as soon as practicable after April 1, 1998 and has
granted certain piggyback registration rights. The Company may delay such
registration for a period of not more than ninety calendar days. Such
registration shall be effected by preparation and filing by the Company with the
Securities and Exchange Commission of a registration statement on Form S-3. The
Company will pay all expenses in connection with the registration of such
shares.
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15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth, for the fiscal periods indicated, the percentage
relationship to revenues of certain items in the Company's Consolidated
Statements of Income (Loss).
13 WEEKS ENDED 39 WEEKS ENDED
-------------- --------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1997 1996 1997 1996
----------- ------------ ------------- -------------
Revenues 100.0% 100.0% 100.0% 100.0%
Cost of sales and operating
expenses 65.6 73.8 65.5 68.5
Write-down of inventory of
discontinued catalogs -- -- -- .2
Special charges -- .2 -- .1
Selling Expenses 24.3 28.6 25.4 28.3
General and administrative
expenses 9.7 12.0 9.9 9.6
Depreciation and amortization 1.8 1.8 1.6 1.9
Income (loss) from operations (1.4) (16.4) (2.4) (8.6)
Interest expense, net (1.2) (1.6) (1.5) (1.3)
Net Income (loss) (2.8%) (18.9%) (4.0%) (10.3%)
RESULTS OF OPERATIONS
THIRTEEN-WEEKS ENDED SEPTEMBER 27, 1997 COMPARED WITH THIRTEEN-WEEKS ENDED
SEPTEMBER 28, 1996
Net Income (Loss). The Company reported a net loss of $(3.4) million or
$(.02) per share for the thirteen-week period ended September 27, 1997 compared
to a net loss of $(29.6) million or $(.26) per share for the same period last
year. The per share amounts were calculated based on weighted average shares
outstanding of 200,329,521 and 114,251,875 for the current and prior year
periods, respectively. The increase in weighted average shares outstanding is
due to two $50 million rights offerings which were completed in August 1996 and
June 1997, respectively.
The decrease in net loss was primarily the result of: (i) reduced
circulation to prospective customers and to customers other than core customers
and increased circulation to core customers with core products which resulted in
improved response rates and lower selling expenses, (ii) reduced cost of
merchandise as the Company began to realize improvements in its product
offerings along with a reduction in charges related to the write-off of slow
moving inventory, (iii) reduced fixed overhead costs due to the Company's
previously implemented cost reduction plan, (iv) improved liquidity, reduced
backorder levels and improved inventory in-stock positions due to the Company's
1997 Rights Offering and (v) certain non-recurring charges incurred in the prior
year period which the Company did not incur in the current period.
Revenues. Revenues decreased 21.8% for the thirteen-week period ended
September 27, 1997 to $122.6 million from $156.7 million for the same period in
1996. Revenues generated by continuing catalogs decreased 10% to approximately
$121.9 million in the current year period from $136.1 million
15
16
for the prior year period. Revenues generated by discontinued catalogs decreased
97% to $.7 million for the thirteen-week period ended September 27, 1997. The
Company circulated 56 million catalogs during the 1997 period which represented
a 9.5% decrease from the prior year. Continuing catalog circulation decreased
from the prior year period as part of the Company's plan to more effectively
target its circulation. The Company's backorders (unfilled orders) decreased 35%
to $12.3 million on September 27, 1997 from $19.0 million on September 28, 1996.
The following table summarizes the Company's revenues and the percent
of total revenues, for the fiscal periods indicated, for each brand; all
revenues are net of returns:
THIRTEEN-WEEKS ENDED
------------------------------------------------------------------
SEPTEMBER 27, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 28,
1997 1997 1996 1996
REVENUES PERCENT OF REVENUES PERCENT OF
(IN MILLIONS) TOTAL REVENUES (IN MILLIONS) TOTAL REVENUES
------------- -------------- ------------- --------------
Brand Group
Home Fashions -
Mid-Market $ 38.2 31.1% $ 50.1 31.9%
Upscale 30.8 25.1 22.0 14.1
General Merchandise 15.8 12.9 17.1 10.9
Women's Apparel 13.1 10.7 18.6 11.9
Men's Apparel 12.6 10.3 16.8 10.7
Gifts 11.4 9.3 11.5 7.3
-------- ----- -------- -----
Total Continuing 121.9 99.4 136.1 86.8
Discontinued 0.7 0.6 20.6 13.2
-------- ----- -------- -----
Total Company $ 122.6 100.0% $ 156.7 100.0%
======== ===== ======== =====
Revenues from continuing catalogs decreased due to a planned decrease
in circulation as the Company continued to implement its plan to focus on its
core customers. The reduction in circulation was partially offset by an increase
in response rates as the Company continued to focus more on its most productive
customers. The decrease in revenues was also partially offset by an increase in
circulation and average order size despite experiencing lower response rates.
Revenues from the catalogs discontinued in 1995 and the venture with
Sears Roebuck & Co. decreased 97% or $19.9 million to $.7 million for the
thirteen-week period ended September 27, 1997 from $20.6 million for the same
period in the prior year.
Operating Costs and Expenses. Cost of sales and operating expenses
decreased to 65.6% of revenues for the thirteen-week period ended September 27,
1997 from 73.8% of revenues for the same period in 1996. The total expense
decreased $35.2 million when the current year period is compared to the same
period in the prior year. In the current period, the Company experienced a two
percentage point decline in its cost of merchandise along with a four percentage
point decline in charges taken in association with the write-down of inventory.
These improvements are due to more efficient inventory controls resulting in a
decrease in sale merchandise in the current year period. Operating costs and
expenses have also been positively impacted by decreased order fulfillment costs
due to the Company's previously announced cost reduction plan.
16
17
Selling expenses decreased to 24.3% of revenues for the thirteen-week
period ended September 27, 1997 from 28.6% of revenues for the same period in
the prior year. The total expense decreased $15.1 million to $29.7 million in
the current year period. This expense has declined in the current period due to
a 23% decrease in continuing catalog circulation and increased customer response
rates as part of the Company's plan to more effectively target its core
customers.
General and administrative expenses decreased $6.8 million due to the
Company's previously announced cost reduction plan. The prior year expense
included approximately $ 2.7 million of non-recurring charges related to
management retention and severance which did not occur in the current year
period. The current period expenses have been reduced by approximately $1
million of income as a result of asset distributions made to the Company related
to previously written-off investment securities. As a result of the Company's
cost reduction effort, this expense decreased to 9.7% of revenues in the current
year period from 12.0% of revenues in the same period in the prior year. In the
current period, the Company recovered approximately $1 million related to
previously written-off investments.
Depreciation and amortization decreased $.7 million to $2.2 million for
the thirteen-week period ended September 27, 1997 as a result of the write-off
of certain intangible assets and close certain of its facilities at the end of
the 1996 fiscal year.
Income (Loss) from Operations. The Company recorded a loss from
operations of $(1.7) million for the thirteen-week period ended September 27,
1997, or (1.4)% of revenues, compared to a loss of $(25.6) million for the
thirteen-week period ended September 28, 1996, or (16.4)% of revenues.
The decrease in losses from operations was the result of the Company's
continued plan to decrease circulation by focusing more on its most profitable
customers and on proven merchandise resulting in lower merchandise costs and
reduced inventory write-offs. This operating plan has also resulted in lower
selling expenses and increased response rates. Variable fulfillment costs also
improved slightly in the current period as inefficiencies in the Company's
Roanoke fulfillment center occurred throughout 1996. In the current period, the
Company is continuing to realize lower fixed overhead costs due it its plan to
reduce such costs.
Interest Expense, Net. Interest expense, net decreased to $1.5 million
for the thirteen week period ended September 27, 1997 from $2.6 million for the
same period in the prior year. This expense also decreased to (1.2)% of revenues
in the current year period from (1.6)% of revenues in the same period in the
prior year. These decreases are mainly due to the Company maintaining lower debt
levels than the prior year due to better management of its working capital. This
improvement was partially offset by higher interest rates and increased
amortization of debt costs related to the Company's $30 million letter of credit
facility.
THIRTY NINE-WEEKS ENDED SEPTEMBER 27, 1997 COMPARED WITH THIRTY NINE-WEEKS
ENDED SEPTEMBER 28, 1996
Net Income (Loss). The Company reported a net loss of $(15.7) million
or $(.09) per share for the thirty nine-week period ended September 27, 1997
compared to a net loss of $(51.6) million or $(.52) per share for the same
period last year. The per share amounts were calculated based on weighted
average shares outstanding of 167,906,290 and 100,365,678 for the current and
prior year periods, respectively. The increase in weighted average shares
outstanding is due to two $50 million rights offerings which were completed in
August 1996 and June 1997, respectively.
17
18
The decrease in net loss was primarily the result of: (i) reduced
circulation to prospective customers and to customers other than core customers
and increased circulation to core customers with core products which resulted in
improved response rates and lower selling expenses, (ii) reduced cost of
merchandise as the Company began to realize improvements in its product
offerings along with a reduction in charges related to the write-off of slow
moving inventory, (iii) reduced fixed overhead costs due to the Company's
previously implemented cost reduction plan, (iv) improved liquidity, reduced
backorder levels and improved inventory in-stock positions due to the Company's
1997 Rights Offering and (v) certain non-recurring charges incurred in the prior
year period which the Company did not incur in the current period.
Revenues. Revenues decreased 23.2% for the thirty nine-week period
ended September 27, 1997 to $386.1 million from $502.5 million for the same
period in 1996. Revenues generated by continuing catalogs decreased 10% to
approximately $376.9 million in the current year period from $419.8 million for
the prior year period. Revenues generated by discontinued catalogs decreased 89%
to $9.2 million for the thirty nine-week period ended September 27, 1997. The
Company circulated 195 million catalogs during the 1997 period which represented
a 25% decrease from the prior year period. Continuing catalog circulation
decreased from the prior year period as part of the Company's plan to more
effectively target its circulation. The Company's backorders (unfilled orders)
decreased 35% to $12.3 million on September 27, 1997 from $19.0 million on
September 28, 1996.
The following table summarizes the Company's revenues and the percent
of total revenues, for the fiscal periods indicated, for each brand; all
revenues are net of returns:
THIRTY NINE-WEEKS ENDED
-------------------------------------------------------------------
SEPTEMBER 27, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 28,
1997 1997 1996 1996
REVENUES PERCENT OF REVENUES PERCENT OF
(IN MILLIONS) TOTAL REVENUES (IN MILLIONS) TOTAL REVENUES
------------- -------------- ------------- --------------
Brand Group
Home Fashions -
Mid-Market $ 115.0 29.8% $ 151.2 30.1%
Upscale 85.3 22.1 63.8 12.7
General Merchandise 51.4 13.3 56.2 11.2
Women's Apparel 47.0 12.2 59.1 11.7
Men's Apparel 44.8 11.6 56.9 11.3
Gifts 33.4 8.6 32.6 6.5
-------- ----- -------- -----
Total Continuing 376.9 97.6 419.8 83.5
Discontinued 9.2 2.4 82.7 16.5
-------- ----- -------- -----
Total Company $ 386.1 100.0% $ 502.5 100.0%
======== ===== ======== =====
Revenues from continuing catalogs decreased due to a planned decrease
in circulation as the Company continued to implement its plan to focus on its
core customers. The reduction in circulation was partially offset by an increase
in response rates as the Company continued to focus more on its most productive
customers. The decrease in revenues was also partially offset by an increase in
circulation and average order size Home Fashions-upscale brand despite
experiencing lower response rates due to increases in prospecting.
18
19
Operating Costs and Expenses. Cost of sales and operating expenses
decreased to 65.5% of revenues for the thirty nine-week period ended September
27, 1997 from 73.8% of revenues for the same period in 1996. The total expense
decreased $91.3 million when the current year period was compared to the same
period in the prior year. In the current thirty nine week period, the Company
experienced a two percentage point decline in its cost of merchandise along with
a reduction in inventory write-down charges. Operating costs and expenses have
continued to be positively impacted by decreased order fulfillment costs due to
the Company's previously announced cost reduction plan.
Selling expenses decreased to 25.4% of revenues for the thirty
nine-week period ended September 27, 1997 from 28.3% of revenues for the same
period in the prior year. The total expense decreased $44.3 million to $97.9
million in the current year period. This expense has declined in the current
period due to a decrease in continuing catalog circulation and increased
customer response rates as part of the Company's plan to more effectively target
its core customers.
General and administrative expenses decreased $10.4 million to $38.0
million for the thirty-nine week period ended September 27, 1997 due to the
Company's previously announced cost reduction plan. The prior year expense
included approximately $ 4.3 million of non-recurring charges related to
management retention and severance which did not occur in the current year
period. The current period expenses have been reduced by approximately $1
million of income as a result of asset distributions made to the Company
related to previously written-off investment securities. These costs increased
to 9.9% of revenues in the current year period from 9.6% of revenues mainly due
to the Company's planned decrease in its revenue base.
Depreciation and amortization decreased $3.0 million to $6.3 million
for the thirty nine-week period ended September 27, 1997 as a result of the
Company's decision to write-off certain intangible assets and close certain of
its facilities at the end of the 1996 fiscal year.
Income (Loss) from Operations. The Company recorded a loss from
operations of $(9.2) million for the thirty nine-week period ended September 27,
1997, or (2.4)% of revenues, compared to a loss of $(43.3) million for the
thirty nine-week period ended September 28, 1996, or (8.6)% of revenues.
The decreased loss from operations was the result primarily of the
Company's continued plan to decrease circulation by focusing more on its most
profitable customers and on proven merchandise. In the first thirty nine weeks
of the current year, the Company experienced a two percentage point decline in
its cost of merchandise along with a reduction in inventory charges related to
slow moving inventory. These improvements are due to more efficient inventory
controls resulting in a decrease in sale merchandise in the current year. This
operating plan continues to result in lower selling expenses and increased
response rates. Variable fulfillment costs also improved as inefficiencies in
the Company's Roanoke fulfillment center occurred throughout 1996. All of these
factors have contributed to an improved overall profit margin. The Company also
began to realize lower costs associated with its fixed overhead cost structure
due to its plan to reduce such costs.
Interest Expense, Net. Interest expense, net decreased $.6 million to
$5.8 million for the thirty nine-week period ended September 27, 1997.
Throughout the current year, the Company has maintained lower debt levels than
the prior year due to better management of its working capital. This improvement
was partially offset by higher interest rates and increased amortization of debt
costs related to the Company's $26.9 million letter of credit facility.
19
20
LIQUIDITY AND CAPITAL RESOURCES
Working Capital. At September 27, 1997, the Company had $.9 million in
cash and cash equivalents, compared to $5.2 million at December 28, 1996.
Working capital and the current ratio were $30.6 million and 1.27 to 1 at
September 27, 1997 versus $(1.5) million and .99 to 1 at December 28, 1996. The
$26.3 million of cash used in operations in the first thirty nine weeks of 1997
was primarily used to fund operating losses and a reduction in accounts payable.
The cash used in operations was provided by reductions in accounts receivable
and proceeds from the 1997 Rights Offering.
As a result of the Company's continued operating losses in 1996, the
Company experienced tightened vendor credit and increased levels of debt. Order
cancellation rates increased and negatively affected initial fulfillment which
resulted in an increase in split shipments and higher customer inquiry calls in
1996 and the first quarter of 1997. As a result of these factors, the Company
decided in late 1996 that it was necessary to obtain relief under its credit
facility and to investigate an equity infusion. In December 1996, the Company
closed its agreement with Richemont that provided the Company with approximately
$28 million of letters of credit to replace letters of credit which were issued
under the Credit Facility with Congress. Although this agreement provided the
Company added liquidity, its timing, on December 19, 1996, had minimal effect on
reducing back orders in 1996. Therefore these back orders carried over to the
first quarter of 1997 and caused an increase in order cancellation rates in the
period. When the final 1996 financial results became known to the Company, it
concluded such results would have a further negative impact on the Company's
ability to conduct business on normal trade terms. Therefore, the Company
decided it was necessary to obtain an additional equity infusion which would
restore the Company's equity base and provide the Company with additional
liquidity.
On March 26, 1997, the Company announced that it intended to distribute
subscription rights to subscribe for and purchase additional shares of Common
Stock to holders of record of the Company's Common Stock and Series B
Convertible Additional Preferred Stock. The 1997 Rights Offering expired on May
30, 1997 and closed on June 6, 1997. NAR applied $10 million of the Company's
indebtedness to acquire $10 million of the Company's Common Stock pursuant to
the 1997 Rights Offering. Richemont purchased 40,687,970 shares of Common Stock
with rights which were not subscribed for and purchased by shareholders in the
1997 Rights Offering per an agreement with the Company. On April 23, 1997,
Richemont advanced $30 million against this commitment. This advance was used to
repay approximately $13 million of indebtedness under the revolving line of
credit, bring past due vendor accounts current and for other general corporate
purposes.
The 1997 Rights Offering generated gross proceeds of approximately $40
million after giving effect to the $10 million of indebtedness NAR applied to
acquire its shares. The proceeds from the 1997 Rights Offering were used for
working capital needs and general corporate purposes, including repayment of
approximately $20 million outstanding under the Company's Credit Facility with
Congress. The Company also incurred fees of approximately $3 million in relation
to the 1997 Rights Offering which were paid from such gross proceeds.
The agreement by which Richemont provided the Company with a $28
million letter of credit facility was to expire in February 1998. On October 1,
1997, the Company paid down $1 million of the underlying debt, reducing the
letters of credit to approximately $26.9 million. The letters of credit carry an
interest rate of 3.5% above the prime rate, currently 11.75%, payable to
Richemont quarterly on amounts drawn under the letters of credit. In October
1997, Richemont agreed in principle to extend its guarantee to March 30, 1999.
As consideration for this transaction, the Company will pay to Richemont
20
21
a fee equal to 4% of the $26.9 million outstanding letters of credit. The
extension is subject to the approval of Congress and Swiss Bank, as well as
certain other conditions.
At September 27, 1997, the Company had $12.2 million of current
borrowings outstanding. This balance includes $8.1 million of term notes under
the Credit Facility that were originally due in November 1997. In October 1997,
Congress agreed to extend the revolving term notes to November 1998. The Company
will continue to make principal payments of approximately $.1 million each
month. The Company had amounts outstanding under the Credit Facility of $.9
million at September 27, 1997 and $13.7 million at December 28, 1996. As of
November 6, 1997, $2.8 million of borrowings were outstanding under the Credit
Facility and remaining availability was $26.2 million.
Throughout fiscal 1997, the Company has been implementing several
initiatives to strengthen financial disciplines and accountability across its
catalog brands and corporate organization. These initiatives, in addition to the
Company's new operating and cost reduction plan, are designed to better enable
the Company to meet its operating goals for fiscal 1997 through better cash
control and "bottom-line" accountability. Such initiatives have begun to show
positive results across the Company's infrastructure.
In December 1996, the Company received waivers for events of default
under the Credit Facility with Congress. In addition, Congress and the Company
agreed to new working capital and net worth covenants for fiscal 1997. The
Company believes that the 1997 Rights Offering together with the Credit Facility
covenant modifications, the extension of the letter of credit by Richemont and
the extension of the due date of the Congress term loan has eased vendor/
credit concerns about the Company's viability. The Company's ability to
continue to improve upon its prior year's performance and implement its
business strategy is critical to maintaining adequate liquidity.
In November 1997, the Company announced that SMALLCAP World Fund, Inc.
("SMALLCAP"), a mutual fund and substantial investor in the Company, agreed to
purchase 3.7 million shares of the Company's Common Stock for an aggregate
purchase price of approximately $5.2 million in a private placement.
The Company experiences seasonality in its working capital requirements
and fluctuations in the revolving Credit Facility with peak borrowing
requirements normally occurring during the first and fourth quarters of the
year.
The Company is required to maintain certain financial covenants related
to the Credit Facility with Congress with which the Company is in compliance at
September 27, 1997.
Operating Plan. In December 1996, the Company began an operational
realignment that it believes will better enable it to capitalize on its internal
strengths. The Company is continuing to move to a brand structure whereby the
individual catalogs will be better able to manage their resources and capitalize
on business opportunities. This plan provides for each catalog's management team
to be responsible for its brand financial results, working capital requirements
and business investment needs. The Company believes that this structure will
result in better management of vendor relationships, inventories and working
capital.
Infrastructure Investments. The Company's plan to restructure its
catalogs into distinct brands and concentrate its mailing efforts on profitable
customers is expected to result in excess capacity throughout its fulfillment
centers. The Company has begun the process to consolidate certain of its
21
22
fulfillment operations into its new Roanoke fulfillment center in 1998. This
will require a capital investment of approximately $8.0 million during 1997 and
1998, of which approximately $5.5 million will be spent during 1997.
Based on preliminary study, the Company is not expected to have
significant expenditures to modify its computer information systems enabling
proper processing of transactions relating to the year 2000 and beyond. The
Company continues to evaluate appropriate courses of corrective action,
including replacement of certain systems whose associated costs would be
recorded as assets and amortized. Accordingly, the Company does not expect the
amounts required to expensed over the next three years to have a material effect
on its financial position or results of operations. The Company is attempting
to contact vendors and others on whom it relies to assure that their systems
will be timely converted. However, there can be no assurance that the systems
of other companies on which the Company's Systems rely also will be timely
converted or that any such failure to convert by another company would not have
an adverse effect on the Company's systems.
Effect 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 through internal cost reductions and operating
efficiencies and then through selection of appropriate mail-order merchandise.
The Company can adjust product mix to mitigate the effects of inflation on its
overall merchandise base.
Paper and Postage. 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 17% of revenues
in the first thirty-nine weeks of 1997. Paper costs represented approximately 6%
of revenues for the same period. The Company experienced a minimal paper price
increase in the second half of 1997. The USPS announced a proposed increase in
mailing rates that will take effect in mid-1998. The Company is currently
investigating ways to mitigate the effects of these expected increases. There is
no assurance that the Company will successfully develop any such plan.
22
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
NONE.
23
24
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
On July 10, 1997, the Company held its 1997 Annual Meeting of
Shareholders. The matters acted upon at the meeting were:
(1) The election of all 12 members of the Board of Directors, including
Ralph Destino, J. David Hakman, Rakesh K. Kaul, S. Lee Kling,
Theodore H. Kruttschnitt, Elizabeth Valk Long, Edmund R. Manwell,
Shailesh J. Mehta, Jan P. du Plessis, Alan G. Quash, Howard M.S.
Tanner and Robert F. Wright, to serve until the 1998 Annual Meeting
of Shareholders (and until their successors have been duly elected
and qualified), with a minimum vote for each director of
142,058,933 shares in favor, 634,060 shares against and no shares
abstaining; and
(2) The ratification and approval of the amendment to the Company's
1996 Stock Option Plan to provide that under such plan options may
not be granted to any employee covering more than 500,000 shares of
Common Stock (rather than 250,000 shares) during any 12-month
period, with 135,749,721 shares in favor, 6,569,495 shares against
and 424,975 shares abstaining; and
(3) The ratification and approval of the amendment to the Company's
Certificate of Incorporation increasing the number of shares of
Common Stock which the Company shall have the authority to issue
from 150,000,000 to 225,000,000, with 141,891,968 shares in favor,
440,624 shares against and 411,599 shares abstaining; and
(4) The ratification and approval of the appointment of Arthur Andersen
LLP as the Company's independent auditors for the fiscal year
ending December 27, 1997, with 142,152,020 shares in favor, 218,411
share against and 373,760 shares abstaining.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3 (ii) By-laws of the Company, as amended
11 Computation of Earnings (Loss) Per Share.
27 Financial Data Schedule (EDGAR filing only).
(b)Reports on Form 8-K
NONE.
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25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANOVER DIRECT, INC.
Registrant
By: /s/ Larry J. Svoboda
- -------------------------
Larry J. Svoboda
Senior Vice-President and Chief Financial Officer
(on behalf of the Registrant and as principal financial officer)
November 11, 1997
25
26
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
3 (ii) - By-laws of the Company, as amended
11 - Computation of Earnings (Loss) Per Share.
27 - Financial Data Schedule (EDGAR filing only).