-----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, HhvfIMOV9bax9lKHzKGYXD9hrZQxp6oG+Gj+E+0vJvD1+tRpEgfY3FULcSe3qRki xRJP/pVXpBaMEQBq7Nv16w== 0000950123-98-007357.txt : 19980812 0000950123-98-007357.hdr.sgml : 19980812 ACCESSION NUMBER: 0000950123-98-007357 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980627 FILED AS OF DATE: 19980811 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: 98682482 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 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 June 27, 1998 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: 210,292,788 shares outstanding as of August 10, 1998. 2 HANOVER DIRECT, INC. FORM 10-Q June 27, 1998 INDEX
Page ---- Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets - June 27, 1998 and December 27, 1997....................................................................... 3 Condensed Consolidated Statements of Income (Loss) - thirteen and twenty-six weeks ended June 27, 1998 and June 28, 1997 .......................................................................... 5 Condensed Consolidated Statements of Cash Flows - twenty-six weeks ended June 27, 1998 and June 28, 1997 ......................................................................... 6 Notes to Condensed Consolidated Financial Statements - twenty-six weeks ended June 27, 1998 and June 28, 1997..................................................................... 7 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations....................................................................................10 Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................14 Part II - Other Information Item 4. Submission of Matters to a Vote of Securityholders....................................................15 Item 5. Other Information.....................................................................................15 Item 6. Exhibits and Reports on Form 8-K......................................................................15 Signatures.........................................................................................................16
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS As of June 27, 1998 and December 27, 1997 (Unaudited) (In thousands)
June 27, December 27, 1998 1997 ---- ---- ASSETS Current Assets: Cash and cash equivalents $ 3,246 $ 14,758 Accounts receivable, net 19,364 17,684 Accounts receivables under financing agreement 19,013 21,918 Inventories 74,697 64,330 Prepaid catalog costs 24,347 20,684 Deferred tax asset, net 3,300 3,300 Other current assets 3,796 3,083 Total Current Assets --------- --------- 147,763 145,757 --------- --------- Property and equipment, at cost: Land 4,634 4,909 Buildings and building improvements 20,312 16,486 Leasehold improvements 9,188 9,040 Furniture, fixtures and equipment 47,464 47,210 Construction in progress 4,012 4,519 --------- --------- 85,610 82,164 Accumulated depreciation and amortization (33,315) (29,712) --------- --------- Net Property and Equipment 52,295 52,452 Goodwill, net 17,150 17,412 Deferred tax asset, net 11,700 11,700 Other assets, net 2,885 2,978 Total Assets --------- --------- $ 231,793 $ 230,299 ========= =========
See Notes to Condensed Consolidated Financial Statements. 3 4 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) June 27, 1998 and December 27, 1997 (Unaudited) (In thousands, except share and per share amounts)
June 27, December 27, 1998 1997 ---- ---- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt and capital lease obligations $ 4,948 $ 5,305 Accounts payable 59,028 58,799 Accrued liabilities 20,530 30,259 Customer prepayments and credits 3,486 3,824 --------- --------- Total Current Liabilities 87,992 98,187 --------- --------- Non-current Liabilities: Long-term debt 55,060 32,668 Obligations under receivables financing 19,013 21,918 Capital lease obligations 38 67 Other 1,977 1,908 --------- --------- Total Noncurrent Liabilities 76,088 56,561 --------- --------- Total Liabilities 164,080 154,748 --------- --------- Commitments and Contingencies Shareholders' Equity: Series B Preferred Stock, convertible, $.01 par value, authorized and issued 634,900 shares 6,033 5,938 Common Stock, $.66 2/3 par value, authorized 225,000,000 shares; issued 205,004,601 and 204,441,538 shares at June 27, 1998 and December 27, 1997, respectively 136,676 136,294 Capital in excess of par value 286,247 285,165 Accumulated deficit (357,255) (347,652) --------- --------- 71,701 79,745 Less: Treasury stock, at cost (358,303 and 686,283 shares at June 27, 1998 and December 27, 1997, respectively) (813) (968) Notes receivable from sale of Common Stock (3,175) (3,226) --------- --------- Total Shareholders' Equity 67,713 75,551 --------- --------- Total Liabilities and Shareholders' Equity $ 231,793 $ 230,299 ========= =========
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 26 Weeks Ended ----------------------------- ---------------------------------- June 27, June 28, June 27, June 28, 1998 1997 1998 1997 ---- ---- ---- ---- Revenues $ 134,562 $ 133,750 $ 259,097 $ 263,475 ------------- ------------- ------------- ------------- Operating costs and expenses: Cost of sales and operating expenses 83,659 86,540 162,360 172,602 Selling expenses 37,080 34,578 71,068 68,168 General and administrative expenses 13,737 13,801 26,210 26,075 Depreciation and amortization 2,453 1,973 4,790 4,111 ------------- ------------- ------------- ------------- 136,929 136,892 264,428 270,956 ------------- ------------- ------------- ------------- Loss from operations (2,367) (3,142) (5,331) (7,481) ------------- ------------- ------------- ------------- Interest Expense, Net (2,242) (2,255) (3,677) (4,289) Loss before income taxes (4,609) (5,397) (9,008) (11,770) Income tax provision (250) (251) (500) (499) ------------- ------------- ------------- ------------- Net Loss (4,859) (5,648) (9,508) (12,269) Preferred stock dividends and accretion (158) (47) (280) (95) ------------- ------------- ------------- ------------- Net Loss applicable to common shareholders $ (5,017) $ (5,695) $ (9,788) $ (12,364) ============= ============= ============= ============= Comprehensive income $ (5,017) $ (5,695) $ (9,788) $ (12,364) ============= ============= ============= ============= Basic and diluted net loss per share ($.02) ($.04) ($.05) ($.08) ============= ============= ============= ============= Weighted average shares outstanding 203,982,414 158,741,451 203,885,594 151,656,168 ============= ============= ============= =============
See Notes to Condensed Consolidated Financial Statements. 5 6 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands)
26 Weeks Ended -------------------------- June 27, June 28, 1998 1997 ---- ---- Cash flows from operating activities: Net loss $ (9,508) $(12,269) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization, including deferred fees 5,706 5,418 Provisions for doubtful accounts 1,734 2,247 Compensation expense related to stock options 1,180 882 Other -- (13) Changes in assets and liabilities, net of acquisitions: Accounts receivable (3,414) 9,971 Inventories (10,367) 10,683 Prepaid catalog costs (3,663) 426 Other current assets (713) (247) Accounts payable 229 (30,688) Accrued liabilities (9,729) (6,251) Customer prepayments and credits (338) (1,023) -------- -------- Net cash used by operating activities (28,883) (20,864) -------- -------- Cash flows from investing activities: Acquisitions of property (4,108) (1,510) Proceeds from sale of businesses and properties -- 642 Other, net (1,088) 322 -------- -------- Net cash used by investing activities $ (5,196) $ (546) -------- -------- Cash flows from financing activities: Net borrowings (repayments) under Credit Facility $ 22,647 $(13,754) Payments of debt and capital lease obligations (641) (1,397) Proceeds from issuance of Common Stock 441 35 Payment of debt issuance costs -- (2,849) Payment on notes receivable from sale of Common Stock 51 -- Proceeds from issuance in Rights Offering -- 40,089 Other, net 69 (13) -------- -------- Net cash provided by financing activities 22,567 22,111 -------- -------- Net (decrease) increase in cash and cash equivalents (11,512) 701 Cash and cash equivalents at the beginning of the year 14,758 5,173 -------- -------- Cash and cash equivalents at end of the period $ 3,246 $ 5,874 ======== ======== Supplemental cash flow disclosures: Interest paid $ 2,238 $ 2,161 ======== ======== Income taxes paid $ 420 $ 603 ======== ========
See Notes to Condensed Consolidated Financial Statements. 6 7 HANOVER DIRECT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWENTY-SIX WEEKS ENDED JUNE 27, 1998 AND JUNE 28, 1997 (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 27, 1997. 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. NET LOSS PER SHARE Net loss per share is computed using the weighted average number of common shares outstanding in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings Per Share". The weighted average number of shares used in the calculation for both basic and diluted net loss excludes warrants, stock options and convertible preferred stock because a net loss was incurred for the periods reported in the accompanying condensed consolidated statements of income (loss). 4. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. This Statement is effective for fiscal years beginning after June 15, 1999. As the Company does not currently engage in derivative instruments and hedging activities, this Statement is not expected to have an impact on the Company's financial statements. 7 8 5. RESTRUCTURING Restructuring reserves primarily are comprised of severance and facility exit/relocation costs. The cost of employee severance includes termination benefits for line and supervisory personnel in fulfillment, telemarketing, MIS, merchandising and various levels of corporate and catalog management. Facility exit/relocation costs are primarily related to the Company's decision to sublet a portion of its Weehawken, NJ corporate facility and to consolidate its distribution centers in Roanoke, VA. Reserves for restructuring costs approximated $4.2 million and $5.4 million at June 27, 1998 and December 27, 1997, respectively, and are included in accrued liabilities in the accompanying condensed consolidated balance sheets. 6. LONG-TERM DEBT The Congress Facility is comprised of a revolving line of credit of up to $65 million ("Congress Revolving Credit Facility") and term loans initially aggregating $10 million ("Revolving Term Notes"), expiring on January 31, 2001. On June 26, 1998, the Company amended its agreement with Congress to increase the Revolving Term Notes to $12.0 million. At June 27, 1998, the Company had borrowings of $18.3 million under the Revolving Credit Facility and $12.0 million in Revolving Term Notes. The rates of interest related to the Congress Revolving Credit Facility and Revolving Term Notes at June 27, 1998 were 9.0% and 9.25%, respectively. The face amount of unexpired documentary letters of credit were $4.5 million at June 27, 1998 and June 28, 1997. The Congress Revolving Credit Facility is secured by all the assets of the Company. Borrowings under the Congress Revolving Credit Facility are based on percentages of eligible inventory and accounts receivable. The Congress Revolving Credit Facility places limitations on the incurrence of additional indebtedness and requires the Company to maintain minimum net worth and working capital throughout the term of the agreement. At June 27, 1998, the Company was in compliance with such covenants and availability under the Congress Revolving Credit Facility was $25.3 million. 7. STOCK BASED COMPENSATION PLANS The Company accounts for its stock based compensation in accordance with the fair value provisions of SFAS No. 123. Total compensation expense recognized in the six months ended June 27, 1998 and June 28, 1997 was $1,180,000 and $882,000, respectively. Pursuant to the Company's 1996 Stock Option Plan, there were 200,000 options granted to employees of the Company with a weighted average exercise price of $3.24 per share during the thirteen-week period ended June 27, 1998. The option exercise price is the fair market value of a share as of the date of grant. Options expire seven years from the date of grant and generally vest over three years. At June 27, 1998, there were 5,312,667 options outstanding with a weighted average exercise price of $1.43 per share, of which 928,747 options are vested with a weighted average exercise price of $.97 per share. The fair value of the options granted during the thirteen-week period ended June 27, 1998 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: expected volatility of 55.77%, expected option life of four years; risk-free interest rate of 5.50%; and no expected dividend. The weighted average fair value of options granted under the 1996 Stock Option Plan was $1.56 as of June 27, 1998. During 1997, the Company granted, and the Compensation Committee approved, nonqualified options to certain employees for the purchase of an aggregate of 1,000,000 shares of the Company's Common Stock. The options become vested over three years and expire in 2003. Pursuant to this special grant, 333,333 options vested in March 1998, of which 191,000 options have been exercised as of June 27, 1998. These options have a weighted average exercise price of $1.00. 8 9 At the May 7, 1998 annual meeting of shareholders, the target price established under the Company's Stock Option Agreement dated August 23, 1996 with Rakesh K. Kaul forming a part of the Long-Term Incentive Plan for the CEO was amended. The target closing price of the Common Stock which would trigger the option was changed from $7.00 to $4.50 per share during a 91-day period ending on or before March 7, 2002. This provision relates to the option expiring March 7, 2006 to purchase 2,000,000 shares of Common Stock of the Company granted to Mr. Kaul. There were no other changes to any of the provisions of any of the Company's stock option plans during the six months ended June 27, 1998. 8. RELATED PARTY TRANSACTIONS At June 27, 1998, current and former officers and executives of the Company owed the Company approximately $3.0 million, of which approximately $1.7 million relates to receivables, excluding accrued interest, under the Executive Equity Incentive Plan. These amounts due to the Company bear interest at rates ranging from 5.0% to 7.75% and are due from 1999 to 2002. An additional $1.0 million relates to a receivable, excluding accrued interest, under the Long-Term Incentive Plan for Rakesh K. Kaul. Pursuant to the Joint Venture Agreement of NAR Group Limited among Richemont Finance, S.A. ("Richemont"), Evansville Limited ("Evansville"), NAR and Alan G. Quasha dated June 13, 1997, a Letter Agreement ( the "Letter Agreement") dated June 1, 1998 was executed whereby an aggregate of 87,606,072 shares of the Company's Common Stock were distributed by NAR to Richemont, Evansville and Mr. Quasha. Richemont received 56,456,197 shares of Common Stock, Evansville received 30,713,770 shares of Common Stock and Mr. Quasha received 436,098 shares of Common Stock. Pursuant to related Warrant Purchase Agreements, NAR and Quadrant Group Limited sold to Richemont for $4,757,350 in cash warrants to acquire up to an aggregate of 5,646,490 shares of Common Stock. On June 1, 1998, upon consummation of these transactions, Richemont owned approximately 47.46% of the Company's Common Stock and NAR ceased to be the beneficial owner of more than 5% of the Company's Common Stock. On July 31, 1998, Richemont exercised these warrants, with exercise prices ranging from $1.95 to $2.59 per share, for a total exercise price of $13,640,796. As a result of such exercise, Richemont owns approximately 48.88% of the issued and outstanding Common Stock of the Company. 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth, for the fiscal periods indicated, the percentage relationship to revenues of certain items in the Company's Condensed Consolidated Statements of Income (Loss). Results of Operations - Thirteen-weeks Ended June 27, 1998 Compared With Thirteen-weeks Ended June 28, 1997.
13 Weeks Ended ------------------------------- June 27, 1998 June 28, 1997 ------------- ------------- Revenues 100.0% 100.0% Cost of sales and operating expenses 62.2 64.7 Selling expenses 27.6 25.8 General and administrative expenses 10.2 10.3 Depreciation and amortization 1.8 1.5 Loss from operations (1.8) (2.3) Interest expense, net (1.7) (1.7) Net loss (3.7)% (4.2)%
Net Loss. The Company reported a net loss of $5.0 million or $(.02) per share for the thirteen-weeks ended June 27, 1998 compared with a net loss of $5.7 million or $(.04) per share for the same period last year. The per share amounts were calculated based on weighted average shares outstanding of 203,982,414 and 158,741,541 for the current year and prior period, respectively. This increase in weighted average shares was due to a rights offering completed in June 1997. The net loss for the thirteen weeks ended June 27, 1998 was primarily the result of the seasonality of the Company's business, an increase in catalog costs and costs related to new marketing initiatives. Compared to the same period last year, the decrease in net loss was primarily the result of (i) improved product margin results, (ii) productivity improvements in telemarketing and fulfillment, (iii) an increase in revenues from continuing operations, and (iv) a continuation of reduced distribution costs. These cost reductions were offset by an increase in selling expenses primarily due to increased circulation costs of catalogs. Revenues. Revenues increased to $134.6 million for the thirteen-week period ended June 27, 1998 versus $133.8 million for the same period last year. Revenues from continuing operations increased 1.6% or $2.1 million compared to the same period last year. Revenues from discontinued catalogs decreased by $1.4 million for the thirteen-week period ended June 27, 1998 compared to the same period last year. Operating Costs and Expenses. Cost of sales and operating expenses decreased to 62.2% of revenues for the thirteen-week period ended June 27, 1998 compared to 64.7% of revenues for the same period in 1997. The Company realized benefits from continued improvement in product margin results due to improved product sourcing and merchandise mix. In addition, the order fill rate has improved during the second quarter of 1998 compared to the same period last year. The Company also experienced productivity improvements in telemarketing and distribution costs. Selling expenses increased to 27.6% of revenues in the second quarter of 1998 from 25.8% in the same period last year. This increase was primarily due to a 7.9% increase in circulation and costs related to new marketing initiatives. The Company circulated 73.8 million catalogs during the second quarter of 1998 compared to 68.4 million catalogs for the same period last year. 10 11 General and administrative expenses were 10.2% of revenues for the second quarter of 1998 versus 10.3% for the comparable period in 1997. General and administrative costs reflected comparable year-to-year spending, despite a slight increase in revenues. Depreciation and amortization increased to 1.8% of revenues for the second quarter of 1998 versus 1.5% for the comparable period in 1997. The increase is primarily a result of fixed asset additions associated with the improvements being effected in the distribution center in Roanoke, Virginia. Loss from Operations. The Company recorded a loss from operations of $2.4 million for the fiscal second quarter or (1.8)% of revenues, compared to a loss from operations of $3.1 million or (2.3)% of revenues for the same period in 1997. Interest Expense, Net. Interest expense, net during the second quarter of 1998 reflected comparable costs compared to the same period in 1997. Income Taxes. The Company recorded a state tax provision of $.25 million in each of the thirteen-week periods ended June 27, 1998 and June 28, 1997. Results of Operations - Twenty-six weeks ended June 27, 1998 Compared With Twenty-six weeks ended June 28, 1997
26 Weeks Ended ----------------------------------- June 27, 1998 June 28, 1997 ------------- ------------- Revenues 100.0% 100.0% Cost of sales and operating expenses 62.7 65.5 Selling expenses 27.4 25.9 General and administrative expenses 10.1 9.9 Depreciation and amortization 1.8 1.6 Loss from operations (2.1) (2.8) Interest expense, net (1.4) (1.6) Net loss (3.8)% (4.7)%
Net Loss. The Company reported a net loss of $9.8 million or $(.05) per share for the twenty-six weeks ended June 27, 1998 compared with a net loss of $12.4 million or $(.08) per share for the same period last year. The per share amounts were calculated based on weighted average shares outstanding of 203,885,594 and 151,656,168 for the current year and prior period, respectively. This increase in weighted average shares was due to a rights offering completed in June 1997. The net loss for the twenty-six weeks ended June 27, 1998 was primarily the result of the seasonality of the Company's business in that the sales volumes achieved in the first six months of the year generally were not sufficient to cover its fixed costs for such period and an increase in catalog costs for circulation to prospective new customers combined with an increase in selling expenses. Compared to the same period last year, the decrease in net loss was primarily the result of (i) improved gross margins which resulted primarily from a reduction in cost of merchandise, (ii) a reduction in distribution costs which resulted from the consolidation of distribution activities into its distribution center in Roanoke, Virginia, and (iii) a 1.6% increase in revenues from continuing operations. These cost savings and increase in revenues from continuing businesses were offset by an increase in selling expenses. The increase in selling expenses resulted primarily from (i) an increase in circulation to core and prospective customers, and (ii) costs related to new marketing initiatives. 11 12 Revenues. Total revenues for the six months ended June 27, 1998 were $259.1 million compared to $263.5 million for the six months ended June 28, 1997. The decrease in revenues was a result of a decline in revenues from discontinued catalogs. Revenues from continuing catalogs increased 1.6% or $4.0 million for the twenty-six week period ended June 27, 1998 compared to the same period last year. Operating Costs and Expenses. Year-to-date cost of sales and operating expenses decreased to 62.7% of revenues compared to 65.5% of revenues for the same period in 1997. This reflects continued improvement in product margin and a reduction in other operating costs. Selling expenses increased to 27.4% of revenues in the first six months of 1998 from 25.9% in the same period in 1997. This increase was primarily due to an increase in circulation to core and prospective customers and costs related to new marketing initiatives. Year-to-date general and administrative expenses were 10.1% of revenues versus 9.9% for the comparable period in 1997. General and administrative costs reflected a slight increase in spending as the Company repositioned its spending to support growth initiatives. Depreciation and amortization increased to 1.8% of revenues for the first six months of 1998 versus 1.6% for the comparable period in 1997. The increase is primarily a result of fixed asset additions associated with the improvements being effected in the distribution center in Roanoke, Virginia. Loss from Operations. For the twenty-six week period ended June 27, 1998, the Company recorded a loss from operations of $5.3 million or (2.1)% of revenues compared to a loss from operations of $7.4 million or (2.8)% of revenues for the same period in 1997. Interest Expense, Net. Interest expense, net during the first six months of 1998 decreased by $.6 million compared to the same period in 1997. Income Taxes. The Company recorded a state tax provision of $.5 million in each of the twenty-six week periods ended June 27, 1998 and June 28, 1997. Liquidity and Capital Resources At June 27, 1998, the Company had $3.2 million in cash and cash equivalents, compared with $14.8 million at December 27, 1997. Working capital and current ratio were $59.8 million and 1.68 to 1 at June 27, 1998 versus $47.6 million and 1.48 to 1 at December 27, 1997. The $28.8 million of cash used in operations was targeted to improve merchandise in-stock position which resulted in increased inventory levels, to fund a seasonal increase in catalog costs, to increase prospecting, and to, fund operating losses and capital expenditures for the twenty-six week period ended June 27, 1998. In December 1996, the Company finalized its agreement (the "Reimbursement Agreement") with Richemont Finance S.A. that provided the Company with up to approximately $28 million of letters of credit through Swiss Bank Corporation, New York Branch. The letters of credit were to expire on February 18, 1998. In November 1997, Richemont agreed to extend its guarantee under the Reimbursement Agreement to March 30, 1999. As consideration for this transaction, the Company agreed to pay to Richemont a fee of 4% of the principal amount of the letters of credit aggregating $1,073,483. The extension required the approval of Congress and Swiss Bank, which approvals were obtained in February 1998, and was subject to certain other conditions. On February 18, 1998, the extension of the Richemont guarantee and the closing of this transaction were consummated. Accordingly, the expiration dates of the letters of credit were extended through March 30, 1999, and the letters of credit were amended to reflect the assignment of all obligations thereon from Swiss Bank, New York Branch to Swiss Bank, Stamford Branch. The Company believes that the 1997 Rights Offering completed in June 1997, together with the Credit Facility modifications, the extension of the letters of credit by Richemont, the July 31, 1998 warrant exercise by Richemont to purchase 5,646,490 shares of Common Stock for a total exercise price of $13,640,796, and the Company's reduced operating losses, have eased vendor/credit concerns about the 12 13 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. Year 2000 - --------- The Company utilizes both systems housed primarily on its own computer network and systems housed on the computers of third parties, such as its vendors, to conduct its normal business activities. Some of the systems on its network are proprietary and many are off the shelf programs acquired from vendors. The Company has inventoried those information technology ("IT") and non-IT systems, including those with embedded chips, critical to its operations and has received assurances from those developers, vendors and third parties that those systems are, or will be prior to June 30, 1999, Year 2000 compliant. The Company has commenced testing of its systems and intends to complete this process and resolve identified problems by December 31, 1998. As an additional precaution, the Company is in the process of developing contingency plans which are expected to be completed by March 31, 1999. The failure of one or more critical systems to be Year 2000 compliant could have a material adverse effect on the results of its operations. The costs incurred to date to become Year 2000 compliant have not been material and, although the Company has not completed its testing, the future costs related to this issue are not expected to be material in the aggregate. 13 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. None. 14 15 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS On May 7, 1998, the Company held its Annual Meeting of Shareholders. The matters acted on at the meeting were: 1. The election of twelve members of the Board of Directors, including Messrs. Ralph Destino, J. David Hakman, Rakesh K. Kaul , S. Lee Kling, Theodore H. Kruttschmitt, Edmund R. Manwell, Shailesh J. Mehta, Jan P. du Plessis, Alan G. Quasha, Howard M. S. Tanner and Robert F. Wright and Ms. Lisa Valk Long, to serve until the 1999 Annual Meeting of Shareholders and in each case until their respective successors are elected and qualified. Each nominee for director received a minimum vote of 194,392,697 shares for and a maximum of 154,764 shares withheld. 2. The approval of an amendment to the Company's Stock Option Agreement dated August 23, 1996 with Rakesh K. Kaul forming a part of the Long-Term Incentive Plan for Rakesh K. Kaul, which received a vote of 187,212,443 shares for, 7,133,015 shares against and 202,003 shares abstaining; and 3. The approval of the appointment by the Board of Directors of Arthur Anderson LLP as the Company's independent auditors for the fiscal year ending December 26, 1998, which received a vote of 194,341,206 shares for, 137,452 shares against and 68,803 shares abstaining. ITEM 5. OTHER INFORMATION If the Company does not receive notice of any matter that is to come before the shareholders at the next annual meeting of the shareholders on or before Saturday, February 27, 1999, which corresponds to forty-five days before the date on which the Company first mailed its proxy materials for the prior year's annual meeting of shareholders, the proxy for the next annual meeting of the shareholders may, pursuant to Rule 14a-4[c] of the Proxy Rules under the Securities Exchange Act of 1934, confer discretionary authority to vote on such matter. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (EDGAR filing only). (b) Reports on Form 8-K None. 15 16 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) Date: August 11, 1998 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 THE LEGEND CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME FOR THE TWENTY-SIX WEEKS ENDED JUNE 27, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR JUN-27-1998 JUN-27-1998 3,246 0 19,364 (2,522) 74,697 147,763 85,610 (33,315) 231,793 87,992 55,098 6,033 0 136,676 (74,996) 231,793 259,097 259,097 162,360 264,428 0 1,734 3,677 (9,008) 500 (9,508) 0 0 0 (9,508) (.05) (.05)
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