-----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, IR1N1EnnL/EnLXpV2ddTTiBJcJhst/e8QseRh6wnsDxatH8KNzJeRxGsBCP4+lfi QPozseZhkiSRiBgV7OdkpQ== 0000950123-97-009427.txt : 19971114 0000950123-97-009427.hdr.sgml : 19971114 ACCESSION NUMBER: 0000950123-97-009427 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970927 FILED AS OF DATE: 19971112 SROS: AMEX 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-Q SEC ACT: SEC FILE NUMBER: 001-08056 FILM NUMBER: 97714888 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-Q 1 HANOVER DIRECT, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended SEPTEMBER 27, 1997 Commission file number 1-12082 HANOVER DIRECT, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-0853260 (State of incorporation) (IRS Employer Identification No.) 1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY 07087 (Address of principal executive offices) (Zip Code) (201) 863-7300 (Telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES /X/ NO / / Common stock, par value $.66 2/3 per share: 200,055,302 shares outstanding as of November 4, 1997. 2 HANOVER DIRECT, INC. FORM 10-Q SEPTEMBER 27, 1997 INDEX Page Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 28, 1996 and September 27, 1997 ......................... 3 Condensed Consolidated Statements of Income (Loss) - thirteen and thirty-nine weeks ended September 28, 1996 and September 27, 1997 .. 5 Condensed Consolidated Statements of Cash Flows - thirty-nine weeks ended September 28, 1996 and September 27, 1997 .................... 6 Notesto Condensed Consolidated Financial Statements for the thirteen and thirty-nine weeks ended September 28, 1996 and September 27, 1997 ................................................. 8 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations ................................ 15 Item 3. Quantitative and Qualitative Disclosures about Market Risk ... 23 Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders .......... 24 Item 6. Exhibits and Reports on Form 8-K ............................ 24 Signatures ........................................................... 25 2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 28, 1996 AND SEPTEMBER 27, 1997 (UNAUDITED) (IN THOUSANDS)
December 28, September 27, 1996 1997 ------------ ------------- ASSETS Current Assets: Cash and cash equivalents $ 5,173 $ 918 Accounts receivable, net 29,399 17,247 Accounts receivable under financing agreement -- 20,279 Inventories 67,610 69,672 Prepaid catalog costs 23,401 27,880 Deferred tax asset, net 3,300 3,300 Other current assets 3,148 4,352 --------- --------- Total Current Assets 132,031 143,648 --------- --------- Property and equipment, at cost: Land 4,797 4,883 Buildings and building improvements 16,554 15,862 Leasehold improvements 9,956 8,050 Furniture, fixtures and equipment 34,603 47,741 Construction in progress 8,315 866 --------- --------- 74,225 77,402 Accumulated depreciation and amortization (22,523) (28,051) --------- --------- Net Property and Equipment 51,702 49,351 Goodwill, net 17,901 17,542 Deferred tax asset, net 11,700 11,700 Other assets, net 7,493 3,770 --------- --------- Total Assets $ 220,827 $ 226,011 ========= =========
See Notes to Condensed Consolidated Financial Statements. 3 4 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) DECEMBER 28, 1996 AND SEPTEMBER 27, 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
December 28, September 27, 1996 1997 ------------ ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt and capital lease obligations $ 11,452 $ 12,189 Accounts payable 79,587 63,300 Accrued liabilities 37,782 33,603 Customer prepayments and credits 4,717 3,930 --------- --------- Total Current Liabilities 133,538 113,022 --------- --------- Noncurrent Liabilities: Long-term debt 53,255 27,693 Obligations under receivable financing -- 20,279 Capital lease obligations 482 146 Other 1,812 1,848 --------- --------- Total Noncurrent Liabilities 55,549 49,966 --------- --------- Total Liabilities 189,087 162,988 --------- --------- Commitments and Contingencies Shareholders' Equity: Series B Preferred Stock, convertible, $.01 par value, authorized and issued 634,900 shares in 1996 and 1997 5,748 5,890 Common Stock, $.662/3 par value, authorized 225,000,000 shares; issued 145,039,915 shares in 1996 and 200,329,521 shares in 1997 96,693 133,814 Capital in excess of par val4ue 270,097 279,968 Accumulated deficit (336,586) (352,417) --------- --------- 35,952 67,255 Less: Treasury stock, at cost (392,017 shares in 1996 and 1997) (813) (813) Notes receivable from sale of Common Stock (3,399) (3,419) --------- --------- Total Shareholders' Equity 31,740 63,023 --------- --------- Total Liabilities and Shareholders' Equity $ 220,827 $ 226,011 ========= =========
See Notes to Condensed Consolidated Financial Statements. 4 5 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (Unaudited)
(In thousands, except share and per share amounts) 13 Weeks Ended 39 Weeks Ended -------------- --------------- September 28, September 27, September 28, September 27, 1996 1997 1996 1997 ---- ---- ---- ---- Revenues $ 156,732 $ 122,597 $ 502,454 $ 386,072 ----------- ----------- ----------- ----------- Operating costs and expenses: Cost of sales and operating expenses 115,580 80,369 344,301 252,971 Write-down of inventory of discontinued catalogs -- -- 1,100 -- Special charges 300 -- 300 -- Selling expenses 44,842 29,745 142,259 97,913 General and administrative expenses 18,775 11,967 48,407 38,042 Depreciation and amortization 2,856 2,193 9,337 6,304 ----------- ----------- ----------- ----------- 182,353 124,274 545,704 395,230 ----------- ----------- ----------- ----------- Loss from operations (25,621) (1,677) (43,250) (9,158) ----------- ----------- ----------- ----------- Interest expense (2,683) (1,494) (6,766) (5,783) Interest income 123 -- 338 -- ----------- ----------- ----------- ----------- (2,560) (1,494) (6,428) (5,783) ----------- ----------- ----------- ----------- Loss before income taxes (28,181) (3,171) (49,678) (14,941) Income tax provision (250) (250) (750) (749) ----------- ----------- ----------- ----------- Net loss before extraordinary item (28,431) (3,421) (50,428) (15,690) Extraordinary item (1,134) -- (1,134) -- ----------- ----------- ----------- ----------- Net loss (29,565) (3,421) (51,562) (15,690) Preferred stock dividends and accretion (59) (47) (177) (142) ----------- ----------- ----------- ----------- Net loss applicable to common shareholders $ (29,624) $ (3,468) $ (51,739) $ (15,832) =========== =========== =========== =========== Net loss per share: Loss before extraordinary item $ (0.25) $ (0.02) $ (0.51) $ (0.09) Extraordinary item (0.01) 0.00 (0.01) 0.00 ----------- ----------- ----------- ----------- Net loss per share $ (0.26) $ (0.02) $ (0.52) $ (0.09) =========== =========== =========== =========== Weighted average shares outstanding 114,251,875 200,329,521 100,365,678 167,906,290 =========== =========== =========== ===========
See Notes to Condensed Consolidated Financial Statements. 5 6 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
39 WEEKS ENDED -------------- SEPTEMBER 28, SEPTEMBER 27, 1996 1997 ---- ---- Cash flows from operating activities: Net (loss) $(51,562) $(15,690) Adjustments to reconcile net (loss) to net cash (used) by operating activities: Depreciation and amortization, including deferred fees 10,559 7,938 Provisions for doubtful accounts 3,447 2,916 Recovery of investments previously written-off -- (1,020) Extraordinary loss-early extinguishment of debt 1,134 -- Other 27 -- Changes in assets and liabilities: Accounts receivable 1,553 9,236 Inventories (7,200) (2,062) Prepaid catalog costs (3,096) (4,479) Other assets 893 (1,204) Accounts payable (646) (16,287) Accrued liabilities (2,854) (4,820) Customer prepayments and credits (1,305) (787) -------- -------- NET CASH (USED) BY OPERATING ACTIVITIES (49,050) (26,259) -------- -------- Cash flows from investing activities: Acquisitions of property (8,306) (3,177) Proceeds from sale of businesses and properties 1,164 642 Proceeds from recovery of investments previously written-off 662 1,020 Other, net (10) 1,672 -------- -------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $ (6,490) $ 157 -------- --------
See Notes to Condensed Consolidated Financial Statements. 6 7 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED) (IN THOUSANDS)
39 WEEKS ENDED -------------- SEPTEMBER 28, SEPTEMBER 27, 1996 1997 ------------- ------------- Cash flows from financing activities: Net borrowings (repayments) under Credit Facility $ 12,413 $(12,768) Proceeds from issuance of debt 35,000 -- Payments of long-term debt and capital lease obligations (40,946) (2,393) Proceeds from issuance of Common Stock 50,504 40,134 Payment of stock issuance costs -- (3,073) Payment of debt issuance costs (384) -- Other, net (876) (53) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 55,711 21,847 -------- -------- Net (decrease) increase in cash and cash equivalents 171 (4,255) Cash and cash equivalents at the beginning of the year 2,682 5,173 -------- -------- CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD $ 2,853 $ 918 ======== ======== Supplemental cash flow disclosures: Interest paid $ 5,203 $ 2,665 ======== ======== Income taxes paid $ 670 $ 699 ======== ======== Supplemental disclosure of non-cash investing and financing activities: Exchange of NAR Promissory Note for equity $ -- $ 10,000 ======== ======== Issuance of Common Stock for notes receivable $ 2,034 $ -- ======== ======== Exchange of 6% Preferred Stock for Common Stock $ 830 $ -- ======== ========
See Notes to Condensed Consolidated Financial Statements. 7 8 HANOVER DIRECT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRTEEN AND THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 1997 AND SEPTEMBER 28, 1996 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of financial condition, results of operations and cash flows in conformity with generally accepted accounting principles. Reference should be made to the annual financial statements, including the footnotes thereto, included in the Hanover Direct, Inc. (the "Company") Annual Report on Form 10-K for the fiscal year ended December 28, 1996. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all material adjustments, consisting of normal recurring accruals, necessary to present fairly the financial condition, results of operations and cash flows of the Company and its consolidated subsidiaries for the interim periods. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. Certain prior year amounts have been reclassified to conform with the current year presentation. 2. RETAINED EARNINGS RESTRICTIONS The Company is restricted from paying dividends at any time on its Common Stock or from acquiring its capital stock by certain debt covenants contained in agreements to which the Company is a party. 3. EARNINGS PER SHARE Net income (loss) per share - Net income (loss) per share was computed using the weighted average number of shares outstanding. Due to the net loss for the thirteen and thirty-nine weeks ended September 28, 1996 and September 27, 1997, warrants, stock options and convertible preferred stock are excluded from the calculations of both primary and fully diluted earnings per share. 4. RECENTLY ISSUED ACCOUNTING STANDARDS Effective January 1, 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 125 ("SFAS"), "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The adoption of this statement resulted in the recognition of approximately $20.3 million of additional accounts receivable and associated long-term debt at September 27, 1997. The provisions of this pronouncement are to be applied prospectively, from January 1, 1997. Retroactive application is not permitted; however, the amount of adjustment at December 28, 1996 would also have been a recognition of an additional $24.7 million in both receivables and the associated receivable financing obligation. Subsequent to December 28, 1996, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings Per Share." This statement establishes standards for computing and presenting earnings per share ("EPS"), replacing the presentation of currently required primary EPS with a presentation of Basic EPS. SFAS No. 128 is effective for financial statements issued for periods ending 8 9 after December 15, 1997, including interim periods, and earlier application is not permitted. When adopted, the Company will be required to restate its EPS data for all periods presented. The Company does not expect the impact of the adoption of this statement to be material to previously reported EPS amounts. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The statement requires all items that are required to be recognized under accounting standards as components of comprehensive income to be reported in a financial statement that is displayed with the same prominence as other financial statements. The statement is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. The Company does not anticipate that the adoption of this statement will result in any significant items of comprehensive income. Additionally, in June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Specifically, the statement requires a public enterprise to report a measure of segment profit or loss, certain specific revenue and expense items, and segment assets and also to provide reconciliation to corresponding amounts in the entity's general-purpose financial statements. This statement is effective for financial statements for periods beginning after December 15, 1997. In the initial year of application, comparative information for earlier years is to be restated. The Company is still assessing the impact of this statement on its financial statement disclosure. 5. RESTRUCTURING In December 1996, the Company recorded special charges aggregating approximately $36.7 million. These charges included severance of approximately $3.2 million and facility exit/relocation costs and fixed asset write-offs of approximately $11.5 million related to the Company's plan to reduce fixed overhead costs and consolidate certain of its facilities. In addition, the Company's review of the impairment of its long-lived assets of certain of its under-performing catalogs led to a write-off of approximately $22.0 million. Severance - The cost of employee severance includes termination benefits and is expected to be completed by the end of 1997. These costs are recorded in accrued liabilities in the accompanying consolidated balance sheets and are $.7 million and $3.2 million at September 27, 1997 and December 28, 1996, respectively. Facility Exit/Relocation Costs and Fixed Asset Write-Offs - These costs are primarily the result of the Company's decision to relocate certain of its corporate operations, and consolidate its distribution centers into its Roanoke home fashion distribution center. Approximately $5.8 million and $6.3 million of these costs are recorded in accrued liabilities in the accompanying consolidated balance sheets at September 27, 1997 and December 28, 1996, respectively. 9 10 Impairment of Long-Lived Assets - The Company considers a history of catalog operating losses to be its primary indicator of potential impairment. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets. The Company has identified the appropriate grouping of assets to be individual catalogs, except where certain catalogs are a part of a group that, together, generate joint cash flows. The assets are deemed to be impaired if a forecast of undiscounted future operating cash flows is less than the carrying amounts. The loss is measured as the amount by which the carrying amount of the assets exceeds its fair value. The Company generally measures fair value by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows and, accordingly, actual results could vary significantly from such estimates. 6. INVESTMENTS During 1994, the Company invested approximately $2.7 million in convertible debt securities of Regal Communications, Inc. ("Regal"). In September 1994, Regal filed for protection under Chapter 11 of the United States Bankruptcy Code. As of December 1996, the Company had written-off the entire investment balance as the decline in fair value was considered an other than temporary impairment. In the third quarter of 1997, the Company received approximately $1 million related to distributions made by Regal. This amount is recorded as income in the period and is included in general and administrative expenses in the accompanying Condensed Consolidated Statements of Income (Loss). 7. RIGHTS OFFERING The Company commenced a $50 million rights offering (the "1997 Rights Offering") on April 29, 1997. Holders of record of the Company's Common Stock and Series B Convertible Additional Preferred Stock as of April 28, 1997, the record date, were eligible to participate in the 1997 Rights Offering. The 1997 Rights Offering expired on May 30, 1997, with 55,654,623 rights to purchase shares exercised, and it closed on June 6, 1997. Richemont Finance S.A., ("Richemont"), a Luxemborg public company, entered into a standby purchase agreement to purchase all shares not subscribed to by shareholders of record at the subscription price. Richemont purchased 40,687,970 shares in the 1997 Rights Offering and, as a result, then owned approximately 20.3% of the Company. The Company paid in cash, from the proceeds of the 1997 Rights Offering, to Richemont on the closing date approximately $1.8 million which represented an amount equal to 1% of the aggregate offering price of the aggregate number of shares issuable upon closing of the 1997 Rights Offering other than with respect to the shares of Common Stock held by NAR Group Limited ("NAR) or its affiliates plus an amount equal to one-half of one percent of the aggregate number of shares acquired by NAR upon exercise of their rights (Standby Fee) plus an amount equal to 4% of the aggregate offering price in respect to all unsubscribed shares (Take-Up Fee). On April 26, 1997, NAR irrevocably agreed with the Company, subject to and upon the consummation of the 1997 Rights Offering, to exercise certain of the rights distributed to it for the purchase of 11,111,111 shares of Common Stock that had an aggregate purchase price of approximately $10 million. NAR agreed to pay for and the Company agreed to accept as payment for the exercise of such rights the surrender by NAR of the principal amount due under the IMR Promissory Note dated September 1996 in the principal amount of $10 million and cancellation thereof (Note 8). In order to facilitate vendor shipments and to permit the commencement of the Company's plan to consolidate certain of its warehousing facilities, Richemont, S.A. advanced $30 million as of April 23, 1997 10 11 against its commitment to purchase all of the unsubscribed shares pursuant to the standby purchase agreement. The Company has executed a subordinated promissory note in the amount of $30 million to evidence this indebtedness (the "Richemont Promissory Note"). The gross cash proceeds from the 1997 Rights Offering of $40 million (after giving effect to the acquisition and exercise by NAR of rights ha ving an aggregate purchase price of $10 million which were paid for by surrender and cancellation of the $10 million IMR Promissory Note) were used to repay the $30 million principal amount outstanding under the Richemont Promissory Note and the balance of the proceeds were used for working capital and general corporate purposes, including repayment of amounts outstanding under the Company's three year, $75 million secured revolving Credit Facility (the "Credit Facility") with Congress Financial Corporation ("Congress"). 8. RELATED PARTY TRANSACTIONS In December 1996, the Company finalized its agreement with Richemont that provided the Company with approximately $27.9 million of letters of credit through Swiss Bank Corporation, New York Branch. These letters of credit issued in the amount of $8.6 million and relate to the Company's Industrial Revenue Bonds due 2003 while $19.3 million related to the Company's Term Financing Facility with Congress. As of October 1, 1997, the Company had paid down $1 million of the underlying debt, reducing the Swiss Bank letters of credit to approximately $26.9 million. The letters of credit carry an interest rate of 3.5% above the prime rate, currently 11.75%, payable to Richemont quarterly on amounts drawn under the letters of credit and were to expire on February 18, 1998. In October 1997, Richemont agreed in principle to extend its guarantee to March 30, 1999. As consideration for this transaction the Company will pay to Richemont a fee of 4% of the $26.9 million letters of credit outstanding. The extension is subject to the approval of Congress and Swiss Bank, as well as certain other conditions. In September 1996, Intercontinental Mining & Resources Incorporated, an affiliate of NAR ("IMR"), loaned the Company $10 million as evidenced by a subordinated promissory note in the amount of $10 million (the "IMR Promissory Note"). The Company accepted as payment for the subscription price related to the exercise of rights to purchase 11,111,111 shares of Common Stock by NAR the principal amount due under the IMR Promissory Note (Note 7) and such note has been cancelled. 9. LONG-TERM DEBT In November 1995, the Company entered into the Credit Facility with Congress. Pursuant to the terms of the Credit Facility, the Company is required to maintain minimum net worth and working capital levels. In addition, the Credit Facility places limitations on the Company's ability to incur additional indebtedness. Due to the Company's financial condition in 1996, the Company was in default of certain of the covenants related to the Credit Facility. The Company received waivers for the December 1996 events of default under the Credit Facility related to the working capital and net worth covenants as of and through December 28,1996. In addition, the Company received a waiver for any event of default relating to the material adverse change provision that was in effect through and including December 28, 1996. Congress also agreed to establish new minimum levels related to these covenants. The working capital and net worth covenants for fiscal 1997 are as follows (in 000's): 11 12
WORKING CAPITAL (AS DEFINED) AMOUNT ---------------------------- -------- January through May 1997 $ (5,000) June through November 1997 $ 0 December 1997 and thereafter $(10,000) NET WORTH AMOUNT --------- -------- January through May 1997 $ 14,000 June 1997 and thereafter $ 21,500
The Company had $.9 million and $8.1 million of borrowings outstanding under the revolving line of credit and $8.1 million and $8.9 million outstanding under the revolving term notes at September 27, 1997 and December 28, 1996, respectively. The revolving term notes were originally due in November 1997. In October 1997, Congress agreed to extend the revolving term notes to November 1998. The Company will continue to make principal payments of approximately $.1 million each month. The Company had $27.5 million and $26 million of unused borrowing capacity under the Credit Facility at September 27, 1997 and December 28, 1996, respectively. The rates of interest related to the revolving line of credit and term notes were 9.75% and 10.0%, respectively, at September 27, 1997. The face amount of unexpired documentary letters of credit under the Credit Facility were $3.0 million and $4.5 million at September 27, 1997 and December 28, 1996, respectively. In addition, the Company is required to reimburse Richemont in connection with liabilities under the $26.9 million of standby letters of credit at September 27, 1997 which were issued by Richemont and are held by Swiss Bank Corporation, New York Branch. 10. INCOME TAXES At September 27, 1997, the Company had a net deferred tax asset of $15 million, including a deferred tax asset valuation allowance of approximately $52 million, which was recorded in prior years primarily relating to the realization of certain net operating loss carry-forwards ("NOLs"). As of December 28, 1996, the Company had $241.2 million of NOLs. Realization of the future tax benefits associated with the NOLs is dependent on the Company's ability to generate taxable income within the carry-forward period and the periods in which net temporary differences reverse. Future levels of operating income and taxable income are dependent upon general economic conditions, competitive pressures on sales and margins, postal and other delivery rates, and other factors beyond the Company's control. Accordingly, no assurance can be given that sufficient taxable income will be generated for utilization of all of the NOLs and reversals of temporary differences. In assessing the realizability of the $15 million net deferred tax asset, the Company has considered numerous factors, including its future operating plans. Management believes that the $15 million net deferred tax asset represents a reasonable, conservative estimate of the future utilization of the NOL's. The Company will continue to routinely evaluate the likelihood of future profits and the necessity of future adjustments to the deferred tax asset valuation allowance. 11. ACCOUNTING FOR STOCK BASED COMPENSATION In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which the Company adopted in fiscal 1996. During the thirty-nine week period ended September 27, 1997, the Company recorded a charge of $1.1 million related to the adoption of this standard. The fair 12 13 value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model. The model requires the Company to make estimates regarding risk free interest rate, expected lives, expected volatility and expected dividends. No change in estimates or assumptions regarding these items were made in the current period. The fair value of each option granted during the nine months ended September 27, 1997 is estimated at the date of grant using the Black-Scholes option-pricing model utilizing expected volatility calculations based on historical data (45.00% - 56.20%) and risk free rates based on U.S. government strip bonds on the date of grant with maturities equal to the expected option term (6.33% - 6.80%). The expected lives are equal to the option terms and no dividends are assumed. Included in the Executive Equity Incentive Plan table on the following page are 3,020,000 options related to the C.E.O. Tandem Plan. The Stock Option Plan table consists of options related to the Company's 1978 Option Plan, 1996 Option Plan, C.E.O. NAR Option Plan, C.E.O. Closing Price Option Plan and the C.E.O. Performance Year Option Plan. A summary of the status of the Company's two stock option plans as of December 28, 1996 and September 27, 1997 and changes during the periods ending on those dates is as follows: EXECUTIVE EQUITY INCENTIVE PLAN
DECEMBER 28, SEPTEMBER 27, ------------ ------------- 1996 1997 ---- ---- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE ------ ----- ------ ----- Options outstanding beginning of period 1,021,170 $ 2.66 3,660,498 $ 1.26 Options granted 3,370,000 $ 1.14 54,000 $ 1.00 Options forfeited (730,672) $ 2.68 (70,498) $ 2.59 --------- --------- Options outstanding end of period 3,660,498 $ 1.26 3,644,000 $ 1.23 ========= ========= Options exercisable end of period 173,832 $ 2.56 130,000 $ 2.58 ========= ========= Options exercised end of period -- -- Weighted average fair value of options granted during the year $ 0.76 $ 0.60
13 14 STOCK OPTION PLANS
DECEMBER 28, SEPTEMBER 27, ------------ ------------- 1996 1997 ---- ---- WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE EXERCISE SHARES PRICE SHARES PRICE ------ -------- ------ -------- Options outstanding beginning of period 90,000 $2.42 8,025,000 $1.17 Options granted 7,955,000 $1.16 2,855,000 $1.05 Options forfeited (20,000) $3.50 (915,000) $1.02 --------- --------- Options outstanding end of period 8,025,000 9,965,000 $1.09 ========= ========= Options exercisable end of period 23,333 $2.11 397,500 $1.21 ========= ========= Options exercised end of period - - Weighted average fair value of $ 0.56 $ 0.68 options granted during the year
12. SUBSEQUENT EVENTS In November 1997, the Company announced that SMALLCAP World Fund, Inc. ("SMALLCAP"), a mutual fund and substantial investor in the Company, agreed to purchase 3.7 million shares of the Company's Common Stock at $1.41 per share for an aggregate purchase price of approximately $5.2 million in a private placement. This transaction was consummated on November 6, 1997. These shares are restricted and have not been registered under the Securities Act of 1933, as amended. The Company has also entered into a registration rights agreement with SMALLCAP that calls for the Company to use its best efforts to effect the registration of such shares as soon as practicable after April 1, 1998 and has granted certain piggyback registration rights. The Company may delay such registration for a period of not more than ninety calendar days. Such registration shall be effected by preparation and filing by the Company with the Securities and Exchange Commission of a registration statement on Form S-3. The Company will pay all expenses in connection with the registration of such shares. 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth, for the fiscal periods indicated, the percentage relationship to revenues of certain items in the Company's Consolidated Statements of Income (Loss).
13 WEEKS ENDED 39 WEEKS ENDED -------------- -------------- SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28, 1997 1996 1997 1996 ----------- ------------ ------------- ------------- Revenues 100.0% 100.0% 100.0% 100.0% Cost of sales and operating expenses 65.6 73.8 65.5 68.5 Write-down of inventory of discontinued catalogs -- -- -- .2 Special charges -- .2 -- .1 Selling Expenses 24.3 28.6 25.4 28.3 General and administrative expenses 9.7 12.0 9.9 9.6 Depreciation and amortization 1.8 1.8 1.6 1.9 Income (loss) from operations (1.4) (16.4) (2.4) (8.6) Interest expense, net (1.2) (1.6) (1.5) (1.3) Net Income (loss) (2.8%) (18.9%) (4.0%) (10.3%)
RESULTS OF OPERATIONS THIRTEEN-WEEKS ENDED SEPTEMBER 27, 1997 COMPARED WITH THIRTEEN-WEEKS ENDED SEPTEMBER 28, 1996 Net Income (Loss). The Company reported a net loss of $(3.4) million or $(.02) per share for the thirteen-week period ended September 27, 1997 compared to a net loss of $(29.6) million or $(.26) per share for the same period last year. The per share amounts were calculated based on weighted average shares outstanding of 200,329,521 and 114,251,875 for the current and prior year periods, respectively. The increase in weighted average shares outstanding is due to two $50 million rights offerings which were completed in August 1996 and June 1997, respectively. The decrease in net loss was primarily the result of: (i) reduced circulation to prospective customers and to customers other than core customers and increased circulation to core customers with core products which resulted in improved response rates and lower selling expenses, (ii) reduced cost of merchandise as the Company began to realize improvements in its product offerings along with a reduction in charges related to the write-off of slow moving inventory, (iii) reduced fixed overhead costs due to the Company's previously implemented cost reduction plan, (iv) improved liquidity, reduced backorder levels and improved inventory in-stock positions due to the Company's 1997 Rights Offering and (v) certain non-recurring charges incurred in the prior year period which the Company did not incur in the current period. Revenues. Revenues decreased 21.8% for the thirteen-week period ended September 27, 1997 to $122.6 million from $156.7 million for the same period in 1996. Revenues generated by continuing catalogs decreased 10% to approximately $121.9 million in the current year period from $136.1 million 15 16 for the prior year period. Revenues generated by discontinued catalogs decreased 97% to $.7 million for the thirteen-week period ended September 27, 1997. The Company circulated 56 million catalogs during the 1997 period which represented a 9.5% decrease from the prior year. Continuing catalog circulation decreased from the prior year period as part of the Company's plan to more effectively target its circulation. The Company's backorders (unfilled orders) decreased 35% to $12.3 million on September 27, 1997 from $19.0 million on September 28, 1996. The following table summarizes the Company's revenues and the percent of total revenues, for the fiscal periods indicated, for each brand; all revenues are net of returns:
THIRTEEN-WEEKS ENDED ------------------------------------------------------------------ SEPTEMBER 27, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 28, 1997 1997 1996 1996 REVENUES PERCENT OF REVENUES PERCENT OF (IN MILLIONS) TOTAL REVENUES (IN MILLIONS) TOTAL REVENUES ------------- -------------- ------------- -------------- Brand Group Home Fashions - Mid-Market $ 38.2 31.1% $ 50.1 31.9% Upscale 30.8 25.1 22.0 14.1 General Merchandise 15.8 12.9 17.1 10.9 Women's Apparel 13.1 10.7 18.6 11.9 Men's Apparel 12.6 10.3 16.8 10.7 Gifts 11.4 9.3 11.5 7.3 -------- ----- -------- ----- Total Continuing 121.9 99.4 136.1 86.8 Discontinued 0.7 0.6 20.6 13.2 -------- ----- -------- ----- Total Company $ 122.6 100.0% $ 156.7 100.0% ======== ===== ======== =====
Revenues from continuing catalogs decreased due to a planned decrease in circulation as the Company continued to implement its plan to focus on its core customers. The reduction in circulation was partially offset by an increase in response rates as the Company continued to focus more on its most productive customers. The decrease in revenues was also partially offset by an increase in circulation and average order size despite experiencing lower response rates. Revenues from the catalogs discontinued in 1995 and the venture with Sears Roebuck & Co. decreased 97% or $19.9 million to $.7 million for the thirteen-week period ended September 27, 1997 from $20.6 million for the same period in the prior year. Operating Costs and Expenses. Cost of sales and operating expenses decreased to 65.6% of revenues for the thirteen-week period ended September 27, 1997 from 73.8% of revenues for the same period in 1996. The total expense decreased $35.2 million when the current year period is compared to the same period in the prior year. In the current period, the Company experienced a two percentage point decline in its cost of merchandise along with a four percentage point decline in charges taken in association with the write-down of inventory. These improvements are due to more efficient inventory controls resulting in a decrease in sale merchandise in the current year period. Operating costs and expenses have also been positively impacted by decreased order fulfillment costs due to the Company's previously announced cost reduction plan. 16 17 Selling expenses decreased to 24.3% of revenues for the thirteen-week period ended September 27, 1997 from 28.6% of revenues for the same period in the prior year. The total expense decreased $15.1 million to $29.7 million in the current year period. This expense has declined in the current period due to a 23% decrease in continuing catalog circulation and increased customer response rates as part of the Company's plan to more effectively target its core customers. General and administrative expenses decreased $6.8 million due to the Company's previously announced cost reduction plan. The prior year expense included approximately $ 2.7 million of non-recurring charges related to management retention and severance which did not occur in the current year period. The current period expenses have been reduced by approximately $1 million of income as a result of asset distributions made to the Company related to previously written-off investment securities. As a result of the Company's cost reduction effort, this expense decreased to 9.7% of revenues in the current year period from 12.0% of revenues in the same period in the prior year. In the current period, the Company recovered approximately $1 million related to previously written-off investments. Depreciation and amortization decreased $.7 million to $2.2 million for the thirteen-week period ended September 27, 1997 as a result of the write-off of certain intangible assets and close certain of its facilities at the end of the 1996 fiscal year. Income (Loss) from Operations. The Company recorded a loss from operations of $(1.7) million for the thirteen-week period ended September 27, 1997, or (1.4)% of revenues, compared to a loss of $(25.6) million for the thirteen-week period ended September 28, 1996, or (16.4)% of revenues. The decrease in losses from operations was the result of the Company's continued plan to decrease circulation by focusing more on its most profitable customers and on proven merchandise resulting in lower merchandise costs and reduced inventory write-offs. This operating plan has also resulted in lower selling expenses and increased response rates. Variable fulfillment costs also improved slightly in the current period as inefficiencies in the Company's Roanoke fulfillment center occurred throughout 1996. In the current period, the Company is continuing to realize lower fixed overhead costs due it its plan to reduce such costs. Interest Expense, Net. Interest expense, net decreased to $1.5 million for the thirteen week period ended September 27, 1997 from $2.6 million for the same period in the prior year. This expense also decreased to (1.2)% of revenues in the current year period from (1.6)% of revenues in the same period in the prior year. These decreases are mainly due to the Company maintaining lower debt levels than the prior year due to better management of its working capital. This improvement was partially offset by higher interest rates and increased amortization of debt costs related to the Company's $30 million letter of credit facility. THIRTY NINE-WEEKS ENDED SEPTEMBER 27, 1997 COMPARED WITH THIRTY NINE-WEEKS ENDED SEPTEMBER 28, 1996 Net Income (Loss). The Company reported a net loss of $(15.7) million or $(.09) per share for the thirty nine-week period ended September 27, 1997 compared to a net loss of $(51.6) million or $(.52) per share for the same period last year. The per share amounts were calculated based on weighted average shares outstanding of 167,906,290 and 100,365,678 for the current and prior year periods, respectively. The increase in weighted average shares outstanding is due to two $50 million rights offerings which were completed in August 1996 and June 1997, respectively. 17 18 The decrease in net loss was primarily the result of: (i) reduced circulation to prospective customers and to customers other than core customers and increased circulation to core customers with core products which resulted in improved response rates and lower selling expenses, (ii) reduced cost of merchandise as the Company began to realize improvements in its product offerings along with a reduction in charges related to the write-off of slow moving inventory, (iii) reduced fixed overhead costs due to the Company's previously implemented cost reduction plan, (iv) improved liquidity, reduced backorder levels and improved inventory in-stock positions due to the Company's 1997 Rights Offering and (v) certain non-recurring charges incurred in the prior year period which the Company did not incur in the current period. Revenues. Revenues decreased 23.2% for the thirty nine-week period ended September 27, 1997 to $386.1 million from $502.5 million for the same period in 1996. Revenues generated by continuing catalogs decreased 10% to approximately $376.9 million in the current year period from $419.8 million for the prior year period. Revenues generated by discontinued catalogs decreased 89% to $9.2 million for the thirty nine-week period ended September 27, 1997. The Company circulated 195 million catalogs during the 1997 period which represented a 25% decrease from the prior year period. Continuing catalog circulation decreased from the prior year period as part of the Company's plan to more effectively target its circulation. The Company's backorders (unfilled orders) decreased 35% to $12.3 million on September 27, 1997 from $19.0 million on September 28, 1996. The following table summarizes the Company's revenues and the percent of total revenues, for the fiscal periods indicated, for each brand; all revenues are net of returns:
THIRTY NINE-WEEKS ENDED ------------------------------------------------------------------- SEPTEMBER 27, SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 28, 1997 1997 1996 1996 REVENUES PERCENT OF REVENUES PERCENT OF (IN MILLIONS) TOTAL REVENUES (IN MILLIONS) TOTAL REVENUES ------------- -------------- ------------- -------------- Brand Group Home Fashions - Mid-Market $ 115.0 29.8% $ 151.2 30.1% Upscale 85.3 22.1 63.8 12.7 General Merchandise 51.4 13.3 56.2 11.2 Women's Apparel 47.0 12.2 59.1 11.7 Men's Apparel 44.8 11.6 56.9 11.3 Gifts 33.4 8.6 32.6 6.5 -------- ----- -------- ----- Total Continuing 376.9 97.6 419.8 83.5 Discontinued 9.2 2.4 82.7 16.5 -------- ----- -------- ----- Total Company $ 386.1 100.0% $ 502.5 100.0% ======== ===== ======== =====
Revenues from continuing catalogs decreased due to a planned decrease in circulation as the Company continued to implement its plan to focus on its core customers. The reduction in circulation was partially offset by an increase in response rates as the Company continued to focus more on its most productive customers. The decrease in revenues was also partially offset by an increase in circulation and average order size Home Fashions-upscale brand despite experiencing lower response rates due to increases in prospecting. 18 19 Operating Costs and Expenses. Cost of sales and operating expenses decreased to 65.5% of revenues for the thirty nine-week period ended September 27, 1997 from 73.8% of revenues for the same period in 1996. The total expense decreased $91.3 million when the current year period was compared to the same period in the prior year. In the current thirty nine week period, the Company experienced a two percentage point decline in its cost of merchandise along with a reduction in inventory write-down charges. Operating costs and expenses have continued to be positively impacted by decreased order fulfillment costs due to the Company's previously announced cost reduction plan. Selling expenses decreased to 25.4% of revenues for the thirty nine-week period ended September 27, 1997 from 28.3% of revenues for the same period in the prior year. The total expense decreased $44.3 million to $97.9 million in the current year period. This expense has declined in the current period due to a decrease in continuing catalog circulation and increased customer response rates as part of the Company's plan to more effectively target its core customers. General and administrative expenses decreased $10.4 million to $38.0 million for the thirty-nine week period ended September 27, 1997 due to the Company's previously announced cost reduction plan. The prior year expense included approximately $ 4.3 million of non-recurring charges related to management retention and severance which did not occur in the current year period. The current period expenses have been reduced by approximately $1 million of income as a result of asset distributions made to the Company related to previously written-off investment securities. These costs increased to 9.9% of revenues in the current year period from 9.6% of revenues mainly due to the Company's planned decrease in its revenue base. Depreciation and amortization decreased $3.0 million to $6.3 million for the thirty nine-week period ended September 27, 1997 as a result of the Company's decision to write-off certain intangible assets and close certain of its facilities at the end of the 1996 fiscal year. Income (Loss) from Operations. The Company recorded a loss from operations of $(9.2) million for the thirty nine-week period ended September 27, 1997, or (2.4)% of revenues, compared to a loss of $(43.3) million for the thirty nine-week period ended September 28, 1996, or (8.6)% of revenues. The decreased loss from operations was the result primarily of the Company's continued plan to decrease circulation by focusing more on its most profitable customers and on proven merchandise. In the first thirty nine weeks of the current year, the Company experienced a two percentage point decline in its cost of merchandise along with a reduction in inventory charges related to slow moving inventory. These improvements are due to more efficient inventory controls resulting in a decrease in sale merchandise in the current year. This operating plan continues to result in lower selling expenses and increased response rates. Variable fulfillment costs also improved as inefficiencies in the Company's Roanoke fulfillment center occurred throughout 1996. All of these factors have contributed to an improved overall profit margin. The Company also began to realize lower costs associated with its fixed overhead cost structure due to its plan to reduce such costs. Interest Expense, Net. Interest expense, net decreased $.6 million to $5.8 million for the thirty nine-week period ended September 27, 1997. Throughout the current year, the Company has maintained lower debt levels than the prior year due to better management of its working capital. This improvement was partially offset by higher interest rates and increased amortization of debt costs related to the Company's $26.9 million letter of credit facility. 19 20 LIQUIDITY AND CAPITAL RESOURCES Working Capital. At September 27, 1997, the Company had $.9 million in cash and cash equivalents, compared to $5.2 million at December 28, 1996. Working capital and the current ratio were $30.6 million and 1.27 to 1 at September 27, 1997 versus $(1.5) million and .99 to 1 at December 28, 1996. The $26.3 million of cash used in operations in the first thirty nine weeks of 1997 was primarily used to fund operating losses and a reduction in accounts payable. The cash used in operations was provided by reductions in accounts receivable and proceeds from the 1997 Rights Offering. As a result of the Company's continued operating losses in 1996, the Company experienced tightened vendor credit and increased levels of debt. Order cancellation rates increased and negatively affected initial fulfillment which resulted in an increase in split shipments and higher customer inquiry calls in 1996 and the first quarter of 1997. As a result of these factors, the Company decided in late 1996 that it was necessary to obtain relief under its credit facility and to investigate an equity infusion. In December 1996, the Company closed its agreement with Richemont that provided the Company with approximately $28 million of letters of credit to replace letters of credit which were issued under the Credit Facility with Congress. Although this agreement provided the Company added liquidity, its timing, on December 19, 1996, had minimal effect on reducing back orders in 1996. Therefore these back orders carried over to the first quarter of 1997 and caused an increase in order cancellation rates in the period. When the final 1996 financial results became known to the Company, it concluded such results would have a further negative impact on the Company's ability to conduct business on normal trade terms. Therefore, the Company decided it was necessary to obtain an additional equity infusion which would restore the Company's equity base and provide the Company with additional liquidity. On March 26, 1997, the Company announced that it intended to distribute subscription rights to subscribe for and purchase additional shares of Common Stock to holders of record of the Company's Common Stock and Series B Convertible Additional Preferred Stock. The 1997 Rights Offering expired on May 30, 1997 and closed on June 6, 1997. NAR applied $10 million of the Company's indebtedness to acquire $10 million of the Company's Common Stock pursuant to the 1997 Rights Offering. Richemont purchased 40,687,970 shares of Common Stock with rights which were not subscribed for and purchased by shareholders in the 1997 Rights Offering per an agreement with the Company. On April 23, 1997, Richemont advanced $30 million against this commitment. This advance was used to repay approximately $13 million of indebtedness under the revolving line of credit, bring past due vendor accounts current and for other general corporate purposes. The 1997 Rights Offering generated gross proceeds of approximately $40 million after giving effect to the $10 million of indebtedness NAR applied to acquire its shares. The proceeds from the 1997 Rights Offering were used for working capital needs and general corporate purposes, including repayment of approximately $20 million outstanding under the Company's Credit Facility with Congress. The Company also incurred fees of approximately $3 million in relation to the 1997 Rights Offering which were paid from such gross proceeds. The agreement by which Richemont provided the Company with a $28 million letter of credit facility was to expire in February 1998. On October 1, 1997, the Company paid down $1 million of the underlying debt, reducing the letters of credit to approximately $26.9 million. The letters of credit carry an interest rate of 3.5% above the prime rate, currently 11.75%, payable to Richemont quarterly on amounts drawn under the letters of credit. In October 1997, Richemont agreed in principle to extend its guarantee to March 30, 1999. As consideration for this transaction, the Company will pay to Richemont 20 21 a fee equal to 4% of the $26.9 million outstanding letters of credit. The extension is subject to the approval of Congress and Swiss Bank, as well as certain other conditions. At September 27, 1997, the Company had $12.2 million of current borrowings outstanding. This balance includes $8.1 million of term notes under the Credit Facility that were originally due in November 1997. In October 1997, Congress agreed to extend the revolving term notes to November 1998. The Company will continue to make principal payments of approximately $.1 million each month. The Company had amounts outstanding under the Credit Facility of $.9 million at September 27, 1997 and $13.7 million at December 28, 1996. As of November 6, 1997, $2.8 million of borrowings were outstanding under the Credit Facility and remaining availability was $26.2 million. Throughout fiscal 1997, the Company has been implementing several initiatives to strengthen financial disciplines and accountability across its catalog brands and corporate organization. These initiatives, in addition to the Company's new operating and cost reduction plan, are designed to better enable the Company to meet its operating goals for fiscal 1997 through better cash control and "bottom-line" accountability. Such initiatives have begun to show positive results across the Company's infrastructure. In December 1996, the Company received waivers for events of default under the Credit Facility with Congress. In addition, Congress and the Company agreed to new working capital and net worth covenants for fiscal 1997. The Company believes that the 1997 Rights Offering together with the Credit Facility covenant modifications, the extension of the letter of credit by Richemont and the extension of the due date of the Congress term loan has eased vendor/ credit concerns about the Company's viability. The Company's ability to continue to improve upon its prior year's performance and implement its business strategy is critical to maintaining adequate liquidity. In November 1997, the Company announced that SMALLCAP World Fund, Inc. ("SMALLCAP"), a mutual fund and substantial investor in the Company, agreed to purchase 3.7 million shares of the Company's Common Stock for an aggregate purchase price of approximately $5.2 million in a private placement. The Company experiences seasonality in its working capital requirements and fluctuations in the revolving Credit Facility with peak borrowing requirements normally occurring during the first and fourth quarters of the year. The Company is required to maintain certain financial covenants related to the Credit Facility with Congress with which the Company is in compliance at September 27, 1997. Operating Plan. In December 1996, the Company began an operational realignment that it believes will better enable it to capitalize on its internal strengths. The Company is continuing to move to a brand structure whereby the individual catalogs will be better able to manage their resources and capitalize on business opportunities. This plan provides for each catalog's management team to be responsible for its brand financial results, working capital requirements and business investment needs. The Company believes that this structure will result in better management of vendor relationships, inventories and working capital. Infrastructure Investments. The Company's plan to restructure its catalogs into distinct brands and concentrate its mailing efforts on profitable customers is expected to result in excess capacity throughout its fulfillment centers. The Company has begun the process to consolidate certain of its 21 22 fulfillment operations into its new Roanoke fulfillment center in 1998. This will require a capital investment of approximately $8.0 million during 1997 and 1998, of which approximately $5.5 million will be spent during 1997. Based on preliminary study, the Company is not expected to have significant expenditures to modify its computer information systems enabling proper processing of transactions relating to the year 2000 and beyond. The Company continues to evaluate appropriate courses of corrective action, including replacement of certain systems whose associated costs would be recorded as assets and amortized. Accordingly, the Company does not expect the amounts required to expensed over the next three years to have a material effect on its financial position or results of operations. The Company is attempting to contact vendors and others on whom it relies to assure that their systems will be timely converted. However, there can be no assurance that the systems of other companies on which the Company's Systems rely also will be timely converted or that any such failure to convert by another company would not have an adverse effect on the Company's systems. Effect of Inflation and Cost Increases. The Company normally experiences increased costs of sales and operating expenses as a result of the general rate of inflation through internal cost reductions and operating efficiencies and then through selection of appropriate mail-order merchandise. The Company can adjust product mix to mitigate the effects of inflation on its overall merchandise base. Paper and Postage. The Company mails its catalogs and ships most of its merchandise through the United States Postal Service ("USPS"), with catalog mailing and product shipment expenses representing approximately 17% of revenues in the first thirty-nine weeks of 1997. Paper costs represented approximately 6% of revenues for the same period. The Company experienced a minimal paper price increase in the second half of 1997. The USPS announced a proposed increase in mailing rates that will take effect in mid-1998. The Company is currently investigating ways to mitigate the effects of these expected increases. There is no assurance that the Company will successfully develop any such plan. 22 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. NONE. 23 24 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. On July 10, 1997, the Company held its 1997 Annual Meeting of Shareholders. The matters acted upon at the meeting were: (1) The election of all 12 members of the Board of Directors, including Ralph Destino, J. David Hakman, Rakesh K. Kaul, S. Lee Kling, Theodore H. Kruttschnitt, Elizabeth Valk Long, Edmund R. Manwell, Shailesh J. Mehta, Jan P. du Plessis, Alan G. Quash, Howard M.S. Tanner and Robert F. Wright, to serve until the 1998 Annual Meeting of Shareholders (and until their successors have been duly elected and qualified), with a minimum vote for each director of 142,058,933 shares in favor, 634,060 shares against and no shares abstaining; and (2) The ratification and approval of the amendment to the Company's 1996 Stock Option Plan to provide that under such plan options may not be granted to any employee covering more than 500,000 shares of Common Stock (rather than 250,000 shares) during any 12-month period, with 135,749,721 shares in favor, 6,569,495 shares against and 424,975 shares abstaining; and (3) The ratification and approval of the amendment to the Company's Certificate of Incorporation increasing the number of shares of Common Stock which the Company shall have the authority to issue from 150,000,000 to 225,000,000, with 141,891,968 shares in favor, 440,624 shares against and 411,599 shares abstaining; and (4) The ratification and approval of the appointment of Arthur Andersen LLP as the Company's independent auditors for the fiscal year ending December 27, 1997, with 142,152,020 shares in favor, 218,411 share against and 373,760 shares abstaining. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3 (ii) By-laws of the Company, as amended 11 Computation of Earnings (Loss) Per Share. 27 Financial Data Schedule (EDGAR filing only). (b)Reports on Form 8-K NONE. 24 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HANOVER DIRECT, INC. Registrant By: /s/ Larry J. Svoboda - ------------------------- Larry J. Svoboda Senior Vice-President and Chief Financial Officer (on behalf of the Registrant and as principal financial officer) November 11, 1997 25 26 EXHIBIT INDEX ------------- Exhibit No. Description ----------- ----------- 3 (ii) - By-laws of the Company, as amended 11 - Computation of Earnings (Loss) Per Share. 27 - Financial Data Schedule (EDGAR filing only). EX-3.II 2 BY-LAWS OF THE COMPANY, AS AMENDED 1 EFFECTIVE 10/31/97 EXHIBIT 3ii BYLAWS OF HANOVER DIRECT, INC. (a DELAWARE CORPORATION) ARTICLE I STOCKHOLDERS 1. CERTIFICATES REPRESENTING STOCK. Every holder of stock in the corporation shall be entitled to have a certificate signed by, or in the name of, the corporation by the Chairman or Vice-Chairman of the Board of Directors, if any, or by the President or a Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the corporation or by agents designated by the Board of Directors, certifying the number of shares owned by him in the corporation and setting forth any additional statements that may be required by the General Corporation Law of Delaware. If any such certificate is countersigned or otherwise authenticated by a transfer agent or transfer clerk or by a registrar other than the corporation, a facsimile of the signature of any such officers or agents designated by the Board may be printed or lithographed upon such certificate in lieu of the actual signatures. In case any officer or officers who shall have signed, or whose facsimile signature or signatures shall have been used on, any such certificate or certificates shall cease to be such officer or officers of the corporation before such certificate or certificates shall have been delivered by the corporation, such certificate or certificates may nevertheless be adopted by the corporation and be issued and delivered as though the person or persons who signed such certificate or certificates, or whose facsimile signature or signatures shall have been used thereon, had not ceased to be such officer or officers of the corporation. Whenever the corporation shall be authorized to issue more than one class of stock or more than one series of any class of stock, and whenever the corporation shall issue any shares of special stock, the certificates representing shares of any such class or series or of any such special stock shall set forth thereon the statements prescribed by the General Corporation Law. Any restrictions on the transfer or registration of transfer of any shares of stock of any class or series shall be noted conspicuously on the certificate representing such shares. The corporation may issue a new certificate of stock in place of any certificate theretofore issued by it, alleged to have been lost, stolen, or destroyed, and the Board of Directors may require the owner of any lost, stolen, or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify the corporation against any claim that may be made against it on account of the alleged loss, theft, or destruction of any such certificate or the issuance of any such new certificate. 1 2 2. FRACTIONAL SHARE INTERESTS. The corporation shall not be obliged to but may execute and deliver a certificate for or including a fraction of a share. In lieu of executing and delivering a certificate for a fraction of a share, the corporation may (i) pay to any person otherwise entitled to become a holder of a fraction of a share an amount in cash specified for such purpose as the value thereof in the resolution of the Board of Directors, or other instrument pursuant to which such fractional share would otherwise be issued, or, if not specified therein, then as may be determined for such purpose by the Board of Directors of the issuing corporation or (ii) execute and deliver registered or bearer scrip over the manual or facsimile signature of an officer of the corporation or of its agent for that purpose, exchangeable as therein provided for full share certificates, but such scrip shall not entitle the holder to any rights as a stockholder except as therein provided. Such scrip may provide that it shall become void unless the rights of the holders are exercised within a specified period and may contain any other provisions or conditions that the corporation shall deem advisable. Whenever any such scrip shall cease to be exchangeable for full share certificates, the shares that would otherwise have been issuable as therein provided shall be deemed to be treasury shares unless the scrip shall contain other provisions for their disposition. 3. STOCK TRANSFERS. Upon compliance with provisions restricting the transfer or registration of transfer of shares of stock, if any, transfers or registration of transfers of shares of stock of the corporation shall be made only on the stock ledger of the corporation by the registered holder thereof, by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation or with a transfer agent or a registrar, if any, and on surrender of the certificate or certificates for such shares of stock properly endorsed and the payment of all taxes, if any, due thereon. The Board of Directors shall have power and authority to make all such rules and regulations as they deem expedient concerning the issue, transfer, and registration of certificates of stock, and may appoint a transfer agent and a registrar, and may require all stock certificates to bear the signature of such transfer agent and of such registrar. 4. TREASURY STOCK. The Chairman or Vice-Chairman of the Board of Directors, if any, or President or a Vice-President or Treasurer or an Assistant Treasurer or Secretary or an Assistant Secretary of the corporation is authorized and hereby is directed to assign, sell, purchase, or transfer shares of the common stock of the corporation for the purpose of effecting stock-for-stock transactions in accordance with the provisions of any Stock Option Plan which may be in effect from time to time. 5. RECORD DATE FOR STOCKHOLDERS. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the directors may fix, in advance, a record date, which shall not be 2 3 more than sixty days nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action, provided, however, that in the case of the payment of any dividend, the record date fixing the stockholders entitled to payment thereof shall be at least ten days after the date on which such dividend is declared by the Board of Directors. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is expressed; and the record date for determining stockholders for any other purpose, other than the payment of dividends, shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at any meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. 6. BENEFICIAL OWNERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. 7. MEETING OF CERTAIN TERMS. As used in these Bylaws in respect of the right to notice of a meeting of stockholders or a waiver thereof or to participate or vote thereat or to consent or dissent in writing in lieu of a meeting, as the case may be, the term "share" or "shares" or "share of stock" or "shares of stock" or "stockholder" or "stockholders" refers to an outstanding share or shares of stock and to a holder or holders of record of outstanding shares of stock when the corporation is authorized to issue only one class of shares of stock, and such reference is also intended to include any outstanding share or shares of stock of any class and any holder or holders of record of outstanding shares of stock of any class upon which or upon whom the Articles of Incorporation confers such rights where there are two or more classes or series of shares of stock or upon which or upon whom the General Corporation Law confers such rights notwithstanding that the Articles of Incorporation may provide for more than one class or series of shares of stock, one or more of which are limited or denied such rights thereunder; provided, however, that, except as provided by the General Corporation Law, no such right shall vest in the event of an increase or a decrease in the authorized number of shares of stock of any class or series which is otherwise denied voting rights under the provisions of the Articles of Incorporation. 8. STOCKHOLDER MEETINGS. (a) TIME. The annual meeting shall be held on the date and at the time fixed, from time 3 4 to time, by the Board of Directors, provided, that the first annual meeting shall be held on a date within thirteen months after the organization of the corporation, and each successive annual meeting shall be held on a date within thirteen months after the date of the preceding annual meeting. A special meeting shall be held on the date and at the time fixed by the Board of Directors. (b) PLACE. Annual meetings and special meetings shall be held at such place, within or without the State of Delaware, as the directors may, from time to time, fix. Whenever the directors shall fail to fix such place, the meeting shall be held at the principle office of the corporation in the State of Delaware. (c) CALL. Annual meetings and special meetings may be called by the directors or by any officer designated by the directors to call the meeting. (d) NOTICE OR WAIVER OF NOTICE. Notice of all meetings shall be in writing and signed by the President or a Vice-President, or the Secretary, or an Assistant Secretary, or by such other person or persons as the directors shall designate. Such notice shall state the purpose or purposes for which the meeting is called and the time when, and the place where, it is to be held. A copy of such notice shall be either delivered personally to, or shall be mailed postage prepaid to, each stockholder not less than ten or more than sixty days before such meeting. If mailed, it shall be directed to a stockholder at his address as it appears upon the records of the corporation. Any stockholder may waive notice of any meeting by a writing signed by him or his duly authorized attorney, either before or after the meeting; and whenever notice of any kind is required to be given under the provisions of the General Corporation Law, a waiver thereof in writing and duly signed, whether before or after the time of such required notice, shall be deemed equivalent thereto. (e) STOCKHOLDER LIST The officer who has charge of the stock ledger of the corporation shall prepare and make or cause to be prepared and made, at least ten days before every meeting of stockholders, a complete list of the stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city or other municipality or community where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, any may be inspected by any stockholder who is present. The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by this section or the books of the corporation, or to vote at any meeting of stockholders. (f) CONDUCT OF MEETING. Meetings of the stockholders shall be presided over by one of the following officers in the order of seniority and if present and acting; the Chairman of 4 5 the Board, if any, the Vice-Chairman of the Board, if any, the President, a Vice-President, or, if none of the foregoing is in office and present and acting, by a chairman to be chosen by the stockholders. The Secretary of the corporation, or in his absence an Assistant Secretary, shall act as secretary of every meeting, but if neither the Secretary nor an Assistant Secretary is present the Chairman of the meeting shall appoint a secretary of the meeting. (g) PROXY REPRESENTATION. Every stockholder may authorize another person or persons to act for him by proxy appointed by an instrument in writing in all matters in which a stockholder is entitled to participate, whether by voting or by participating at a meeting, or by expressing consent or dissent without a meeting. Every proxy must be executed by the stockholder or by his attorney-in-fact. No proxy shall be valid after the expiration of three years from the date of its execution, unless it specifies therein a longer period. (h) INSPECTORS. The Board of Directors, in advance of any meeting of stockholders shall appoint one or more inspectors to act at the meeting or any adjournment thereof and make a written report thereof. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by the person presiding at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall (i) determine the number of shares of stock outstanding and the voting power of each; (ii) determine the shares of stock represented at the meeting and validity of proxies and ballots; (iii) shall count all votes and ballots; (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; and (v) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. (i) QUORUM. The holders of a majority of the outstanding shares of stock or of the voting power, as the case may be, shall constitute a quorum at a meeting of stockholders for the transaction of any business unless the action to be taken at the meeting shall require a greater proportion. The stockholders present may adjourn the meeting despite the absence of a quorum. (j) VOTING. Each share of stock shall entitle the holder thereof to one vote except where the General Corporation Law, the Certificate of Incorporation, or the Bylaws prescribe a different exercise of voting power. In the election of directors, a plurality of the votes cast shall elect. Any other action shall be authorized by a majority of the votes cast except where the General Corporation Law, the Certificate of Incorporation, or the Bylaws prescribe a different percentage of votes. In the election of directors, voting need not be by ballot; and, except as otherwise may be provided by the General Corporation Law, voting by ballot shall not be required for any other action. 9. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action, except the election of directors and except as may otherwise be provided by the General Corporation Law, which may be taken by the vote of stockholders at a meeting may be taken without a meeting if 5 6 authorized by the written consent of stockholders holding at least a majority of the voting power; provided that, if any greater proportion of voting power is required for such action at a meeting, then such greater proportion of written consents shall be required. In no instance where action is authorized by written consent need a meeting of stockholders be called or noticed. ARTICLE II DIRECTORS 1. FUNCTIONS AND DEFINITION. The business and affairs of the corporation shall be managed by the Board of Directors of the corporation. The Board of Directors shall have the authority to fix the compensation of the members thereof for services in any capacity. The use of the phrase "whole Board" herein refers to the total number of directors which the corporation would have if there were no vacancies, as determined by the Board of Directors. 2. QUALIFICATIONS. Each director must be least 18 years of age. At least one director must be a citizen of the United States. A director need not be a stockholder or a resident of the State of Delaware. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors or by any stockholder of the corporation at the meeting who complies with the notice procedures set forth in this Article II, Section 2. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation at least 75 days before initiation of solicitation to the stockholders for election in the event of an election other than at an annual meeting and at least 75 days before the corresponding date that was the record date of the previous year's annual meeting of stockholders in the event of an election at an annual meeting. Any such notification pursuant to this paragraph shall be effective and such person shall be eligible to be elected or to serve only if the notification contains all information required under Regulation S-K and the Rules, each promulgated under the Securities Exchange Act of 1934, as amended. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Article II, Section 2. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribe by the Bylaws; and, if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. 3. NUMBER, ELECTION, AND TERM. The Board of Directors shall consist of not less than seven and not more than thirteen directors. A director shall hold office until the next annual meeting of stockholders and until his successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification, or removal from office. Any 6 7 vacancy on the Board of Directors that results from an increase in the number of directors may be filled by a majority of the Board of Directors then in office, any other vacancy occurring in the Board of Directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessor. 4. MEETINGS. (a) TIME. Meetings shall be held at such time as the Board shall fix. (b) PLACE. Meetings shall be held at such place within or without the State of Delaware as shall be fixed by the Board. (c) CALL. No call shall be required for regular meetings for which time and place have been fixed. Special meetings may be called by or at the direction of the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, the President, or a majority of the directors in office. (d) NOTICE OF ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for regular meetings for which the time and place have been fixed. Written, oral, or any mode of notice of the time and place shall be given for special meetings in sufficient time for the convenient assembly of the directors thereat. Notice, if any, need not be given to a director or to any member of a committee of directors who submits a written waiver of notice signed by him before or after the time stated therein. Attendance of any such person at a meeting shall constitute a waiver of notice of such meeting, except when he attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors need be specified in any written notice. (e) QUORUM AND ACTION. A majority of the whole Board shall constitute a quorum except when a vacancy or vacancies prevents such majority, whereupon a majority of the directors in office shall constitute a quorum, provided, that such majority shall constitute at least one-third of the whole Board. A majority of the directors present, whether or not a quorum is present, may adjourn a meeting to another time and place. Except as the Articles of Incorporation or the Bylaws may otherwise provide, and except as otherwise provided by the General Corporation Law, the act of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board. The quorum and voting provisions herein stated shall not be construed as conflicting with any provisions of the General Corporation Law and the Bylaws which govern a meeting of directors held to fill vacancies and newly created directorships in the Board or which govern actions of disinterested directors. 7 8 Members of the Board or of any committee which may be designated by the Board may participate in a meeting of the Board or of any such committee, as the case may be, by means of a conference telephone network or a similar communications method by which all persons participating in the meeting hear each other. Participation in a meeting by said means shall constitute presence in person at any such meeting. Each person participating in a meeting by such means shall sign the minutes thereof. (f) CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if present and acting, shall preside at all meetings. Otherwise, the Vice-Chairman of the Board, if any and if present and acting, or the President, if present and acting, or any other director chosen by the Board, shall preside. 5. REMOVAL OF DIRECTORS. Any or all of the directors may be removed for cause or without cause by the holders of at least two thirds of the outstanding stock of the corporation entitled to vote at an election of directors. One or more of the directors may be removed for cause by the Board of Directors. 6. COMMITTEES. There shall be a Nominating Committee which shall consist of four members. The Board of Directors may, in addition, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation and each committee to have such authority as the Board shall determine. Any such committee, to the extent provided in the resolution or resolutions of the Board and as limited by General Corporation Law, shall have and may exercise the powers and authority of the Board of Directors in the management of the business except that no such committee shall have authority as to the following matters: (a) The submission to shareholders of any action that needs shareholders' approval under the General Corporation Law, the Articles of Incorporation, or the Bylaws. (b) The filling of vacancies in the Board of Directors or in any committee. (c) The fixing of compensation of the directors for serving on the Board or on any committee. (d) The amendment or repeal of the Bylaws, or the adoption of new Bylaws. (e) The amendment or repeal of any resolution of the Board which by its terms shall not be so amendable or repealable. 7. WRITTEN ACTION. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if a written consent thereto is signed by all the members of the Board or committee, as the case may be. 8 9 ARTICLE III OFFICERS 1. The corporation shall have a President, a Secretary, a Treasurer, a Resident Agent, and, if deemed necessary, expedient, or desirable by the Board of Directors, a Chairman of the Board, a Vice-Chairman of the Board, one or more Executive Vice-Presidents, one or more Senior Vice-Presidents, one or more other Vice-Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers, and such other officers and agents with such titles as the resolutions choosing them shall designate. Each of any such officers and agents shall be elected by a majority vote of the Board of Directors or in the manner determined by the Board of Directors. 2. QUALIFICATIONS. Except as may otherwise be provided in the resolution choosing him, no officer other than the Chairman of the Board, if any, and the Vice-Chairman of the Board, if any, need be a director. Any two or more offices may be held by the same person, as the directors may determine. 3. TERM OF OFFICE. (a) Unless otherwise provided in the resolution choosing him, each officer, except the Resident Agent, shall be chosen for a term which shall continue until the meeting of the Board of Directors following the next annual of stockholders and until his successors shall have been chosen and qualified. The Resident Agent shall serve until his or its successor shall have been chosen and qualified. (b) Any officer may be removed, with or without cause, by the Board of Directors or in the manner determined by the Board. (c) Any vacancy in any office may be filled by the Board of Directors or in the manner determined by the Board. In case of any vacancy in the position of Chairman of the Board, if any, President, any Executive Vice-President, if any, any Senior Vice President, if any, any Vice-President, Secretary, or Treasurer, there shall be no automatic succession but such vacancy shall be filled by the Board of Directors. 4. DUTIES AND AUTHORITY. (a) All officers of the corporation shall have such authority and perform such duties in the management and operation of the corporation as shall be prescribed in the resolution designating and choosing such officers and prescribing their authority and duties, and shall have such additional authority and duties as are incident to their office except to the extent that such resolutions or instruments may be inconsistent therewith. (b) The President shall preside at all meetings of the officers and shall exercise such general executive powers as are usually incident to such office. 9 10 ARTICLE IV INDEMNIFICATION OF DIRECTORS AND OFFICERS 1. INDEMNIFICATION. Except as prohibited by General Corporation Law, every director and officer of the corporation shall be entitled as a matter of right to be indemnified by the corporation against reasonable expense and any liability paid or incurred by such person in connection with any actual or threatened claim, action, suit or proceeding, civil, criminal, administrative, investigative or other, whether brought by or in the right of the corporation or otherwise, in which he or she may be involved, as a party or otherwise, by reason of such person being or having been a director or officer of the corporation or by reason of the fact that such person is or was serving at the request of the corporation as a director, officer, employee, fiduciary or other representative of the corporation or another corporation, partnership, joint venture, trust, employee benefit plan or other entity (such claim, action, suit or proceeding hereinafter being referred to as an "action"); provided, however, that no such right of indemnification shall exist with respect to an action brought by a director or officer against the corporation other than in a suit for indemnification as provided hereunder. Such indemnification shall include the right to have expenses incurred by such person in connection with an action paid in advance by the corporation prior to final disposition of such action, subject to such conditions as may be prescribed by law. As used herein, "expense" shall include, among other things, fees and expenses of counsel selected by such person, and "liability" shall include amounts of judgments, excise taxes, fines and penalties, and amounts paid in settlement. 2. INSURANCE; OTHER FUNDING. The corporation may purchase and maintain insurance to protect itself and any person eligible to be indemnified hereunder against any liability or expense asserted or incurred by such person in connection with any action, whether or not the corporation would have the power to indemnify such person against such liability or expense by law or under the provisions of this Article IV. The corporation may make other financial arrangements, which may include, among other things, a trust fund, program of self-insurance, grant of a security interest or other lien on any assets of the corporation, or establishment of a letter of credit, guaranty, or surety to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. 3. NON-EXCLUSIVE; NATURE AND EXTENT OF RIGHTS. The right of indemnification provided for herein (i) shall not be deemed exclusive of any other rights, whether now existing or hereafter created, to which those seeking indemnification hereunder may be entitled under any agreement, the Articles of Incorporation, vote of stockholders or directors, or otherwise, (ii) shall be deemed to create contractual rights in favor of persons entitled to indemnification hereunder, (iii) shall continue as to persons who have ceased to have the status pursuant to which they were entitled or were designated as entitled to indemnification hereunder and shall inure to the benefit of the heirs and legal representatives of persons entitled to indemnification hereunder, and (iv) shall be applicable to actions, suits, or proceedings commenced after the adoption of this Bylaw, whether arising from acts or omissions occurring before or after the adoption hereof. The right of indemnification provided for herein may not be 10 11 amended, modified, or repealed so as to limit in any way the indemnification provided for herein with respect to any acts or omissions occurring prior to the adoption of any such amendment or repeal. ARTICLE V CHECKS AND NOTES 1. All checks, drafts and orders for the payment of money shall be signed by the President or Treasurer or such officer as may be designated by the Board of Directors or such other person as may be designated by the President or Chief Financial Officer, and such signature may be affixed by facsimile signature except that any disbursement in an amount of $10,000.00 or more must be countersigned manually by another designated officer. 2. All promissory notes of the corporation and acceptances must be authorized by the Board of Directors and signed by the President and Treasurer. ARTICLE VI FISCAL YEAR, WORKING CAPITAL AND DIVIDENDS 1. The fiscal year of the corporation shall consist of a fifty-two or fifty-three week period beginning on the first Sunday after the last Saturday of each calendar year and ending on the last Saturday of each calendar year, unless otherwise changed by the Board of Directors. 2. The Board of Directors shall have power to fix a sum, which may be set aside or reserved, over and above the corporation's capital paid-in, as working capital for the corporation, and from time to time they may increase, diminish, and vary same in their absolute judgment and discretion. 3. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, and may be paid in cash, in property, or in shares of the capital stock. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the Board of Directors from time to time, in its absolute discretion, deems proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for any proper purpose, and the Board of Directors may modify or abolish any such reserve. ARTICLE VII CORPORATE SEAL OR STAMP The corporate seal or stamp shall be in such form as the Board of Directors may prescribe. 11 12 ARTICLE VIII PRINCIPAL OFFICE-RESIDENT AGENT-RECORDS The location of the initial principal office of the corporation in the State of Delaware is set forth in the original Articles of Incorporation of the corporation; and the name of the initial resident agent of the corporation in charge of said principal office is The Corporation Trust Company. The corporation shall maintain at said principal office a copy of its Articles of Incorporation and all amendments thereto, and a copy of the Bylaws and all amendments thereto, as certified by the Secretary of the corporation. The corporation shall also keep at said principal office a stock ledger or a duplicate stock ledger revised annually, containing the names, alphabetically arranged, of all persons who are stockholders of the corporation, showing their places of residence, if known, and the number of shares held by them respectively, or a statement setting out the name of the custodian of the stock ledger or duplicate stock ledger, and the present and complete post office address, including street and number, if any, where such stock ledger or duplicate stock ledger is kept. ARTICLE IX CONTROL OVER BYLAWS The Bylaws may be amended or repealed, and new Bylaws may be adopted, (1) by vote of the holders of shares representing at least 75% of the votes entitled to be cast at any annual meeting of stockholders, or at any special meeting of the stockholders called for that purpose, or (2) by a majority vote of the Board of Directors. Any Bylaw adopted by the Board may be amended or repealed by the stockholders entitled to vote thereon as herein provided, but a Bylaw adopted by the stockholders may provide that such Bylaws shall not be subject to amendment or repeal by the Board. If any Bylaw regulating an impending election of directors is adopted, amended, or repealed by the Board, there shall be set forth in the notice of the next meeting of stockholders for the election of directors the Bylaw so adopted, amended, or repealed, together with a concise statement of the changed made. 12 EX-11 3 COMPUTATION OF EARNINGS (LOSS) PER SHARE 1 HANOVER DIRECT, INC. EXHIBIT 11 COMPUTATION OF EARNINGS (LOSS) PER SHARE
(In 000's except per share amounts) 13 WEEKS ENDED SEPTEMBER 28, SEPTEMBER 27, 1996 1997 ---- ---- Net income (loss) before extraordinary item $ (28,431) $ (3,421) Extraordinary item (1,134) -- ----------- ---------- Net income (loss) (29,565) (3,421) Preferred stock dividends (59) (47) ----------- ---------- Net income (loss) applicable to common shareholders $ (29,624) $ (3,468) =========== ========== Average shares of common stock outstanding during the period 114,252 200,330 Total shares used to calculate PEPS* 114,252 200,330 Primary earnings per share: Earnings (loss) before extraordinary item $ (0.25) $ (0.02) Extraordinary item (0.01) -- ----------- ---------- Primary earnings per share (0.26) (0.02) =========== ========== Average shares of common stock outstanding during the period 114,252 200,330 Total shares used to calculate FDEPS* 114,252 200,330 Fully diluted earnings per share: Earnings (loss) before extraordinary item $ (0.25) $ (0.02) Extraordinary item (0.01) -- ----------- ---------- Fully diluted earnings per share $ (0.26) (0.02) =========== ========== Average shares of common stock outstanding during the period 114,252 200,300 Basic earnings per share: Earnings (loss) before extraordinary item $ (0.25) $ (0.02) Extraordinary item (0.01) -- ----------- ---------- Basic earnings per share $ (0.26) $ (0.02) =========== ==========
*Per APB 15, when a net loss is reported, exercise or conversion of stock options is not to be assumed. 27 EX-27 4 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER DIRECT, INC AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 27, 1997 AND IS QUALIFIED IN ITS ENTIRETY, EXCEPT FOR GROSS ACCOUNTS RECEIVABLE AND THE ALLOWANCE FOR DOUBTFUL ACCOUNTS, BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 9-MOS DEC-27-1997 DEC-27-1996 SEP-27-1997 918 0 37,746 (2,200) 69,672 143,648 77,402 (28,051) 226,011 (113,022) 47,972 5,890 0 133,814 (76,681) 226,011 386,072 386,072 252,971 142,259 0 0 5,783 (14,941) (749) (15,690) 0 0 0 (15,690) (0.09) (0.09)
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