-----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, Hl/LfHHOWt5hC3Gb/yhu3Jn2XNYaoDHna6HJvGZystWSQ6Hgj1jwC/RfCYYzzfHS 3g4b5TC0UjebVFFmIBBatw== 0000950123-99-007365.txt : 19990811 0000950123-99-007365.hdr.sgml : 19990811 ACCESSION NUMBER: 0000950123-99-007365 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990626 FILED AS OF DATE: 19990810 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: 99682459 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 26, 1999 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: 211,179,303 shares outstanding as of August 6, 1999. 2 HANOVER DIRECT, INC. FORM 10-Q JUNE 26, 1999 INDEX
Page ---- Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets - June 26, 1999 and December 26, 1998.................................................. 3 Condensed Consolidated Statements of Income (Loss) - thirteen and twenty-six weeks ended June 26, 1999 and June 27, 1998 .............................. 5 Condensed Consolidated Statements of Cash Flows - twenty-six weeks ended June 26, 1999 and June 27, 1998...................................................... 6 Notes to Condensed Consolidated Financial Statements - twenty-six weeks ended June 26, 1999 and June 27, 1998................................................ 7 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations..............................................................11 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................17 Part II - Other Information Item 4. Submission of Matters to a Vote of Security Holders..............................18 Item 6. Exhibits and Reports on Form 8-K.................................................18 Signatures....................................................................................19
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS) (UNAUDITED)
JUNE 26, DECEMBER 26, 1999 1998 ---- ---- ASSETS Current Assets: Cash and cash equivalents (Note 3) $ 7,127 $ 12,207 Accounts receivable, net 17,427 22,737 Accounts receivable under financing agreement 17,345 18,998 Inventories 53,310 62,322 Prepaid catalog costs 20,791 16,033 Deferred tax asset, net 3,300 3,300 Other current assets 3,061 2,402 --------- --------- Total Current Assets 122,361 137,999 --------- --------- Property and equipment, at cost: Land 4,634 4,634 Buildings and building improvements 22,735 22,724 Leasehold improvements 9,392 9,303 Furniture, fixtures and equipment 51,778 51,193 Construction in progress 518 113 --------- --------- 89,057 87,967 Accumulated depreciation and amortization (42,034) (37,884) --------- --------- Net Property and Equipment 47,023 50,083 Goodwill, net 16,597 16,890 Deferred tax asset, net 11,700 11,700 Other assets, net 2,060 2,198 --------- --------- Total Assets $ 199,741 $ 218,870 ========= =========
See Notes to Condensed Consolidated Financial Statements. 3 4 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS OF DOLLARS) (UNAUDITED)
JUNE 26, DECEMBER 26, 1999 1998 ---- ---- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt and capital lease obligations $ 2,577 $ 2,573 Accounts payable 47,263 64,594 Accrued liabilities 22,366 22,212 Customer prepayments and credits 4,860 4,691 --------- --------- Total Current Liabilities 77,066 94,070 --------- --------- Non-current Liabilities: Long-term debt 45,133 37,288 Obligations under accounts receivable financing 17,345 18,998 Other 2,098 2,044 --------- --------- Total Noncurrent Liabilities 64,576 58,330 --------- --------- Total Liabilities 141,642 152,400 --------- --------- Shareholders' Equity: Series B Preferred Stock, convertible, $.01 par value, authorized and issued 634,900 shares 6,223 6,128 Common Stock, $.66 2/3 par value, authorized 300,000,000 and 225,000,000 shares; issued 211,158,303 and 210,785,688 shares at June 26, 1999 and December 26, 1998, respectively 140,772 140,524 Capital in excess of par value 299,322 297,751 Accumulated deficit (384,150) (373,815) --------- --------- 62,167 70,588 Less: Treasury stock, at cost (358,303 shares at June 26, 1999 and December 26, 1998) (813) (813) Notes receivable from sale of Common Stock (3,255) (3,305) --------- --------- Total Shareholders' Equity 58,099 66,470 --------- --------- Total Liabilities and Shareholders' Equity $ 199,741 $ 218,870 ========= =========
See Notes to Condensed Consolidated Financial Statements. 4 5 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
13 WEEKS ENDED 26 WEEKS ENDED JUNE 26, JUNE 27, JUNE 26, JUNE 27, 1999 1998 1999 1998 ---- ---- ---- ---- Revenues $ 131,237 $ 134,562 $ 258,951 $ 259,097 ------------- ------------- ------------- ------------- Operating costs and expenses: Cost of sales and operating expenses 82,624 83,659 164,528 162,360 Write-down of inventory of discontinued catalogs (324) -- (324) -- Selling expenses 34,072 37,080 66,018 71,068 General and administrative expenses 15,882 13,737 30,329 26,210 Depreciation and amortization 2,243 2,453 4,544 4,790 ------------- ------------- ------------- ------------- 134,497 136,929 265,095 264,428 ------------- ------------- ------------- ------------- Loss from operations (3,260) (2,367) (6,144) (5,331) ------------- ------------- ------------- ------------- Interest expense, net (2,333) (2,242) (3,480) (3,677) ------------- ------------- ------------- ------------- Loss before income taxes (5,593) (4,609) (9,624) (9,008) Income tax provision (201) (250) (394) (500) ------------- ------------- ------------- ------------- Net loss (5,794) (4,859) (10,018) (9,508) Preferred stock dividends and accretion (158) (158) (317) (280) ------------- ------------- ------------- ------------- Net loss applicable to common shareholders $ (5,952) $ (5,017) $ (10,335) $ (9,788) ============= ============= ============= ============= Basic and diluted net loss per share $ (.03) $ (.02) $ (.05) $ (.05) ============= ============= ============= ============= Weighted average shares outstanding 210,634,049 203,982,414 210,539,416 203,885,594 ============= ============= ============= =============
See Notes to Condensed Consolidated Financial Statements. 5 6 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS) (UNAUDITED)
26 WEEKS ENDED ---------------------------- JUNE 26, JUNE 27, 1999 1998 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(10,018) $ (9,508) Adjustments to reconcile net loss to net cash used By operating activities: Depreciation and amortization, including deferred fees 5,705 5,706 Provisions for doubtful accounts 1,143 1,734 Compensation expense related to stock options 1,394 1,180 Changes in assets and liabilities: Accounts receivable 5,310 (3,414) Inventories 9,012 (10,367) Prepaid catalog costs (4,758) (3,663) Accounts payable (17,331) 229 Accrued liabilities (989) (9,729) Customer prepayments and credits 169 (338) Other, net (734) (713) -------- -------- Net cash used by operating activities (11,097) (28,883) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment (1,010) (4,108) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds under Credit Facility $ 8,545 $ 22,647 Payments of debt and capital lease obligations (830) (641) Payment of debt issuance costs (998) (1,088) Proceeds from issuance of Common Stock 425 441 Other, net (115) 120 -------- -------- Net cash provided by financing activities 7,027 21,479 -------- -------- Net decrease in cash and cash equivalents (5,080) (11,512) Cash and cash equivalents at the beginning of the year 12,207 14,758 -------- -------- Cash and cash equivalents at the end of the period $ 7,127 $ 3,246 ======== ======== Supplemental cash flow disclosures: Interest paid $ 2,186 $ 2,238 ======== ======== Income taxes paid $ 579 $ 420 ======== ========
See Notes to Condensed Consolidated Financial Statements. 6 7 HANOVER DIRECT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS TWENTY SIX WEEKS ENDED JUNE 26, 1999 AND JUNE 27, 1998 (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 26, 1998. 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 to the current year presentation. 2. REVENUE RECOGNITION/DEFERRED EXPENSES-SHOPPER'S EDGE BUYING CLUB Membership fees are billed through clients of the Company primarily through credit cards. An allowance for cancellations is established based on the Company's most recent actual cancellation experience, updated regularly. Deferred membership fees are recorded, net of estimated cancellations, when the trial period has elapsed and are amortized as revenues from membership fees on a straight-line basis over the remainder of the membership period, generally twelve months. Membership cancellations are charged to the allowance for cancellations on a current basis. During an initial annual membership term or renewal term, a member may cancel his or her membership in this program, generally for a complete refund of the membership fee for that period. Membership solicitation costs, which include telemarketing, printing, postage (excluding membership kit postage) and mailing costs related directly to membership solicitation (i.e. direct response advertising costs) are deferred and charged to operations as revenues from membership fees are recognized, in accordance with Statement of Position 93-7, "Reporting on Advertising Costs". Other deferred costs consist of commissions paid to service providers and transaction processing fees, which relate to the same revenue streams as the direct marketing costs and are also charged to income over the membership period. 3. CASH AND CASH EQUIVALENTS-RESTRICTED CASH The Company is contractually restricted under the 1999 Shopper's Edge Upsell agreement to usage and withdrawal of cash generated by the program. The agreement requires that cash provided by membership fees be utilized to fund program-related operating expenses and membership fee reimbursements resulting from cancellations. However, withdrawals of commissions based upon pre-determined formulas within the agreement are made by the Company periodically. As at June 26, 1999, approximately $2.3 million of the total $7.1 million cash balance was subject to the above restrictions. 4. 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. 7 8 5. 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 per share 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). 6. RESTRUCTURING RESERVES The remaining restructuring reserves established in 1996 are primarily comprised of facility exit/relocation costs. 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. Remaining reserves for restructuring costs approximated $2.5 million and $3.3 million at June 26, 1999 and December 26, 1998, respectively, and are included in accrued liabilities in the accompanying condensed consolidated balance sheets. 7. LONG-TERM DEBT The Company's long-term credit arrangement with Congress Financial Corporation is comprised of a revolving line of credit of up to $65 million ("Congress Revolving Credit Facility") and term loans aggregating $14 million ("Revolving Term Notes") expiring on January 31, 2001. At June 26, 1999, the Company had borrowings of $8.5 million under the Congress Revolving Credit Facility and $13.3 million in Revolving Term Notes. The rates of interest related to the Congress Revolving Credit Facility and Revolving Term Notes at June 26, 1999 were 8.25% and 7.81%, respectively. The face amount of unexpired documentary letters of credit were $7.1 million and $4.5 million at June 26, 1999 and June 27, 1998, respectively. 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 26, 1999, the Company was in compliance with such covenants and remaining unused availability under the Congress Revolving Credit Facility was $26.8 million. In March 1999, the term of the letter of credit guarantee issued by Richemont Finance S.A. ("Richemont") was extended to March 31, 2000. As consideration, the Company agreed to pay Richemont a fee of 9.5% of the principal amount of the letters of credit. At June 26, 1999, borrowings supported by the letter of credit guarantee were $25.0 million. 8 9 8. SEGMENT INFORMATION During 1999, the Company decided to reposition its operations into two separate units, Brand Marketing and Web Services, each representing the overall strategic initiatives of the Company. This represents a change from 1998, when the Company operated only in one segment - direct marketing. The Brand Marketing division is primarily comprised of the Company's branded portfolio of specialty catalogs and related retail operations, the Company's e-commerce web site portfolio relating to each of the Company's catalogs, and products and services provided by the Company's upsell programs. The Web Services division consists of the Company's Internet marketing services group, its telemarketing and fulfillment operations, information systems platform and corporate administration. Revenues for the Brand Marketing division are derived primarily from the sale of merchandise through the Company's catalog and related e-commerce product offerings. Other sources of revenue include various upsell initiatives and other catalog related revenue. Revenues for the Web Services division include charges to the Brand Marketing division pursuant to intercompany service agreements and revenues in connection with the Company's fulfillment services and e-commerce services provided to third parties. The aforementioned intercompany service agreements, which became effective as of January 1, 1999, provide for the billing by Web Services of web hosting, system interface and fulfillment services provided on a "for profit" basis. These costs are primarily comprised of telemarketing and distribution costs as well as certain general and administrative costs (including information systems and corporate services provided). Based on the above, reportable segment data were as follows:
IN THOUSANDS OF DOLLARS ------------------------------------------------------------------------ RESULTS FOR THE 2ND QUARTER BRAND WEB CONSOLIDATED ENDED JUNE 26, 1999: MARKETING SERVICES UNALLOCATED TOTAL --------- -------- ----------- ----- Revenues from external customers $ 130,185 $ 1,052 $ -- $ 131,237 Intersegment Revenues -- 24,967 (24,967) -- Income/(loss) from operations 1,737 (4,997) -- (3,260) Interest Income/(Expense) (585) (1,748) -- (2,333) --------- --------- --------- --------- Income/(loss) before income taxes 1,152 (6,745) -- (5,593) Total Assets at June 26, 1999 145,698 38,925 15,118 199,741 RESULTS FOR THE 2ND QUARTER ENDED JUNE 27, 1998: Revenues from external customers $ 134,294 $ 268 $ -- $ 134,562 Intersegment Revenues -- 26,490 (26,490) -- Income/(loss) from operations (2,177) (190) -- (2,367) Interest Income/(Expense) (912) (1,330) -- (2,242) --------- --------- --------- --------- Income/(loss) before income taxes (3,089) (1,520) -- (4,609) Total Assets at June 27, 1998 172,209 43,754 15,830 231,793
9 10
RESULTS FOR THE SIX MONTHS BRAND WEB CONSOLIDATED ENDED JUNE 26, 1999: MARKETING SERVICES UNALLOCATED TOTAL --------- -------- ----------- ----- Revenues from external customers $ 257,198 $ 1,753 $ -- $ 258,951 Intersegment Revenues -- 49,984 (49,984) -- Income/(loss) from operations 2,443 (8,587) -- (6,144) Interest Income/(Expense) (879) (2,601) -- (3,480) --------- --------- --------- --------- Income/(loss) before income taxes 1,564 (11,188) -- (9,624) RESULTS FOR THE SIX MONTHS ENDED JUNE 27, 1998: Revenues from external customers $ 258,478 $ 619 $ -- $ 259,097 Intersegment Revenues -- 52,882 (52,882) -- Income/(loss) from operations (6,047) 716 -- (5,331) Interest Income/(Expense) (1,213) (2,464) -- (3,677) --------- --------- --------- --------- Income/(loss) before income taxes (7,260) (1,748) -- (9,008)
The Company uses income (loss) from operations as the measurement of segment profit or loss. As income taxes are centrally managed at the corporate level, deferred tax assets are not allocated by segment. As previously mentioned, the intercompany service agreements were effective as of January 1, 1999. Had the provisions of the intercompany service agreements been in effect in 1998, intersegment revenues for the Web Services division would have been approximately $26.7 million and $52.7 million for the thirteen weeks and twenty six weeks ended June 27, 1998, respectively. Income/(loss) from operations would have been approximately $0.1 million and $(2.5) million for the Web Services and Brand Marketing divisions, respectively, for the thirteen weeks ended June 27, 1998. Income/(loss) from operations would have been $0.6 million and $(5.9) million for the Web Services and Brand Marketing divisions, respectively, for the twenty six weeks ended June 27, 1998. 10 11 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).
13 WEEKS ENDED ---------------------------------- JUNE 26, JUNE 27, 1999 1998 ---- ---- Revenues 100.0% 100.0% Cost of sales and operating expenses 62.7 62.2 Selling expenses 26.0 27.6 General and administrative expenses 12.1 10.2 Depreciation and amortization 1.7 1.8 Loss from operations (2.5) (1.8) Interest expense, net ( 1.8) (1.7) Net loss (4.4)% (3.6)%
RESULTS OF OPERATIONS- THIRTEEN-WEEKS ENDED JUNE 26, 1999 COMPARED WITH THIRTEEN-WEEKS ENDED JUNE 27, 1998 Net Loss. The Company reported a net loss of $(5.8) million or $(.03) per share for the thirteen-weeks ended June 26, 1999 compared with a net loss of $(4.9) million or $(.02) per share for the comparable period last year. The per share amounts were calculated based on weighted average shares outstanding of 210,634,049 and 203,982,414 for the current year and prior year period, respectively. This increase in weighted average shares was due to an exercise of warrants in July 1998 by Richemont Finance S. A. The net loss for the thirteen-weeks ended June 26, 1999 was primarily the result of the seasonality of the Company's business and increased costs (of approximately $3.0 million) related to the Company's strategic initiatives, which include e-commerce, as well as underabsorbed overhead costs related to the start-up of the Company's third party fulfillment business (see Note 8 "Segment Information"). These losses were partly offset by higher demand for the Company's core catalog offerings and 1999 earnings versus 1998 losses associated with the Company's non-core catalogs. The seasonality of the Company's business is such that the sales volumes achieved during the second quarter are not sufficient to cover both its fixed costs and the costs for its strategic initiatives for such period. Compared to the comparable period last year, the increase in net loss was primarily due to: (i) costs related to the Company's strategic initiatives partially offset by, (i) better catalog productivity (ii) higher catalog margins and (iii) 1999 earnings versus 1998 losses from non-core catalogs 11 12 Revenues. Revenues decreased 2.5% for the thirteen-week period ended June 26, 1999 to $131.2 million from $134.6 million for the comparable period in 1998 as increases in revenues from the Company's core catalogs of $3.0 million or 2.4% were more than offset by revenue decreases from the Company's non-core catalogs. Revenues from non-core catalogs decreased to $6.4 million from $12.7 million in the prior year period. The Company circulated 75 million catalogs during both the 1999 and 1998 periods. Operating Costs and Expenses. Cost of sales and operating expenses increased to 62.7% of revenues for the second quarter ended June 26, 1999 compared to 62.2% of revenues for the same period in 1998. These results reflect higher costs related to strategic initiatives (including fixed distribution costs of the third party fulfillment business as well as systems development and support costs). This was partially offset by higher catalog margins provided by the Company's core catalogs. Selling expenses decreased to 26.0% of revenues in the second quarter of 1999 from 27.6% for the comparable period in 1998. This decrease reflects improved catalog productivity resulting from more targeted circulation strategies as well as the repositioning of non-core catalogs to e-commerce. The number of customers having made a purchase from the Company's catalogs in the 12 months preceding June 26, 1999 remained at approximately 4 million, consistent with December 26, 1998. General and administrative expenses were 12.1% of revenues for the second quarter of 1999 versus 10.2% for the comparable period in 1998. The 1.9% increase reflects higher marketing, legal and MIS costs primarily related to the Company's strategic initiatives. Depreciation and amortization decreased to 1.7% of revenues for the second quarter of 1999 versus 1.8% for the comparable period in 1998. Loss from Operations. The Company recorded a loss from operations of $(3.3) million for the second quarter ended June 26, 1999 or (2.5%) of revenues, compared to a loss from operations of $(2.4) million for the comparable period in 1998 or (1.8%) of revenues. The Company's loss from operations consists of the following segment results: - - Brand Marketing: Income from operations of $1.7 million is primarily due to higher demand and margins for core catalogs and the 1999 repositioning of non-core catalogs, partially offset by costs related to strategic initiatives (primarily internet). - - Web Services: Loss from operations of $(5.0) million reflects costs related to strategic initiatives (primarily start up of the third party fulfillment business). These include fixed distribution costs as well as systems development and support costs. Interest Expense, Net. Interest expense, net increased $0.1 million in the second quarter of 1999 compared to the same period last year. Income Taxes. The Company recorded a state tax provision of $0.2 million and $0.3 million in each of the thirteen-week periods ended June 26, 1999 and June 27, 1998, respectively. 12 13 RESULTS OF OPERATIONS--TWENTY-SIX WEEKS ENDED JUNE 26, 1999 COMPARED WITH TWENTY-SIX WEEKS ENDED JUNE 27, 1998
26 WEEKS ENDED ------------------------- JUNE 26, JUNE 27, 1999 1998 ---- ---- Revenues 100.0% 100.0% Cost of sales and operating expenses 63.4 62.8 Selling expenses 25.5 27.4 General and administrative expenses 11.7 10.1 Depreciation and amortization 1.8 1.8 Loss from operations (2.4) (2.1) Interest expense, net (1.3) (1.4) Net loss (3.9)% (3.7)%
Net Loss. The Company reported a net loss of $(10.0) million or $(.05) per share for the twenty-six weeks ended June 26, 1999 compared with a net loss of $(9.5) million or $(.05) per share for the comparable period last year. The per share amounts were calculated based on weighted average shares outstanding of 210,539,416 and 203,885,594 for the current year and prior period, respectively. This increase in weighted average shares was due to an exercise of warrants in July 1998 by Richemont Finance S.A. The net loss for the twenty-six weeks ended June 26, 1999 was primarily the result of the seasonality of the Company's business and increased costs (of approximately $5.5 million) related to the Company's strategic initiatives, which include e-commerce, as well as underabsorbed overhead costs related to the start-up of the Company's third party fulfillment business. These losses were partly offset by higher demand for the Company's core catalog offerings and 1999 earnings versus 1998 losses associated with the Company's non-core catalogs. The seasonality of the Company's business is such that the sales volume achieved during the first six months of the year are not sufficient to cover both its fixed costs and the costs for its strategic initiatives for such period. Compared to the comparable period last year, the increase in net loss was primarily due to: (i) costs related to the Company's strategic initiatives partially offset by, (i) better catalog productivity (ii) higher catalog margins (iii) 1999 earnings versus 1998 losses from non-core catalogs Revenues. Revenues were $259 million for both twenty-six week periods ended June 26, 1999 and June 27, 1998 as increases in revenues from core catalogs were offset by decreases in revenues from non-core catalogs. Revenues from core catalogs increased by $11.8 million or 5.1% while revenues from non-core catalogs decreased to $14.8 million from $26.8 million in the prior year period. The Company circulated 144 million catalogs during the 1999 period versus 149 million catalogs in the prior year period reflecting the repositioning of non-core catalogs to e-commerce. 13 14 Operating Costs and Expenses. Year-to-date cost of sales and operating expenses increased to 63.4% of revenues for the six months ended June 26, 1999 compared to 62.8% of revenues for the same period in 1998. These results reflect higher costs related to strategic initiatives (including fixed distribution costs of the third party fulfillment business as well as systems development and support costs). This was partially offset by higher catalog margins provided by the Company's core catalogs. Selling expenses decreased to 25.5% of revenues in the first six months of 1999 from 27.4% for the comparable period in 1998. This decrease reflects improved catalog productivity as a result of more targeted circulation strategies as well as the repositioning of non-core catalogs to e-commerce. The number of customers having made a purchase from the Company's catalogs in the 12 months preceding June 26, 1999 remained at approximately 4 million, consistent with December 26, 1998. General and administrative expenses were 11.7% of revenues for the first six months of 1999 versus 10.1% for the comparable period in 1998. The 1.6% increase reflects higher marketing, legal and MIS costs primarily related to the Company's strategic initiatives. Depreciation and amortization remained at 1.8% of revenues for the first six months of 1999 and for the comparable period in 1998. Loss from Operations. For the twenty-six week period ended June 26, 1999, the Company recorded a loss from operations of $(6.1) million or (2.4)% of revenues compared to a loss from operations of $(5.3) million for the comparable period of 1998 or (2.1)% of revenues. The Company's loss from operations reflects the following segment results: - - Brand Marketing: Income from operations of $2.5 million was primarily due to higher demand and margins for core catalogs and the 1999 repositioning of non-core catalogs, partially offset by costs related to strategic initiatives (primarily internet). - - Web Services: Loss from operations of $(8.6) million reflects costs related to strategic initiatives (primarily start up of the third party fulfillment business). These include fixed distribution costs as well as systems development and support costs. Interest Expense, Net. Interest expense, net decreased by $0.2 million compared to the same period in 1998. Income Taxes. The Company recorded a state tax provision of $0.4 million and $0.5 million in each of the six month periods ended June 26, 1999 and June 27, 1998. 14 15 LIQUIDITY AND CAPITAL RESOURCES At June 26, 1999, the Company had $7.1 million in cash and cash equivalents compared with $12.2 million at December 26, 1998. Working capital and current ratio were $45.3 million and 1.59 to 1 at June 26, 1999 versus $43.9 million and 1.47 to 1 at December 26, 1998. Net cash used in operations during the six months ended June 26, 1999 of $11.1 million was primarily the result of significant payments made to suppliers to ensure a consistent flow of product during 1999 as well as the necessary spending for the development of the Company's e-commerce and third party fulfillment initiatives. Cash was also used to fund a seasonal increase in catalog costs. This cash spending was partially offset by the planned reduction of inventory levels and by the Company's more aggressive inventory liquidation strategy during the period. In addition, cash collections from customers and from the Company's upsell activities mitigated the impact of the cash spending during the period. Although $2.3 million related to Shopper's Edge upsell activities is restricted, the Company is entitled to periodic withdrawals of commissions. The Company also incurred capital expenditures of $1.0 million during the six-month period ending June 26, 1999. The Company utilized $8.5 million of net borrowings for the six months ended June 26, 1999 under the Congress Revolving Credit Facility to fund seasonal working capital requirements. This amount was less than the $22.6 million of borrowings in the comparable period during the prior year primarily due to lower inventory carrying levels as well as lower capital expenditures. The total amount outstanding under the Congress Revolving Credit Facility at June 26, 1999 was $8.5 million, compared with $0 at December 26, 1998. Remaining availability under the Congress Revolving Credit Facility at June 26, 1999 was $26.8 million ($33.9 million including cash on hand). In March 1999 Richemont agreed to extend its letter of credit guarantee to March 31, 2000. As consideration for this transaction, the Company agreed to pay Richemont a facility fee of 9.5% of the principal amount of each letter of credit. 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 ISSUE As is the case with most other database marketing firms and, for the most part, other businesses using computers and telecommunications equipment in their operations, the Company is in the process of addressing the Year 2000 problem to ensure it will be able to continue to perform its critical functions specifically: receiving, processing and shipping customer orders, ordering and receiving merchandise from vendors, and processing payments. The Company's Year 2000 project commenced in 1996 and was divided into the following phases: 1) Discovery - identification/inventorying of all systems with potential Year 2000 issues, 2) Assessment - evaluation, categorizing and prioritizing of Year 2000 issues, 3) Remediation - modifying or replacing existing systems, and 4) Testing/Deployment - comprehensive testing of Year 2000 readiness to ensure all problems were discovered and adequately corrected. At the present time, the Company is presently in the late stages of the remediation and testing/deployment phases for its information technology infrastructure, which should be completed by October 1999. 15 16 Additionally, the Company has performed surveys of its suppliers to determine their Year 2000 readiness. At the present time over 90% of the top 100 suppliers represented their products and services to be Year 2000 compliant. The Company is following up with the remaining suppliers while it also conducts searches for alternate suppliers. Also contingency plans are still under review and some redundant services have been installed. While the Company believes it is not likely to encounter any significant operational problems, there is no guarantee that a Year 2000 related failure will not arise. This uncertainty is due, to a large extent, to the uncertainty surrounding potential third party related Year 2000 problems as well as the Company's potential failure to discover all its own susceptible internal systems. While the Company expects that its efforts will provide reasonable assurance that material disruptions will not occur, as previously discussed, the potential for interruption still exists. 16 17 ITEM 3. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. 17 18 PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The 1999 annual meeting of stockholders was held in New York, New York on May 6, 1999. 198,614,670 shares of Common Stock, or 94.6% of outstanding shares, were represented in person or by proxy. 1. The following eleven directors were elected to a one-year term expiring in 2000.
NUMBER OF SHARES --------------------------------- FOR AGAINST --- ------- Ralph Destino 198,319,069 295,601 J. David Hakman 198,319,069 295,601 Rakesh K. Kaul 198,316,859 297,811 June R. Klein 198,318,048 296,622 Kenneth Krushel 198,317,669 297,001 Theodore H. Kruttschnitt 198,319,069 295,601 Shailesh J. Mehta 198,317,669 297,001 Jan P. du Plessis 184,744,599 13,870,071 Alan G. Quasha 198,316,151 298,519 Howard M. S. Tanner 198,319,069 295,601 Robert F. Wright 198,319,069 295,601
2. The approval of an amendment to the Company's Certificate of Incorporation to increase the number of shares of all classes of stock which the Company would have authority to issue from 243,172,403 to 318,172,403 and the number of shares of Common Stock within such shares from 225,000,000 to 300,000,000 shares: 197,389,717 voted in favor; 1,123,585 voted against; and 101,368 shares abstained. 3. The approval of Arthur Andersen LLP as independent accountants for fiscal year 1999: 198,311,893 voted in favor; 236,663 voted against; and 66,114 shares abstained. 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. 18 19 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/ Brian C. Harriss ----------------------------- Brian C. Harriss Senior Vice-President and Chief Financial Officer (On behalf of the Registrant and as principal financial officer) Date: August 10, 1999 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED JUNE 26, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 6-MOS DEC-25-1999 JUN-26-1999 7,127 0 19,140 (1,713) 53,310 122,361 89,057 (42,034) 199,741 77,066 0 6,223 0 140,772 (88,896) 199,741 258,951 258,951 164,204 100,891 0 (6,144) (3,480) (9,624) (394) (10,018) 0 0 0 (10,018) (.05) (.05)
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