-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J8o+RmGvJADXvPKLxLSqchnA/+lJzSp1Qr1ajXWmq/eL5h0xncfJnIamBipAQnVn XTJzA2QNreArB9f6Uau4nw== 0000950123-96-003647.txt : 19960718 0000950123-96-003647.hdr.sgml : 19960718 ACCESSION NUMBER: 0000950123-96-003647 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19951230 FILED AS OF DATE: 19960717 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANOVER DIRECT INC CENTRAL INDEX KEY: 0000320333 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 138053260 STATE OF INCORPORATION: NV FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-K405/A SEC ACT: SEC FILE NUMBER: 001-08056 FILM NUMBER: 96595648 BUSINESS ADDRESS: STREET 1: 1500 HARBOR BLVD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 BUSINESS PHONE: 2018653800 MAIL ADDRESS: STREET 1: 1500 HARBOR BLVD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 FORMER COMPANY: FORMER CONFORMED NAME: HORN & HARDART CO /NV/ DATE OF NAME CHANGE: 19920703 10-K405/A 1 HANOVER DIRECT, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A3 AMENDMENT NO. 3 TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 30, 1995 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 None 12(g) of the Act: 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 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. X As of March 21, 1996 the aggregate market value of the voting stock held by non-affiliates of the registrant was $52 million (based on the closing price of the Common Stock on the American Stock Exchange on March 21, 1996). As of March 21, 1996 the registrant had 93,516,651 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE NONE. 2 EXPLANATORY NOTE This Form 10-K/A3 is being filed by Hanover Direct, Inc., a Delaware corporation (the "Company"), as an amendment to its Annual Report on Form 10-K for the fiscal year ended December 30, 1995, amended April 29, 1996 and April 30, 1996, to make certain amendments to Part II -- Items 7 and 8 and Part IV -- Item 14 thereof. -2- 3 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 ---------------------------------------- 1993 1994 1995 ---- ---- ---- Revenues 100.0% 100.0% 100.0% Cost of sales and operating expenses . . . . . . . . . . 63.4 62.9 64.5 Write-down of inventory of discontinued catalogs . . . . - - 1.1 Provision for facility closings . . . . . . . . . . . . . - - .3 Selling expenses . . . . . . . . . . . . . . . . . . . . 24.6 25.7 27.4 General and administrative expenses . . . . . . . . . . . 8.5 8.5 8.5 Depreciation and amortization . . . . . . . . . . . . . . .5 .8 1.2 Income (loss) from operations . . . . . . . . . . . . . . 3.0 2.1 (3.0) Interest expense, net . . . . . . . . . . . . . . . . . .4 .4 .6 Other income (expense) . . . . . . . . . . . . . . . . . .1 (.2) - Net income (loss) . . . . . . . . . . . . . . . . . . . . 2.7% 1.9% (4.0%)
RESULTS OF OPERATIONS 1995 COMPARED WITH 1994 Net Income (loss). The Company reported a net loss before extraordinary items of $28.2 million or $(.30) per share for the year ended December 30, 1995 compared to net income of $14.8 million or $.16 per share in 1994. Including the effect of the extraordinary loss of $1.8 million for the early extinguishment of debt, the Company reported a net loss of $30 million or $(.32) per share for the year ended December 30, 1995. Per share amounts are expressed after deducting preferred dividends of $.2 million in 1995 and $.1 million in 1994. The weighted average number of shares outstanding was 93,029,816 for the year ended December 30, 1995 compared to 93,285,190 in 1994. The net loss in 1995 was primarily the result of the cumulative impact on the Company of the 14% to 18% increase in USPS rates, a 43% increase in paper prices and weak consumer demand. As a result of these factors, the Company discontinued six poorly performing catalogs in 1995 which have incurred substantial losses which the Company believed could not overcome these obstacles. Including an incremental write-down of inventory associated with discontinuing these catalogs of $8.6 million, these catalogs lost $20 million in 1995 compared to $4.7 million in the prior year. In addition, the Company also incurred costs, aggregating $2.7 million, in connection with the consolidation of facilities into its new Roanoke, VA fulfillment center. These costs included operating expenses related to maintaining duplicate facilities of $1.0 million and $1.7 million of costs related to start-up problems, operating down-time and inefficiencies in the new facility. Due to these cost pressures, the Company implemented a cost reduction program in 1995 whereby the Company instituted a salary freeze, reduced its work force by approximately 10%, closed 5 facilities and reduced other administrative and overhead expenses. In connection with the closing of these 5 facilities, the Company incurred non-recurring costs of $1.5 million. The Company also incurred one-time severance and employee separation expenses of $2.0 million. Revenues. Revenues decreased 2.5% in 1995 to $750 million from $769 million in 1994. Revenues of continuing catalogs increased approximately 2% from $651 million in 1994 to $662 million in 1995, which -3- 4 was offset by a 26% decline to $88 million in revenues from discontinued catalogs. The Company circulated 370 million catalogs in 1995, a 2% reduction from the prior year. Non-Apparel continuing catalog revenues increased 1% to $528 million, due to a 14% increase in revenues from the Company's venture with Sears to $81 million and $68 million of revenues from the 1995 acquisitions of Improvements, Safety Zone and Austad's which offset revenue reductions in the other Non-Apparel catalogs, principally Domestications and Colonial Garden Kitchens. Domestications revenues were down 28% as improved customer response rates partially offset a decline in the average order and a 31% reduction in circulation. Revenues from discontinued catalogs decreased $11.7 million from $77.7 million in 1994 to $66 million in 1995. The Company discontinued the Mature Wisdom catalog in mid-1995 and the Tapestry and Hanover House catalogs in the fourth quarter of 1995. Apparel continuing catalog revenues increased $5 million, or approximately 4%, from $129 million in 1994 to $134 million in 1995, as all continuing catalogs, International Male, Undergear, Silhouettes and Tweeds reported higher sales than the prior year. Revenues from discontinued Apparel catalogs declined 46% from $40 million in 1994 to $22 million in 1995, including the effect of discontinuing Essence by Mail, One 212 and Simply Tops. Operating Costs and Expenses. Cost of sales and operating expenses as a percentage of revenues increased from 62.9% in 1994 to 64.5% in 1995. This increase is primarily attributable to lower overall product margins due to greater sale activity as a result of the generally weak consumer demand and the impact of inventory write-downs for the discontinued catalogs. In addition, fulfillment costs were higher in 1995 due to the start up of the new facility in Roanoke and higher outbound freight expenses of approximately $7 million or 15% as a result of the increase in USPS rates. The write-down of inventory for the discontinuance of six of the Company's catalogs of $8.6 million primarily consisted of incremental inventory write-downs in excess of normal seasonal write-downs and severance expenses. During 1995, the Company recorded a Provision for Facility Closings totalling $1.5 million consisting primarily of moving expenses ($.7 million), lease termination fees ($.3 million) and severance expenses ($.5 million), substantially all of which were paid in 1995. No such charges were recorded in 1994. Selling expenses increased $8.2 million or 4.2% in 1994 to 27.4% of revenues for the current year, primarily due to a 43% increase in average paper costs and a 15% increase in the average cost of mailing a catalog which more than offset the 2.0% reduction in catalog circulation and higher customer response rates. As a result of these price increases, the Company incurred approximately $18.0 million of higher costs to prepare and deliver its catalogs in 1995. General and administrative expenses declined $1.1 million or 2% in 1995 although they remained constant as a percentage of revenues at 8.5% in both years. Excluding the impact of one-time severance expenses of $2.0 million, these expenses declined as a percentage of sales to 8.3% due to the Company's cost reduction program instituted in early 1995. This reduction was partially offset by higher bad debt expenses, reflecting increased losses on major credit cards and the Company's private label credit card. Depreciation and amortization increased $2.8 million from $6.2 million in 1994 to $9.0 million in 1995. The increase was attributable to new amortization charges associated with the Roanoke, Virginia fulfillment facility, the management information system, the new Gump's retail store and the goodwill and mailing lists associated with the 1995 acquisitions. -4- 5 Income (Loss) from Operations. Income from operations declined from $16.0 million in 1994 to a loss of $22.6 million in 1995. Losses from discontinued catalogs increased from $4.7 million in 1994 to $20 million in 1995. Non-Apparel income from operations decreased from $20.5 million in 1994 to a loss of $7.8 million in 1995. The most significant contributor to the decrease in profitability was Domestications, which in addition to being significantly impacted by the higher postage and paper costs also incurred additional costs in connection with the move of its operations into the new Roanoke facility. These costs included start-up costs, down time due to equipment problems, temporary labor costs, higher shipping, damages and replacement costs. Additionally, Domestications' product margin was adversely impacted by product mix changes, increased promotional activities and higher obsolescence charges. The loss from discontinued Non-Apparel catalogs increased from $1.3 million in 1994 to $10.1 million in 1995. Profitability from the Sears venture increased by $.1 million to $3 million in 1995 and the 1995 acquisitions contributed income of $2.5 million. The Company Store and Gump's also had higher operating profits in 1995 compared to 1994. Apparel results of operations declined $7.7 million from a loss of $.5 million in 1994 to a loss of $8.2 million in 1995. This decrease is mainly attributable to the discontinued Apparel catalogs whose losses increased $6.5 million from $3.4 million in 1994 to $9.9 million in 1995. Mens Apparel operating income increased 35% to $2.6 million which offset lower earnings at Tweeds and an operating loss at Silhouettes, where credit problems in the fourth quarter of 1995 contributed to its loss. Interest Income (Expense). Interest expense increased approximately $1.5 million from $3.5 million in 1994 to $5.0 million in 1995. This increase was due to higher average borrowings outstanding under the Company's revolving credit facility in 1995 as well as an increase in the basis point of approximately 3% in the Company's borrowing rate which is attributable to the Company's deteriorating financial performance in 1995. Interest income declined by $.2 million to $.5 million in 1995 because the Company had less cash available for investment. Other Income (Expense). Other expenses in 1994 totaled a net $1.8 million while there were no similar expenses in 1995. The loss in 1994 was comprised of $1.2 million related to the Company's investment in Boston Publishing Company and $1.3 million related to its investment in Regal Communications, Inc. offset by other income of $.7 million. The Company acquired a 20% ownership in Boston Publishing Company in February 1994. The Company made this investment with the intention of possibly acquiring Boston Publishing Company at some point in the future. During 1994 the Company made an investment in debt securities of Regal Communications, Inc. It was the Company's intention to hold these debt securities as a long term investment and perhaps at some point in the future obtain certain operating subsidiaries of Regal in exchange for such securities. Income Taxes. The Company did not record a Federal income tax provision in 1995 based on the current year net operating loss. The Federal income tax provision of $5.9 million in 1994 was offset by the utilization of net operating loss carry forwards. The Company's state tax provision was $1.0 million and $.9 million in 1995 and 1994, respectively. Shareholders' Equity. The number of shares of Common Stock outstanding increased by 714,928 in 1995 due to shares issued in connection with the Company's equity and incentive plans, the exchange of the 6% Series A Convertible Preferred Stock and other activities. At December 30, 1995 there were 93,452,768 shares of Common Stock outstanding compared to 92,737,840 shares of Common Stock outstanding at December 31, 1994. -5- 6 Extraordinary Items. The extraordinary loss of $1.8 million in 1995 represented a loss on the early extinguishment of debt which arose in connection with the refinancing of the Company's $75 million Revolving Credit Facility and its $14 million 9.25% Senior Subordinated Notes due 1998. 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 for the same period 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 ("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 under performing catalog in 1993 thus focusing 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 63.4% in 1993 to 62.9% in 1994. The decrease was primarily attributable to higher overall profit margins and lower fulfillment costs primarily due to the commencement of the Company's facilities consolidation program, 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, -6- 7 particularly in Domestications, where prospecting was heaviest. The Company mailed approximately 377 million catalogs in 1994. General and administrative expenses remained flat as a percentage of revenues at 8.5% in both years. General and administrative expenses increased $10.0 million or 18.1% from 1993 to 1994 due primarily to the 1993 acquisitions. Depreciation and amortization increased $2.9 million from $3.3 million in 1993 to $6.2 million in 1994. The increase was attributable to a full year of charges for goodwill, mailing lists and depreciation associated with the 1993 acquisitions of Gump's, The Company Store and Tweeds. 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. 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 was 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 carry forwards ("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 -7- 8 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. LIQUIDITY AND CAPITAL RESOURCES The Company had $24.1 million and $2.7 million in cash and cash equivalents at December 31, 1994 and December 30, 1995 respectively. Working capital and the current ratio were $58.5 million and 1.51 to 1 at December 31, 1994 versus $28.8 million and 1.22 to 1 at December 30, 1995. The primary sources of cash in 1995 were the $20.7 million of proceeds from the issuance of long-term debt and $8.7 million due to a reduction in inventories. Cash was used primarily to fund: (i) the Company's 1995 operating loss, (ii) $13.7 million of capital expenditures, (iii) $13.0 million for the purchase of businesses, (iv) $8.7 million for the reduction of accounts payable, and (v) $3.6 million for payments of long-term debt and debt issuance costs. As a result of the operating losses incurred in 1995, the Company's financial condition deteriorated which reduced its working capital position and resulted in an increase in long-term debt. In addition, as a result of these operating losses, the Company was not in compliance at various times during 1995 with certain financial covenants that had been contained in its $80 million credit facility that it had entered into in 1994 ("Credit Facility"). The Company obtained waivers for these covenant violations, but was required to agree to more restrictive terms with respect to availability (reduced to $55 million), financial covenants and a higher interest rate. The disclosure of these covenant violations in the Company's 1995 interim financial statements, coupled with a very difficult year for retailers with numerous Chapter 11 filings occurring, caused a tightening of vendor credit in the fourth quarter of 1995. This resulted in higher back order levels (unfilled orders) and increased fulfillment costs which negatively impacted the Company's operating results in that quarter even though credit restrictions eased when the Company closed its new three year $75 million credit facility with Congress Financial Corp. ("Congress Facility") on November 15, 1995. The Company had determined that it was necessary to replace the original Credit Facility because the terms of the proposed amendment were too restrictive. Although the Congress Facility is secured by all of the Company's assets, it provides the Company with greater liquidity and less restrictive financial covenants, and was competitive in terms of cost with the proposed amendment. At the time the Company closed the Congress Facility, the Company believed that the facility would provide the Company with adequate capital to fund its operations. The Company had made this determination based upon the relaxing of the trade credit restrictions, the accompanying increased flow of merchandise, and -8- 9 expectations for its fourth quarter operating results it had at that time. In early 1996, after several additional retail companies filed Chapter 11, the Company again began to experience tightening of vendor credit. Despite this, backorder levels have increased only marginally, and the Company has managed to receive merchandise shipments in most cases on a timely basis and in sufficient quantities to satisfy its customer demand. However, it has had to utilize more working capital to accomplish this than had previously been anticipated, due to a tightening in trade terms. In addition, when the final results of 1995 became known to the Company, it concluded that such results would have a further negative impact on the Company's ability to conduct business on normal trade terms. Therefore, the Company decided that it was necessary to obtain an equity infusion which would: (i) restore the Company's equity base that had deteriorated due to the operating loss in 1995, (ii) reduce long-term debt, and (iii) provide the Company with additional liquidity. As a result, the Company announced that it would conduct a $40 million rights offering after the first quarter to be underwritten by NAR, the Company's largest shareholder. The Company will utilize $14 million of the net proceeds to repay its 9.25% Senior Subordinated Notes due 1998. At such time, the Company will record an extraordinary expense related to the early extinguishment of debt, representing the write-off of the unamortized debt issuance costs of approximately $1.4 million. The balance of the proceeds will be used for general corporate purposes, including the repayment of outstanding revolver indebtedness under the Congress Facility. The announcement of this rights offering has eased vendor/creditor concerns about the Company's viability, and the Company believes that upon the conclusion of the rights offering, the Company will return to normal trade terms with all suppliers and will be able to obtain sufficient merchandise on a timely basis to satisfy customer demand, as well as have adequate capital to support its operations. 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. Infrastructure Investments. In early 1995, the Company completed the construction of a new fulfillment facility on a 53 acre site in Roanoke, Virginia to support the Domestications catalog. The total cost of the facility was $18.3 million. The Company began partial shipping and receiving activities in the first quarter of 1995 and the facility was fully operational in September 1995. The Company experienced operating inefficiencies and start-up problems in conjunction with bringing this facility into service. The Company's operating margins were negatively impacted by approximately $2.7 million of costs in 1995. The Company believes it will continue to experience inefficiencies in early 1996. However, the Company has taken and is taking actions which it believes will lead to more efficient operations. The Company also completed the construction and opened its new Gump's retail store in San Francisco in March 1995. The total cost of the construction was $7.8 million, of which $1.7 million was spent in 1995. The Company continued its management information systems up-grade in 1995. The new system, which began operation in two of the Company's catalogs in 1994, was operational in ten catalogs at the end of 1995. The Company expects to complete the roll-out of the system to the remaining catalogs in 1996. The Company will incur higher MIS costs in 1996 due to the completion of the transition to the new system. As of December 30, 1995, the Company had incurred costs of approximately $15.9 million as part of this plan, including $6.8 million in 1995. Such costs included hardware and software costs aggregating $10.3 million and internal costs of $2.5 million related to production of this new system that have been capitalized. The Company began to amortize these costs over 5 years in 1995. The Company's level of capital spending will be reduced in 1996 and will focus on the completion of the systems project. -9- 10 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 internal cost reductions and operating efficiencies and then through selective price increases where market conditions permit. The Company's inventory is mail-order 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. 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 18% of revenues in 1995. In January 1995, the USPS increased postage rates by approximately 14% to 18%. The Company also experienced record price increases in 1995 for the paper that is used in the production of its catalogs as the paper industry announced a series of significant price increases that increased the Company's average cost for paper by over 43% from 1994. Paper costs represented approximately 8% of revenues in 1995. These cost increases which totaled $25 million, and the duplicate costs associated with the consolidation of the distribution facilities and the transition to the new system discussed earlier, adversely impacted the Company's margins and earnings in 1995. In 1996, the USPS announced a reclassification of postal rates that will become effective on July 1, 1996. It is anticipated that this will favorably impact the Company's postage expenses by approximately 2%-3% on an annualized basis. Paper prices may continue at current levels during 1996. Cautionary Statements The following statements constitute forward looking statements which involve risks and uncertainties: "...the Company believes that upon the conclusion of the rights offering, the Company will return to normal trade terms with all suppliers and will be able to obtain sufficient merchandise on a timely basis to satisfy customer demand, as well as have adequate capital to support its operations." "...the Company has taken and is taking actions which it believes will lead to more efficient operations. Paper prices may continue at current levels during 1996." "In 1996, the USPS announced a reclassification of postal rates that will become effective on July 1, 1996. It is anticipated that this will favorably impact the Company's postage expenses by approximately 2%-3% on an annualized basis." The following are important factors, among others, that could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf, of the Company: a general deterioration in the economic conditions in the United States leading to increased competitive activity including a business failure of a substantial size company in the retail industry, a reduction in consumer spending generally or specifically with reference to the types of merchandise that the Company offers in its catalogs; -10- 11 an increase in the failure rate of consumer indebtedness generally; an increase in credit sales by the Company accompanied by an increase in its bad debt experience with respect to consumer debt; a delay in the implementation of the actions to be taken by the Company to increase the efficiency of operations; rapid increases and decreases in the volume of merchandise that passes through the Company's warehouse facilities; and a delay or reversal in the implementation of postal rate increase or an increase in paper cost. -11- 12 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 December 30, 1995 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 30, 1995. These consolidated 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 consolidated 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 December 30, 1995 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 30, 1995 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 audit 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 February 26, 1996 (except with respect to the matters discussed in Note 14, as to which the date is March 7, 1996) New York, New York -12- 13 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 1994 and December 30, 1995
DECEMBER 31, DECEMBER 30, 1994 1995 ------------ ----------- (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents $24,053 $2,682 Accounts receivable, net of allowance for doubtful accounts of $2,730 in 1994 and $2,597 in 1995 25,247 30,176 Inventories 83,653 79,281 Prepaid catalog costs 33,725 37,118 Deferred tax asset, net 3,200 3,300 Other current assets 2,658 6,170 ------- ------- Total Current Assets 172,536 158,727 ------- ------- Property and Equipment, at cost Land 1,917 4,811 Buildings and building improvements 7,994 19,353 Leasehold improvements 6,807 14,001 Furniture, fixtures and equipment 24,103 39,508 Construction in progress 21,358 5,479 -------- -------- 62,179 83,152 Accumulated depreciation and amortization (19,708) (26,090) -------- -------- Property and Equipment, net 42,471 57,062 -------- -------- Goodwill 19,026 36,586 Deferred tax asset, net 11,800 11,700 Other assets 16,413 14,934 -------- -------- Total Assets $262,246 $279,009 ======== ========
See Notes to Consolidated Financial Statements. -13- 14 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) As of December 31, 1994 and December 30, 1995
DECEMBER 31, DECEMBER 30, 1994 1995 ------------ ------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt and capital lease obligations $ 812 3,546 Accounts payable 89,366 93,291 Accrued liabilities 20,215 25,969 Customer prepayments and credits 3,642 7,147 ---------- -------- Total Current Liabilities 114,035 129,953 ---------- -------- Noncurrent Liabilities: Long-term debt 35,907 57,283 Capital lease obligations 1,196 1,973 Other 1,383 2,590 ---------- -------- Total Noncurrent Liabilities 38,486 61,846 ---------- -------- Total Liabilities 152,521 191,799 ---------- -------- Shareholders' Equity: 6% Series A Convertible Additional Preferred Stock, $10 stated value, authorized 5,000,000 shares; issued 156,600 shares in 1994 and 78,300 shares in 1995 1,589 795 Series B Convertible Additional Preferred Stock, $.01 par value, authorized and issued 634,900 shares in 1995 - 5,558 Common Stock, $.66 2/3 par value, authorized 150,000,000 shares; issued 92,978,234 shares in 1994 and 93,693,162 shares in 1995 61,985 62,461 Capital in excess of par value 253,210 255,390 Accumulated deficit (201,102) (231,332) ---------- -------- 115,682 92,872 Less: Treasury stock, at cost (1,157,061 shares in 1994 and 1995) (3,345) (3,345) Notes receivable from sale of Common Stock (1,912) (2,023) Deferred compensation (700) (294) ---------- -------- Total Shareholders' Equity 109,725 87,210 ---------- -------- Total Liabilities and Shareholders' Equity $262,246 $279,009 ========== ========
See Notes to Consolidated Financial Statements. -14- 15 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) For the years ended January 1, 1994, December 31, 1994 and December 30, 1995
1993 1994 1995 ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) REVENUES $642,511 $768,884 $749,767 -------- -------- -------- Operating costs and expenses: Cost of sales and operating expenses 407,087 484,059 483,493 Write-down of inventory of discontinued catalogs - - 8,580 Provision for facility closings - - 1,563 Selling expenses 157,811 197,436 205,618 General and administrative expenses 55,258 65,257 64,112 Depreciation and amortization 3,279 6,157 9,020 -------- -------- -------- 623,435 752,909 772,386 -------- -------- -------- INCOME (LOSS) FROM OPERATIONS 19,076 15,975 (22,619) Interest expense (4,925) (3,544) (5,050) Interest income 2,168 731 519 Other income (expense) 888 (1,833) - -------- -------- -------- Income (loss) before income taxes 17,207 11,329 (27,150) Income tax provision (benefit) (130) (3,509) 1,003 -------- -------- -------- Income (loss) before extraordinary item 17,337 14,838 (28,153) Extraordinary item - - (1,837) -------- -------- -------- NET INCOME (LOSS) 17,337 14,838 (29,990) Preferred stock dividends (4,093) (135) (240) -------- -------- -------- Net income (loss) applicable to Common Shareholders $13,244 $14,703 ($30,230) ======== ======== ======== Net income (loss) per share: Income (loss) before extraordinary item $ 0.17 $ 0.16 ($.30) Extraordinary item - - (.02) -------- -------- -------- NET INCOME (LOSS) PER SHARE $ 0.17 $ 0.16 ($ .32) ========== ======== ========
-15- See Notes to Consolidated Financial Statements. 16 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended January 1, 1994, December 31, 1994 and December 30, 1995
1993 1994 1995 ---- ---- ---- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $17,337 $14,838 ($29,990) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization including deferred fees . . . . . . . . . . . . . . . . . . . . . . . . . 4,122 6,499 9,419 Provision for doubtful accounts . . . . . . . . . . . . 3,404 3,697 4,448 Provision for catalog and facility closings . . . . . . - - 10,143 Extraordinary item - early extinguishment of debt . . . - - 1,837 Provision for losses on notes receivable and marketable securities . . . . . . . . . . . . . . . . - 2,121 - Deferred transaction costs . . . . . . . . . . . . . . - (837) - Deferred taxes . . . . . . . . . . . . . . . . . . . . (631) (4,369) - Other, net . . . . . . . . . . . . . . . . . . . . . . (33) 43 76 Changes in assets and liabilities, net of effects of acquired businesses and dispositions of assets: Accounts receivable, net . . . . . . . . . . . . . . . 5,503 (9,901) (6,161) Inventories . . . . . . . . . . . . . . . . . . . . . . (12,081) (3,424) 8,679 Prepaid catalog costs . . . . . . . . . . . . . . . . . (5,305) (8,154) 206 Other current assets . . . . . . . . . . . . . . . . . 282 (1,220) (3,131) Accounts payable . . . . . . . . . . . . . . . . . . . 24,530 10,518 (8,671) Accrued liabilities . . . . . . . . . . . . . . . . . . (10,650) 185 (1,583) Dividend payable . . . . . . . . . . . . . . . . . . . 886 - - Customer prepayments and credits . . . . . . . . . . . 684 (1,389) 3,134 -------- -------- -------- Net cash provided (used) by operating activities . . . . . 28,048 8,607 (11,594) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property and equipment . . . . . . . . . (4,239) (23,856) (13,686) Purchase of businesses . . . . . . . . . . . . . . . . . (100) - (13,008) Purchase of convertible debt securities . . . . . . . . . - (2,693) - Investments in affiliates . . . . . . . . . . . . . . . . - (3,183) Advances . . . . . . . . . . . . . . . . . . . . . . . . - (2,300) - Other, net . . . . . . . . . . . . . . . . . . . . . . . (313) (3,293) (887) -------- -------- -------- Net cash provided (used) by investing activities . . . . . (4,652) (35,325) (27,581) -------- -------- --------
See Notes to Consolidated Financial Statements. -16- 17 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years ended January 1, 1994, December 31, 1994 and December 30, 1995
1993 1994 1995 ---- ---- ---- (IN THOUSANDS) CASH FLOWS FROM FINANCING ACTIVITIES: Net payments under revolving credit facility . . . $(20,965) $ (230) - Proceeds from issuance of debt . . . . . . . . . . 20,000 10,000 20,685 Payments of long-term debt and capital lease obligations . . . . . . . . . . . . . . . . . . . (19,856) (8,015) (1,419) Cash dividends paid . . . . . . . . . . . . . . . . (890) (1,027) - Payment of debt issuance costs . . . . . . . . . . (1,560) (1,458) (2,202) Repurchase of Common Stock . . . . . . . . . . . . - (215) - Proceeds from issuance of Common Stock . . . . . . 912 49,305 400 Other, net . . . . . . . . . . . . . . . . . . . . (1,007) (172) 340 -------- --------- -------- Net cash provided (used) by financing activities . . (23,366) 48,188 17,804 -------- --------- -------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . 30 21,470 (21,371) Cash and cash equivalents at the beginning of the year . . . . . . . . . . . . . . . . . . . . . . 2,553 2,583 24,053 -------- -------- -------- Cash and cash equivalents at end of the year . . . . $ 2,583 $ 24,053 $ 2,682 ======== ======== ======== SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid . . . . . . . . . . . . . . . . . . . $ 4,883 $ 2,923 $ 4,586 Income taxes paid . . . . . . . . . . . . . . . . . $ 71 $ 701 $ 1,318
See Notes to Consolidated Financial Statements. -17- 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 1, 1994, DECEMBER 31, 1994 AND DECEMBER 30, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations - Hanover Direct, Inc. ("HDI") is a direct specialty retailer in the United States that publishes a portfolio of branded specialty catalogs offering home fashions, general merchandise and apparel. HDI also operates several retail operations in the United States which comprised approximately 3% of HDI's net revenues for the year ended December 30, 1995. 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 of shares of H&H Common Stock for shares of HDI Common Stock, (ii) the exchange of shares of THC 7.5% Preferred Stock for shares of HDI's 7.5% Preferred Stock, and (iii) the exchange of shares of THC Class B Preferred Stock for 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 31, 1994 and December 30, 1995 were 52 - week years. The year ended January 1, 1994 was a 53 - week year. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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. The Company considers slow moving inventory to be surplus and calculates a loss on the impairment as the difference between an individual item's cost and the net proceeds anticipated to be received upon disposal. Such inventory is written down to its net realizable value. The costs capitalized by the Company are the costs of the product and freight-in charges. Prepaid Catalog Costs - Costs related to mail order catalogs and promotional material are amortized over their estimated productive lives, not exceeding six months. Costs related to mail order catalogs and promotional material are capitalized and amortized over their estimated productive lives, not exceeding six months. Total catalog expense was $197.3 million, $191.8 million, and $154.9 million, respectively, in 1995, 1994 and 1993. -18- 19 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, 30-40 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. Capitalized development costs for the Company's new management information systems aggregated $6.4 million and $5.5 million at December 30, 1995 and December 31, 1994, respectively. Such costs are included in other assets and are being amortized over a five year period commencing July 1995. In connection with the MIS upgrade the Company capitalizes its incremental internal costs for its systems development (including payroll and fringe benefits for MIS personnel working directly on new systems development and implementation). 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 $4.5 million and $5.6 million at December 31, 1994 and December 30, 1995, respectively. On an ongoing basis, the Company assesses the carrying value and the economic useful life of the goodwill based on the acquired business' prior and future operating income and estimated net cash flows. The evaluation of the carrying value of the goodwill asset is performed on an undiscounted basis. Mailing Lists - The costs of acquired mailing lists are amortized over a five year period. Mailing lists, included in Other assets, amounted to $1.8 million and $3.5 million at December 31, 1994 and December 30, 1995, respectively, and are carried net of accumulated amortization of $.7 million and $1.6 million, respectively. On an ongoing basis, the Company assesses the carrying value and the economic useful life of the mailing lists based on the acquired business' potential future operating income and estimated net cash flows. The evaluation of the carrying value of the mailing lists asset is performed on an undiscounted basis. Accounting for the Impairment of Long-Lived Assets: In March 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of". This Statement is effective beginning in 1996 and requires long-lived assets as well as identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. The Company does not expect a material impact on their financial position upon implementation of this Statement in 1996. 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 1994 and 1995 was 93,285,190 and 93,029,816 shares, respectively. For 1993 the weighted average number of shares for primary and fully diluted net income per share was 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. -19- 20 Supplemental Earnings Per Share - 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. Extraordinary Items. The extraordinary loss of $1.8 million in 1995 represented a loss on the early extinguishment of debt which arose in connection with the refinancing of the Company's $75 million Revolving Credit Facility and its $14 million 9.25% Senior Subordinated Notes due 1998. Revenues -- The Company's revenue recognition policy states that revenue on mail-order merchandise sales should be recognized at the time the merchandise is shipped to the customer. Amounts billed to customers for postage and handling charges are recognized as revenue at the time that the revenues on the product shipment are recognized. The Company provides a reserve for expected future returns at the time the sale is recorded based upon historical experience. Fair Value of Financial Instruments - The fair value of financial instruments does not materially differ from their carrying values. The assets of Regal Communications, Inc. ("Regal") were valued in the bankruptcy proceedings. The Company valued their share of the Regal assets in proportion to their share of net realizable assets. Supplemental Disclosure of Noncash Activities
1993 1994 1995 ---- ---- ---- (IN THOUSANDS) 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 $ - $ 1,155 ========== =========== ========= Other equity issuances and exchanges . . . . . . . . . . . . . . . . . $ 4,990 $ 1,823 $ 1,456 ========== =========== ========= Acquisition of businesses: Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . $ 38,578 $ - $ 45,165 Fair value of liabilities assumed . . . . . . . . . . . . . . . . . . (26,180) - (26,757) Preferred stock issued . . . . . . . . . . . . . . . . . . . . . . . - - (5,400) Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . (12,298) - - ---------- ----------- --------- Net cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 100 $ - $ 13,008 ========== =========== =========
2. 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 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) $1.5 million of additional credit under the Company's revolving credit facility, as amended. -20- 21 The Company Store - In August 1993, the Company acquired certain assets of the Company Store Holdings, Inc. and subsidiaries ("The Company Store"), a direct marketer of down comforters, other down product and home furnishings. The consideration given for 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 (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. The Company made the following acquisitions in 1995: 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 Improvements and Leichtung Workshops names, for a purchase price of approximately $12.8 million in cash and the assumption of certain liabilities. This acquisition has been accounted for using the purchase method of accounting based on the fair market values of the assets and liabilities acquired and has resulted in the recording of approximately $7.3 million of goodwill and $1.4 million of customer mailing list intangible assets. In connection with this acquisition the Company plans to sell the assets of the Leichtung Workshops catalog and has relocated all telemarketing and fulfillment operations to the Company's Hanover, PA facility. The distribution facility in Ohio and the Leichtung Workshops assets, which are being held for sale are being carried at their estimated net realizable value of $1.7 million, as of December 30, 1995. The Safety Zone. In February 1995, the Company acquired the remaining 80% of the outstanding common stock it did not already own of Aegis Safety Holdings, Inc. ("Aegis"), publisher of The Safety Zone catalog, through the issuance of 634,900 shares of a newly-created Series B Convertible Additional Preferred Stock ("Series B Stock") of the Company with a stated value of $10 per share. Previously, in September 1993, the Company had acquired 20% of the outstanding common stock of Aegis. Dividends can be payable on the Series B Stock at various rates and times and are contingent on specific earnings targets. The Series B Stock is also convertible, subject to antidilution, as discussed in Note 8. Dividends were not paid in 1995 based on The Safety Zone catalog's 1995 operating results. This investment has been accounted for using the purchase method of accounting based on the fair market values of Aegis' assets and liabilities and the Series B Stock, and has resulted in the recording of approximately $7.1 million of goodwill. The fair value of the Series B Stock, which is based on an independent appraisal, is $.9 million less than the stated value and the discount is being amortized over a five-year period. This amortization is included in preferred stock dividends in the statement of income from the date of acquisition. Austad's. In May 1995, the Company acquired 67.5% of the outstanding shares of Austad's Holdings, Inc. ("Austad's"), which owned The Austad Company ("TAC"), the publisher of the Austad's catalog featuring golf equipment, apparel and gifts, for a purchase price of $1.8 million in cash. The Company also lent TAC, on a subordinated basis, $2.2 million which bears interest at the rate of 10% per annum and is due by May -21- 22 2000. The Company also provided a $.4 million loan to TAC which bears interest at a fluctuating rate (8.75% through April 1996) and is secured by a second mortgage on TAC's office and warehouse. The acquisition has been accounted for using the purchase method of accounting based on the estimated fair market values of the assets and liabilities acquired and has resulted in the recording of approximately $4.5 million of goodwill and approximately $1.2 million of customer mailing list intangible assets. On February 16, 1996, David Austad and certain family members surrendered to Austad's their Austad's shares, amounting to 32.5% of the outstanding shares, and paid approximately $1.2 million (subject to certain post-closing adjustments) in exchange for all the outstanding shares of AGS, Inc. ("AGS"), a South Dakota corporation newly formed by TAC to hold the existing retail assets and liabilities of TAC. The transaction assumed a value for Austad's and TAC based on the Company's purchase price in the May 1995 acquisition, as adjusted by adding the net income of Austad's and TAC from May 25, 1995 through February 16, 1996. As a result of the reorganization, Austad's became a wholly owned subsidiary of the Company. In connection with the reorganization, TAC was released from all future obligations under three of four store leases. The Company expects that a similar release will be obtained in the near future regarding the fourth lease. AGS will operate the four existing retail stores acquired from TAC as Austad's stores under license from Austad's. The license grants Mr. Austad exclusive retail rights to the Austad's name in 37 states and Canada. Austad's retains all direct marketing rights and all other rights. Mr. Austad will continue to work together with TAC on joint buying and other cooperative efforts. The customer service and fulfillment operations of Austad's will be transferred to other Company facilities in the first quarter of 1996. The Company plans on selling the Austad's South Dakota warehouse and distribution facility and will use the proceeds to pay the 8.75% Mortgage Note Payable. To the extent that the proceeds from both the sale of such facility and certain computer equipment produces any gain or loss, Mr. Austad will share therein to the extent of his previous 32.5% interest in Austad's. TAC had a revolving credit facility that was secured by substantially all of TAC's assets that was to expire on February 26, 1996. Such facility was paid off at the February 16th closing with the proceeds from the sale of the retail operations and from the Company's revolving credit facility. Accounting for Acquisitions - The acquisitions of Gump's, The Company Store, Tweeds, Improvements, Leichtung Workshops, The Safety Zone and Austad's have been accounted for using the purchase method of accounting with goodwill of approximately $30.3 million recorded, based upon the fair values of the net assets acquired and liabilities assumed. In addition, The Company recorded $5.6 million representing the fair value of acquired mailing lists. In accordance with the purchase of method of accounting, the Company updated its estimates of fair value of the net assets acquired and increased goodwill by $1.2 million in 1994. -22- 23 The following represents the unaudited pro forma results of operations for the years ended January 1, 1994, December 31, 1994 and December 30, 1995 as if these three acquisitions had occurred at the beginning of fiscal year 1993.
(In thousands, except per share amounts) (Unaudited) 1993 1994 1995 ---- ---- ---- Revenues $782,365 $840,295 $ 763,786 ======== ======== =========== Income (loss) before extraordinary item $ 8,954 $ 14,305 $ (28,083) ======== ======== =========== Net income (loss) $ 4,861 $ 14,170 $ (30,160) ======== ======== =========== Per Share: Income (loss) before extraordinary item $ .06 $ .15 $ (.30) Extraordinary item -- -- (0.2) -------- -------- ----------- Net income (loss) $ .06 $ .15 $ (.32) ======== ======== ===========
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. Per share amounts are expressed after deducting preferred stock dividends of $4.1, $.1 and $.2, million in 1993, 1994 and 1995, respectively. OTHER INVESTMENTS - Other Investments include the following: 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. The remaining 50% interest is held by an unrelated third party. This investment is accounted for by the equity method of accounting. The Company made annual rent payments to the partnership totaling $.7 million and $.6 million in 1994 and 1995, respectively, as part of a 15 year lease through 2008. The Company recorded $.1 million in income for its portion of the partnership income in 1994, and 1995, respectively. The Company's investment in Blue Ridge was $1.1 million and $1.0 million at December 31, 1994 and December 30, 1995, respectively. Boston Publishing Company - In February 1994, the Company acquired a 20% equity interest in Boston Publishing Company ("BPC") and provided secured and unsecured loans to BPC. In August 1994, BPC filed for protection under Chapter 11 of the United States Code. In 1995, the Company received inventory and the customer mailing list of BPC in payment of its $1.2 million loan and subsequently realized $.3 million upon disposition of these assets and wrote off the remaining assets. Regal Communications, Inc. - 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 Code. As a result, during 1994, the Company wrote down the convertible debenture to the estimated fair value of $1.7 million. The decline in fair value of the investment was considered other-than-temporary impairment and the $1 million decline was included in realized loss in the other expense caption on the income statement. The convertible debt matures on June 15, 2008. -23- 24 In December 1995, a plan of reorganization was confirmed by the Bankruptcy Court and the Company expects to recover the $1.7 million carrying value of its investment. The Company received its first distribution of $.5 million in February 1996. Tiger Direct. - In February 1995, the Company entered into an agreement to acquire certain securities of Tiger Direct, Inc. ("Tiger"), a direct marketer of computer software, peripherals and CD-ROM hardware and software. In February 1995, the Company entered into a loan and security agreement with Tiger pursuant to which the Company provided a secured working capital line of credit to Tiger, up to a maximum of $3.0 million, which was loaned under such agreement. In September 1995, due to the continued deterioration of Tiger's financial condition, the Company terminated the securities purchase agreement. The Company sold the loan to a third party and received payment in full for the principal of the loan and interest to the date of sale. During the period from February 1995 to September 1995, the Company provided certain services to Tiger and also incurred certain costs related to entering into the loan and security agreements aggregating $.5 million. Under the terms of the agreement, Tiger is required to reimburse the Company for such costs and services rendered. To date, Tiger has refused to reimburse the Company for these costs. The Company has instituted an action to recover such costs, which are carried at their realizable value. 3. PROVISION FOR FACILITY CLOSINGS AND WRITE-DOWN OF INVENTORY OF DISCONTINUED CATALOGS. In 1995, the Company made a decision to discontinue six catalogs. The six discontinued catalogs generated revenues of $88 million and $118 million and losses of $20 million and $4.7 million, in 1995 and 1994, respectively. These losses represent operating losses attributable to falling revenues due to poor sales on the discontinued catalogs, in addition to increasing operating costs and expenses, cost of sales and selling expenses, predominantly incurred to create liquidation catalogs. The 1995 loss also included a provision of approximately $8.6 million, primarily related to the write-down of inventory associated with these catalogs to its net realizable value, based on the planned liquidation of such inventory. The $8.6 million write-down occured because the Company will be mailing fewer catalogs than had been planned originally, so it has significantly more merchandise that needs to be moved through non-catalog channels. The Company utilizes various methods to dispose of the inventory related to discontinued catalogs, including special sale catalogs, sales sections in other catalogs, and liquidations of remaining inventory through off-price merchants. This liquidation process typically takes from six to nine months. The $8.6 million is included in the write-down of inventory of discontinued catalogs in the Consolidated Statements of Income (Loss) at December 30, 1995 and represents an incremental provision in excess of the original provision included in cost of sales expense. There were no such charges incurred by the Company in 1993 or 1994. Fixed overhead, primarily telemarketing and fulfillment costs, that was allocated to the six discontinued catalogs has been absorbed by the operations of the 1995 acquisitions and through cost containment measures made by the Company. In 1995, the Company incurred costs, aggregating approximately $1.5 million, in connection with the consolidation of its fulfillment facilities. These costs include moving expenses, lease termination fees and severance expenses, substantially all of which were paid in 1995. There were no such charges incurred by the Company in 1993 or 1994. These costs are included in write-down of inventory of discontinued catalogs. 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, and Sears Improvements, based on the Improvements 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. In accordance with the Sears Agreement, EBIT generated by the Sears catalogs is the basis for dividing these profits. The Sears specialty catalogs generated revenues of $81 million and $71 million and earnings before interest and taxes ("EBIT") of $3.0 million and $2.9 million in 1995 and 1994, respectively. -24- 25 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 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. The warrant exercise price is $10.57 per share. If neither of these goals is achieved, the performance warrant will expire unexercised in 1999. Through 1995, 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 is 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 agreement expires in December 2000. 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. The proceeds to the Company relating to the sale of receivables for 1995, 1994 and 1993 were $46.2, $56.1 and $46.7, respectively. At December 31, 1994 and December 30, 1995, the uncollected balances under this program were $45.9 million and $38.6 million, respectively, of which $11.5 million and $5.5 million, respectively, represent deposits under the agreement which are included in Accounts receivable, net. The total reserve balance maintained for the repurchase of uncollectible accounts was $2.3 million and $2.4 million at December 31, 1994 and December 30, 1995, respectively, of which $1.2 million and $1.4 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):
DECEMBER 31, DECEMBER 30, 1994 1995 ------------ ------------ Reserve for future sales returns . . . . . . . . . . . . . . $ 6,023 $ 5,535 Compensation . . . . . . . . . . . . . . . . . . . . . . 3,923 5,795 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,330 3,007 Reserve for repurchase of accounts receivable sold with recourse . . . . . . . . . . . . . . . . . . . . . 1,180 1,391 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,759 10,241 ------- ------- $20,215 $25,969 ======= =======
-25- 26 7. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
DECEMBER 31, DECEMBER 30, 1994 1995 ------------ ------------ Revolving Term Notes . . . . . . . . . . . . . . . . . . . . $ - $ 9,931 TAC Revolving Credit Facility . . . . . . . . . . . . . . . . - 2,011 Term Financing Facility . . . . . . . . . . . . . . . . . . . 10,000 20,000 8.75% Mortgage Note Payable due 2003 . . . . . . . . . . . . - 1,718 Industrial Revenue Bonds with variable interest rates averaging 4.5% in 1994 and 4.1% in 1995 due 2003 . . . . . . 8,000 8,000 6% Mortgage Notes Payable due 1998 . . . . . . . . . . . . . 3,300 3,139 9.25% Subordinated Notes due 1998 . . . . . . . . . . . . . 14,000 14,000 7 1/2% Convertible Subordinated Debentures due 2007 . . . . . 751 751 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 19 ------- ------- 36,091 59,569 Less current portion . . . . . . . . . . . . . . . . . . . . 184 2,286 ------- ------- Noncurrent portion . . . . . . . . . . . . . . . . . . . . . $35,907 $57,283 ======= =======
Revolving Credit Facility - As a result of the operating losses incurred during 1995, the Company was not in compliance with certain financial covenants under its revolving credit facility that it had entered into in 1994. In order to obtain waivers to this facility for these covenant violations, the Company agreed to more restrictive terms with respect to availability (reduced from $80 million to $55 million), rate and financial covenants. The Company determined that the terms of these proposed amendments were too restrictive and agreed to a waiver through November 15, 1995, when the Company replaced this facility with a new $75 million secured credit facility with Congress Financial Corporation ("Congress Facility"). The Congress Facility is comprised of a revolving line of credit of up to $65 million with a three year term and two year term loans aggregating $10 million ("Revolving Term Notes"). The amount that can be borrowed under the Congress Facility is based on percentages of eligible inventory and accounts receivable from time to time. The revolving line of credit carries an interest rate of 1.25% above CoreStates' prime rate and the Revolving Term Notes carry an interest rate of 1.5% above CoreStates' prime rate. The Congress Facility is secured by all assets of the Company including customer mailing lists, and the Company is required to maintain a minimum net worth of $80 million, as well as working capital of $26 million. In addition, the Congress Facility places limitations on the incurrence of additional indebtedness. 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. The Credit Facility provided for a $40 million revolving credit facility, a $20 million acquisition line and $20 million of 15 year Term Financing for certain capital expenditures ("Term Financing Facility"). There was a $35 million sub-limit for letters of credit under the Credit Facility. The Company borrowed $10 million in each of 1994 and 1995 under the Term Financing Facility. The rate of interest on the Term Financing Facility is based on the equivalent rate of A-1 commercial paper existing at the time of each borrowing. The face rate ranged from 5.85% to 6.30% and 5.73% to 6.02% at December 31, 1994 and December 30, 1995. The Term Financing Facility requires annual sinking fund payments of $1.0 million beginning October 1996 though October 1999 and increasing to $1.6 million for each of the ten years thereafter. -26- 27 The Credit Facility was terminated and amounts outstanding under the revolving credit facility were repaid with the closing of the Congress Facility in November 1995. The Term Financing Facility continues to be outstanding and in effect under its original terms. All standby letters of credit issued under the Credit Facility were replaced with letters of credit issued by Congress. At December 30, 1995, the Company had no outstanding borrowings under the revolving line of credit and $9.9 million outstanding under the Revolving Term Notes. The rates of interest related to the revolving line of credit and Term Notes were 9.50% and 9.75%, respectively, at December 30, 1995. The face amount of unexpired documentary letters of credit at December 31, 1994 and December 30, 1995, were $7.2 million and $4.2 million, respectively. In addition, the Company had issued $31.2 million and $28.5 million of standby letters of credit at December 30, 1995 and December 31, 1994, respectively, which in 1995 included $8.6 million related to the Industrial Revenue Bonds due 2003 and $20.3 million related to the Term Financing Facility. The TAC Revolving Credit Facility was paid off with the proceeds from the Congress Facility on February 16, 1996 and accordingly has been classified as a long-term obligation. 8.75% Mortgage Note Payable due 2003 - TAC's 8.75% Mortgage Note Payable is reflected as an obligation of the Company and consolidated subsidiaries in consequence of the corporate reorganization, completed in February 1996. Pursuant to the reorganization TAC's retail business was split off to Mr. David Austad and certain of his family members, in exchange for their 32.5% interest in Austad (and a cash payment of $1.2 million, subject to certain post-closing adjustments), and the Company became the owner of all the outstanding capital shares of Austad. The 8.75% Mortgage Note Payable is secured by the TAC warehouse and distribution facility in South Dakota. That facility's operations have been largely transferred to other Company facilities and the Company plans to sell the South Dakota property. The 8.75% Mortgage Note payable is secured by the Austad's distribution facility. Monthly principal payments amount to $.1 million per year with a final payment of $1.4 million due in March 2003. 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 schedule 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 - At December 30, 1995, the Company has $14 million of 9.25% Senior Subordinated Notes due 1998 ("9.25% Notes") outstanding. In November 1995 Intercontinental Mining & Resources Incorporated ("IMR"), an affiliate of NAR, purchased the 9.25% Notes from a third party in connection with the refinancing of the indebtedness under the Congress Facility. The Company paid NAR a commitment fee of $105,000 upon the signing of a repurchase and option agreement and a fee of $210,000 (1.5% of the outstanding principal amount of the 9.25% Notes acquired by IMR) upon the funding, as well as all expenses incurred by NAR in performing its obligation. -27- 28 The Company also extended by two years the terms of the warrants to purchase 5,033,735 shares held by NAR and IMR to August 1, 1998. The Company recorded as debt issuance costs, approximately $1.2 million, representing the fair value of the warrant extensions AS DETERMINED USING THE BLACK SCHOLES MODEL. Such costs are being amortized over the life of the 9.25% Notes. The Company has also agreed to indemnify NAR against any and all claims or losses asserted against it or incurred by it relating to the transactions contemplated by the repurchase and option agreement. In connection with IMR's purchase of the 9.25% Notes, the Company and IMR agreed to amend the financial covenants contained in the Indenture relating to the 9.25% Notes and to grant to the Trustee for such 9.25% Notes a second priority security interest in the Company's customer and mailing lists. The Company is required to maintain certain financial covenants with which it was in compliance at December 30, 1995. General - As a result of the replacement of the Credit Facility and the purchase by IMR of the 9.25% Notes, the Company wrote off approximately $1.8 million of unamortized debt issuance costs as an extraordinary item due to the early extinguishment of debt. At December 30, 1995, the aggregate annual principal and sinking fund payments required on all long-term debt were as follows (in thousands): 1996 - $2,286; 1997 - $10,176; 1998 - $19,868; 1999 - $1,076; 2000 - $1,649 and thereafter - $24,514. 8. CAPITAL STOCK 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. 6% Series A Convertible Additional Preferred Stock - In December 1993, in connection with the Company's acquisition of Tweeds, Inc. ("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 Additional 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. The Company converted the first and second equal portions of the 234,900 issued shares of the 6% Preferred Stock into 189,818 and 427,785 shares of Common Stock on September 30, 1994 and September 29, 1995, respectively. The Company elected to pay cash dividends of $.1 million related to the September 1994 conversion. Series B Convertible Additional Preferred Stock - In February 1995, the Company issued 634,900 shares of its Class B Convertible Additional Preferred Stock ("Series B Stock") to acquire the remaining 80% of the outstanding common stock of Aegis Safety Holdings, Inc. ("Aegis"), publisher of The Safety Zone catalog. The Series B Stock has a stated value of $10 per share. Non-cumulative dividends will accrue and be paid at 5% per annum during each of the first three years if Aegis attains at least $1 million in earnings before interest and taxes each year. In years four and five, dividends are cumulative will accrue and be paid at 7% per annum and are not contingent on the achievement of any earnings target. Dividends will not be paid in 1995 based on The Safety Zone catalog's 1995 operating results. -28- 29 The Series B Stock is convertible at any time, at $6.66 per share, subject to antidilution, at the option of the holder and is convertible at the Company's option if the market value of the Company's Common Stock is greater than $6.66 per share, subject to antidilution, for 20 trading days in any consecutive 30 day trading period or at the holder's option from time to time. If, after five years, the Series B Stock is not converted, it is mandatorily redeemable, at the Company's option, in cash or for 952,359 shares of the Company's Common Stock provided the market value of the stock is at least $6.33 per share, subject to antidilution. If the market value of the Company's Common Stock does not meet this minimum, the redemption rate is subject to adjustment which would increase the number of shares for which the Series B Stock is redeemed. The fair value of the Series B Stock, which is based on an independent appraisal, is $.9 million less than the stated value. This discount is being amortized over a five year period and resulted in a charge of $.2 million to preferred stock dividends in the statement of income for 1995. Warrants - The warrants outstanding at December 30, 1995 are as follows:
WARRANTS EXERCISE EXPIRATION ISSUED PRICE DATE -------- -------- ---------- 1,541,301 $2.42 8/01/98 3,157,884 2.91 8/01/98 334,550 2.19 8/01/98 --------- 5,033,735 =========
All of the above issued warrants are held by NAR and its 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 30, 1995, there were 93,452,768 shares of Common Stock, 78,300 shares of 6% Preferred Stock and 634,900 shares of Series B Stock outstanding. Additionally, an aggregate of 15,087,471 shares of Common Stock were reserved for issuance pursuant to (i) the exercise of outstanding options (265,000), (ii) the exercise of outstanding warrants (12,033,735), (iii) the Executive Equity Incentive Plan (1,021,170), (iv) the Restricted Stock Award Plan (275,700), and (v) the All Employee Equity Investment Plan (1,491,866). In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation", which is effective in 1996. The statement encourages entities to adopt the fair value based method of accounting for employee stock options, as opposed to the Company's current method, which measures compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees". The Company has not as yet decided whether they will adopt SFAS No. 123 for financial statement purposes, however at a minimum they will be required disclose in their footnotes to financial statements, additional information relating to the Company's various stock-based employee benefit plans and the Company's pro forma net income and earnings per share, as if the options granted were expensed at their estimated fair value at the time of grant. If the Company decides to adopt SFAS No. 123 for financial statement purposes, an additional expense will be recorded; however, the Company has not as yet calculated the impact of the adoption. -29- 30 Dividend Restrictions - The Company is restricted from paying dividends on its Common Stock or from acquiring its capital stock by certain debt covenants contained in agreements to which the Company is a party. 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. 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 numbers of shares, are as follows:
1993 1994 1995 ---- ---- ---- Options outstanding, beginning of period 603,765 365,250 496,050 Granted - 162,000 70,000 Exercised - (1,000) - Expired (214,165) (20,700) (334,050) Canceled (24,350) (9,500) (142,000) ---------- ---------- --------- Options outstanding, end of period 365,250 496,050 90,000 ========== ========== ========= Options exercisable, end of period 365,250 334,050 20,000 ========== ========== ========= Available for grant of options, end of period 1,583,833 1,452,033 1,858,083 ========== ========== =========
The option prices and amounts are: $1.75 - 20,000 shares, $2.25 - 50,000 shares and $3.50 - 20,000 shares. In June 1994, one director was granted non-qualified options to purchase 55,000 shares at an exercise price of $6.125 per share which expire in 2000. In September 1992, six directors were granted options to purchase 20,000 shares each, at the market price, which at the time was $1.75 per share. These option grants were approved at the 1993 Annual Meeting of Shareholders and the options expire in 1997. The table above does not include these option grants. Hanover Direct, Inc. Savings Plan - The 401(k) Savings and Retirement 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. -30- 31 The Company's contributions charged to expense for 1993, 1994 and 1995 were approximately $431,000, $608,000 and $556,000, 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 1993, 1994 and 1995 amounted to approximately $130,000, $192,000 and $222,000, respectively. The Retirement Plan permits eligible employees to contribute up to 4% of their salary. The Company matches all participant contributions, up to 50% of their contributions with a cap of 2%. 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 $.4 million, $1.1 million and $1.5 million in 1993, 1994 and 1995, respectively. Under the bonus plan, 25% of the bonus is deferred and payable in cash or restricted stock that vests over a three year period. 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. -31- 32 Changes in shares, options outstanding and options available for grant, expressed in numbers of shares, for the Incentive Plan are as follows:
1993 1994 1995 ---- ---- ---- Shares outstanding beginning of period 663,830 753,830 Shares purchased 663,830 90,000 143,333 Shares canceled -- -- (20,000) --------- --------- ---------- Shares outstanding end of period 663,830 753,830 877,163 --------- --------- ---------- Options outstanding, beginning of period -- 1,101,000 1,073,836 Options granted 1,327,660 180,000 286,666 Options canceled (226,660) (207,164) (339,332) --------- --------- ---------- Options outstanding, end of period 1,101,000 1,073,836 1,021,170 --------- --------- ---------- Total shares and options outstanding, end of period 1,764,830 1,827,666 1,898,333 ========= ========= ========= Available for grant of options and shares, end of period 635,170 572,334 501,667 ========= ========= =========
The purchase prices per share of the Company's Common Stock upon exercise of stock options are as follows: $1.75 - 30,000 shares, $2.25 - 33,333 shares, $2.50 - 676,505 shares, $2.63 -50,000 shares, $2.75 - 133,332 shares, $3.00 - 20,000 shares, $3.89 - 20,000 shares and $4.50 - 58,000 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 is being amortized over the three-year period in which the options become exercisable. The amount of amortization charged to expense was approximately $170,000, $137,000 and $72,000 for 1993, 1994 and 1995, respectively, net of forfeitures. Changes to the notes receivable related to the Incentive Plan are as follows:
1993 1994 1995 ---- ---- ---- Notes receivable balance beginning of period - $1,424,000 $1,522,000 Additions $1,707,000 328,000 229,000 Payments (283,000) (230,000) (100,000) ----------- ----------- ----------- Notes receivable end of period $1,424,000 $1,522,000 $1,651,000 =========== =========== ===========
Under the terms of the Incentive Plan, the purchase price for shares is based upon the market price at the date of purchase, and payment is made in the form of a 20% cash down payment and a six year note that bears interest at the mid-term applicable federal rate, as determined by the Internal Revenue Service, as of the month of grant of such shares. The Incentive Plan participants purchased shares at prices ranging from $1.75 to $4.50 with the Company accepting notes bearing interest at rates ranging from 5.35% to 7.75%. 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 -32- 33 Company or its affiliates selected by the Compensation Committee who holds a key position that the Compensation Committee shall have been 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 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 approximately $188,000 in 1993, $292,000 in 1994 and $219,000 in 1995, 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 will 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 vest 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. Changes in shares outstanding and available for grant, expressed in numbers of shares for the Investment Plan are as follows:
1993 1994 1995 ---- ---- ---- Shares outstanding, beginning of period 211,883 380,563 Shares purchased 223,508 260,124 216,931 Forfeited 11,625 91,444 89,360 --------- --------- --------- Shares outstanding end of period 211,883 380,563 508,134 ========= ========= ========= Shares available for grant, end of period 1,788,117 1,619,437 1,491,866 ========= ========= =========
-33- 34 The difference between the market price and the discounted price aggregated approximately $.4 million, $.4 million and $.2 million in 1993, 1994 and 1995, respectively. These amounts have been reduced by approximately $46,000 in 1993, $226,000 in 1994 and $181,000 in 1995 which have been charged to amortization expense. 10. INCOME TAXES At December 30, 1995, the Company had net operating loss carryforwards ("NOLs") totalling $162.5 million, which expire as follows: In the year 2001 - $17.3 million, 2003 - $14.6 million, 2004 - $14.3 million, 2005 - $20.6 million, 2006 - $46.9 million, 2007 - $27.7 million and 2010 - $21.1 million. The Company also has $1 million of general business tax credit carryforwards that expire in 2000 through 2009. The Company's available NOLs for tax purposes consists of $91.4 million of NOLs subject to a $4 million annual limitation under Section 382 of the Internal Revenue Code of 1986 and $71.2 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 $91.4 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 that, 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 direct marketing business and its expectations for the future, 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. Despite incurring an additional $21.1 million NOL in 1995, management believes that the Company will be able to utilize up to $43 million of NOLs over the next three years based upon the Company's assessment of numerous factors, including its future operating plans and its pre-tax income in 1993 and 1994 and its 1995 NOL. 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. For the year ended December 30, 1995, the Company maintained its deferred tax asset of $15 million (net of a valuation allowance of $48.5 million). Management believes that the $15 million net deferred tax asset represents a reasonable estimate of the future utilization of the NOLs and will continue to routinely evaluate the likelihood of future profits and the necessity of future adjustments to the deferred tax asset valuation allowance. -34- 35 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 $5.9 million in 1993, $4.2 million in 1994 and zero in 1995. The 1994 provision was 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 was $.5 million in 1993, $.9 million in 1994 and $1.0 million in 1995. The following is reconciliation of the Company's net income for financial statement purposes to taxable income (loss) for the years ended January 1, 1994, December 31, 1994 and December 30, 1995 (in thousands):
1993 1994 1995 ---- ---- ---- Net income (loss) . . . . . . . . . . . . . . $17,337 $14,838 ($30,230) Income tax provision (benefit) . . . . . . . (130) (3,509) 1,003 ------- ------- ------- Income (loss) before income taxes . . . . . . 17,207 11,329 (29,227) ------- ------- ------- Differences between income before taxes for financial statement purposes and taxable income: State income taxes . . . . . . . . . . . . . (501) (860) (1,003) Utilization of carryovers . . . . . . . . . . (2,543) (12,652) - Differences attributable to subsidiary not included in Company's tax return . . . . . . (313) Permanent differences. . . . . . . . . . . . 28 717 1,223 Net change in temporary differences . . . . . . . . . . . . . . . . (14,191) 1,466 8,190 ------- ------- -------- (17,207) (11,329) 8,097 ------- ------- -------- Taxable income (loss) . . . . . . . . . . . . $ - $ - ($21,130) ======= ======= ========
-35- 36 The components of the net deferred tax asset at December 30, 1995 are as follows (in millions):
Non- Current current Total ------- ------- ----- Federal tax NOL and business tax credit carryforwards . . . . . . . . . . . . . . . . . . . . $ -- $57.9 $57.9 Allowance for doubtful accounts . . . . . . . . . . . . 1.7 -- 1.7 Inventories . . . . . . . . . . . . . . . . . . . . . . 1.5 -- 1.5 Prepaid catalog costs . . . . . . . . . . . . . . . . . (1.8) -- (1.8) Excess of net assets of acquired business . . . . . . . -- (1.4) (1.4) Accrued liabilities . . . . . . . . . . . . . . . . . . 2.3 -- 2.3 Customer prepayments and credits . . . . . . . . . . . 1.7 -- 1.7 Tax basis in net assets of discontinued operations in excess of financial statement amount . . . . . . . 0.6 -- 0.6 Other -- 1.0 1.0 ------ ----- ----- Deferred tax asset . . . . . . . . . . . . . . . . . . 6.0 57.5 63.5 Valuation allowance . . . . . . . . . . . . . . . . . . (2.7) (45.8) (48.5) ------ ----- ----- Deferred tax asset, net ............................... $ 3.3 $11.7 $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 NOLs. 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 the NOLs. The Company believes, however, that IRS challenges that would limit the utilization of the 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:
1993 1994 1995 PERCENT PERCENT PERCENT OF PRE-TAX OF PRE-TAX OF PRE-TAX INCOME INCOME (LOSS) ---------- ---------- ---------- Tax (benefit) at Federal statutory rate . . . . . . . . . . 35.0% 35.0% (35.0%) State and local taxes . . . . . . . . . . . . . . . . . . . 1.9 4.9 2.2 Effect of Federal rate change on deferred tax asset . . . . (3.7) - - Reversal of valuation allowance . . . . . . . . . . . . . - (38.5) - Net increase in (reversal of) temporary differences . . . . Deferred compensation and incentive plans . . . . . (5.1) 11.4 - Loss on asset disposals . . . . . . . . . . . . . . (5.2) - - Depreciation and amortization . . . . . . . . . . . (2.7) (3.5) (5.4) Other (each less than 5%) . . . . . . . . . . . . . (15.9) (10.4) 15.1 Utilization of contribution and NOL carryover . . . . . . . (5.4) (39.1) - Tax NOLs for which no benefit could be recognized - - 25.3 Other . . . . . . . . . . . . . . . . . . . . . . . . . . 0.3 2.2 1.2 ----- ------ ---- (0.8%) (31.0%) 3.4% ===== ====== ====
-36- 37 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):
1993 1994 1995 ---- ---- ---- Minimum rentals $ 9,458 $ 13,572 $13,070
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 30, 1995, are as follows (in thousands):
OPERATING CAPITAL YEAR ENDING LEASES LEASES ----------- ------ ------ 1996 . . . . . . . . . . . . . . . . . . . . . . . $ 9,815 $1,659 1997 . . . . . . . . . . . . . . . . . . . . . . . 7,722 1,396 1998 . . . . . . . . . . . . . . . . . . . . . . . 6,075 432 1999 . . . . . . . . . . . . . . . . . . . . . . . 5,296 20 2000 . . . . . . . . . . . . . . . . . . . . . . . 4,736 - Thereafter . . . . . . . . . . . . . . . . . . . . 35,391 - -------- ------ Total minimum lease payments . . . . . . . . . . . 69,035 3,507 Less amount representing interest (a) . . . . . . ======== 274 ------ Present value of minimum lease payments (b) . . . $3,233 ======
(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 $628,000 and $1,196,000 at December 31, 1994 and $1,260,000 and $1,973,000 at December 30, 1995, respectively. The future minimum lease payments under noncancellable leases that remain from the discontinued restaurant operations as of December 30, 1995 are as follows: 1996 - $.8 million; 1997 - $.8 million; 1998 - $.8 million; 1999 - $.8 million; 2000 - $.8 million; and thereafter $3.3 million. The above amounts exclude annual sublease income of $1.0 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. The Company does not guarantee the indebtedness associated with the Roanoke apparel center held by Blue Ridge Associates. 12. RELATED PARTY TRANSACTIONS At December 30, 1995, current and former officers and executives of the Company owed the Company approximately $2.2 million of which approximately $1.7 million relates to receivables under the Executive Equity Incentive Plan. These amounts due to the Company bear interest at rates ranging from 5.35% to 7.75% -37- 38 and are due from 1999 to 2001. The remaining $.5 million is due on demand from two officers of the Company and bears interest at rates ranging from 6.0% to 7.96%. 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. NAR will not collect such a fee in 1996 as no such services are being performed. At December 30, 1995, NAR owned approximately 50% of the Company's outstanding Common Stock and would own 53% upon exercising all of their outstanding warrants. 13. COMMITMENTS AND CONTINGENCIES 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 materially misleading statements contained in the Company's public offering prospectus dated March 30, 1994. In lieu of an answer, defendants filed a motion to dismiss the complaint in its entirety for failure to state a claim upon which relief can be granted. On May 23, 1995, the United States District Court for the District of New Jersey dismissed the plaintiff's claim, with prejudice, for failure to state a claim upon which relief could be granted. On June 22, 1995, plaintiff filed a notice of appeal of the May 23, 1995 decision to the United States Court of Appeal for the Third Circuit. The appeal was submitted on the briefs on March 11, 1996. On March 26, 1996, the Court rendered its decision affirming the District Court's decision. 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. 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. In connection with certain discontinued restaurant transactions, the Company remains contingently liable with respect to lease obligations for 9 restaurant properties, should the buyers fail to perform under the agreements. The future minimum lease payments as of December 30, 1995 are as follows (in thousands): 1996 - $336; 1997 - $278; 1998 - $192; 1999 - $192; 2000 - $143; and thereafter $403. 14. SUBSEQUENT EVENTS In March 1996 the Company announced that the Board of Directors had voted to conduct a rights offering for $40 million of the Company's Common Stock after completion of the first quarter. The rights will -38- 39 be exercisable at a price to be determined at the time of commencement of the rights offering equal to 75% of the then-current market price, but not less than $1.00 nor more than $1.50 per share. NAR Group Limited, the Company's majority shareholder, will receive rights entitling it to purchase approximately 50% of the shares to be offered in the rights offering and has agreed to exercise such rights. In addition, NAR has agreed to standby and purchase all shares not subscribed by common shareholders and will receive a fee as a result. The proceeds of the rights offering will be used by the Company to repay the 9.25% Senior Subordinated Notes due on August 1, 1998 held by an affiliate of NAR, and for other general corporate purposes, including repaying outstanding indebtedness under its revolving credit facility. At such time the Company will record an extraordinary expense related to the early extinguishment of this debt, representing the write-off of the unamortized debt issuance costs of approximately $1.4 million. In February 1996, the Company announced that Rakesh K. Kaul was named President and Chief Executive Officer and elected to the Board of Directors effective March 7, 1996. Mr. Kaul has most recently served as Vice Chairman and Chief Operating Officer of Fingerhut Companies, Inc. 15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
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 ======== ======== ======== ========
-39- 40
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (in thousands, except per share amounts) 1995 Revenues $176,592 $182,774 $169,175 $221,227 Gross profit 62,905 63,003 54,285 79,565 Loss from operations (4,147) (5,988) (6,042) (6,442) -------- -------- -------- -------- NET LOSS (4,903) (7,490) (9,586) (8,011) Preferred stock dividends (45) (59) (66) (70) -------- -------- -------- -------- Net loss applicable to Common Shareholders $ (4,948) $ (7,549) $ (9,652) $ (8,081) ======== ======== ======== ======== Net loss per share $ (0.05) $ (0.08) $ (0.10) $ (0.09) ======== ======== ======== ========
-40- 41 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K * * * (c) See Exhibit Index * * * -42- 42 10-K SCHEDULE II HANOVER DIRECT VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 30, 1995, DECEMBER 31, 1994 AND JANUARY 1, 1994
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F ADDITIONS ---------------------------------- BALANCE AT CHARGED TO CHARGED TO OTHER BALANCE AT BEGINNING OF COSTS AND ACCOUNTS DESCRIBE DEDUCTIONS END OF DESCRIPTION PERIOD EXPENSES DESCRIBE PERIOD 1995: ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE, CURRENT $3,912,000 4,796,000 (4) 42,000 (1) 4,762,000 $3,988,000 RESERVES FOR DISCONTINUED OPERATIONS 1,668,000 (2) 29,000 1,639,000 RESERVE FOR SALES RETURNS 6,023,000 103,602,000 (2) 104,090,000 5,535,000 DEFERRED TAX ASSET VALUATION ALLOWANCE 38,600,000 (7) 9,900,000 48,500,000 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 RESERVE FOR SALES RETURNS 4,911,000 114,665,000 (2) 113,553,000 6,023,000 DEFERRED TAX ASSET VALUATION ALLOWANCE 49,700,000 11,100,000 38,600,000 1993: ALLOWANCE FOR DOUBTFUL 6,386,000 3,676,000 (4) 134,000 (1) 5,952,000 4,244,000 ACCOUNTS RECEIVABLES, CURRENT RESERVES FOR DISCONTINUED OPERATIONS 3,464,000 (2) 906,000 2,558,000 RESERVE FOR SALES RETURNS 3,901,000 80,665,000 (2) 79,655,000 4,911,000 DEFERRED TAX ASSET VALUATION ALLOWANCE 53,000,000 (5) 2,600,000 (3) 5,900,000 49,700,000
- --------------------------------------------------------- (1) Accounts written off. (2) Utilization of reserves. (3) Utilization of valuation allowance. (4) Represents acquired allowance for doubtful accounts receivable. (5) Represents available NOL's and the effect of the increase in corporate tax rates from 34% to 35%. (6) Represents decrease due to: utilization of valuation allowance and recognition of NOL's estimated to be utilized by future operating results. (7) Represents the increase in the valuation allowance offset by an increase in the gross tax asset. 43 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: July 16, 1996 By: s/Rakesh K. Kaul --------------------------------------- Rakesh K. Kaul, 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 and on the date indicated below. 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, Director Jeffrey Laikind, Director s/Elizabeth Valk Long s/Robert F. Wright -------------------------------- ------------------------------ Elizabeth Valk Long, Director Robert F. Wright, Director Date: July 16, 1996 -43- 44 EXHIBIT INDEX 11 COMPUTATION OF PER SHARE EARNINGS -44- EX-11 2 COMPUTATION OF EARNINGS 1 EXHIBIT 11
(In 000's, except per share amounts) TWELVE MONTHS ENDED DEC. 30, DEC. 31, 1995 1994 ---- ---- Income (loss) before extraordinary item $(28,153) $14,838 Extraordinary item (1,837) -- -------- ------- Net income (loss) (29,990) 14,838 Preferred stock dividends (240) (135) -------- ------- Net income (loss) applicable to Common Shareholders (30,230) 14,703 Average shares of common stock outstanding during the period 93,030 90,207 Incremental shares from assumed exercise of stock options (primary) 665 3,078 Total shares used to calculate PEPS* 93,030 93,285 Primary earnings per share before extraordinary item $(0.30) $0.16 Extraordinary item (0.02) -- -------- ------- Primary earnings per share $(0.32) $0.16 Average shares of common stock outstanding during the period 93,030 90,207 Incremental shares from assumed exercise of stock options (fully diluted) 665 3,078 Total shares used to calculate FDEPS* 93,030 93,285 Fully diluted earnings per share before extraordinary item $(0.30) $0.16 Extraordinary item (0.02) -- -------- ------- Fully diluted earnings per share $(0.32) $0.16 Average shares of common stock outstanding during the period 93,030 90,207 Basic earnings per share $(0.32) $0.16
* Per APB 15, when a net loss is reported, exercise or conversion is not to be assumed. -45- -----END PRIVACY-ENHANCED MESSAGE-----