-----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, GFl9xYMe9Ah25TPGV7hAWcH3XFWShjvkniiZj+h56DpZmz2hpkytKKuWH+aICz5x 0xxWinDajfD7Mh3/oVDrKw== 0000950123-98-009700.txt : 19981111 0000950123-98-009700.hdr.sgml : 19981111 ACCESSION NUMBER: 0000950123-98-009700 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980926 FILED AS OF DATE: 19981110 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: 98743405 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 FORM 10-Q RE: 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 September 26, 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: 210,718,923 shares outstanding as of November 3, 1998. 2 HANOVER DIRECT, INC. FORM 10-Q September 26, 1998 INDEX
Page Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 26, 1998 and December 27, 1997................................. 3 Condensed Consolidated Statements of Income (Loss) - thirteen and thirty-nine weeks ended September 26, 1998 and September 27, 1997 ...................................................... 5 Condensed Consolidated Statements of Cash Flows - thirty-nine weeks ended September 26, 1998 and September 27, 1997................................ 6 Notes to Condensed Consolidated Financial Statements - thirty-nine weeks ended September 26, 1998 and September 27, 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 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 SEPTEMBER 26, 1998 AND DECEMBER 27, 1997 (UNAUDITED) (IN THOUSANDS)
SEPTEMBER 26, DECEMBER 27, 1998 1997 ------------- ------------ ASSETS Current Assets: Cash and cash equivalents $ 3,292 $ 14,758 Accounts receivable, net 21,817 17,684 Accounts receivable under financing agreement 17,694 21,918 Inventories 77,085 64,330 Prepaid catalog costs 25,457 20,684 Deferred tax asset, net 3,300 3,300 Other current assets 3,972 3,083 --------- --------- Total Current Assets 152,617 145,757 --------- --------- Property and equipment, at cost: Land 4,634 4,909 Buildings and building improvements 22,610 16,486 Leasehold improvements 9,626 9,040 Furniture, fixtures and equipment 50,513 47,210 Construction in progress 280 4,519 --------- --------- 87,663 82,164 (35,920) (29,712) --------- --------- Accumulated depreciation and amortization Net Property and Equipment 51,743 52,452 Goodwill, net 17,021 17,412 Deferred tax asset, net 11,700 11,700 Other assets, net 2,342 2,978 --------- --------- Total Assets $ 235,423 $ 230,299 ========= =========
See Notes to Condensed Consolidated Financial Statements. 3 4 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) SEPTEMBER 26, 1998 AND DECEMBER 27, 1997 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
SEPTEMBER 26, DECEMBER 27, 1998 1997 ------------- ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt and capital lease obligations $ 2,133 $ 5,305 Accounts payable 54,813 58,799 Accrued liabilities 21,126 30,259 Customer prepayments and credits 3,150 3,824 --------- --------- Total Current Liabilities 81,222 98,187 --------- --------- Noncurrent Liabilities: Long-term debt 55,265 32,668 Obligations under receivables financing 17,694 21,918 Capital lease obligations 38 67 Other 2,005 1,908 --------- --------- Total Noncurrent Liabilities 75,002 56,561 --------- --------- Total Liabilities 156,224 154,748 --------- --------- Commitments and Contingencies Shareholders' Equity: Series B Preferred Stock, convertible, $.01 par authorized and issued 634,900 shares in 1997 6,081 5,938 Common Stock, $.66 2/3 par value, authorized 225,000,000 shares; issued 204,441,538 shares in 1997 and 210,705,589 shares in 1998 140,470 136,294 Capital in excess of par value 296,761 285,165 Accumulated deficit (360,139) (347,652) --------- --------- 83,173 79,745 Less: Treasury stock, at cost (686,283 shares in 1997 and 358,303 shares in 1998) (813) (968) Notes receivable from sale of Common Stock (3,161) (3,226) --------- --------- Total Shareholders' Equity 79,199 75,551 --------- --------- Total Liabilities and Shareholders' Equity $ 235,423 $ 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 39 WEEKS ENDED -------------- -------------- SEPTEMBER 26 SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27, 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Revenues $ 123,417 $ 122,597 $ 382,514 $ 386,072 ------------- ------------- ------------- ------------- Operating costs and expenses: Cost of sales and operating expenses 76,863 80,369 239,223 252,971 Selling expenses 32,462 29,745 103,530 97,913 General and administrative expenses 12,498 11,967 38,708 38,042 Depreciation and amortization 2,357 2,193 7,147 6,304 ------------- ------------- ------------- ------------- 124,180 124,274 388,608 395,230 ------------- ------------- ------------- ------------- Loss from operations (763) (1,677) (6,094) (9,158) ------------- ------------- ------------- ------------- Interest expense, net (1,823) (1,494) (5,500) (5,783) Loss before income taxes (2,586) (3,171) (11,594) (14,941) Income tax provision (250) (250) (750) (749) ------------- ------------- ------------- ------------- Net loss (2,836) (3,421) (12,344) (15,690) Preferred stock dividends and accretion (158) (47) (438) (142) ------------- ------------- ------------- ------------- Net loss applicable to common shareholders $ (2,994) $ (3,468) $ (12,782) $ (15,832) ============= ============= ============= ============= Comprehensive income $ (2,994) $ (3,468) $ (12,782) $ (15,832) ============= ============= ============= ============= Basic and diluted net loss per share $ (.01) $ .02) $ (.06) $ (.09) ============= ============= ============= ============= Weighted average shares outstanding 207,909,428 200,329,521 205,226,872 167,906,290 ============= ============= ============= =============
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 26, September 27, 1998 1997 ------------- ------------- Cash flows from operating activities: Net loss $(12,344) $(15,690) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization, including 8,622 7,938 deferred fees Provisions for doubtful accounts 2,315 2,916 Recovery of investments previously written-off -- (1,020) Compensation expense related to stock options 1,742 1,323 Changes in assets and liabilities, net of acquisitions: Accounts receivable (6,448) 9,236 Inventories (12,755) (2,062) Prepaid catalog costs (4,773) (4,479) Other current assets (889) (1,204) Accounts payable (3,986) (16,287) Accrued liabilities (9,133) (4,820) Customer prepayments and credits (674) (787) -------- -------- Net cash used by operating activities (38,323) (24,936) -------- -------- Cash flows from investing activities: Acquisitions of property (5,716) (3,177) Proceeds from sale of businesses and properties -- 642 Proceeds from recovery of investments previously written off -- 1,020 Other, net -- 349 -------- -------- Net cash used by investing activities $ (5,716) $ (1,166) -------- -------- Cash flows from financing activities: Net borrowings (repayments) under Credit Facility $ 22,597 $(12,768) Payments of debt and capital lease (3,201) (2,393) obligations Proceeds from issuance of Common Stock 497 40,134 Payment of debt issuance costs Payment of stock issuance costs (1,195) -- Payment on notes receivable from sale of Common -- (3,073) Stock 65 -- Proceeds from issuance in warrant exercise 13,640 -- Other, net 170 (53) -------- -------- Net cash provided by financing activities 32,573 21,847 -------- -------- Net (decrease) increase in cash and cash (11,466) (4,255) equivalents Cash and cash equivalents at the beginning of the 14,758 5,173 -------- -------- year Cash and cash equivalents at end of the period $ 3,292 $ 918 ======== ======== Supplemental cash flow disclosures: Interest paid $ 3,710 $ 2,665 ======== ======== Income taxes paid $ 407 $ 699 ======== ========
See Notes to Condensed Consolidated Financial Statements. 6 7 HANOVER DIRECT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 1998 AND SEPTEMBER 27, 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." 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. 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 $3.8 million and $5.4 million at September 26, 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 7 8 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 September 26, 1998, the Company had borrowings of $20.0 million under the Congress 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 September 26, 1998 were 8.75% and 9.0%, respectively. The face amount of unexpired documentary letters of credit were $4.0 million at September 26, 1998 and $2.9 million at September 27, 1997. Effective September 30, 1998 an agreement was reached with Congress to increase the Revolving Term Notes to $14.7 million and the additional funds were used to reduce the amount outstanding under the Congress Revolving Credit Facility by $2.7 million. 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 September 26, 1998 the Company was in compliance with such covenants and remaining unused availability under the Congress Revolving Credit Facility was $21.2 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 nine months ended September 26, 1998 and September 27, 1997 was $1,742,000 and $1,323,000, 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 $2.87 per share during the thirteen-week period ended September 26, 1998. The option exercise price is the fair market value of a share of Common Stock as of the date of grant. Options expire seven years from the date of grant and generally vest over three years. At September 26, 1998, there were 6,058,001 options outstanding with a weighted average exercise price of $1.43 per share, of which 1,980,609 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 September 26, 1998 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: expected volatility of 55.88%; expected option life of four years; risk-free interest rate of 5.35%; and no expected dividend. The weighted average fair value of options granted under the 1996 Stock Option Plan was $1.56 as of September 26, 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 September 26, 1998. These options have a weighted average exercise price of $1.00. There were no other changes to any of the provisions of any of the Company's stock option plans during the nine months ended September 26, 1998. 8. RELATED PARTY TRANSACTIONS Pursuant to the Joint Venture Agreement of NAR Group Limited among Richemont Finance, S.A. ("Richemont"), Evansville Limited ("Evansville"), NAR and Alan G. Quasha, whereby 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. Upon consummation of these 8 9 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. 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 additional shares of 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 periods indicated, the percentage relationship to revenues of certain items in the Company's Condensed Statements of Income (Loss). Results of Operations - Thirteen-Weeks Ended September 26, 1998 Compared With Thirteen-Weeks Ended September 27, 1997
13 Weeks Ended September 26, September 27, 1998 1997 ------------- ------------- Revenues 100.0% 100.0% Cost of sales and operating expenses 62.3 65.6 Selling expenses 26.3 24.3 General and administrative expenses 10.1 9.8 Depreciation and amortization 1.9 1.7 Loss from operations (.6) (1.4) Interest expense, net (1.5) (1.2) Net loss (2.3) (2.8)
Net Income (Loss). The Company reported a net loss of $(2.8) million or $(.01) per share for the thirteen-week period ended September 26, 1998 compared with a net loss of $(3.4) million or $(.02) per share for the same period last year. The per share amounts were calculated based on weighted average shares outstanding of 207,909,428 and 200,329,521 for the current and prior year periods, respectively. This increase in weighted average shares was primarily due to the exercise of warrants on July 31, 1998, and the sale of 3.7 million shares of common stock in November 1997. The net loss for the thirteen-weeks ended September 26, 1998 was primarily the result of the seasonality of the Company's business, an increase in selling expenses and costs related to new marketing initiatives. Compared with the same period last year, the decrease in net loss was primarily the result of (i) improved product margin and the positive impact upsell promotions, and (ii) a reduction in product delivery costs. Revenues. Revenues increased to $123.4 million for the thirteen-week period ended September 26, 1998 versus $122.6 million for the same period last year. Revenues from continuing operations increased 1.1% or $1.3 million compared to the same period last year. Revenues from discontinued catalogs decreased by $.5 million for the thirteen-week period ended September 26, 1998 compared to the same period last year. Operating Costs and Expenses. Cost of sales and operating expenses decreased to 62.3% of revenues for the thirteen-week period ended September 26, 1998 compared to 65.6% for the same period last year. The Company realized benefits from continued increases in product margin results due to improved product sourcing and merchandise mix. Additionally, the order fill rate improved during the third quarter of 1998 compared to the same period last year. The Company also experienced productivity improvements in distribution activities. Selling expenses increased to 26.3% of revenues in the third quarter of 1998 from 24.3% in the same period last year. This increase was primarily due to an increase in the utilization of name list rentals, additional creative costs and new marketing initiatives. The Company circulated 49.6 million catalogs during the third quarter of 1998 versus 52.7 million catalogs for the same period last year. 10 11 General and administrative expenses were 10.1% of revenues for the third quarter of 1998 versus 9.8% for the comparable period in 1997. General and administrative costs reflect an increase in spending to support growth initiatives. Depreciation and amortization increased to 1.9% of revenues for the third quarter of 1998 versus 1.8% for the comparable period in 1997. The increase is primarily a result of fixed asset additions associated with the improvements in the operation of the distribution center in Roanoke, Virginia. Loss from Operations. The Company recorded a loss from operations of $.8 million for the third fiscal quarter of 1998 or (.6)% of revenues, compared to a loss from operations of $1.7 million or (1.4)% of revenues for the same period in 1997. Interest Expense, Net. Interest expense, net during the third quarter of 1998 increased by $.3 million compared to the same period in the prior year due to higher borrowings under the Congress Revolving Credit Facility. Income Taxes. The Company recorded a state tax provision of $.25 million in each of the thirteen week periods ended September 26, 1998 and September 27, 1997. Results of Operations - Thirty-Nine Weeks Ended September 26, 1998 Compared With Thirty-Nine Weeks Ended September 27, 1997
39 Weeks Ended September 26, September 27, 1998 1997 ------------- ------------- Revenues 100.0% 100.0% Cost of sales and operating expenses 62.5 65.5 Selling expenses 27.1 25.4 General and administrative expenses 10.1 9.9 Depreciation and amortization 1.9 1.6 Loss from operations (1.6) (2.4) Interest expense, net (1.4) (1.5) Net loss (3.2) (4.0)
Net Income (Loss). The Company reported a net loss of $(12.3) million or $(.06) per share for the thirty nine-week period ended September 26, 1998 compared to a net loss of $(15.7) million or $(.09) per share for the same period last year. The per share amounts were calculated based on weighted average shares outstanding of 205,226,872 and 167,906,290 for the current and prior year periods, respectively. The increase in weighted average shares outstanding is primarily due to a rights offering completed in June 1997. The net loss for the thirty-nine weeks ended September 26, 1998 was primarily the result of the seasonality of the Company's business in that the sales generated in the first nine months of the year generally were not sufficient to cover its fixed costs for such period. Compared to the same period last year, the decrease in net loss was primarily the result of (i) improved gross margins which resulted from a reduction in cost of merchandise, (ii) a reduction in distribution costs which resulted from the consolidation of distribution activities into its Roanoke, Virginia facility, (iii) a 1.4% increased in revenues from continuing operations, and (iv) the positive impact of upsell promotions. These cost savings and increased revenues from continuing businesses were partially offset by an increase in selling expenses resulting from increases in customer prospecting, paper prices and creative costs. Revenues. Revenues decreased to $382.5 million for the thirty-nine week period ended September 26, 1998 versus $386.1 million for the same period last year. Revenues from continuing operations increased 11 12 1.4% or $5.4 million compared to the same period last year. Revenues from discontinued catalogs decreased by $8.2 million for the thirty-nine week period ended September 26, 1998 versus the same period last year. Operating Costs and Expenses. Year-to-date cost of sales and operating expenses decreased to 62.5% of revenues versus 65.5% of revenues for the same period in 1997. The Company realized continued gains in product margin due to improved product sourcing and merchandise mix. Additionally, the order fill rate improved compared to the same period last year resulting in savings in product delivery costs. The Company has also experienced savings in the fixed costs associated with telemarketing and distribution. Selling expenses increased to 27.1% of revenues in the first nine months of 1998 versus 25.4% in the same period of 1997. This increase is primarily due to increased levels of prospecting for new customers, a general increase in the price of paper used in the Company's catalog production as well as increased costs associated with the creative design of certain of the Company's catalogs. Year-to-date general and administrative expenses were 10.1% of revenues for the first nine months of 1998 versus 9.9% for the comparable period in 1997. General and administrative costs reflect a slight increase in spending as the Company repositioned its spending to support growth initiatives. Depreciation and amortization increased to 1.9% of revenues in the first nine months of 1998 versus 1.6% for the comparable period in 1997. The increase is primarily a result of fixed asset additions associated with improvements being effected in the distribution center in Roanoke, Virginia. Loss from Operations. For the thirty-nine week period ended September 26, 1998 the Company recorded a loss of $6.1 million or (1.6)% of revenues compared to a loss from operations of $9.2 million or (2.4)% of revenues for the same period in 1997. Interest Expense, Net. Interest expense, net during the first nine months of 1998 decreased by $.3 million compared to the same period in 1997, due primarily to lower average borrowings under the Congress Revolving Credit Facility during the first six months of the fiscal year. Income Taxes. The Company recorded a state tax provision of $.75 million in each of the thirty-nine week periods ended September 26, 1998 and September 27, 1997. Liquidity and Capital Resources At September 26, 1998, the Company had $3.3 million in cash and cash equivalents, compared with $14.8 million at December 27, 1997. Working capital and current ratio were $71.4 million and 1.9 to 1 versus $47.6 million and 1.48 to 1 at December 27, 1997. The $38.3 million of cash used in operations was used primarily to fund deferred billing promotions, to improve the merchandise in-stock position which resulted in improved initial fill rates, lower back orders and increased inventory levels to fund a seasonal increase in catalog costs, and to fund capital expenditures and seasonal operating losses for the thirty-nine week period ended September 26, 1998. On July 31, 1998, Richemont Finance S.A. acquired an aggregate of 5,646,490 additional shares of Common Stock of the Company pursuant to the exercise of certain common stock purchase warrants with exercise prices ranging from $1.95 to $2.59 per share and an aggregate total exercise price of $13,640,796. As a result of such exercise, Richemont owns 102,790,657 shares or 48.88% of the issued and outstanding Common Stock of the Company. The Company used the proceeds from the warrant exercise to reduce the amounts outstanding under its secured revolving credit facility with Congress Financial Corporation (the "Credit Facility"). Revolver debt increased $1.7 million to $20.0 million during the quarter to fund seasonal working capital requirements. Remaining availability under the Credit Facility was $21.2 million at September 26, 1998. 12 13 Effective September 30, 1998, the Company entered into an agreement with Congress to increase the amount of the term loans authorized and outstanding by $2.7 million. Such amount was used to reduce revolver debt which had been used in August 1998 to pay off mortgages in a like amount on the Company's properties in LaCrosse, Wisconsin. The Company believes that the warrant exercise by Richemont, the Credit Facility modifications and the Company's reduced operating losses have eased vendor/creditor 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. 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 develop solutions to 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 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 5. OTHER INFORMATION Effective November 9, 1998, Robert J. Vill joined the Company as Vice President - Finance and Treasurer following the retirement of Edward J. O'Brien as Senior Vice President and Treasurer effective November 5, 1998. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (EDGAR filing only). (b) Reports on Form 8-K Current Report on Form 8-K dated July 31, 1998 reporting under Item 5 Richemont's exercise of certain warrants to purchase common stock of the Company. 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: November 10, 1998 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 THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE BY SUCH FINANCIAL STATEMENTS. YEAR SEP-26-1998 SEP-26-1998 3,292 0 21,817 2,058 77,085 152,617 87,663 (35,920) 235,423 81,222 55,303 6,081 0 140,470 (67,352) 235,423 282,514 382,514 239,223 388,608 0 2,315 5,500 (11,594) 750 (12,344) 0 0 0 (12,344) (.06) (.06)
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