-----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, NZhMlRbU+lw9GqPUBXynsJP3b8DZ429bZc/JATl3DmHT7SoDwOsdQOaYOT+xArYA k10IIXycDZy4x2HYwMkqpQ== 0000950123-99-009887.txt : 19991110 0000950123-99-009887.hdr.sgml : 19991110 ACCESSION NUMBER: 0000950123-99-009887 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990925 FILED AS OF DATE: 19991109 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: 99743998 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 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 25, 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: 211,255,301 shares outstanding as of November 3, 1999. 2 HANOVER DIRECT, INC. TABLE OF CONTENTS
Part I - Financial Information Page ---- Item 1. Financial Statements Condensed Consolidated Balance Sheets - September 25, 1999 and December 26, 1998 ................................... 3 Condensed Consolidated Statements of Income (Loss) - thirteen and thirty-nine weeks ended September 25, 1999 and September 26, 1998 ...................... 5 Condensed Consolidated Statements of Cash Flows - thirty-nine weeks ended September 25, 1999 and September 26, 1998 .................................. 6 Notes to Condensed Consolidated Financial Statements - thirty-nine weeks ended September 25, 1999 and September 26, 1998 ............................ 7 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations ......................................... 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk ........... 18 Part II - Other Information Item 6. Exhibits and Reports on Form 8-K ..................................... 19 Signatures .................................................................... 20
2 3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS) (UNAUDITED)
SEPTEMBER 25, DECEMBER 26, 1999 1998 --------- --------- ASSETS Current Assets: Cash and cash equivalents (Note 3) $ 6,407 $ 12,207 Accounts receivable, net 18,268 22,737 Accounts receivable under financing agreement (Note 4) -- 18,998 Inventories 60,510 62,322 Prepaid catalog costs 25,165 16,033 Deferred tax asset, net 3,300 3,300 Other current assets 8,784 2,402 --------- --------- Total Current Assets 122,434 137,999 --------- --------- Property and equipment, at cost: Land 4,634 4,634 Buildings and building improvements 22,761 22,724 Leasehold improvements 9,526 9,303 Furniture, fixtures and equipment 52,754 51,193 Construction in progress 1,947 113 --------- --------- 91,622 87,967 Accumulated depreciation and amortization (44,151) (37,884) --------- --------- Net Property and Equipment 47,471 50,083 Goodwill, net 16,467 16,890 Deferred tax asset, net 11,700 11,700 Other assets, net 1,818 2,198 --------- --------- Total Assets $ 199,890 $ 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)
SEPTEMBER 25, DECEMBER 26, 1999 1998 --------- --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt and capital lease obligations $ 2,575 $ 2,573 Accounts payable 48,469 64,594 Accrued liabilities 30,356 22,212 Customer prepayments and credits 4,841 4,691 --------- --------- Total Current Liabilities 86,241 94,070 --------- --------- Non-current Liabilities: Long-term debt 54,973 37,288 Obligations under accounts receivable financing (Note 4) -- 18,998 Other liabilities 2,418 2,044 --------- --------- Total Noncurrent Liabilities 57,391 58,330 --------- --------- Total Liabilities 143,632 152,400 --------- --------- Shareholders' Equity: Series B Preferred Stock, convertible, $.01 par value, authorized and issued 634,900 shares 6,270 6,128 Common Stock, $.66 2/3 par value, authorized 300,000,000 and 225,000,000 shares; issued 211,254,217 and 210,785,688 shares at September 25, 1999 and December 26,1998, respectively 140,836 140,524 Capital in excess of par value 300,203 297,751 Accumulated deficit (386,997) (373,815) --------- --------- 60,312 70,588 Less: Treasury stock, at cost (358,303 shares at September 25, 1999 and December 26, 1998) (813) (813) Notes receivable from sale of Common Stock (3,241) (3,305) --------- --------- Total Shareholders' Equity 56,258 66,470 --------- --------- Total Liabilities and Shareholders' Equity $ 199,890 $ 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 39 WEEKS ENDED -------------- -------------- SEPTEMBER 25, SEPTEMBER 26, SEPTEMBER 25, SEPTEMBER 26, 1999 1998 1999 1998 ------------- ------------- ------------- ------------- Revenues $ 121,656 $ 123,417 $ 380,607 $ 382,514 ------------- ------------- ------------- ------------- Operating costs and expenses: Cost of sales and operating expenses 76,117 76,863 240,645 239,223 Write-down of inventory of discontinued catalogs (Note 9) (1,511) -- (1,835) -- Selling expenses 29,468 32,462 95,486 103,530 General and administrative expenses 16,068 12,498 46,397 38,708 Depreciation and amortization 2,314 2,357 6,858 7,147 ------------- ------------- ------------- ------------- 122,456 124,180 387,551 388,608 ------------- ------------- ------------- ------------- Loss from operations (800) (763) (6,944) (6,094) ------------- ------------- ------------- ------------- Interest expense, net (1,703) (1,823) (5,183) (5,500) ------------- ------------- ------------- ------------- Loss before income taxes (2,503) (2,586) (12,127) (11,594) Income tax provision (185) (250) (579) (750) ------------- ------------- ------------- ------------- Net loss (2,688) (2,836) (12,706) (12,344) Preferred stock dividends and accretion (159) (158) (476) (438) ------------- ------------- ------------- ------------- Net loss applicable to common shareholders $ (2,847) $ (2,994) $ (13,182) $ (12,782) ============= ============= ============= ============= Basic and diluted net loss per share $ (.01) $ (.01) $ (.06) $ (.06) ============= ============= ============= ============= Weighted average shares outstanding 210,843,167 207,909,428 210,640,667 205,226,872 ============= ============= ============= =============
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)
39 WEEKS ENDED -------------- SEPTEMBER 25, SEPTEMBER 26, 1999 1998 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(12,706) $(12,344) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization, including deferred fees 8,681 8,622 Provisions for doubtful accounts 1,733 2,315 Compensation expense related to stock options 2,192 1,742 Changes in assets and liabilities: Accounts receivable 3,464 (6,448) Inventories 1,812 (12,755) Prepaid catalog costs (9,132) (4,773) Other current assets (6,382) (889) Accounts payable (16,125) (3,986) Accrued liabilities 7,366 (9,133) Customer prepayments and credits 150 (674) -------- -------- Net cash used by operating activities (18,947) (38,323) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property and equipment (3,251) (5,716) CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds under credit facility 18,814 22,597 Payments of debt and capital lease obligations (1,231) (3,201) Payment of debt issuance costs (1,487) (1,195) Proceeds from issuance of common stock 572 497 Proceeds from exercise of stock warrants -- 13,640 Other, net (270) 235 -------- -------- Net cash provided by financing activities 16,398 32,573 -------- -------- Net decrease in cash and cash equivalents (5,800) (11,466) Cash and cash equivalents at the beginning of the year 12,207 14,758 -------- -------- Cash and cash equivalents at the end of the period $ 6,407 $ 3,292 ======== ======== Supplemental cash flow disclosures: Interest paid $ 3,389 $ 3,710 ======== ======== Income taxes paid $ 596 $ 407 ======== ========
See Notes to Condensed Consolidated Financial Statements. 6 7 HANOVER DIRECT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THIRTY NINE WEEKS ENDED SEPTEMBER 25, 1999 AND SEPTEMBER 26, 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 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 September 25, 1999, approximately $2.8 million of the total $6.4 million cash balance was subject to the above restrictions. 7 8 4. ACCOUNTING FOR TRANSFERS OF CREDIT CARD RECEIVABLES In July 1999, the Company transferred its portfolio of credit card accounts to Capital One Services, Inc./Capital One Bank ("Capital One") as part of its account purchase and credit card marketing and services agreement entered into in March 1999. The agreement, which provides services similar to those of the previous administrator, provides for the transfer of the Company's private label credit card receivables to Capital One, which the Company accounts for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities". This statement establishes criteria distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. In accordance with SFAS No. 125, the Company determined that the terms applicable to the transfer of its credit card financing receivables to Capital One should be accounted for as a sale. Accordingly, the credit card receivables and related obligations are no longer recorded. Furthermore, the Company transferred the receivables on terms which did not result in any gain or loss. 5. 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. 6. 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 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). 7. 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 $2.2 million and $3.3 million at September 25, 1999 and December 26, 1998, respectively, and are included in accrued liabilities in the accompanying condensed consolidated balance sheets. 8. 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 expiring on January 31, 2001. At September 25, 1999, the Company had borrowings of $18.8 million under the Congress Revolving Credit Facility and $12.9 million in Congress Term Loans. The rates of interest related to the Congress Revolving Credit Facility and Congress Term Loans at September 25, 1999 were 8.50% and 8.17%, respectively. The face amount of unexpired documentary letters of credit issued by First Union Bank were $5.2 million and $4.0 million at September 25, 1999 and September 26, 1998, respectively. 8 9 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 25, 1999, the Company was in compliance with such covenants and remaining unused availability under the Congress Revolving Credit Facility was $18.8 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 September 25, 1999, borrowings supported by the letter of credit guarantee were $25.0 million. 9. WRITE-DOWN OF INVENTORY OF DISCONTINUED CATALOGS In 1998, the Company recorded a $3.7 million charge for the write-down of its non-core catalog inventory to estimated net realizable value. This was related to the Company's decision to discontinue the traditional catalog operations of its Austad's, Tweeds and Colonial Garden Kitchens catalog brands. During 1999, the Company disposed of a substantial amount of its non-core catalog inventory by utilizing the various liquidation vehicles at its disposal such as off-price merchants and special sales catalogs. Of these, the Company was able to utilize special sales catalogs, which provide higher cost recoveries, to a larger extent than anticipated in 1998. Accordingly, $1.8 million of the 1998 charges were reversed and included in the Company's 1999 year-to-date results. 10. 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 primarily 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 an intercompany service agreement and revenues in connection with the Company's fulfillment services and e-commerce services provided to third parties. The aforementioned intercompany service agreement, which became effective as of January 1, 1999, provides 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). 9 10 Based on the above, reportable segment data were as follows:
IN THOUSANDS OF DOLLARS ----------------------------------------------------------------- RESULTS FOR THE 3RD QUARTER BRAND WEB CONSOLIDATED ENDED SEPTEMBER 25, 1999: MARKETING SERVICES UNALLOCATED TOTAL --------- --------- --------- --------- Revenues from external customers $ 119,923 $ 1,733 $ -- $ 121,656 Intersegment Revenues -- 23,379 (23,379) -- Income/ (loss) from operations 2,640 (3,440) -- (800) Interest Income/(Expense) (464) (1,239) -- (1,703) --------- --------- --------- --------- Income/ (loss) before income taxes 2,176 (4,679) -- (2,503) Total Assets at September 25, 1999 $ 143,780 $ 40,817 $ 15,293 $ 199,890 --------- --------- --------- --------- RESULTS FOR THE 3RD QUARTER ENDED SEPTEMBER 26, 1998: Revenues from external customers $ 122,870 $ 547 $ -- $ 123,417 Intersegment Revenues -- 24,195 (24,195) -- Income/ (loss) from operations (544) (219) -- (763) Interest Income/(Expense) (842) (981) -- (1,823) --------- --------- --------- --------- Income/ (loss) before income taxes (1,386) (1,200) -- (2,586) Total Assets at September 26, 1998 $ 177,368 $ 42,849 $ 15,206 $ 235,423 --------- --------- --------- ---------
RESULTS FOR THE NINE MONTHS BRAND WEB CONSOLIDATED ENDED SEPTEMBER 25, 1999: MARKETING SERVICES UNALLOCATED TOTAL --------- --------- --------- --------- Revenues from external customers $ 377,121 $ 3,486 $ -- $ 380,607 Intersegment Revenues -- 73,363 (73,363) -- Income/ (loss) from operations 5,083 (12,027) -- (6,944) Interest Income/(Expense) (1,343) (3,840) -- (5,183) --------- --------- --------- --------- Income/ (loss) before income taxes 3,740 (15,867) -- (12,127) RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 26, 1998: Revenues from external customers $ 381,348 $ 1,166 $ -- $ 382,514 Intersegment Revenues -- 77,077 (77,077) -- Income/ (loss) from operations (6,591) 497 -- (6,094) Interest Income/(Expense) (2,055) (3,445) -- (5,500) --------- --------- --------- --------- Income/ (loss) before income taxes (8,646) (2,948) -- (11,594)
10 11 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 agreement was effective as of January 1, 1999. Had the provisions of the intercompany service agreement been in effect in 1998, intersegment revenues for the Web Services division would have been approximately $24.4 million and $ 77.1 million for the thirteen weeks and thirty-nine weeks ended September 26, 1998, respectively. Loss from operations would have been approximately $(0.1) million and $(0.7) million for the Web Services and Brand Marketing divisions, respectively, for the thirteen weeks ended September 26, 1998. Income/ (loss) from operations would have been $0.5 million and $(6.6) million for the Web Services and Brand Marketing divisions, respectively, for the thirty-nine weeks ended September 26, 1998. 11. SUBSEQUENT EVENT In October 1999, the Company sold the assets of its non-core Austad's catalog for approximately $1.4 million in cash. The assets sold primarily included inventory and intangible assets such as customer lists and trademarks with an approximate book value of $0.6 million. Pending any post closing adjustments, which may require minimal adjustments to the aforementioned amounts, the Company expects to realize and record a gain from the sale sometime during the fourth quarter of 1999. The Company will continue to provide back office and fulfillment services for the catalog. 11 12 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 SEPTEMBER 25 SEPTEMBER 26, 1999 1998 ---- ---- Revenues 100.0% 100.0% Cost of sales and operating expenses 62.6 62.3 Write-down of inventory of discontinued Catalogs (1.2) -- Selling expenses 24.2 26.3 General and administrative expenses 13.2 10.1 Depreciation and amortization 1.9 1.9 Loss from operations (0.7) (0.6) Interest expense, net ( 1.4) (1.5) Net loss (2.2) (2.3)
RESULTS OF OPERATIONS - THIRTEEN-WEEKS ENDED SEPTEMBER 25, 1999 COMPARED WITH THIRTEEN-WEEKS ENDED SEPTEMBER 26, 1998 Net Loss. The Company reported a net loss of $(2.7) million or $(.01) per share for the thirteen-weeks ended September 25, 1999 compared with a net loss of $(2.8) million or $(.01) per share for the comparable period last year. The per share amounts were calculated based on weighted average shares outstanding of 210,843,167 and 207,909,428 for the current 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. Compared to the comparable period last year, the $0.1 million decrease in net loss was primarily due to: (i) higher demand and margins for the Company's core catalog offerings; (ii) 1998 losses from non-core catalogs, which were repositioned as e-commerce brands in 1999; (iii) partial reversal of a 1998 charge for the write-down of non-core catalog inventory; and (iv) lower interest expense partially offset by, (i) costs related to the Company's strategic initiatives; and (ii) lower earnings related to the Company's upsell programs. 12 13 Revenues. Revenues decreased $1.7 million (1.4%) for the thirteen-week period ended September 25, 1999 to $121.7 million from $123.4 million for the comparable period in 1998 as increases in revenues from core catalogs and 1999 revenues from the Company's third party fulfillment business were more than offset by revenue decreases from non-core catalogs. Revenues from core catalogs increased by $4.0 million (3.5%) while revenues from non-core catalogs decreased by $7.4 million (71.8%). The Company circulated 39 million catalogs during the 1999 period versus 43 million catalogs in the 1998 period reflecting the repositioning of non-core catalogs to e-commerce. The number of customers having made a purchase from the Company's catalogs during the 12 months preceding September 25, 1999 remained at approximately 4 million, consistent with December 26, 1998. Thirteen-week (third quarter) 1999 revenues from the Company's third party fulfillment business were $1.7 million. Operating Costs and Expenses. Cost of sales and operating expenses increased to 62.6% of revenues for the thirteen weeks ended September 25, 1999 compared to 62.3% of revenues for the comparable period in 1998. This increase is primarily due to higher costs related to strategic initiatives (including fixed distribution costs of the third party fulfillment business as well as systems development and support costs), partially offset by higher margins for the Company's core catalog offering's. Selling expenses decreased to 24.2% of revenues for the thirteen weeks ended September 25, 1999 from 26.3% for the comparable period in 1998. This decrease reflects lower catalog production costs as well as the repositioning of non-core catalogs to e-commerce. General and administrative expenses were 13.2% of revenues for the thirteen weeks ended September 25, 1999 versus 10.1% of revenues for the comparable period in 1998. The 3.1% increase reflects higher legal and administrative costs that are primarily related to the Company's strategic initiatives. Depreciation and amortization remained at 1.9% of revenues for the thirteen weeks ended September 25, 1999 from the comparable period in 1998. Loss from Operations. The Company recorded a loss from operations of $(0.8) million or (0.7%) of revenues for the thirteen weeks ended September 25, 1999, compared to a loss from operations of $(0.8) million or (0.6%) of revenues for the comparable period in 1998. The Company's results are comprised of the following segments: - Brand Marketing: Income from operations of $2.6 million reflects the higher demand and margins for the Company's core catalog offerings and the partial reversal of a 1998 provision for non-core catalog inventory, partially offset by costs related to the strategic initiatives (primarily internet). - - Web Services: Loss from operations of $(3.4) 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 $0.1 million for the thirteen weeks ended September 25, 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 September 25, 1999 and September 26, 1998, respectively. 13 14 RESULTS OF OPERATIONS - THIRTY-NINE WEEKS ENDED SEPTEMBER 25, 1999 COMPARED WITH THIRTY-NINE WEEKS ENDED SEPTEMBER 26, 1998
39 WEEKS ENDED -------------- SEPTEMBER 25, SEPTEMBER 26, 1999 1998 ---- ---- Revenues 100.0% 100.0% Cost of sales and operating expenses 63.2 62.5 Write-down of inventory of discontinued Catalogs (0.5) -- Selling expenses 25.1 27.1 General and administrative expenses 12.2 10.1 Depreciation and amortization 1.8 1.9 Loss from operations (1.8) (1.6) Interest expense, net (1.4) (1.4) Net loss (3.3) (3.2)
Net Loss. The Company reported a net loss of $(12.7) million or $(.06) per share for the thirty-nine weeks ended September 25, 1999 compared with a net loss of $(12.3) million or $(.06) per share for the comparable period last year. The per share amounts were calculated based on weighted average shares outstanding of 210,640,667 and 205,226,872 for the current 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. Compared to the comparable period last year, the $0.4 million increase in net loss was primarily due to: (i) costs related to the Company's strategic initiatives partially offset by, (i) higher demand and margins for the Company's core catalog offerings; (ii) 1998 losses from non-core catalogs, which were repositioned as e-commerce brands in 1999; and (iii) partial reversal of a 1998 charge for the write-down of non-core catalog inventory. Revenues. Revenues decreased $1.9 million (0.5%) for the thirty-nine week period ended September 25, 1999 to $380.6 million from $382.5 million for the comparable period in 1998 as increases in revenues from core catalogs and the third party fulfillment business were more than offset by decreases in revenues from non-core catalogs. Revenues from core catalogs increased by $13.9 million (4.0%) while revenues from non-core catalogs decreased by $19.3 million (52.2%). The Company circulated 184 million catalogs during the 1999 period versus 191 million catalogs in the prior year period reflecting the repositioning of the non-core catalogs to e-commerce. Thirty-nine week (nine month) 1999 revenues from the Company's third party fulfillment business were $3.5 million. 14 15 Operating Costs and Expenses. Year-to-date cost of sales and operating expenses increased to 63.2% of revenues for the thirty-nine weeks ended September 25, 1999 compared to 62.5% of revenues for the comparable period in 1998. This increase is primarily due to higher costs related to strategic initiatives (including fixed distribution costs of the third party fulfillment business as well as systems development and support costs), partially offset by higher margins for the Company's core catalog offering's. Selling expenses decreased to 25.1% of revenues for the first thirty-nine weeks of 1999 from 27.1% for the comparable period in 1998. This decrease reflects lower catalog circulation and production costs as well as the repositioning of non-core catalogs to e-commerce. General and administrative expenses were 12.2% of revenues for the first thirty-nine weeks of 1999 versus 10.1% of revenues for the comparable period in 1998. The 2.1% increase reflects higher legal and administrative costs that are primarily related to the Company's strategic initiatives. Depreciation and amortization decreased to 1.8% of revenues for the first thirty-nine weeks of 1999 versus 1.9% of revenues for the comparable period in 1998. Loss from Operations. For the thirty-nine week period ended September 25, 1999, the Company recorded a loss from operations of $(6.9) million or (1.8)% of revenues compared to a loss from operations of $(6.1) million or (1.6%) of revenues for the comparable period of 1998. The Company's loss from operations reflects the following segment results: - - Brand Marketing: Income from operations of $5.1 million reflects the higher demand and margins for the Company's core catalog offerings and the partial reversal of a 1998 provision for non-core catalog inventory, partially offset by costs related to the strategic initiatives (primarily internet). - - Web Services: Loss from operations of $(12.0) 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 decreased by $0.3 million compared to the same period in 1998. Income Taxes. The Company recorded a state tax provision of $0.6 million and $0.8 million in each of the thirty-nine week periods ended September 25, 1999 and September 26, 1998, respectively. 15 16 LIQUIDITY AND CAPITAL RESOURCES At September 25, 1999, the Company had $6.4 million in cash and cash equivalents compared with $12.2 million at December 26, 1998. Working capital and current ratio were $36.2 million and 1.42 to 1 at September 25, 1999 versus $43.9 million and 1.47 to 1 at December 26, 1998. Net cash used in operations during the thirty-nine weeks ended September 25, 1999 of $18.9 million was primarily the result of significant payments made to suppliers to ensure a consistent flow of product 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. These cash outflows were partly offset by cash inflows resulting from decreases in receivables due from customers and from the Company's upsell activities. Although $2.8 million of cash and cash equivalents 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 $3.3 million during the thirty-nine week period ending September 25, 1999. The Company utilized $18.8 million of net borrowings for the thirty-nine weeks ended September 25, 1999 under the Congress Revolving Credit Facility to fund its seasonal working capital requirements and its strategic initiatives. This amount was less than the $22.6 million of borrowings for the comparable period in 1998. The total amount outstanding under the Congress Revolving Credit Facility at September 25, 1999 was $18.8 million, compared with $0 at December 26, 1998. Remaining availability under the Congress Revolving Credit Facility at September 25, 1999 was also $18.8 million ($25.2 million including cash on hand). In March 1999 Richemont Finance S.A. 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 the letters 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, these include 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. The Company has evaluated its internal mainframe business systems deemed critical to its business and has substantially completed all discovery, assessment, remediation, testing/deployment, and unit testing efforts, except as noted below. This included a systems rollover test allowing for a system date change to January 1, 2000, which was performed in early September, and a second test completed at the end of October 1999. Issues remain with two systems, currently in the remediation process, which are expected to be resolved in the fourth quarter of 1999. 16 17 Additionally, the Company has completed an inventory and assessment of hardware and software associated with individual PC systems for Year 2000 readiness and currently expects to complete all PC remediation and testing by the end of November 1999. 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. Accordingly, the Company currently expects, based on its testing and the representations of its suppliers, that its most important computer systems will be able to function adequately into the next century. While some disruptions are likely to occur with the Company's internal systems and at least a few product vendors, the Company believes, subject to factors beyond the Company's control noted below, the most probable scenario is that there will not be a system failure of critical services or infrastructure that will materially disrupt its operations as a whole. Furthermore, in view of the seasonality of the Company's business, any disruptions that do occur are likely to take place in the off-peak selling period following the 1999 holiday season. While the Company believes it is not likely to encounter any significant operational problems, there is no guarantee that a Year 2000 system 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 of its own Year 2000 susceptible internal systems problems. As a contingency plan, the Company has made arrangements to have technical staff available at all locations to support its customers in the event of a Year 2000 failure. By taking advantage of multiple locations which include call centers and warehousing functions, the Company expects to be able to provide uninterrupted service to all of its customers provided that interruptions to either power, utilities or telephone services that are beyond its control do not occur. 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. 17 18 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK None. 18 19 PART II - OTHER INFORMATION 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. 19 20 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: November 9, 1999 20 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 NINE MONTHS ENDED SEPTEMBER 25, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS DEC-25-1999 SEP-25-1999 6,407 0 20,539 (2,271) 60,510 122,434 91,622 (44,151) 199,890 86,241 0 6,270 0 140,836 (90,848) 199,890 380,607 380,607 238,810 148,741 0 (6,944) (5,183) (12,127) (579) (12,706) 0 0 0 (12,706) (.06) (.06)
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