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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended January 1,December 31, 1994
Commission file number 1-12082
HANOVER DIRECT, INC.
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(Exact name of registrant as specified in its charter)
DelawareDELAWARE 13-0853260
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(State of incorporation) (I.R.S. Employer Identification No.)
1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY 07087
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 863-7300
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.66 2/3 Par Value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. _____10-K._____
As of March 9, 1993,15, 1995 the aggregate market value of the voting stock held by
non-affiliates of the registrant was $200.2$106 million (based on the closing price of
the Common Stock on the American Stock Exchange on March 9, 1994)15, 1995).
As of March 9, 1994,15, 1995 the registrant had 82,933,17792,816,843 shares of Common Stock and
234,900 shares of Series A Preferred Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy statement for the 1994 Annual Meeting of Shareholders is incorporated by
reference into Part III of this Annual Report on Form 10-K.Items 10, 11, 12 and 13.
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P A R T I
ITEM 1. BUSINESS
GENERAL
Hanover Direct, Inc. (the "Company") is a leading direct specialty
retailer that publishes a portfolio of 14 branded specialty catalogs offering home
furnishings,fashion, general merchandise and apparel. The Company's home fashion catalogs
include DOMESTICATIONS,Domestications(R), the nation's leading specialty home textile catalog,
and The Company Store(R), an upscale direct marketer of down comforters and
other down and related products for the home. The Company also publishes
Gump's(R), the well-known San Francisco retailer and a leading upscale catalog
marketer of exclusive gifts, which has
grown rapidlyopened its new retail store in downtown San
Francisco in March 1995. The Company is a market leader in the kitchenware
segment with revenues increasing from approximately $30 million in 1987
to approximately $311 million in 1993. The Company's portfolio of catalogs
also includes COLONIAL GARDEN KITCHENS,Colonial Garden Kitchens(R), a leading specialty catalog featuring
worksavingwork saving and lifestyle enhancing items for the kitchen and home.home, and Kitchen
& Home(sm), introduced in 1994, a highly focused upscale kitchen and home
product catalog. In apparel, the Company's portfolio includes Tweeds(R), the
European inspired women's fashion catalog, and International Male(R), an
authority for unique men's fashions with an international flair.
In 1994, the Company further expanded its catalog offerings by entering
into a venture with Sears, Roebuck and Co. ("Sears") in which the Company mails
several versions of its catalogs to the more than 20 million mail order and
credit card customers of Sears. In 1994, the Company generated revenues of
$71 million and operating income of $2.9 million from this venture.
During 1993,1994, the Company mailed approximately 322377 million catalogs and
had total revenues of approximately $643$769 million and operating income of $16.0
million. The Company maintains a proprietary customer list currently containing
approximatelymore than 19 million names of customers who have made purchases from at least
one of the Company's catalogs within the past 36 months. Approximately sevenOver 7 million of the
names on the list represent customers who have made purchases from at least one
of the Company's catalogs within the last 12 months.
In early 1995, the Company acquired Improvements (R), a leading
do-it-yourself home improvement catalog featuring home aid accessories,
Leichtung Workshops (R), a woodworking and hobby catalog featuring tools, wood
products and accessories, and The Safety Zone (R), a direct marketer of safety,
prevention and protection products.
The Company is incorporated in Delaware with its principal executive
office at 1500 Harbor Boulevard, Weehawken, New Jersey 07087. The Company's
telephone number is (201) 863-7300. HISTORY AND ORGANIZATION
History. The Company's direct marketing subsidiary, founded in 1934,
initially operated as a chain of specialty retail women's fashion stores in
Pennsylvania and nearby states under the name Lana Lobell. In 1950, it
published its first catalog offering women's fashion by mail and, by the end of
the decade, a majority of the subsidiary's revenues was derived from catalog
sales. In 1962, the subsidiary first published HANOVER HOUSE, a catalog
featuring gifts, seasonal, household and novelty items. The Company's direct
marketing subsidiary was acquired in 1972 by The Horn & Hardart Company
("H&H"), a restaurant company founded in 1911. The Company's direct marketing
subsidiary continued its growth through internal development of new and
existing catalogs utilizing its proprietary customer list as well as through
acquisitions of other catalog companies.
Restructuring. The Company incurred a substantial amount of debt in
connection with the growth of its restaurant business in the 1970s and 1980s.
As the Company began the disposition of its restaurant operations in 1989,
management believed that the underlying asset values would at least enable it
to repay the debts secured thereby. However, the Company's withdrawal from the
restaurant business coincided with a severe decline in real estate values in
the northeastern United States and elsewhere in the country. Accordingly,
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the Company failed to generate sufficient cash proceeds to repay all of the
associated debt. As a result, a high level of debt remained and placed an
excessive burden on the cash flows of the direct marketing business, the
Company's only source of internally generated cash. By early 1991, vendors and
factors were restricting the availability of trade credit on normal terms,
hampering the Company's ability to purchase merchandise. Because of strong
demand for the merchandise in the Company's catalogs and its inability to
obtain adequate trade credit with which to purchase merchandise, the Company's
backorder level increased substantially and it incurred operating losses. In
response, the Company began to take additional actions and explore financial
alternatives available to it to solve its cash flow problems, including the
sale of an equity interest in the Company.
In the fall of 1991, NAR Group Limited, a British Virgin Islands
corporation (together with its affiliates, "NAR"), effectively gained controlowns approximately 51% of the
Company.Company's common stock. NAR, is a private investment holding company, that is a joint
venture between the family of Alan G. Quasha, a Director and the Chairman of the
Board of the Company, and Compagnie Financiere Richemont A.G., a Swiss public
company engaged in
tobacco,2
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luxury goods, tobacco and other businesses. NAR
acquired a 48.9% interest in the Company through an equity investment of $40
million and the extension of a line of credit of up to $30 million (later
increased to $50 million) and implemented a restructuring program consisting of
operational changes, debt reduction and disposition of substantially all of the
Company's remaining non-direct marketing assets. By the end of 1992, through
the sale of assets and a series of transactions, including a rights offering, a
sale of preferred stock and exchange offers, the Company reduced its debt and
lease obligations (excluding working capital debt) by $182.8 million from
September 1991. As a result of these transactions, NAR increased its interest
in the Company to approximately 56% through an additional equity investment of
approximately $38.1 million.
In September 1993, the Company changed its name to Hanover Direct, Inc. and
eliminated its two-tier holding company structure. This reorganization was
accounted for similarly to a pooling-of-interests and, accordingly, the
Company's financial statements include the results of H&H and The Hanover
Companies ("THC") for all applicable periods presented.
RECENT ACQUISITIONS AND VENTURES
During 1993, the Company made the following acquisitions:
Gump's. In May 1993, the Company acquired substantially all of the assets
of Gump's Inc., the well known San Francisco retailer and a leading upscale
catalog marketer of exclusive gifts, for a total purchase price of $13.2
million, consisting of $6.9 million in cash and $6.3 million of Common Stock.
The Company is relocating its retail storea successor in
interest to The Horn & Hardart Company, a new locationrestaurant company founded in downtown San
Francisco, which is scheduled to open in the fall of 1994.
The Company Store. In August 1993, the Company acquired in Chapter 11
bankruptcy proceedings substantially all of the assets of Company Store
Holdings,1911,
and Hanover House Industries, Inc., an upscale direct marketer of down comforters and other down
and related products for the home, sold under THE COMPANY STORE and SCANDIA
DOWN names, for a total purchase price of $7 million, consisting of the
issuance of $4.6 million of notes and $2.4 million of Common Stock.
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Tweeds. In September 1993, the Company purchased all of the outstanding
stock of Tweeds, the European inspired women's fashion catalog, for a total
purchase price of $8.8 million, consisting of the assumption of $5.1 million of
liabilities, $.1 millionfounded in cash and $3.6 million of Common Stock.
In addition, the Company has recently entered into the following ventures:
Sears. In January 1994, the Company entered into a licensing agreement
(the "Sears Agreement") with the direct marketing subsidiary of Sears Roebuck
and Co. ("Sears"), to produce specialty catalogs for the 23 million customers
of the recently discontinued Sears catalog. The specialty catalogs include:
Show Place, based on the DOMESTICATIONS catalog, Great Kitchens, based on the
COLONIAL GARDEN KITCHENS catalog, and Beautiful Style, based on the SILHOUETTES
catalog. The Sears Agreement has an initial three-year term and continues
thereafter unless terminated by either party. Profits and losses from the
venture are to be shared between the parties on an equal basis. The Company
also issued to Sears a performance warrant to purchase 3.5 million shares of
Common Stock in 1999 if the licensed business with Sears has revenues of at
least $250 million and earnings before interest and taxes of at least $30
million in 1998. Alternately, Sears will be entitled to purchase 7 million
shares of Common Stock in 1999 if the licensed business with Sears has revenues
of at least $500 million and earnings before interest and taxes of at least $60
million in 1998. If neither of these goals is achieved, the performance
warrant will expire unexercised in 1999. The warrant exercise price is $10.57
per share. The Company is obligated to meet various operational performance
standards and, if the Company is unable to meet these standards, Sears would be
entitled to terminate the agreement. The Company is also entitled to terminate
the agreement if Sears fails to comply with any material provision thereof.
Show Place, Great Kitchens and Beautiful Style are trademarks of Sears.
The Safety Zone. In September 1993, the Company acquired 20% of the
outstanding common stock of Aegis Safety Holdings, Inc. ("Aegis"), a direct
marketer of safety and anti-hazard products through The Safety Zone catalog.
The consideration for the acquisition was the provision by the Company of
certain catalog fulfillment and production services to Aegis at the Company's
cost until August 1998, subject to certain early termination provisions. The
Company also acquired an option to increase its ownership to 50% of Aegis'
common stock until the end of 1996. Aegis has an option to require the Company
to acquire all of Aegis' then outstanding stock after December 31, 1998 if the
Company has exercised its option and certain other conditions have been
satisfied. The Company has agreed to extend a secured working capital line of
up to $1 million to Aegis. Aegis had approximately $9 million in net sales
for the eleven months ended January 1, 1994.
Boston Publishing Company. In February 1994, the Company acquired a 20%
ownership interest in Boston Publishing Company, Inc. ("BPC"), the publisher
of The Museum Collection, a catalog featuring reproductions, replicas and
adaptations of items contained in museum collections, and Finishing Touches, a
catalog featuring items for the home, in consideration for providing $3.0
million of secured working capital financing, a $.75 million short-term loan
and a $.5 million convertible term loan. As part of the acquisition the
Company will provide BPC with access to the Company's proprietary customer list
and catalog production assistance. BPC had approximately $12 million in
revenues in 1993.
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THE COMPANY'S CATALOGS
Each of the Company's specialty catalogs targets distinct market
segments and develops and executes its own merchandising strategy based onoffering a focused assortment of merchandise that is designed to meet the needs
and preferences of its target customers. Through market research and ongoing
testing of new products and concepts, the Companyeach catalog determines on a catalog by catalog basis,its own
merchandise strategy, including the appropriate price points, service levels,
mailing plans and presentation of its products. The Company has placed an increasing emphasis on the useis continuing its
development of exclusive or private label products in a number of its catalogs,
including DOMESTICATIONS,
TWEEDSDomestications, Tweeds and THE COMPANY STORE,The Company Store, to further enhance the
brand identity of the catalog.
The Company's specialty catalogs typically range in size from 4432 to 100
pages with four to six new editions per year depending on the seasonality and
fashion content of the products offered. Each edition may be mailed several
times each yearseason with slight variations in format and content.
Depending on the catalog's product focus, approximately 30% to 70% of the
merchandise assortment in each edition is seasonal or new items. Catalogs
featuring women's fashions generally have the highest new product introduction
rate. Each catalog employs
the services of an outside creative agency or has its own creative staff which
is responsible for the design, layout, copy, feel and theme of the book.
Generally, the initial sourcing of new merchandise for a catalog begins two to
six months before the catalog is mailed.
During 1993, the Company streamlined its catalogThe Company's operations are divided into two main groups, ApparelNon-Apparel
and Non-Apparel.Apparel. Revenues for 1993 and the percent of total revenues for 1993 and 1994 for
each of the Company's catalogsgroup are set forth below:
1993 1994
1993 PERCENT OF 1994 PERCENT OF
REVENUES (a)(A) TOTAL REVENUES ------------REVENUES (A) TOTAL REVENUES
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(IN THOUSANDS) (IN THOUSANDS)
NON-APPAREL GROUP
DOMESTICATIONS $ 310,573 48.3%
HANOVER HOUSE 41,869 6.5
COLONIAL GARDEN KITCHENS 39,604 6.2
TAPESTRY 31,584 4.9
GUMP'S (b) (c) 22,653 3.5
THE$483,876 75% $599,408 78%
APPAREL $158,635 25% $169,476 22%
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TOTAL COMPANY STORE (b) 15,244 2.4
MATURE WISDOM 13,420 2.1
Other (d) 2,478 .4
Discontinued Catalogs 6,451 1.0
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Total Non-Apparel $ 483,876 75.3%
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APPAREL GROUP
INTERNATIONAL MALE $44,759 7.0%
SILHOUETTES 25,268 3.9
SIMPLY TOPS 23,988 3.7
ESSENCE BY MAIL 16,475 2.6
UNDERGEAR 12,825 2.0
TWEEDS (b) 9,280 1.5
Sale catalogs and other(e) 12,773 2.0
Discontinued Catalogs 13,267 2.0
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Total Apparel $ 158,635 24.7%
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Total Company (f) $ 642,511$642,511 100% =========$768,884 100%
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(a) Revenues are net of returns.
(b) Revenues were recorded for these catalogs from the dates of their
respective acquisitions in 1993.
(c) Represents revenues from both the GUMP'S catalog and retail store.
(d) Represents revenues from the outlet store and surplus inventory
liquidation.
(e) Represents revenues from sale catalogs, the outlet stores and surplus
inventory liquidation.
(f) Excludes Safety Zone which is accounted for on the equity method.
Non-Apparel Group.3
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NON-APPAREL GROUP.
The catalogs comprising the Non-Apparel Group are as follows:
DOMESTICATIONS(R): DOMESTICATIONSDomestications is the nation's leading specialty home textilestextile catalog
and the preferred fashion decorating sourcebooksource book for today's value-oriented and
style-conscious consumer. DOMESTICATIONSDomestications features sheets, towels, comforters,
tablecloths, draperies and other items for the home. The catalog has
enjoyed significant growthhome, and success, experiencing a 48% compound annual
growth rate during the period from 1987 to 1993. The layout and presentation
of DOMESTICATIONS has a decorator look offeringoffers coordinated
decorating ideas for the home. Over 60% ofhome at value prices. Domestications is also mailed to
Sears customers under the items offered in the catalog are exclusive or
private label, designed by its in-house staff.
HANOVER HOUSE(R): HANOVER HOUSE features gifts, seasonal, household and
novelty items. HANOVER HOUSE is currently being repositioned to upgrade its
presentation and product mix.
COLONIAL GARDEN KITCHENS(R): COLONIAL GARDEN KITCHENS is a leading
specialty catalog, featuring work saving and lifestyle enhancing items for the
kitchen and home.name Show Place.
The Company is currently testing a new upscale kitchen and
home product catalog called KITCHEN & HOME.
TAPESTRY(R): TAPESTRY is a value-oriented home accessories catalog
featuring flatware, dinnerware, furniture, rugs and other home decorating
items.
GUMP'S(R): GUMP'S is the well known San Francisco retailer and a leading
upscale catalog marketer of exclusive gifts.
THE COMPANY STORE(R): THE COMPANY STOREStore is an upscale direct marketer of down comforters and
other down and related products for the home. MATURE WISDOM(R): MATURE WISDOMThe Company Store also features
designer brand name sheets, towels and other bedding accessories.
Colonial Garden Kitchens features work saving and lifestyle enhancing
items for the kitchen and home. Colonial Garden Kitchens is onealso mailed to Sears
customers under the name Great Kitchens.
Kitchen & Home features upscale kitchen and home products.
Gump's is the well-known San Francisco retailer and a leading upscale
catalog marketer of exclusive gifts. In March 1995, Gump's relocated its retail
store to a landmark building in downtown San Francisco, offering comprehensive
collections of antique and contemporary jewelry and gifts.
Tapestry is a value-oriented home accessories catalog featuring
flatware, dinnerware, furniture, rugs and other home decorating items. Tapestry
is also mailed to Sears customers under the leading general merchandise
catalogs cateringname Right Touch.
Hanover House, the Company's oldest catalog, features gifts, seasonal,
household and novelty items.
Mature Wisdom caters to the needs of older customers featuringand features
fashions, health care products and other items for greater ease ofeasier living.
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THE SAFETY ZONE:Improvements, acquired in January 1995, is a leading do-it-yourself
home improvement catalog featuring home improvement accessories.
Leichtung Workshops, acquired in January 1995, is a woodworking and
hobby catalog featuring tools, wood products and accessories.
The Safety Zone, acquired in February 1995, is a direct marketer of
safety, protection and anti-hazard products in which the Company has a 20% interest.
Apparel Group.prevention products.
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APPAREL GROUP.
The catalogs comprising the Apparel Group are as follows:
INTERNATIONAL MALE(R): INTERNATIONAL MALE is an authority for unique men's
fashion with an international flair.
UNDERGEAR(R): UNDERGEARTweeds is a leader in activewear, workout wear andEuropean inspired women's fashion underwear for men.
SILHOUETTES(R): SILHOUETTEScatalog featuring relaxed
fashions uniquely designed by its in-house staff.
Silhouettes is a women's fashion catalog featuring every day,
workout, special occasion and career fashions in sizes 14 to 26.
SIMPLY TOPS(R): SIMPLY TOPSSimply Tops is a source for unique apparel, supplying moderate-priced
clothing to women interested in embellished clothing whichthat makes a statement.
ESSENCE BY MAIL(R): ESSENCE BY MAILOne 212, introduced in 1994, is a women's fashion catalog featuring
upscale clothing with a distinctly modern, cosmopolitan look designed by its
in-house staff.
Essence By Mail is the original catalog featuring women's fashions and
home decorating items reflecting African-American culture
andculture. It is a 50% joint
venture with Essence Communications Inc., publisher of Essence magazine. TWEEDS(R): TWEEDSThis
catalog will be discontinued after the Summer 1995 mailing.
International Male is an authority for unique men's fashion with an
international flair.
Undergear is a European inspired women'sleader in activewear, workout wear and fashion underwear
for men.
RECENT ACQUISITIONS AND VENTURES
Sears. In January 1994, the Company entered into a licensing agreement
with the direct marketing subsidiary of Sears to produce specialty catalogs for
the more than 20 million mail order and credit card customers of Sears. The
catalogs currently being mailed under the program are based on existing Company
catalogs and contain a title page with the Sears name and logo. The specialty
catalogs include: Show Place, based on the Domestications catalog, featuring
relaxed fashions uniquely designedGreat
Kitchens, based on the Colonial Garden Kitchens catalog, and Right Touch, based
on the Tapestry catalog. The Sears agreement has an initial three-year term and
continues thereafter unless terminated by either party on various grounds,
including the Company's failure to meet various operational performance
standards. Profits and losses from this licensing agreement are shared between
the parties on an equal basis. The Company also issued to Sears a performance
warrant to purchase up to 7 million shares of the Company's Common Stock in
1999, at an exercise price of $10.57 per share, subject to certain revenue and
profit thresholds.
Improvements and Leichtung Workshops. In January 1995, the Company
acquired substantially all of the assets of Leichtung, Inc., the publisher of
Improvements, a leading do-it-yourself home improvement catalog, and Leichtung
Workshops, a woodworking and hobby catalog,
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for a total cash purchase price of approximately $12 million and the assumption
of certain liabilities.
The Safety Zone. In February 1995, the Company acquired the remaining
80% of the outstanding capital stock it did not already own of Aegis Safety
Holdings, Inc. ("Aegis"), a direct marketer of safety, prevention and protection
products through The Safety Zone catalog. The purchase price was $6.3 million,
stated value, of the Company's Series B Convertible Additional Preferred Stock
("Series B Stock"). The Series B Stock is convertible into the Company's Common
Stock at $6.66 per share, subject to anti-dilution, and will pay a 5% dividend
in each of the first three years if Aegis has earnings before interest and taxes
of at least $1 million in each year, and a 7% dividend in years four and five.
The Series B Stock is subject to mandatory redemption in cash or common stock at
the Company's option on the fifth anniversary of issuance. If the Company elects
to redeem the Series B Stock in Company Common Stock, additional shares may be
issued if the Company's Common Stock is below a certain value.
Tiger Direct. In February 1995, the Company entered into an agreement
by which, upon closing of the transaction, it agreed to make an $8 million
investment in Tiger Direct, Inc. ("Tiger") and to provide certain strategic
services to Tiger. Tiger is a direct marketer of computer software, peripherals
and CD-ROM hardware and software. Upon consummation of the transactions, the
Company will be issued either a convertible debenture or convertible preferred
stock (if authorized) and warrants for its in-house staff.investment. The debenture will pay
interest at a rate of 10% per year for three years, payable in shares of Tiger
common stock, and will be convertible into a new class of Tiger convertible
preferred stock (subject to Tiger shareholder approval), with dividends payable
at 10% per year for three years, also payable in shares of Tiger common stock.
Tiger will also issue warrants to the Company to purchase additional stock over
a three year period at prices ranging from $1.20 to $1.50 per share. If the
debenture or the preferred stock is converted, the warrants are exercised and
the dividend shares are fully issued, the Company will own approximately 42%
of Tiger's outstanding common stock. The Company will have the right to acquire
additional shares of common stock in the open market, up to a total of 50.1%,
during a five year standstill period. The Company will be permitted to
nominate four of Tiger's seven directors for five years. The Company is also
providing a short-term secured working capital line to Tiger, up to a maximum
of $3 million. All outstanding short-term indebtedness under this working
capital line will be repaid when the transaction closes or within one year from
termination if the transaction does not close.
MARKETING AND DATABASE MANAGEMENT
The Company maintains one of the largest proprietary customer lists in
the industry currently containing approximatelymore than 19 million names of customers who
have purchased from one of the Company's catalogs within the past 36 months. The
list contains name, gender, residence and historical transaction data
(including catalog(s) purchased from, product classifications, recency of
purchase, average order size and payment method).data. This
database is selectively enhanced with demographic, socioeconomic, lifestyle and
purchase behavior overlays from other sources.
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The Company utilizes proprietary modellingmodeling and sophisticated
segmentation analysis, on a catalog by catalog basis, to devise catalog
marketing and circulation strategies whichthat are intended to maximize the
contribution by customer by catalog. This analysis is the basis for the
Company's determination of which of the Company's 14 catalogs (and how frequently)
will be mailed to a particular customer, as well as the promotional incentive
content of the catalog(s) such customer receives.
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In addition to mailing to customers who exist oncurrently in its database, the
Company has an ongoing prospect acquisition program designed to attract new
customers on a cost effective basis. The primary source of new customers for the
Company's catalogs is lists that have been rented from other mailers and compilers. Prior to
mailing to these non-proprietary lists, the lists are edited using statistical
segmentation tools to enhance their probable performance. Other sources of new
customers include space advertisements and promotional inserts in outbound
merchandise packages and friend's name cards
inserted in mailed catalogs.
During 1993, the Company mailed approximately 322 million catalogs. Of the
approximately 19 million names on the Company's proprietary customer list,
approximately seven million customers, or approximately 37%, have made at least
one purchase from one of the Company's catalogs within the preceding 12 months.packages.
TELEMARKETING AND CUSTOMER SERVICE
The Company designs its service standards to exceed its customers'
expectations and supports this with an unconditional merchandise guarantee.
Under the Company's return policy, a customer may return merchandise for a
refund, exchange or replacement if not satisfied for any reason.
The Company's
return rate for 1993 was approximately 13% of gross shipments.
In 1993,1994, the Company received approximately 64%70% of its orders through
its toll-free telephone service which offers customer access seven days per
week, 24 hours per day. TelemarketingThe Company has created a telephone network to link its
three primary telemarketing facilities are located in San Diego,
California, Hanover, Pennsylvania, DeSoto, Texas, Roanoke,
Virginia and La Crosse, Wisconsin. The Company's telemarketing facilities
utilize state-of-the-art telephone switching equipment which enables the Company
to route calls between telemarketing centers and enhancethus provide prompt customer
service. During 1993, the
Company'sSatellite telemarketing centers processed approximately 11.7 million callsare also located in San Diego,
California and received approximately 5.6 million orders. The remaining calls included
requests for copies of catalogs, order status inquiries and other general
inquiries.Cleveland, Ohio.
The Company trains its telemarketing service representatives to be
courteous, efficient and knowledgeable about the Company's products.
Each
telemarketingTelemarketing service representative initially receivesrepresentatives generally receive 40 hours of training in
selling products, services, systems and communication skills through simulated
as well as actual phone calls. A substantial portion of the evaluation of
telemarketing service representatives' performance is based on meetinghow well the
representative meets customer service standards. While primarily trained with
product knowledge to serve customers of one or more specific catalogs,
telemarketing service representatives also receive cross-training whichthat enables
them to take overflow calls from other catalogs. The Company utilizes customer
surveys as an important measure of performance and customer satisfaction.
The Company's computerized database provides its telemarketing service
representatives with information concerning a customer's previous orders,
permitting the service representative to establish a personalized dialogue with
the customer. TelemarketingIn some cases telemarketing service representatives are provided
selling information which they are trained to use to describe promotional items.
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DISTRIBUTION
The Company maintains a primary distribution centerscenter in Hanover,
Pennsylvania DeSoto, Texas,and two in Roanoke, Virginia and LaCrosse, Wisconsin.Virginia. The Company's long
rangefacilities processed
approximately 14 million packages in 1994. The Company's plan is to maximize
efficiencies in merchandise handling and distribution by consolidatingconsolidation of the
warehousing and distribution of like items in specific fulfillment centers. TheIn
1994, the Company plans to consolidatesubstantially completed the Apparel Groupconsolidation of its women's
apparel catalogs, intoall of which are now fulfilled from the TweedsCompany's Roanoke
facility and to constructapparel facility. Also in 1994, the Company completed construction of a 500,000530,000
square foot state-of-the-art home fashions warehouse and distribution facility
on a separate site in RoanokeRoanoke. This facility is projected to cost approximately
$17 million, of which upon its completion,$12.4 million was incurred in 1994. This facility will
handle all of DOMESTICATIONSDomestications' fulfillment needs. Single item orders are
currently being shipped from this facility, which will be fully operational in
the second half of 1995. The Company will also complete the consolidation of
Gump's fulfillment operations from DeSoto, Texas to Hanover, Pennsylvania,
where all giftware, other hardgoods and men's apparel are fulfilled, by
April 1995.
The Company mails its catalogs through the United States Postal Service
("USPS") utilizing pre-sort, bulk mail and other discounts. Most of the
Company's facilities processedpackages are shipped through the USPS. Effective January 1, 1995, the
USPS increased postage rates by approximately 13 million packages14% to 18%. Overall, catalog
mailing and package shipping costs approximated 16% of the Company's net
revenues in 1993.1994. The Company obtains rate discounts from the United States Postal ServiceUSPS by
automatically weighing each parcel and sorting and trucking packages to a number
of United States Postal ServiceUSPS drop points throughout the country. Some packages are shipped using a
consolidator for less frequently used drop points. The Company's size enables it to efficiently handle packages in this manner. From
time to time, the Company also uses
United Parcel Service, Federal Express and other expedited delivery services. The Company, on average, shipped approximately
48,000 packages per day in 1993.
PURCHASING
The Company's large sales volume permits it to achieve a variety of
purchasing efficiencies, including the ability to obtain prices and terms whichthat
are more favorable than those available to smaller companies. Major goods and
services used by the Company are purchased or leased from selected suppliers by
its central buying staff. These goods and services include: paper, catalog
printing and printing related services such as order forms and color
separations, communication systems including telephone time and switching
devices, packaging materials, expedited delivery services, computers and
associated network software and hardware. The Company's objective is to achieve
favorable "total costs" reflecting a long-term mutual commitment by the Company
and each supplier for competitive rates and terms as well as the quality, future
maintenance, replacement and modification needs of the Company.
The Company's telephone telemarketing costs (both inbound and outbound
calls) are typically contracted for on a three year basis. The Company typicallygenerally
enters into annual agreements for paper and printing with a limited number of
suppliers. These agreements permit periodic price increases or decreases based
on prevailing market conditions, changes in supplier costs and continuous
productivity improvements. TheFor 1994, paper costs approximated 7% of the
Company's
telephone systems8
9
net revenues. In 1995, paper costs are typically contracted for onexpected to rise approximately 20% to 30%
due to increasing demand, rising costs of pulp, increased manufacturing costs,
and a threelack of new manufacturing plants to four year basis.
During 1993, the Company purchased approximately 55 thousand tons of paper and
approximately 60 million minutes of telephone time.meet increasing demand.
The Company believes it has developed and maintains strong
relationships with suppliers for key goods and services.
MANAGEMENT INFORMATION SYSTEMS
The Company is currently in the process of upgradingcontinuing to upgrade its management information systems
by implementing new integrated software and migrating from a centralized
mainframe to mid-range mini-computers. The migration of the Company's business
applications is the first phasean important part of the Company's overall systems plan which
defines the mid- and long-term systems and computing strategy for the Company.
As part of this plan,In 1994 the Company has purchased, and will be installing newin 1995 is continuing to modify and install,
on a catalog by catalog basis, integrated softwaresystems for use in managing all phases
of the Company's operations. The new software is an upgraded
8
10
version of existing software installed in over 60 mail order companies which
hasThese systems have been designed to meet the
Company's requirements as a high volume publisher of multiple catalogs. The
Company plansbrought several catalogs on line in 1994, and expects to bring
additional catalogs on-line through early 1996, when the new systems on-line for
several catalogsCompany expects to
complete the project. As of December 31, 1994, the Company invested
approximately $9.1 million in 1994 with expected completion in 1995. Delivery,
installation and implementation are expected to commence shortly.such systems. The Company currently estimates that
the total cost to install and implement the new systems, including the cost of
dedicated internal personnel, will be approximately $13 to $15 million.
The new software system is an on-line, real-time system which includes
order processing, fulfillment, inventory management, list maintenance and
reporting. The implementation of the software will provide the Company with a
flexible system that offers highly sophisticated data manipulation, a high
degree of marketing-oriented and fulfillment functionality and extensive
reporting capabilities. The new management information systems are designed to
permit the Company to achieve substantial improvements in the way its
financial, merchandising and inventory functions are performed. The new system
was selected to support the Company's decentralized operating structure because
it can be customized for and by each catalog unit.
CREDIT MANAGEMENT
The Company's customers are able to purchase merchandise using checks or
money orders, the Company's credit cards or third party credit cards.
Several of the Company's catalogs, including DOMESTICATIONS, INTERNATIONAL MALE,Domestications,
International Male and GUMP'S,Gump's, offer their own credit cards. Approximately 73% of 1993 sales were
paid using third partyThe Company also
offers, for use with almost all catalogs, the Hanover Shop At Home credit cards and 8% were paid with the Company's credit
cards.
In December 1992, thecard.
The Company entered intohas a three year $75 million credit facility with General Electric
Credit Corporation ("GECC") which provides for the sale and servicing of
accounts receivable originating from the Company's revolving credit cards. The Company is obligated to repurchase uncollectible
accounts and is required to maintain a specified percentage of all outstanding
receivables sold under the program as a deposit with GECC to service its
obligations under the agreement. The Company is required to pay certain
servicing fees to GECC and the Company earns the finance charge income that
GECC charges to the accounts.
GECC's servicing responsibilities include credit processing, collections,
billing/payment processing, reporting and credit card issuance.
INVENTORY MANAGEMENT
The Company's inventory management strategy is designed to maintain
inventory levels that provide optimum in-stock positions while maximizing
inventory turnover rates and minimizing the amount of unsold merchandise at the
end of each season. The Company manages inventory levels by monitoring sales and
fashion trends and making purchasing adjustments as necessary and by promotional
sales. Additionally, the Company sells excess inventory in its special sale
catalogs, its outlet stores and to jobbers.
The Company acquires products for resale in its catalogs from numerous
domestic and foreign vendors. No single source supplied more than 8%5% of the
Company's products in 1993.1994. The Company's vendors are selected based on their
ability to reliably meet the Company's production
9
10
and quality requirements, as well as their financial strength and willingness to
meet the Company's needs on an ongoing basis.
9
11
EMPLOYEES
The Company currently employs approximately 2,2803,300 persons on a full
time basis and approximately 530600 persons on a part time basis. Approximately 120150
employees of The Company Store manufacturing facility are membersat one of the International Ladies Garment Workers Union.Company's subsidiaries are represented by a union. The
Company believes its relations with its employees are good.
SEASONALITY
Although the Company experiences quarterly variations in sales, such
variations are due primarily to fluctuations in circulation levels rather than
seasonality and are further ameliorated by the Company's diversified portfolio
of catalogs. The Company traditionally mails more catalogs in the second half of
the year.
COMPETITION
The mail order catalog business is highly competitive. The Company
believes that the principal bases upon which it competes are quality, value,
service, product offerings, catalog design, convenience, efficiency and safety.
The Company's catalogs compete with other mail order catalogs, both specialty
and general, and retail stores, including department stores, specialty stores
and discount stores. Competitors also exist in each of the Company's catalog
specialty areas including Spiegelof women's fashions, home furnishings, general merchandise, and
Chadwick's of Boston in women's fashion; Spiegel, Touch of Class, Linen Source,
Lands' End Coming Home and Horchow in home furnishings; Lillian Vernon, Taylor
Gift, Williams Sonoma, Chef's Corner, Harriet Carter and Dr. Leonards in
general merchandise; and Bachrach's, Collections, Road Runner Sports and J.
Crew in men's fashions. The Company also considers general catalog companies
such as J.C. Penney and retail stores as part of its competition. A number of the Company's competitors have substantially greater
financial, distribution and marketing resources than the Company. TheHowever, the
Company believes that the recent substantial sales growth in the costs of doing
business in the direct marketing industry, has encouragedespecially with respect to the
entryincreased costs of many new
competitorspaper and an increasepostal expenses, may cause a consolidation in competition from established companies. The
Company believes that the
principal bases upon which it competes are quality,
value, service, product offerings, catalog design, convenience, efficiency and
safety.industry as smaller catalogs face the difficult cost increases.
TRADEMARKS
Each of the Company's catalogs has its own federally registered
trademark.
DOMESTICATIONS, TAPESTRY, HANOVER HOUSE, COLONIAL GARDEN KITCHENS, MATURE
WISDOM, INTERNATIONAL MALE, UNDERGEAR, SILHOUETTES, SIMPLY TOPS, GUMP'S,
TWEEDS, THE COMPANY STORE, FASHION FAVORITES, FASHION GALAXY and OUTTAKES are
registered trademarks of the Company. "Essence" is a trademark used by the
Company under license by Essence Communications, Inc. The Company also owns numerous trademarks, copyrights and service
marks on its logos, products and catalog offerings. The Company has also
protected various trademarks internationally. The Company vigorously protects
such marks and believes there is substantial goodwill associated with them.
Essence is a trademark used by the Company under license by Essence
Communications, Inc. Show Place, Great Kitchens, and Right Touch are trademarks
of Sears.
10
11
GOVERNMENT REGULATION
The Company is subject to Federal Trade Commission regulations
governing its advertising and trade practices, Consumer Product Safety
Commission and Food and Drug Administration regulations governing the safety of
the products it sells in its catalogs and other regulations relating to the sale
of merchandise to its customers. The Company is also subject to the Department
of Treasury-Customs regulations
10
12 with respect to any goods it imports. To date,
such governmental regulations have not had a material adverse effect on the
Company's business.
The imposition of a sales and use tax collection obligation on
out-of-state catalog companies in states to which they ship products iswas the
subject of a case recently decided in 1994 by the United States Supreme Court. While the
Court reaffirmed an earlier decision whichthat allowed direct marketers to make sales
into states where they do not have a physical presence without collecting sales
taxes with respect to such sales, the Court further noted that Congress has the
power to change this law. The Company believes that it collects sales tax in all
jurisdictions where it is currently required to do so.
ITEM 2. PROPERTIES
The Company's corporate headquarters are located in a modern
84,700-square-foot facility in Weehawken, New Jersey. The facility houses
merchandising and marketing personnel, an art department including photographic
studios, catalog production personnel and corporate and administrative offices.
The Weehawken facility is leased for a 15-year term expiring in 2005.
The Company also occupies a leased office buildingoperates warehouse and fulfillment facilities in two
principal locations: Roanoke, Virginia, for home fashions and women's apparel,
and Hanover, Pennsylvania, for giftware, other hardgoods and five warehouse/fulfillment locationsmen's apparel.
In Roanoke, the Company owns a newly constructed 530,000 square-foot
state-of-the-art home fashions distribution center. The facility was
substantially completed in December 1994 and is expected to become fully
operational in the second half of 1995. This facility will handle all of
Domestications' fulfillment needs. Also in Roanoke, the Company leases its
175,000 square-foot apparel distribution and telemarketing center from a
partnership in which it owns a 50% interest.
In Hanover, area providingthe Company owns a totaldistribution center of approximately
1,200,000265,000 square feet of space, including its principal
fulfillment center consisting ofand leases a twenty acre leasehold with a 265,000 square
foot warehousetelemarketing and other improvements. The other four warehouse/fulfillment
locations are leased pursuant to short-term leases. The Company intends to
consolidate all or mostadministrative office
facility of the facilities with short-term leases into its new
fulfillment center that will be constructed for DOMESTICATIONS in Roanoke,
Virginia.
Administrative offices in Hanover, Pennsylvania are located in a two- story
building of approximately 123,000 square feet, withand a warehouse facility of 433,000 square
feet. Renewal terms through 2009 remain on the first lease; the second lease
expiring in 1994,
which contains renewal optionsexpires November 30, 1995 and is expected to be extended for three five-year periods. Brawn of
California, Inc., occupies 30,000 square feet of new office spacean additional
period.
In addition to these principal facilities, the Company leases
administrative facilities for men's apparel in San Diego, California pursuant toand for
women's apparel in Edgewater, New Jersey. The San Diego facility also serves
as a fifteen-year lease that expires in 2004.
Gump's occupies 4,700 square feet of office space in addition to 49,800
square feet of spacetelemarketing and customer service facility for its retail store in San Francisco, California. In
addition, Gump's occupies a leased warehouse/fulfillment center in DeSoto,
Texas of approximately 43,000 square feet. This lease expires in 1995.men's apparel. The Company
Store occupies 185,000 square feetalso operates a telemarketing and fulfillment facility in Cleveland, Ohio for
its
warehouse/fulfillment center pursuant to a short-term lease. Additionally,the Improvements and Leichtung Workshops catalogs.
In La Crosse, Wisconsin, the Company also owns a 150,000 square ft.square-foot
home fashions manufacturing and assembly facility and a 58,000 square ft.square-foot
telemarketing and customer service facility, in La Crosse are owned.
In January 1994, the Company purchased for $1.1 millionand leases a 50% interest in
Blue Ridge Associates (the "Partnership"),warehouse and
fulfillment center of 185,000 square feet under a partnership which owns the Tweeds
Roanoke, Virginia fulfillment center. In addition, the Partnership and the
Company entered into a 15 year lease covering the facility. Under the termsshort-term lease.
11
12
The Company's principal retail operations consist of the lease agreement and subject to certain conditions specified therein, the
Partnership, as lessor, agreed to expand the facility by not less than 100,000newly
relocated Gump's retail store, which occupies approximately 30,000 square feet
in accordance with plansa building in downtown San Francisco, California. The Gump's facility, which
is leased pursuant to a 15-year lease, also includes administrative offices for
retail and specifications reasonably acceptable
to the parties.mail order functions.
The expanded facility will be leased to the Company on the
same terms as the existing facility, subject to an adjustment in the amount of
rent paymentsalso operates and the expiration date.
11leases 7 outlet stores at various
locations.
12
13
The following chart lists each of the Company's principal properties:
OWNED
OR APPROXIMATE CATALOG
LOCATION LEASEDSTATUS SQUARE FOOTAGE USE
(a)
-------- ------------------------------ ------------- -------------- ---------------
Warehouse and
Fulfillment Centers:
Emigsville, PA Leased 144,000
Hanover, PA Owned 265,000
Hanover, PA Leased 433,300
Landsville,433,000 (a)
Hanover, PA Leased 23,000
York, PA Leased 319,000
DeSoto, TX Leased 43,000 GUMP'S(b)Leased/Owned 265,000 (a) and (b)
Roanoke, VA Owned 530,000 Domestications
Roanoke, VA Leased 175,000 TWEEDS(c)
LaCrosse,Women's Apparel(c)
La Crosse, WI Leased 185,000 THE COMPANY STOREThe Company Store
Corporate and
Administrative Offices:
San Diego, CA Leased 30,000 Men's Apparel(f)Apparel(d)
San Francisco, CA Leased 4,700 GUMP'S15,000 Gump's(e)
Edgewater, NJ Leased 65,000 TWEEDSWomen's Apparel
Weehawken, NJ Leased 84,70085,000 Corporate Headquarters
Cleveland, OH Leased/Owned 40,000 Leichtung Workshops
and Improvements(f)
Telemarketing and
Customer Service:
Hanover, PA Leased 123,300
LaCrosse,123,000 (a)
La Crosse, WI Owned 58,000(d)58,000 The Company Store
Roanoke, VA Leased 175,000 Women's Apparel(c)
Beachwood, OH Leased 7,800 Leichtung Workshops
and Improvements
Retail Stores:
Beverly Hills,San Francisco, CA Leased 1,200 SCANDIA DOWN
Costa Mesa, CA30,000 Gump's
Tysons Corner, VA Leased 1,200 SCANDIA DOWN1,700 The Safety Zone
San Diego, CA Leased 3,800 INTERNATIONAL MALE
San Francisco, CA Leased 49,800 GUMP'S(e)International Male
West Hollywood, CA Leased 3,600 INTERNATIONAL MALE
Hanover, PA Leased 12,500 Outlet StoreInternational Male
Manufacturing
and Assembly:
La Crosse, WI Leased 13,000 THE COMPANY STORE
Oshkosh, WI Leased 2,000 THE COMPANY STORE
Kenosha, WI Leased 5,500 THE COMPANY STORE
Madison, WI Leased 5,500 THE COMPANY STORE
Manufacturing
and Assembly:
LaCrosse, WI Owned 150,000 THE COMPANY STOREThe Company Store
13
14
-------------
(a) Unless otherwise noted,Used for Gump's, Colonial Garden Kitchens, Kitchen & Home, Tapestry,
Hanover House, Mature Wisdom and Men's Apparel.
(b) The building is owned by the facility services multiple catalogs.
(b) AlsoCompany and the property is subject to a
telemarketing center for GUMP'S.ground lease.
(c) Also a telemarketing center for TWEEDS.Telemarketing and warehouse/fulfillment functions are all located and
performed at the one facility. Square footage stated represents the
entire facility.
(d) Also used for executive offices for THE COMPANY STORE.
(e) Also used for GUMP'S executive offices. To be replaced by a new store in
the fall of 1994.
(f) Also a telemarketing center for Men's Apparel.
12(e) Retail and office space are all located at the one facility. Square
footage stated represents allocations to corporate/administrative,
and retail and retail storage space.
(f) Acquired in connection with the Leichtung, Inc. acquisition in January
1995. The building is owned by the Company and the property is subject
to a ground lease.
14
14
The Company also leases 18 properties, all of which are subleased. All of
such properties are part of the Company's discontinued restaurant operations.15
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine lawsuits of a nature which
is deemed customary and incidental to its businesses. In the opinion of
management, the ultimate disposition of such actions will not have a material
adverse effect on the Company's financial position or results of operations.
On or about September 2, 1994, a complaint was filed in the United
States District Court for the District of New Jersey by Veronica Zucker, an
individual who allegedly purchased shares of Common Stock of the Company in
the public offering completed on April 7, 1994, against the Company, all
of its directors, certain of its officers, Sun Life Insurance Company of
America, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Alex. Brown &
Sons, Incorporated. The complaint, which purports to be filed on behalf of a
class of all persons who purchased the Common Stock of the Company in the public
offering or thereafter through and including August 14, 1994, seeks to recover
monetary damages the class has allegedly suffered as a result of certain alleged
false and material misleading statements contained in the Company's public
offering prospectus dated March 30, 1994. In lieu of an answer, defendants have
filed a motion to dismiss the complaint in its entirety for failure to state a
claim upon which relief can be granted. The motion is scheduled to be heard by
the Court on April 10, 1995. The Company and its directors and executive
officers believe they have meritorious defenses to the Complaint and intend to
defend the matter vigorously.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.HOLDERS
None
1315
1516
P A R T II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on the American Stock Exchange (Symbol:
HNV). The following table sets forth, for the periods shown, the high and low
sale prices of the Common Stock reported on the American Stock Exchange
Composite Tape.
HIGH LOW
-------- -------
1992
First Quarter $ 3 $ 1 1/2
Second Quarter 2 1/8 1 5/8
Third Quarter 2 1/4 1 3/8
Fourth Quarter 2 7/8 1 5/8
1993
First Quarter $ 4 $ 2 1/16
Second Quarter 4 1/2 2 3/4
Third Quarter 5 1/2 4 1/6
Fourth Quarter 7 5/8 4 1/2
1994
First Quarter $ 7 7/8 $ 6
Second Quarter 7 1/8 3 15/16
Third Quarter 4 15/16 3 3/4
Fourth Quarter 4 3/8 3 3/8
The Company is restrictedlimited from paying dividends at any time on its Common
Stock beyond 25% of the consolidated net income of the then preceding four
quarter period or from acquiring anyin excess of one million shares of its capital stockCommon
Stock by certainthe most restrictive debt covenants contained in debt agreements to
which the Company is a party.
Cash dividends have not been paid
on the Common Stock since 1967.
As of March 9, 1994,15, 1995, there were approximately 4,3594,567 holders of record
of Common Stock.
1416
1617
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data for each of the years
indicated:
1989 1990 1991 1992 1993 -------- -------- -------- -------- --------
INCOME STATEMENT DATA:1994
--------- ---------- ---------- ---------- ----------
(in thousands, except share and per share data)
INCOME STATEMENT DATA:
REVENUES $ 382,637 $ 555,770 $ 623,650 $ 586,562 $ 642,511$555,770 $623,650 $586,562 $642,511 $768,884
Operating (loss) income 9,703 10,190 (26,078) 14,402 19,076 15,975
Interest expense, net... 11,084net . . . . . . . . 11,426 18,341 13,135 2,757 2,813
Other income (expense).. 1,868 . . . . . . . - (6,437) - 888 (1,833)
Income (loss) from continuing
operations.. 187operations . . . . . . . . . . . . . . (2,136) (51,081) 1,048 17,337 14,838
(Loss) from discontinued operations............. (9,146)operations . . . (115,921) (21,119) - - ---------- ---------- ---------- ---------- -----------
-------- -------- -------- -------- --------
Income (loss) before extraordinary
items and cumulative effect of
accounting change for income taxes........... (8,959)taxes . . . (118,057) (72,200) 1,048 17,337 14,838
Extraordinary items..... -items . . . . . . . . . . . 2,146 6,915 9,201 - -
Cumulative effect of accounting
change for income taxes........... -taxes . . . . . . . . - - 10,000 - ---------- ---------- ---------- ---------- -----------
-------- -------- -------- -------- --------
NET INCOME (LOSS)....... (8,959) . . . . . . . . . . . . (115,911) (65,285) 20,249 17,337 14,838
Preferred stock dividends -. . . . . . . . - (466) (3,197) (4,093) ---------- ---------- ---------- ---------- ----------(135)
-------- -------- -------- -------- --------
Net income (loss) applicable to
common shareholders........... $ (8,959) $ (115,911) $ (65,751)shareholders . . . . . . . . . . ($115,911) ($65,751) $ 17,052 $ 13,244 ========== ========== ========== ========== ==========$ 14,703
========= ======== ======== ======== ========
Per Share:
Income (loss) from continuing
operations..operations . . . . . . . . . . . . . . ($ .15) ($ 3.16) ($ .06) $ .01.17 $ (.15) $ (3.16) $ (.06) $ .17.16
(Loss) from discontinued operations (.64). . (8.24) (1.30) - - ---------- ---------- ---------- ---------- -----------
-------- -------- -------- -------- --------
Income (loss) before extraordinary
items.... (.63)items . . . . . . . . . . . . . . . . . (8.39) (4.46) (.06) .17 .16
Extraordinary items..... -items . . . . . . . . . . . .15 .43 .24 - -
Cumulative effect of accounting
change for income taxes........... -taxes . . . . . . . . - - .26 - ---------- ---------- ---------- ---------- -----------
-------- -------- -------- -------- --------
Net (loss) income ...... $ (.63) $ (8.24) $ (4.03). . . . . . . . . . . . ($ 8.24) ($ 4.03) $ .44 $ .17 ========== ========== ========== ========== ==========$ .16
========= ======== ======== ======== ========
Weighted average number
of shares outstanding:
Primary... ............. 14,145,416Primary . . . . . . . . . . . . . . . 14,068,460 16,287,723 38,467,015 75,625,330 93,285,190
========== ========== ========== ========== ==========
Fully diluted........... 14,145,416diluted . . . . . . . . . . . . . . 14,068,460 16,287,723 38,467,015 77,064,131 93,285,190
========== ========== ========== ========== ==========
BALANCE SHEET DATA
(END OF PERIOD):
Working capital (deficit).............. $ 42,176 . . . . . . . . $ 8,913 $ (37,636)($37,636) $ 31,566 $ 25,47625,180 $ 58,501
Total assets............ 324,148assets . . . . . . . . . . . . . . 234,761 162,800 134,352 188,838 262,246
Total debt.............. 179,251debt . . . . . . . . . . . . . . . 155,649 127,918 43,362 36,160 37,915
Preferred stock of subsidiary............. -subsidiary . . . . . . - 35,247 32,842 - -
Shareholders' (deficit) equity................. 53,813equity . . . . . (61,484) (113,632) (19,758) 45,868 109,725
There were no cash dividends declared on Common Stock in any of the periods.
See Notes to Consolidated Financial Statements.
1517
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following table sets forth, for the fiscal years indicated, the percentage
relationship to revenues of certain items in the Company's Consolidated
StatementStatements of (Loss) Income:
Fiscal Year
--------------------------------------
1991--------------------------------------------
1992 1993 1994
-------- -------- --------
Revenues 100.0% 100.0% 100.0%
Cost of sales and operating expenses.... 65.6expenses . . . . . . . . . . 65.1 63.6 63.3
Selling expenses........................ 28.0expenses . . . . . . . . . . . . . . . . . . . . 23.6 24.6 25.7
General and administrative expenses..... 9.2expenses . . . . . . . . . . . 8.9 8.9 9.0
Income (loss) from operations............ (4.2)operations . . . . . . . . . . . . . . . . . 2.5 3.0 2.1
Interest expense, net................... 2.9net . . . . . . . . . . . . . . . . . 2.2 .4 Income (loss) from continuing operations
before.4
Other income/(expense) . . . . . . . . . . . . . . . . . - .1 (.2)
Net income taxes..................... (8.2) .2 2.7
Income tax provision (credit)........... - - -
Income (loss) from continuing operations (8.2)% .2%. . . . . . . . . . . . . . . . . . . . . . . 3.5% 2.7% ===== ===== =====1.9%
RESULTS OF OPERATIONS
1994 COMPARED WITH 1993
Net Income. The Company reported net income of $14.8 million or $.16
per share for the year ended December 31, 1994, compared to net income of $17.3
million or $.17 per share in 1993. Per share amounts are expressed after
deducting preferred dividends of $.1 million in 1994 and $4.1 million in 1993.
The weighted average number of shares outstanding increased approximately 21%
to 93,285,190 shares for the year ended December 31, 1994, compared to
77,064,131 shares for the same period in 1993, primarily due to the public
offering and the conversion of certain preferred stocks.
Revenues. Revenues increased $126 million, or 20%, from $643 million
in 1993 to $769 million in 1994. This significant increase in revenues was
primarily a result of an increase of $48 million from the Company's venture
with Sears and increased revenues of $88 million from Gump's, The Company Store
and Tweeds which were acquired in the second half of 1993 ("the 1993
acquisitions"). Revenues from catalogs discontinued in 1993 were $20 million
in 1993 and $1 million in 1994.
Revenues were negatively impacted in 1994 by an increase in customer
returns from approximately 13.1% of shipped sales in 1993 to 14.9% of shipped
sales in 1994. The increased returns were generated by new product categories
and the Company implemented measures that reduced the rate of returns in the
second half of 1994.
Non-Apparel continuing catalog revenues increased $122 million, or
26%, from $477 million in 1993 to $599 million in 1994. The Company's venture
with Sears generated increased Non-Apparel revenues of $46 million from 1993 to
1994, while revenues generated by Gump's and The Company Store increased $57
million from 1993 to 1994. The remainder of the Non-Apparel revenue increase
was primarily due to increased revenues related to Domestications, and the
new Kitchen & Home catalog. Revenues from discontinued catalogs were $7
million and $.2 million in 1993 and 1994, respectively.
Apparel continuing catalog revenues increased $23 million, or
approximately 16%, from $146 million in 1993 to $169 million in 1994. This
increase was primarily due to a $31 million increase in the revenues of Tweeds
which was acquired in the fourth quarter of 1993. Women's Apparel continuing
catalog revenues increased 6% which is mainly attributable to Silhouettes and
One 212, while Men's Apparel revenues decreased 16% as the group discontinued
an
18
19
underperforming catalog in 1993 and focused on its profitable segments.
Revenues from discontinued apparel catalogs were $13 million and $.5 million in
1993 and 1994, respectively.
Operating Costs and Expenses. Cost of sales and operating expenses as
a percentage of revenues decreased from 63.6% in 1993 to 63.3% in 1994. The
decrease is primarily attributable to higher overall profit margins and lower
fulfillment costs, as partially offset by higher delivery costs in 1994 based
on sales mix.
Selling expenses increased from 24.6% of revenues for the year ended
January 1, 1994 to 25.7% of revenues for the year ended December 31, 1994 as
the Company increased catalog circulation 17% in an effort to increase the
number of active customers on its mailing lists in anticipation of the 1995
postal rate increase. The response to this prospecting program was less than
anticipated which resulted in higher selling expense. Overall demand from the
new customer acquisition program was soft principally in the Non-Apparel
catalogs, particularly in Domestications, where prospecting was heaviest. The
Company mailed approximately 377 million catalogs in 1994.
General and administrative expenses increased from 8.9% of revenues in
1993 to 9.0% of revenues in 1994 due primarily to a $.7 million increase in the
amortization of mailing lists and goodwill related to the 1993 acquisitions.
General and administration expenses increased $11.8 million, or 21%, from 1993
to 1994 due primarily to the 1993 acquisitions.
Income from Operations. Income from operations decreased from $19.1
million in 1993, or 3.0% of revenues, to $16.0 million in 1994, or 2.1% of
revenues. Losses from discontinued catalogs were $3.9 million in 1993 compared
to $.1 million in 1994.
Non-Apparel income from operations decreased $5.7 million from $25.9
million in 1993 to $20.2 million in 1994. This decrease was mainly due to the
previously-mentioned lower response rates to the Company's customer acquisition
program. Non-Apparel income from operations was also impacted by a loss of
$2.1 million in 1994 compared to break even results in 1993 related to the
Gump's retail operations due to the temporary relocation of its retail store
prior to the move to its new location in March 1995.
Apparel income from operations increased $3.1 million from a $3.6
million loss in 1993 to a $.5 million loss in 1994. The Men's Apparel income
from operations increased $3.3 million from a loss of $1.4 million in 1993 to
income of $1.9 million in 1994 as a result of overhead reductions and
increased response rates. The Women's Apparel income from operations increased
$1.0 million excluding losses of $.5 million and $1.6 million in 1993 and 1994,
respectively, from the start-up of a new catalog. Apparel income from
operations for discontinued catalogs was a loss of $4.3 million in 1993 and
income of $.2 million in 1994.
The Company's venture with Sears generated $1.4 million of income from
operations in 1993 versus $2.9 million in 1994.
Interest Income (Expense). Interest expense decreased approximately
$1.4 million from $4.9 million in 1993 to $3.5 million in 1994. This decrease
was the result of the Company using the proceeds of the public offering to pay
down its revolving line of credit in April 1994, thus reducing borrowing
requirements throughout the remainder of 1994. In addition, the Company
experienced lower interest rates upon entering into a new credit agreement in
October 1994. The Company's long-term debt increased $2.5 million from 1993 to
1994. Interest income decreased $1.5 million from $2.2 million in 1993 to $.7
million in 1994, due to interest income related to a Federal income tax refund
received in 1993.
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Other Income (Expense). Other income decreased $2.7 million from
income of $.9 million in 1993 to a loss of $1.8 million in 1994. The income of
$.9 million in 1993 represents a settlement of a claim in bankruptcy. The loss
in 1994 is comprised of $2.5 million of charges due to losses on investments
and advances as partially offset by other income of $.7 million.
Income Taxes. The Company recorded a Federal income tax benefit of
$4.4 million in 1994 based on its estimate of the amount of net operating loss
carryfowards ("NOLs") that can be utilized in the future. Federal income tax
provisions of $5.9 million and $4.2 million, respectively, were offset by the
utilization of NOLs in 1993 and 1994. The Company's state tax provision was
$.5 million and $.9 million in 1993 and 1994, respectively.
Shareholders' Equity. The number of shares of Common Stock
outstanding increased by 9,804,663 in 1994 due to: i) 8,045,296 shares issued
in connection with the Public Offering, ii) 1,309,207 shares issued in
connection with a cashless exchange upon the exercise of certain warrants and
iii) 450,160 shares issued in connection with the Company's equity and
incentive plans, the exchange of the 6% Series A Convertible Preferred Stock
(the "6% Preferred Stock") and other activities. At December 31, 1994, there
were 92,737,840 shares of Common Stock outstanding compared to 82,933,177
shares of Common Stock outstanding at January 1, 1994.
The dividends of $.1 million in 1994 represent dividend requirements
on the 6% Preferred Stock issued in September 1993 while the dividends of $4.1
million in 1993 represent dividend requirements on the 7.5% Preferred Stock and
the Class B Preferred Stock, both of which were converted into Common Stock in
the fourth quarter of 1993.
1993 COMPARED WITH 1992
Net Income. The Company reported net income of $17.3 million or $.17
per share for the year ended January 1, 1994, compared to net income of $1.0
million (before extraordinary items and cumulative effect of accounting change)
or a loss of $.06 per share in 1992. Net income for 1992 after extraordinary
items and cumulative effect of accounting change was $20.2 million or $.44 per
share. Per share amounts are expressed after deducting preferred dividends of
$3.2 million in 1992 and $4.1 million in 1993.
Revenues. Revenues increased 9.5% from $587 million in 1992 to $643
million in 1993. The higher revenues were due to a 10% increase in revenues
relating to continuing catalogs, which include the initial test marketing of
the Sears venture which began in mid-1993 and resulted in the Sears Agreement
in January 1994. Additionally, approximately $47 million of the increase was
generated by the acquisition of GUMP'S, THE COMPANY STORE AND TWEEDSGump's, The Company Store and Tweeds in the
second half of 1993. Revenues from discontinued catalogs were $63 million and
$19.5$20 million in 1992 and 1993, respectively.
Non-Apparel revenues increased 23% from $395 million in 1992 to $484
million in 1993. This increase iswas a result of $38 million of revenues
generated by GUMP'SGump's and THE COMPANY STOREThe Company Store which were acquired in the third
quarter of 1993 and a 14% increase in revenues related to continuing catalogs.
Substantially all of the increase in revenues from continuing catalogs is
related to DOMESTICATIONS, COLONIAL GARDEN KITCHENSDomestications, Colonial Garden Kitchens and TAPESTRY,Tapestry, of which
approximately 40% iswas attributable to the Sears venture. Revenues from
discontinued catalogs (assuming such catalogs were discontinued at the
beginning of 1992) were $10 million and $6.5$7 million in 1992 and 1993,
respectively.
Apparel revenues declined 17% from $192 million in 1992 to $159
million in 1993. Revenues from discontinued catalogs were $53 million and $13
million in 1992 and 1993, respectively, while continuing catalog revenues
declined by 2% from 1992. Additionally, the acquisition of TWEEDSTweeds in the
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fourth quarter of 1993 contributed $9 million to revenues. As discussed below,
the Company is continuing to restructurerestructured its Apparel catalogs.
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The Company mailed approximately 322 million catalogs in 1993, a 13%
increase over 1992, with variations in mailing strategies and volumes amongst
the catalogs. Additionally, the Company was able to increase its average order
size by 9%. Revenues also improved as the Company reduced its order
cancellation and return rates compared to 1992, principally as a result of
improving its in-stock inventory position.
Operating Costs and Expenses. Cost of sales and operating expenses as
a percentage of revenues decreased from 65.1% in 1992 to 63.6% in 1993. The
improvement was attributable to an increase in product margin due to changes in
the sales mix as well as lower inventory markdowns in 1993 and lower shipping
costs due to more efficient shipping methods. Shipping costs were also
positively impacted by fewer split-shipments due to the improved in-stock
inventory position.
Selling expenses increased from 23.6% of revenues in 1992 to 24.6% of
revenues in 1993 and represented an increase of $19.3 million. This increase
was due to lower response rates, related principally to an aggressive customer
acquisition campaign primarily in DOMESTICATIONSDomestications (which increased the size of
its 12 month customer list by 14%) and from the addition of the selling
expenses for the GUMP'SGump's retail store. Selling expenses include catalog
creation and mailing costs and rentals of mailing lists from third parties, as
well as retail selling expenses.
General and administrative expenses represented 8.9% of revenues in
1992 and 1993. Such expenses increased $5.3 million, or 10.2%, from 1992 to
1993, including $5.8 million of expenses for the three companies acquired in
1993. General and administrative expenses were reduced by lower bad debt
expense and lower credit card commissions, offset by increases in merchandise
and marketing personnel.
Income (Loss) from Operations. Income from operations increased from $14.4
million in 1992, or 2.5% of revenues, to $19.1 million in 1993, or 3.0% of
revenues. Income from operations excluding the discontinued catalogs was $24.6
million in 1992 (comprised of $21.9 million and $2.7 million for Non-Apparel
and Apparel, respectively) compared to $26.7 million in 1993 (comprised of
$25.8 million and $.9 million for Non-Apparel and Apparel, respectively). Of
this, the three companies acquired in 1993 generated income from operations of
$3 million. Losses from discontinued catalogs were $9.0 million in 1992
compared to $4.3 million in 1993.
The restructuring of the Apparel catalogs continued in 1993 as the
catalog mix was changed further, with two catalogs being discontinued and the
acquisition of Tweeds. In order to improve operating results, each Apparel
catalog is being more sharply focused on its target audience and overhead and
circulation levels for certain catalogs have beenwere reduced.
Interest and Other Income (Expense). Interest expense decreased
approximately $8.5 million from $13.4 million in 1992 to $4.9 million in 1993,
due to the Company's financial restructuring which began in the fourth quarter
of 1991 and included a debt reduction of $67 million from the beginning of 1992
to the end of 1993. Interest income was $2.2 million in 1993, an increase of
$1.9 million from 1992, due primarily to the interest portion of a Federal
income tax refund received in fiscal 1993.
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Other income of $.9 million in 1993 represents a settlement of a claim
in bankruptcy from a brokerage firm with which the Company had previously had a
contract.
Income Taxes. In 1992 the Company adopted Statement of Financial
Accounting Standards No. 109 - Accounting for Income Taxes ("SFAS 109"). In
accordance with this statement, the Company recognized a deferred tax asset of
$10 million reflecting the cumulative effect of this accounting change for the
estimated future benefit expected to be realized from the utilization of net
operating loss carryforwards ("NOLs") and deductible temporary differences.
The deferred tax asset consisted of a $63 million gross deferred tax asset less
a $53 million valuation allowance that was established to reflect the annual
limitation on the utilization of certain of the NOLs and an
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assumed limitation on the utilization of the remaining deferred tax asset.
Realization of the future tax benefits is dependent on the Company's ability to
generate taxable income within the carryforward period. Future levels of
operating income and taxable income are dependent, in part, upon general
economic conditions, competitive pressures on sales and margins, and other
factors beyond the Company's control.
In 1992 management determined that, based on the successful completion
of the financial restructuring, future operating income of the Company would be
sufficient to utilize $30 million of deductible timing differences and NOLs
prior to their expiration. (See Results of Operations for 1992 Compared with
1991 for additional details). At January 1, 1994, the Company had $147 million of
NOLs and has maintained the $30 million amount of expected future operating
income that will more likely than not utilize the NOLs prior to their
expiration. Management believes that, although the 1993 operating results
might justify a higher amount, in view of its history of operating losses, the
$30 million represents a reasonable conservative estimate of the future
utilization of the NOLs and the Company will continue to evaluate the
likelihood of future profit and the necessity of future adjustments to the
deferred tax asset valuation allowance.
The Federal income tax provision was $5.9 million in 1993 which was
offset by the utilization of certain NOLs. In addition, the Revenue
Reconciliation Act of 1993 raised the 1993 corporate income tax rate from 34%
to 35%, and, as a result, the Company recognized an additional deferred tax
benefit of $.6 million in 1993. In addition, the Company recorded a state tax
provision of $.2 million in 1992 and $.5 million in 1993.
Shareholders' Equity. The number of shares of Common Stock
outstanding increased by 13,396,345 in 1993 due to: i) 1,150,733 shares issued
in connection with the Company's equity and incentive plans, ii) 2,615,928
shares issued in connection with the acquisitions of GUMP'S, THE COMPANY STORE AND
TWEEDS,Gump's, The Company Store
and Tweeds, iii) 2,278,128 shares issued upon the conversion of the 7.5%
Preferred Stock, iv) 18,937,169 shares issued in connection with the exchange
of the Class B Preferred Stock and Class B Common Stock (of which 12,270,503
shares were exchanged) and v) 684,890 shares issued as dividends on the Class B
Preferred Stock. At January 1, 1994, there were 82,933,177 shares of Common
Stock outstanding compared to 69,536,832 shares outstanding at December 26,
1992.
The dividends of $3.2 million in 1992 and $4.1 million in 1993
represent dividend requirements on the two preferred stocks. These preferred
stocks were converted into Common Stock in 1993, which resulted in the
elimination of future dividends.
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20
1992 COMPARED WITH 1991
Net Income. The Company generated net income of $17.1 million, or $.44 per
share, in 1992 compared to a net loss of $65.8 million, or $4.03 per share in
1991. Included in the 1992 net income are $9.2 million of extraordinary gains
resulting from the exchange offers (compared to extraordinary gains of $6.9
million in 1991) and $10 million due to the cumulative effect of the change in
the method of accounting for income taxes. The year ended December 28, 1991
included provisions for losses on disposal of discontinued operations of $21.1
million and restructuring and other non-recurring charges of $15.3 million.
Income (Loss) From Operations. Income from continuing operations improved
$52.1 million from a loss of $51.1 million in 1991 to income of $1 million in
1992. This improvement reflects the impact of the financial restructuring and
operational changes that began in the fourth quarter of 1991 with NAR's
investment in the Company. The financial restructuring has allowed the Company
to eliminate $142.8 million in debt and $40 million of lease obligations and
dispose of its discontinued restaurant operations. Without this cash drain,
the Company's liquidity has significantly improved. The operational changes
included the decentralization of the Company which resulted in a strategic
review throughout the organization of all catalogs, costs and service levels.
As a result, seven catalogs (six Apparel and one Non-Apparel) were discontinued
in late 1991 and early 1992. In 1991 and 1992, these catalogs had a combined
loss from operations of $16.2 and $6.7 million, respectively, on revenues of
$97 million and $25 million, respectively. The elimination of these catalogs
enabled the Company to redirect its resources into its core catalogs, thereby
improving its inventory position for the remaining catalogs and allowing for
investment in infrastructure improvements. Revenues from continuing catalogs
increased approximately $35 million or 7% from 1991 to 1992.
The Company's improved liquidity, as well as the elimination of the
uncertainty as to whether the Company would be able to satisfy its debt
obligations, enabled it to normalize its relationships with vendors. This
resulted in higher inventory receipts on a timely basis which significantly
reduced backorder levels and the associated costs. In addition, net interest
expense was reduced in fiscal 1992 by $5.2 million ($9 million on an annualized
basis) as a result of the debt and equity transactions. These reasons, as well
as the elimination of the $15.3 million of non-recurring restructuring,
transaction and other costs resulted in the significant turnaround in the
Company's operating results.
Revenues. Revenues decreased $37 million, or 5.9%, compared to 1991 as the
Company focused on its profitable catalogs and discontinued seven poorer
performing catalogs in late 1991 and early 1992. Revenues from continuing
catalogs increased 7% from $527 million in 1991 to $562 million in 1992. The
Company mailed approximately 375 million catalogs in 1991 compared to
approximately 285 million in 1992, a 24% decrease, but was able to increase its
average order size and response rates. Revenues were also improved as the
Company reduced its order cancellation and return rates by two percentage
points compared to 1991, principally as a result of the normalization of the
backorder levels which peaked at approximately $58 million in 1991 to a low of
$11 million at the end of 1992.
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Non-Apparel revenues increased 3% from $383 million in 1991 to $395 million
in 1992. Revenues from continuing catalogs increased 7% to $394 million in
1992. Revenues from discontinued catalogs were $15.6 million and $.7 million
in 1991 and 1992, respectively.
Apparel revenues declined 20% from $240 million in 1991 to $192 million in
1992, although revenues from continuing catalogs increased 6% to $168 million.
Revenues of the discontinued catalogs were $82 million and $24 million in 1991
and 1992, respectively.
Operating Costs and Expenses. Cost of sales and operating expenses as a
percentage of revenues decreased from 65.6% in 1991 to 65.1% in 1992, although
gross margin decreased $9.7 million from 1991 to 1992. The improvement in
margin percentage was attributable to reducing shipping costs by one percent of
revenues as there were less split-shipments and other operational
inefficiencies associated with the 1991 backorder situation. Partially
offsetting these improvements was a change in the sales mix from higher margin
fashion merchandise to lower margin home textile merchandise.
Selling expenses decreased $35.9 million in 1992, of which $23 million was
due to lower circulation resulting from discontinuing certain catalogs.
Selling expenses decreased as a percentage of revenues from 28.0% in 1991 to
23.6% in 1992 due to improved customer order response rates and lower paper
costs.
General and administrative expenses decreased $5.4 million, or 9.4%, from
1991 to 1992. Such expenses decreased as a percentage of sales, from 9.2% in
1991 to 8.9% in 1992. The decrease in expense was due to lower bad debt
expense ($1.3 million), lower credit card commissions ($2 million) and reduced
space advertising activity ($2 million). These decreases were partially offset
by increases in consulting and internal development costs for management
information systems and to support the decentralized organization ($2.2
million).
Interest and Other Income (Expense). Interest expense was $13.4 million in
1992, a decrease of $7.1 million over 1991, as a result of debt reduction due
to the rights offering relating to the H&H Common Stock (the "Rights Offering")
and two separate exchange offers for the Company's 14% senior subordinated
debentures due 1997 (the "14% Debentures") and the Company's 7 1/2% convertible
subordinated debentures due 2007 (the "7 1/2% Debentures" and the two exchange
offers being referred to herein as the "Exchange Offers"). Future interest
expense will be reduced on an annualized basis by $9 million, as a result of
this debt reduction. The closing of the transactions in 1991 had the effect of
reducing interest expense due to the retirement of $15.1 million of 7 1/2%
Debentures, the repayment of $5 million of principal amount of 8% Subordinated
Notes due 1994 (the "8% Notes"), as well as a reduction of the interest rate
from 11% to 8% thereon.
Interest income was $.2 million in 1992, a decrease of $1.9 million from
1991. The decrease is due to the Company's overall liquidity position in which
funds were not available to invest in interest bearing instruments.
Extraordinary Items. In 1991, the Company recognized a $6.9 million
extraordinary gain with respect to the retirement of $15.1 million of its 7
1/2% Debentures. The Company recorded extraordinary gains of $9.2 million in
1992 from the exchange of $11.9 million of 7 1/2% Debentures and $23.4 million
of 14% Debentures into equity.
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Income Taxes. At December 26, 1992, the Company had tax NOLs totalling
$142 million, which expire through 2007. Certain transactions the Company
entered into during 1991 resulted in an ownership change with respect to the
Company and, thus, in the imposition of an annual limitation of approximately
$4 million on the amount of future taxable income of the Company which may be
offset by the Company's pre-change NOLs. The Company's available NOLs for tax
purposes consists of $98 million of pre-change NOLs (subject to this
limitation) and $44 million of post-change NOLs (not subject to this
limitation).
SFAS 109 requires that the tax benefit of such NOLs be recorded as an asset
to the extent that management assesses the utilization of such NOLs to be "more
likely than not". The deferred tax asset of $10 million recognized in 1992
consists of a $63 million gross deferred tax asset (principally, the expected
tax benefit of the NOLs discussed above) less a $53 million valuation
allowance.
The Company believes, based upon successful completion of the financial
restructuring, the disposal of unprofitable discontinued operations, the
Company's history of prior operating earnings in its direct marketing business
and its expectations for the future, that the operating income of the Company
will be sufficient to utilize a substantial portion of the NOLs prior to their
expiration. Since the realization of the future tax benefits is dependent on
the Company's ability to generate taxable income within the carryforward period
(through 2007), the Company believes it would be imprudent to record the entire
benefit, based on income projections through 2007, due to the Company's recent
operating losses. The Company does believe that an appropriate measure of its
current earnings level is to adjust its 1992 income before extraordinary gains
of $1 million by $9 million, which represents the annual interest expense on
the debt that has been retired. Using this $10 million income as a base and
three years as a reasonable time frame, income would not have to grow from its
current level in order to generate the $30 million necessary to utilize NOLs
sufficient to realize the $10 million benefit that was recorded in 1992.
Shareholders' Equity. Net income for the year ended December 26, 1992 was
$17.1 million, or $0.44 per share, as compared to a net loss of $65.8 million,
or $4.03 per share in 1991. Net income from continuing operations in 1992 was
$1 million, or a loss of $.06 per share after deducting preferred dividends of
$3.2 million, compared to a net loss of $51.1 million, or $3.16 per share in
1991.
Extraordinary items in 1992 were $9.2 million or $.24 per share, compared
to $6.9 million or $.43 per share in 1991. The cumulative effect of accounting
change for income taxes in 1992 was $10 million, or $.26 per share as compared
to no cumulative adjustment in 1991. For the year ended December 26, 1992
there was no income or loss from discontinued operations compared to a loss of
$21.1 million, or $1.30 per share in 1991.
The number of shares of Common Stock outstanding increased in 1992
principally due to the Rights Offering in which 14,396,798 shares were issued,
the Exchange Offers in which 7,548,465 shares were issued and the exchange of
the preferred stock by NAR for 20 million shares of H&H Common Stock. At
December 26, 1992 there was a total of 69,535,089 shares of H&H Class B Common
and H&H Common Stock outstanding compared to 28,537,471 at December 28, 1991.
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The dividends of $3.2 million in 1992 represent dividend requirements on
the two preferred stocks that were issued in October 1991 and September 1992.
In 1991, the dividend accretion was $.5 million, representing the two months
during which the 8% preferred stock was outstanding in 1991.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $2.6 million and $24.1 million in cash and cash
equivalents at eachthe end of
December 26, 1992 and January 1, 1994.1994 and December 31, 1994, respectively.
Working capital and the current ratio were $25.5$25.2 million and 1.241.23 to 1 at
January 1, 1994 versus $31.6$58.5 million and 1.421.51 to 1 at December 26, 1992.31, 1994.
The Company had substantially paid down its
long-term revolving credit facility at January 1,primary sources of cash in 1994 compared to a balance
of $21.2 million outstanding at December 26, 1992.
The Company generated $28.0 million in cash from operations in 1993. Cash
was used primarily to support increases of i) $12.1were the $49.3 million of inventory as
partproceeds
from the issuance of Common Stock, $10.0 million of proceeds from the Company's strategy to increase its in-stock position at the time
customer orders are received; ii) $5.3 million in prepaid catalog costs to
support the spring mailing activity and iii) $4.2 million in capital
expenditures, primarily for its new management information system, while $21.0
million was used for the paydownissuance
of the Company's revolving credit facility.
These uses of cash were primarily financed bydebt, a $24.5$10.5 million increase in accounts payable, and operating profits.
With the significant improvementCash was used primarily to support increases of: i) $23.9 million in the Company's financial conditioncapital
expenditures, ii) $8.1 million in 1993, it has been successfulinvestments and advances, iii) $6.2 million
in restoring
normal trade terms with its vendors, which has resultedaccounts receivable, and iv) $8.2 million in greater leverage of
its accounts payable.prepaid catalog costs. The
Company also used $8.0 million to pay down various debt obligations during
1994.
The Company experiences seasonality in its working capital
requirements and fluctuations in the revolving credit facility will occur,
usually within the first and fourth quarters of the year.
With the Company's financial restructuring completed and the corresponding
improvement in its financial condition,22
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Public Offering of Common Stock. In April 1994, the Company
focusedconsummated a public offering of 8,045,296 shares of its Common Stock resulting
in 1993 on
refinancing its remainingproceeds net of expenses of approximately $47.5 million. The Company has
used the net proceeds to reduce outstanding indebtedness, simplifying its capital structureto fund certain
infrastructure investments and embarking on a program of investing in infrastructure improvements to support
its growth objectives.
Refinancing of Indebtedness.for general corporate purposes. In May 1993,April 1994,
the Company refinanced its
revolving credit facility that had been previously provided by a subsidiaryrepaid $6 million of NAR with a new three-year $40 million facility with an independent financial
institution. In October 1993, the Company increased the maximum credit
available to $52.5 million to include GUMP'S, THE COMPANY STORE AND TWEEDS as
borrowers under the facility. A subsidiary of NAR has provided a secured
limited guarantee of $10 million which allows the Company to borrow in excess
of its availability based on a formula, up to the facility's limit. This
limited guarantee was reduced by approximately $5.1 million during the fourth
quarter of 1993, and the guarantee will be eliminated in March 1994 based on
the Company's 1993 operating results. At January 1, 1994, the Company's
borrowing base formula would have enabled the Company to borrow approximately
$40 million, compared to the $.2 million that was outstanding.
In August 1993, the Company issued $20 million of 9.25% Senior Subordinated
Notes ("and paid down
the 9.25% Notes") in a private placement with an insurance company.
The Company retired its outstanding $12.4 million of 8% Notes that were due in
October 1994 and $.8 million of its 14% Notesthen existing revolving credit facility using the proceeds of the 9.25%
Notes, with the remainder to be used for the purchase of additional fulfillment
and warehouse capacity. The Company is
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required to redeem $6 million of the 9.25% Notes without penalty by February
15,public
offering.
Infrastructure Investments. In 1994, (subsequently amended to May 1, 1994) if the Company has not
established or acquiredsubstantially
completed the construction of a new distribution facility by such date.
In 1993, the Company acquired three companies for $.1 million of its own
cash, $4.6 million of debt and $12.3 million of Common Stock. In addition, the
Company has agreed to provide an aggregate of up to $4 million of secured
working capital financing, a $.75 million short-term loan and a $.5 million
convertible note to two entities in which it has acquired an equity interest.
Simplification of Capital Structure. In September 1993, through a series
of mergers involving H&H and THC, the Company changed its name to Hanover
Direct, Inc. and eliminated its two-tier holding company structure.
On December 13, 1993, the Company converted its 7.5% Preferred Stock into
2,278,128 shares of Common Stock. The holders of the 7.5% Preferred Stock were
paid all accrued and unpaid dividends in cash amounting to $197,000. On
January 1, 1994, 12,270,503 shares of Class B Common Stock and 40,000 shares of
Class B Preferred Stock were exchanged into 18,937,169 shares of Common Stock.
All accrued and unpaid dividends amounting $886,000 were paid in cash in
February 1994. As a result of these transactions, the Company has eliminated
approximately $4 million of future annual preferred stock dividend
requirements.
On December 10, 1993, the Company issued 234,900 shares of its 6.0% Series
A Preferred Stock (6.0% Preferred Stock) for an installment note in the amount
of $2.4 million that it had assumed in its acquisition of Tweeds.
As a result of these transactions, the Company's capital structure consists
of 82,933,177 shares of Common Stock and 234,900 shares of 6.0% Preferred Stock
at January 1, 1994.
Infrastructure Investments. To improve its infrastructure to support its
growth objectives, the Company intends to construct a new 500,000 square foot fulfillment center costing approximately $18 millionon a 53 acre site in
Roanoke, Virginia to primarily support the DOMESTICATIONS business and has acquired a 50% interest in a
partnership which owns the 175,000 square foot TWEEDS fulfillmentDomestications catalog. The center
into
whichis projected to cost $17 million. As of December 31, 1994, the Company plans to consolidate its Apparel group.
Additionally, the Company is currentlyhad
incurred costs of approximately $12.4 million in the processconstruction of this
facility. The Company began partial shipping and receiving activities in the
first quarter of 1995 and anticipates that the facility will be fully
operational in the second half of 1995. The Company expects that its
operating margins will be negatively impacted in the first half of 1995 as it
incurs costs in connection with the start-up and relocation of distribution
activities to the facility in Roanoke, Virginia and the consolidation of other
facilities.
The Company is upgrading its management information systems by implementing new integrated software which it
expects to be fully operational in 1995 and is migrating from a centralized
mainframe to mid-range mini-computers at a total
cost estimated cost ofto be approximately $13 to $15 million. The new system began
successful operation in two of the Company's catalogs during the second half of
1994 and the Company expects the roll out of the system to the rest of its
catalogs through early 1996. The Company expects to incur certain duplicate
system costs during a period in 1995 as they transition to the new computer
system. As of January 1,December 31, 1994, the Company hashad incurred costs of
approximately $5.3$9.1 million as part of this plan, including capitalcapitalized leases
aggregating $2.4 million and internal costs of $1.7 million related to
be paid over four years.
Public Offeringproduction of Shares. On February 18,this new system that have been capitalized. The Company will
begin to amortize all system costs as the system becomes operational in 1995.
As of December 31, 1994, the Company filedwas concluding the construction
of the new Gump's retail store and began operation of the new store in March
1995. As of December 31, 1994, the Company had incurred costs of approximately
$6.1 million for this store. The total estimated cost of the project is
approximately $8 million.
Financing. The Company entered into a registration statementnew $80 million credit facility
(the "Credit Facility") during the fourth quarter of 1994. This agreement
replaces the $52.5 million secured revolving working capital facility
previously in place. The Company obtained funding of approximately $10 million
in November 1994 and intends to draw an additional $10 million in 1995 under
the Credit Facility. As part of the Credit Facility, $20 million of the $80
million is reserved for making future acquisitions (the "Acquisition Facility")
and an additional $20 million is reserved for funding capital expenditures. As
of December 31, 1994, the total amount outstanding under the Credit Facility
was $10 million. The Company expects to experience lower financing costs in
the future as a result of the Credit Facility.
The Credit Facility requires the Company to maintain certain financial
covenants on Form S-3a quarterly basis. The Company and the Lenders under the Credit
Facility have amended the applicable agreements to, among other things, ease
the requirements in certain financial covenants, increase the interest rate
payable by the Company under certain circumstances and require the Lenders
initial consent for certain investments and acquisitions.
The indenture under which the $14 million of the 9.25% Notes were
issued also requires the Company to maintain certain financial covenants on a
quarterly basis. As of December 31, 1994, the Company was not in compliance
with one of the Securitiescovenants under these 9.25% Notes, for which it has received a
waiver from the holder of the notes. The Company and Exchange Commission
registering 10the holder of the Notes
have amended the covenants in the Indenture to reduce certain financial
standards contained in the covenants. The covenants will revert in the first
quarter of 1996 to those in effect prior to the amendment.
23
24
The Company's $75 million sharesagreement related to the sale and servicing
of accounts receivable originating from the Company's revolving credit card is
expected to be renegotiated by December 1995. The Company has begun
negotiations with several parties and anticipates that any new agreement would
generate improved cash flows and cost savings.
The Company believes that is has sufficient capital to support the
growth of its Common Stock, including 4,154,604 shares
on behalfbusiness and infrastructure investments.
Investments and Acquisitions. In 1994, the Company invested in debt
and equity securities of two selling shareholders. The net proceeds from the offering with
respectcompanies and also made cash advances to the Company's shares will be used for general corporate purposes,
including the expansionone of
the Company's business.
23
25
Thecompanies. As of December 31, 1994, these investments and advances include
$2.7 million of convertible debt securities of Regal Communications, Inc.
("Regal") and $2.3 million of advances to Boston Publishing Company, plans to fund the remaining infrastructure costs through cash
generated from operations, the proceedsInc.
("BPC") which are carried at net realizable values of $1.7 million and $1.2
million, respectively, at December 31, 1994. During 1994, both Regal and BPC
filed for protection under Chapter 11 of the Common Stock offering and,
possibly, obtaining mortgage financing. TheUnited States bankruptcy laws.
While the Company believes that it has adequate sourcesrecorded a conservative estimate of financingthe
realizable value of these assets, certain actions of the bankruptcy proceedings
are outside the control of the Company and future events could occur that would
require the Company to servicere-evaluate the assets.
In January 1995, the Company purchased substantially all of the assets
of Leichtung, Inc. for approximately $12 million in cash and the assumption of
certain liabilities.
In February 1995, the Company acquired Aegis Safety Holdings, Inc.
("Aegis") for 634,900 shares of Class B Convertible Preferred Stock that has a
stated value of $6.3 million. The Company had previously owned 20% of the
outstanding common stock of Aegis.
In March 1995, the Company entered into an agreement, by which, upon
closing of the transaction, it agreed to make an $8 million investment in Tiger
Direct, Inc. ("Tiger") and provide certain strategic services to Tiger. The
Company can increase its investment to $17.7 million upon the conversion of: i)
a debenture or preferred stock, ii) the interest or dividends on such
convertible instruments and iii) exercisable warrants. The Company would
increase its ownership percentage to 42% if all of the above are converted into
Tiger common stock. The Company anticipates using the Acquisition Facility to
fund this investment. The Company is also providing a temporary short-term
secured working capital requirements.line of credit to Tiger up to a maximum of $3 million.
All outstanding short-term indebtedness related to this facility will be repaid
when the transaction closes or one year from the date the purchase agreement
is terminated.
The Company continues to analyze other potential acquisitions of
catalog companies and currently intends to use substantially all of the $20
million Acquisition Facility.
Effects of Inflation.Inflation and Cost Increases. The Company normally
experiences increased costcosts of sales and operating expenses as a result of the
general rate of inflation in the economy. Operating margins are generally
maintained through selective price increases where market conditions permit.
The Company's inventory is mail-ordermailorder merchandise which undergoes sufficiently
high turnover so that the costcosts of goods sold approximates replacement cost.
Because sales are not dependent upon a particular supplier or product brand,
the Company can adjust product mix to mitigate the effects of inflation on its
overall merchandise base.
The Company mails its catalogs and ships most of its merchandise
through the United States Postal Service ("USPS"), with catalog mailing and
product shipment expenses representing approximately 16% of revenues in 1994.
In January 1995, the USPS increased postage rates by approximately 14% to 18%.
The Company is also experiencing record price increases in 1995 for paper that
is used in the production of its catalogs as the paper industry has announced a
series of significant increases. Paper costs represented approximately 7% of
revenues in
24 25
1994. These cost increases and the duplicate costs associated with the
consolidation of the distribution facilities and the transition to the new
system discussed earlier will adversely impact the Company's margins and
earnings particularly in the first half of 1995.
As a result, the Company has implemented a plan to reduce its expense
structure by $8 million through overhead reductions and consolidation of
warehouse facilities. The Company also expects to reduce catalog circulation
from 1994 levels and to increase the productivity of the mailings.
25
26
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Hanover Direct, Inc.:
We have audited the accompanying consolidated balance sheets of
Hanover Direct, Inc. (a Delaware corporation) (successor to The Horn & Hardart
Company, see Note 1 to the Consolidated Financial Statements) and subsidiaries
as of December 26, 1992 and January 1, 1994 and December 31, 1994, and the related consolidated
statements of income, (loss), shareholders' (deficit) equity and cash flows for each of
the three fiscal years in the period ended January 1,December 31, 1994. These financial
statements and the schedulesschedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules referred to belowschedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Hanover Direct,
Inc. and subsidiaries as of December 26, 1992 and January 1, 1994 and December 31, 1994, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended January 1,December 31, 1994 in conformity with generally
accepted accounting principles.
As discussed in Notes 1 and 10 to the Consolidated Financial Statements,
effective December 29, 1991 the Company changed its method of accounting for
income taxes.
Our audits were made for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedulesschedule listed in the index
to financial statement schedules areschedule is presented for purposes of complying with the
Securities and Exchange Commission's rules and areis not part of the basic
financial statements. These schedules haveThe schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly statestates in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN & CO.LLP
New York, New York
February 28, 1994
2521, 1995
26
27
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 26, 1992 and January 1, 1994 and December 31, 1994
DECEMBER 26, JANUARY 1, 1992DECEMBER 31,
1994 ----------- ---------1994
---------- ------------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,5532,583 $ 2,58324,053
Accounts receivable, net of allowance for doubtful
accounts of $2,892 in
1992 and $2,509 in 1993 22,840and $2,730 in 1994 19,043 25,247
Inventories 58,270 80,429 83,653
Prepaid catalog costs 25,571 33,725
Deferred tax asset, net 2,800 2,975 Prepaid catalog costs 18,277 25,5713,200
Other current assets 2,058 2,3741,858 2,658
-------- --------
Total Current Assets 106,798 132,975132,459 172,536
-------- --------
Property and Equipment, at cost
Land 205 1,171 1,917
Buildings and building improvements 4,462 7,862 7,994
Leasehold improvements 5,696 6,242 6,807
Furniture, fixtures and equipment 16,309 22,551 24,103
Construction in progress - 5,4343,042 21,358
-------- --------
26,672 43,26040,868 62,179
Accumulated depreciation and amortization (15,761) (18,341) (19,708)
-------- --------
Net
Property and Equipment, 10,911 24,919net 22,527 42,471
-------- --------
Excess of Cost Over Net Assets of
Acquired Businesses,Goodwill 18,463 19,026
Deferred tax asset, net 8,710 18,463
Deferred Tax Asset,7,656 11,800
Investments and advances - 6,000
Other assets, net 7,200 7,656
Other Assets, net 733 4,8257,733 10,413
-------- --------
Total Assets $134,352 $188,838 $262,246
======== ========
See Notes to Consolidated Financial Statements.
2627
28
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
As of January 1, 1994 and December 31, 1994
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
As of December 26, 1992 and January 1, 1994 DECEMBER 26, JANUARY 1, 1992DECEMBER 31,
1994 1994
---------- ------------ ----------
(IN THOUSANDS, EXCEPT SHARE AND PER
SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Current portion of long-term debt and capital
lease obligations $ 732,024 $ 2,024812
Accounts payable 49,741 78,905 Dividends payable - 88689,366
Accrued liabilities 21,363 20,65321,319 20,215
Customer prepayments and credits 4,055 5,031 3,642
--------- -----------------
Total Current Liabilities 75,232 107,499107,279 114,035
--------- -----------------
Noncurrent Liabilities:
Long-term debt 43,184 32,313 35,907
Capital lease obligations 105 1,823 1,196
Other 2,747 1,3351,555 1,383
--------- -----------------
Total Noncurrent Liabilities 46,036 35,47135,691 38,486
--------- -----------------
Total Liabilities 121,268 142,970 152,521
--------- --------
Commitments and Contingencies
Preferred Stock:
7.5% cumulative, convertible, $.01 par
value, authorized 861,900 shares;
issued 529,114 shares in 1992 6,526 -
Class B 8% cumulative, convertible,
$.01 par value, authorized and issued
40,000 shares in 1992 26,316 -
---------
--------
Total Preferred Stock 32,842 -
--------- --------
Shareholders' (Deficit) Equity:
6% Preferred Stock, convertible, $10 stated value,
authorized 5,000,000 shares; issued 234,900 shares
in 1993 - 2,378
Class B Common Stock, $.01 par value,
authorized and issued 12,270,503156,600 shares in 1992 123 -1994 2,378 1,589
Common Stock, $.66 2/3 par value, authorized
150,000,000 shares; issued 58,154,584 shares
in 1992 and 83,136,542 shares in
1993 38,774and 92,978,234 shares in 1994 55,423 61,985
Capital in excess of par value 178,149 209,834 253,210
Accumulated deficit (229,049) (215,805) (201,102)
--------- --------
(12,003)---------
51,830 115,682
Less:
Treasury stock, at cost (2,169,713(1,120,032 shares in 19921993
and 1,120,0321,157,061 shares in 1993) (7,170)1994) (3,130) (3,345)
Notes receivable from sale of Common Stock - (1,774) (1,912)
Deferred compensation (585) (1,058) (700)
--------- -----------------
Total Shareholders' (Deficit) Equity (19,758) 45,868 109,725
--------- -----------------
Total Liabilities and Shareholders' (Deficit)
Equity $ 134,352 $188,838188,838 $262,246
========= ========
See Notes to Consolidated Financial Statements.
2728
29
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(LOSS)
For The Years Ended December 28, 1991, December 26, 1992, and January 1, 1994 and December 31, 1994
1991 1992 1993 --------1994
--------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUES $623,650 $586,562 $642,511 $768,884
-------- -------- --------
Operating costs and expenses:
Cost of sales and operating expenses 409,098 381,716 408,387 486,477
Selling expenses 174,401 138,494 157,811 197,436
General and administrative expenses 57,329 51,950 57,237 Restructuring expenses 8,90068,996
-------- -------- --------
572,160 623,435 752,909
-------- -------- --------
INCOME FROM OPERATIONS 14,402 19,076 15,975
Interest expense (13,379) (4,925) (3,544)
Interest income 244 2,168 731
Other income (expense) - 888 (1,833)
-------- -------- --------
Income before income taxes 1,267 17,207 11,329
Income tax provision (benefit) 219 (130) (3,509)
-------- -------- --------
Income before extraordinary items and
cumulative effect of accounting change 1,048 17,337 14,838
Extraordinary items 9,201 - -
Cumulative effect of accounting change for
income taxes 10,000 - -
-------- -------- --------
649,728 572,160 623,435
-------- -------- -------NET INCOME (LOSS) FROM OPERATIONS (26,078) 14,402 19,076
Interest expense (20,525) (13,379) (4,925)
Interest income 2,184 244 2,168
Other income (expense) (6,437) - 88820,249 17,337 14,838
Preferred stock dividends (3,197) (4,093) (135)
-------- -------- --------
IncomeNet income applicable to Common
Shareholders $ 17,052 $ 13,244 $ 14,703
======== ========= ========
Net income (loss) from continuing operations
before income taxes (50,856) 1,267 17,207
Income tax provision (benefit) 225 219 (130)
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS (51,081) 1,048 17,337
Provision for loss on disposal of
discontinued operations (21,119) - -
-------- -------- --------per share:
Income (loss) before extraordinary items
and cumulative effect of accounting change (72,200) 1,048 17,337$ (0.06) $ 0.17 $ 0.16
Extraordinary items 6,915 9,2010.24 - -
Cumulative effect of accounting change for
income taxes 0.26 - 10,000 -
-------- -------- --------
NET INCOME (LOSS) (65,285) 20,249 17,337
Preferred stock dividends (466) (3,197) (4,093)
-------- -------- --------
Net income (loss) applicable to Common
Shareholders $(65,751) $ 17,052 $ 13,244
======== ======== ========
Net income (loss) per share:
Income (loss) from continuing operations $ (3.16) $ (0.06) $ 0.17
(Loss) from discontinued operations (1.30) - -
-------- -------- --------
Income (loss) before extraordinary items
and cumulative effect of accounting change (4.46) (0.06) 0.17
Extraordinary items 0.43 0.24 -
Cumulative effect of accounting change for
income taxes - 0.26 -
-------- -------- --------
Net income (loss) per share $ (4.03) $ 0.44 $ 0.17 $ 0.16
======== ======== ========
See Notes to Consolidated Financial Statements.
2829
30
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 28, 1991, DECEMBER 26, 1992, AND JANUARY 1, 1994
(in thousands, except share amounts)
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 26,1992, JANUARY 1, 1994, AND DECEMBER 31,1994
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Preferred Stock Preferred Stock Preferred Stock
Class B 8% Cumulative 7.5% Cumulative Series A, 6.0%
Shares Amount Shares Amount -----------------------------------------------------Shares Amount
-----------------------------------------------------------------
Balance at December 29, 1990 0 $0 0 $0
Net loss for the year
Issuance of warrants
Executive employment contracts
Shares to 401k savings plan
Payment on notes receivable
Issuance of Class B Common Stock
Amortization of deferred compensation
Termination of Employee Stock Ownership
Plan
-----------------------------------------------------
Balance at December 28, 1991 0 $0 0 $0 0 $0
Net income for the yearapplicable to common shareholders
Issuance of Common Stock to and redemption of
Class B Common Stock by NAR
Issuance of Class B Common Stock
Amortization of deferred compensation
Issuance of Common Stock in
connection with Rights Offering
14% Exchange Offer
7 1/2%7.5% Exchange Offer
Stock Dividend to NAR
Issuance of Common Stock
Transfer of ESOP shares to treasury
----------------------------------------------------------------------------------------------------------------------
Balance at December 26, 1992 0 $0 0 $0 0 $0
Net income applicable to common shareholders
Mergers of H&H & H & THC into Hanover Direct, Inc. 40,000 25,516 569,532 7,158
Exchange of Class B 8%8 % Preferred and Common Stock (40,000) (25,516)
Conversion of 7.5% Preferred Stock (569,532) (7,158)
Issuance of Preferred Stock 234,900 2,342
Stock dividends 36
Amortization of deferred compensation
Issuance of Common Stock
----------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1994 0 $0 0 $0 =====================================================234,900 $2,378
Net income applicable to common shareholders
Exercise of warrants
Shares issued in Stock Offering
Preferred stock dividends (6)
Conversion of one-third of the 6% Preferred Stock (78,300) (783)
Conversion of note payable
Issuance of Common Stock for Employee Benefit Plans, net
-----------------------------------------------------------------
Balance at December 31, 1994 0 $0 0 $0 156,600 $1,589
=================================================================
Preferred StockCapital
Class B Common Stock Series A, 6.0%Common Stock in Excess
$.01 par value $.66 2/3 par value of Par
Shares Amount Shares Amout
----------------------------------------------------Amount Value
-----------------------------------------------------
Balance at December 29, 1990 0 $0 0 $0
Net loss for the year
Issuance of warrants
Executive employment contracts
Shares to 401k savings plan
Payment on notes receivable
Issuance of Class B Common Stock 13,333,334 133
Amortization of deferred compensation
Termination of Employee Stock Ownership
Plan
----------------------------------------------------
Balance at December 28, 1991 0 $0 13,333,334 $133 16,094,321 $10,728 $135,612
Net income for the yearapplicable to common shareholders
Issuance of Common Stock to and redemption of
Class B Common Stock by NAR (13,333,334) (133) Issuance of Class B Common Stock 12,270,503 123
Amortization of deferred compensation
Issuance of Common Stock in
connection with Rights Offering
14% Exchange Offer
7 1/2% Exchange Offer
Stock Dividend to NAR
Issuance of Common Stock
Transfer of ESOP shares to treasury
----------------------------------------------------
Balance at December 26, 1992 0 $0 12,270,503 $123
Net income
Mergers of H&H & THC into Hanover Direct, Inc.
Exchange of Class B 8% Preferred and Common Stock (12,270,503) (123)
Conversion of 7.5% Preferred Stock
Issuance of Preferred Stock 234,900 2,342
Stock dividends 36
Amortization of deferred compensation
Issuance of Common Stock
--------------------------------------------------
Balance at January 1, 1994 234,900 $2,378 0 $0
==================================================
Capital
Common Stock in Excess
$.66 2/3 par value of par Accum. Treasury Stock
Share Amount Value (Deficit) Shares Amount
-----------------------------------------------------------------------------------
Balance at December 29, 1990 14,812,863 $9,874 $124,228 ($180,350) (900,943) ($7,865)
Net loss for the year (65,751)
Issuance of warrants 3,286
Executive employment contracts 1,281,458 854 6,287 (1,281,458) (3,845)
Shares to 401k savings plan (56) 12,502 109
Payment on notes receivable
Issuance of Class B Common Stock 1,867
Amortization of deferred compensation
Termination of Employee Stock
Ownership Plan
-----------------------------------------------------------------------------------
Balance at December 28, 1991 16,094,321 $10,728 $135,612 ($246,101) (2,169,899) ($11,601)
Net income for the year 17,052
Issuance of Common Stock to and
redemption of Class B Common
Stock by NAR 20,000,000 13,334 24,146
Issuance of Class B Common Stock 12,270,503 123 410
Amortization of deferred compensation
Issuance of Common Stock in
connection with Rights Offering 14,396,798 9,603 11,086
14% Exchange Offer 4,099,625 2,733 5,123
7 1/2%7.5% Exchange Offer 3,448,840 2,299 5,773
45,006 393
Stock Dividend to NAR (3,764) 601,233 5,249
Issuance of Common Stock 115,000 77 (237)
Transfer of ESOP shares to treasury
(646,053) (1,211)
----------------------------------------------------------------------------------------------------------------------------------------
Balance at December 26, 1992 12,270,503 $123 58,154,584 $38,774 $178,149
($229,049) (2,169,713) ($7,170)
Net income 13,244applicable to common shareholders
Mergers of H&H & H & THC into Hanover Direct, Inc.
Exchange of Class B 8%8 % Preferred and Common Stock (12,270,503) (123) 18,937,169 12,625 13,014
Conversion of 7.5% Preferred Stock 2,278,128 1,519 5,639
Issuance of Preferred Stock
Stock dividends (438)
684,890 2,946
Amortization of deferred compensation
Issuance of Common Stock 3,766,661 2,505 13,470
364,791 1,094
---------------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1994 0 $0 83,136,542 $55,423 $209,834
($215,805) (1,120,032) ($3,130)
==================================================================================
Net income applicable to common shareholders
Exercise of warrants 1,309,207 873 (873)
Shares issued in Stock Offering 8,045,296 5,364 42,136
Preferred stock dividends
Conversion of one-third of the 6% Preferred Stock 189,818 126 657
Conversion of note payable 13,945 9 162
Issuance of Common Stock for Employee Benefit Plans, net 283,426 190 1,294
-----------------------------------------------------
Balance at December 31, 1994 0 $0 92,978,234 $61,985 $253,210
=====================================================
Notes
Receivable
From Sale
Accum. Treasury Stock of Common Deferred
(Deficit) Shares Amount Stock Comp. Total
----------------------------------------------------------------------------------------------------
Balance at December 29, 1990 ($270) ($7,101) ($61,484)
Net loss for the year (65,751)
Issuance of warrants 3,286
Executive employment contracts (1,297) 1,999
Shares to 401k savings plan 53
Payment on notes receivable 270 270
Issuance of Class B Common Stock 2,000
Amortization of deferred compensation 1,145 1,145
Termination of Employee Stock
Ownership Plan 4,850 4,850
----------------------------------
Balance at December 28, 1991 ($246,101) (2,169,899) ($11,601) $0 ($2,403) ($113,632)
Net income for the yearapplicable to common shareholders 17,052 17,052
Issuance of Common Stock to and redemption of
Class B Common Stock by NAR 37,347
Issuance of Class B Common Stock 533
Amortization of deferred compensation 607 607
Issuance of Common Stock in
connection with Rights Offering 20,689
14% Exchange Offer 7,856
7 1/2%7.5% Exchange Offer 45,006 393 8,465
Stock Dividend to NAR 601,233 5,249 1,485
Issuance of Common Stock (160)
Transfer of ESOP shares to treasury (646,053) (1,211) 1,211 0
-----------------------------------------------------------------------------------------------------
Balance at December 26, 1992 ($229,049) (2,169,713) ($7,170) $0 ($585) ($19,758)
Net income applicable to common shareholders 13,244 13,244
Mergers of H&H & H & THC into Hanover Direct, Inc. 32,674
Exchange of Class B 8%8 % Preferred and Common Stock 0
Conversion of 7.5% Preferred Stock 0
Issuance of Preferred Stock 2,342
Stock dividends 684,890 2,946 2,544
Amortization of deferred compensation 599 599
Issuance of Common Stock 364,791 1,094 (1,774) (1,072) 14,223
-----------------------------------------------------------------------------------------------------
Balance at January 1, 1994 ($215,805) (1,120,032) ($3,130) ($1,774) (1,058)($1,058) $45,868
==================================Net income applicable to common shareholders 14,703 14,703
Exercise of warrants 0
Shares issued in Stock Offering 47,500
Preferred stock dividends (6)
Conversion of one-third of the 6% Preferred Stock 0
Conversion of note payable 171
Issuance of Common Stock for Employee Benefit Plans, net (37,029) (215) (138) 358 1,489
-------------------------------------------------------------------
Balance at December 31, 1994 ($201,102) (1,157,061) ($3,345) ($1,912) ($700) $109,725
===================================================================
See Notes to Consolidated Financial Statements
29
31
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years ended December 28, 1991,Ended December 26, 1992, and January 1, 1994 and December 31, 1994
1991 1992 1993 --------1994
--------- -------- --------
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($65,285) $20,249 $17,337. . . . . . . . . . . . . . . . . . . . . . $ 20,249 $ 17,337 $ 14,838
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization ......... 11,568. . . . . . . . . . . 5,188 4,122 Noncash portion of loss provision...... 19,516 - -6,499
Noncash portion of extraordinary gains. (6,915). . . . . . (9,201) - -
Noncash portion of cumulative effect of an
accounting change.............. -change . . . . . . . . . . . . . . . . (10,000) - Noncash portion of ESOP termination.... 4,734-
Provision for losses on notes receivable and
marketable securities . . . . . . . . . . . . . . - - Noncash portion of contract settlement. 2,6522,121
Deferred transaction costs . . . . . . . . . . . . - - (837)
Deferred taxes......................... -taxes . . . . . . . . . . . . . . . . . . - (631) (4,369)
Other, net............................. 216net . . . . . . . . . . . . . . . . . . . . 368 (33) 43
Changes in assets and liabilities, net of effects of
acquired businesses and dispositions of assets:
Payment for repurchase of mail order customer
receivables..............receivables . . . . . . . . . . . . . . . . . . . (35,301) - (35,301) -
Net proceeds from sale of mail order
customer receivables.................. 11,332receivables . . . . . . . . . . . . . . 37,008 - -
Accounts receivable, net............... (4,427)net . . . . . . . . . . . . . 13,321 8,907 Inventories............................ 10,662(6,204)
Inventories . . . . . . . . . . . . . . . . . . . . (9,854) (12,081) (3,424)
Prepaid catalog costs.................. 12,606costs . . . . . . . . . . . . . . . 9,470 (5,305) (8,154)
Other current assets................... 3,254assets . . . . . . . . . . . . . . . (671) 282 (1,220)
Accounts payable....................... (23,937)payable . . . . . . . . . . . . . . . . . (17,292) 24,530 10,518
Accrued liabilities.................... (9,811)liabilities . . . . . . . . . . . . . . . . (12,821) (10,650) 185
Dividend payable....................... -payable . . . . . . . . . . . . . . . . . - 886 -
Customer prepayments and credits....... -credits . . . . . . . . . (3,508) 684 ------- ------- -------(1,389)
-------- -------- ---------
Net cash provided (used) by operating activities............................... (33,835)activities . . . (13,044) 28,048 ------- ------- ------8,607
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash.............. 557cash . . . . . . . . . . . . . 5,765 - -
Acquisitions of property and equipment... (1,320)equipment . . . . . . . (1,431) (4,239) (23,856)
Purchase of businesses...................businesses . . . . . . . . . . . . . . . - (100) - (100)
Net proceeds from sales of property...... 3,025property . . . . . . . . . 17,256 - -
Purchase of convertible debt securities . . . . . . . - - (2,693)
Investments in affiliates . . . . . . . . . . . . . . - - (3,183)
Advances . . . . . . . . . . . . . . . . . . . . . . - - (2,300)
Other, net............................... (647)net . . . . . . . . . . . . . . . . . . . . . - (313) ------- ------- -------(3,293)
-------- --------- --------
Net cash provided (used) by investing activities................................ 1,615activities . . . 21,590 (4,652) ------- ------- -------(35,325)
-------- --------- --------
See Notes to Consolidated Financial Statements.
3031
32
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
For The(CONTINUED)
Years Ended December 28, 1991,ended December 26, 1992, and January 1, 1994 and December 31, 1994
1991 1992 1993 1994
-------- --------- ----------------- --------
(IN THOUSANDS)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under revolving credit facility . . . . . . . . . . . . . . . . . $ - $(20,965) $ - $ (20,965)(230)
Proceeds from issuance of debt . . . . . . . 21,602. . . 9,583 20,000 10,000
Net proceeds from issuance of Preferred
Stock and Class B Common Stock . 29,281. . . . . . . . 27,533 - -
Payments of long-term debt and capital lease
obligations . . . . . . . . . . . . (18,060). . . . . . . (68,720) (19,856) (8,015)
Proceeds from Rights Offering . . . . . . . . . . . 19,748 - 19,748 -
Cash dividends paid . . . . . . . . . . . . - - (890)
Payment of debenture issuance costs . . . . (2,665) (825) - (890) (1,027)
Payment of debt issuance costs . . . . . . . - -. . . (825) (1,560) Loan to ESOP.(1,458)
Repurchase of Common Stock . . . . . . . . . . . . . . . . (1,050) - - (215)
Proceeds from issuance of Common Stock . . . -. . . - 912 49,305
Other, net . . . . . . . . . . . . . . . . . (1,593). . . - (1,007) (172)
-------- ----------- ------------------ --------
Net cash provided (used) by financing activities . . . . . . . . . . . . . . . . . . 27,515 (12,681) (23,366) 48,188
-------- ----------- ------------------ --------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . (4,705). . . (4,135) 30 21,470
Cash and cash equivalents at the beginning of
the year . . . . . . . . . . . . . . . . . 11,393. . . . 6,688 2,553 2,583
-------- ----------- ------------------ --------
Cash and cash equivalents at end of the year . . . . . . . . . . . . . . . . . . . . . $ 6,688 $ 2,553 $ 2,583 $ 24,053
======== =========== ================== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid . . . . . . . . . . . . . . . $ 21,325. . . . $ 12,547 $ 4,883 $ 2,923
Income taxes paid . . . . . . . . . . . . . 755 226 71
Issuance of warrants . . . . . . . . . . . . 3,286 - -$ 226 $ 71 $ 701
See Notes to Consolidated Financial Statements.
3132
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 28, 1991, DECEMBER 26, 1992, AND JANUARY 1, 1994 AND DECEMBER 31, 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Merger - Hanover Direct, Inc. ("HDI") was formed in connection with
the September 8, 1993 merger (the "Merger") involving HDI, The Horn & Hardart
Company ("H&H") and The Hanover Companies ("THC"), a wholly-owned subsidiary of
H&H. The Merger consisted of the merger of H&H into HDI, followed by the
merger of THC into HDI. The purpose of the Merger was to create a single
corporation to replace the then-existing two-tier structure whereby H&H and THC
were both subject to the filing requirements of Section 13 of the Securities
Exchange Act of 1934, as amended. The financial statements of THC had previously been
included in the consolidated financial statements of H&H.
The Merger was consummated by (i) the exchange to holders of shares of
H&H Common Stock shares of HDI Common Stock, (ii) the exchange to holders of
shares of THC 7.5% Preferred Stock shares of HDI's 7.5% Preferred Stock, and
(iii) the exchange to holders of shares of THC Class B Preferred Stock shares
of HDI's Class B Preferred Stock, each such distribution being on a one-for-
one-basis.one-
for-one-basis.
The Merger was accounted for similarly to a pooling-of-interests and,
accordingly, HDI's Consolidated Financial Statements include the results of H&H
and THC for all applicable periods presented.
Principles of Consolidation - The Consolidated Financial Statements
include the accounts of HDI and all subsidiaries (the "Company"). Intercompany
transactions and balances have been eliminated. Certain prior year amounts
have been reclassified to conform to the current year presentation.
Fiscal Year - The Company operates on a 52/53 - week fiscal year. The
years ended December 28, 199126, 1992 and December 26, 199231, 1994 were 52 - week years. The
year ended January 1, 1994 was a 53 - week year.
Inventories - Inventories consist principally of merchandise held for
resale and are stated at the lower of cost or market. Cost is determined using
the first-in, first-out (FIFO) method.
Prepaid Catalog Costs - Costs related to mail order catalogs and
promotional material are amortized over their estimated productive lives, based
on projected net shipments, not
exceeding six months.
Depreciation and Amortization - Depreciation and amortization of
property and equipment are provided on the straight-line method at rates based
onover the
lesser of the estimated useful lives of the assets or terms of leases as
follows:following lives: buildings and building improvements, 30 years; furniture,
fixtures and equipment, 3-10 years; and leasehold improvements, over the lower
of the estimated useful lives or the terms of the related leases. Expenditures
for maintenance and repairs are charged to operations as incurred; major
improvements are capitalized.
ConstructionPurchased software costs of $3.6 million at December 31, 1994 included
in Progress - Construction in progress includesrelate to the costs to upgrade the Company's new management information
systems. TheseCapitalized development costs of $5.5 million are included in Other
assets as of December 31, 1994. All such costs will be depreciated and amortized over a five
years or the life of any leases,
whichever is shorter, and depreciation will commenceyear period commencing in 1995 when the assets are placed
in service. The Company capitalized $5.3 million of such costs as of January
1, 1994.
32
34
Excess of Cost Over Net Assets of Acquired Businessessystem is operational.
Goodwill - Excess of cost over the net assets of acquired businesses
is being amortized on a straight-line basis over periods up to forty years.
Accumulated amortization was $3,458,000$3.9 million and $3,878,000$4.5 million at December 26, 1992 and January 1, 1994
and December 31, 1994, respectively. On an on-going basis, the Company
assesses the carrying value and the economic useful life of the goodwill based
on the acquired businesses' prior and future operating results and estimated
net cashflows.
33
34
Mailing Lists - The costs of acquired mailing lists are amortized
over a five year period. Mailing lists, included in Other Assets,assets, amounted to
$89,000 and $2,274,000$2.5 million at December 26, 1992 and January 1, 1994 respectively,and December 31, 1994 and are carried net of
accumulated amortization of $6,020,000$.2 million and $6,295,000,$.7 million, respectively.
Change in
Accounting for Income Taxes - Effective December 29, 1991
(beginning of fiscal year 1992), theThe Company adoptedaccounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109 -
Accounting for Income Taxes ("SFAS 109"). This
standard requires, among other things, recognition of future tax benefits,
measured by enacted rates, attributable to deductible temporary differences
between financial statement and income tax bases of assets and liabilities and
to tax net operating loss carryforwards, to the extent that realization of such
benefits is "more likely than not".
Cash and Cash Equivalents - For purposes of the Consolidated
Statements of Cash Flows, the Company considers all highly liquid temporary
investments with an original maturity of less than ninety days as cash
equivalents.
Net Income (Loss) Per Share - Net income (loss) per share was computed using the
weighted average number of common shares outstanding. The weighted average
number of shares used in the calculation for both primary and fully diluted net
income (loss) per share in 19911992 and 19921994 were 16,287,72338,467,015 and 38,467,01593,285,190 shares,
respectively. For 1993 the weighted average number of shares for primary and
fully diluted net income (loss) per share were 75,625,330 and 77,064,131 shares,
respectively. Common share equivalents for purposes of net income (loss) per share
areconsist of stock options and warrants.
Supplemental Earnings Per Share - Assuming that the rights offering
and exchange offers discussed in Notes 2 and 7 had been consummated at the
beginning of fiscal year 1992, the weighted average number of shares outstanding
would have been 68,795,471, and earnings per share for 1992 would have been as follows:
Income from continuing operations $.09
Net income $.37
The supplemental earnings
per share was calculated assuming that the
Company eliminated $9 million of interest on the debt that was retired and the
Company incurred additional dividends on $.8 million on the preferred stock.$.37 per share, respectively.
Assuming that the conversionsconversion of the 7.5% Preferred Stock and the
exchange of the Class B 8% Preferred Stock and the Class B Common Stock
discussed in Note 8 had been consummated at the beginning of fiscal year 1993,
the weighted average number of shares outstanding for primary and fully diluted
earnings per share for 1993 would have been 84,408,807 and 85,847,608 and
earnings per share for 1993 would have been $.21 and $.20, respectively. This supplemental earnings per share
calculation assumes that the Company eliminated $4.1 million of preferred stock
dividends.
33
35
Supplemental Disclosure of Noncash Activities
1992 1993 ---------1994
------- -------- --------
(IN THOUSANDS)
Exchange of THC 8% Cumulativecumulative Preferred Stock
and issuance of 20,000,000 shares of THC Common Stock . . . . . . . . . . . $ 35,847 $ - =========$ -
======== ======== ========
Exchange of 7.5% Convertible Subordinated and 14%
Senior Subordinated Debentures for THC Common
Stock and THC 7.5% Preferred Stock . . . . . . . . . . . . . . . . . . $ 18,57530,475 $ - =========$ -
======== Exchange of 7 1/2% Convertible Subordinated
Debentures for======== ========
Dividend on Class B 8% Preferred Stock paid in THC Common Stock and THC 7.5%
Preferred
Stock . . . . . . . . . . . $ 11,900 $ -
========= ========
Dividend on 7.5% Preferred Stock paid -
in-kind. . . . . . . . . . . . . . . . . . . . . $ - $ 610
========= ========
Dividend on Class B 8% Preferred Stock
paid in Common Stock . . . . . . . . .2,508 $ -
$ 2,508
================= ======== ========
Exchange of 8.0%8% Class B Preferred Stock and 7.5%
Convertible Preferred Stock for HDI Common Stock . . . . . . . . . . . $ - $ 25,516
=========32,674 $ -
======== Exchange of Class B Common Stock for
Common Stock======== ========
Capital lease obligations . . . . . . . . . . . . . $ - $ 123
========= ========
Exchange of 7.5% Convertible Preferred
Stock for Common Stock . . . . . . . . $ - $ 7,158
========= ========
Issuance of 6% Preferred Stock . . . . . $ - $ 2,342
========= ========
Capital Lease Obligations . . . . . . . . $ - $ 2,541
========= ========
Issuance of Common Stock for notes
receivable . . . . . . . . . . . . . . $ - $ 1,915
=========2,541 $ -
======== ======== ========
Other equity issuances and exchanges . . . . . . . . . . . . . . . . . $ - $ 4,990 $ 1,823
======== ======== ========
Acquisition of businesses:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . $ - $ 38,578 $ -
Fair value of liabilities assumed . . . . . . . . . . . . . . . . . . - (26,180) -
Common stock issued . . . . . . . . . . . . . . . . . . . . . . . . . - (12,298) -
--------- -------- --------
Net cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 100 $ -
======== ======== ========
There were no significant noncash activities in 1991.34
35
2. TRANSACTIONS WITH NAR GROUP LIMITED
OnIn October 25, 1991, the Company's shareholders approved several
transactions among the Company, THC and NAR Group Limited ("NAR") pursuant to
which NAR acquired 13,333,334 shares of Class B Common Stock of the Company
and 40,000 shares of 8% Cumulative Preferred Stock of THC (the "Hanover
Preferred Stock"), for an aggregate purchase price of $40 million. The
purchase price was paid by the surrender by NAR of $15.1 million principal
amount of the Company's 7-1/2%7.5% Convertible Subordinated Debentures due March 1,
2007 (valued under the Purchase Agreement at $7.5 million) plus $31.3 million
in cash (representing the difference between $32.5 million and the sum of (i)
accrued interest on the debentures and (ii) $1 million of reimbursable expenses
payable to NAR under the stock purchase agreement).cash. NAR also received warrants to purchase 1,210,901 shares of the
Company's Common Stock at exercise prices ranging from $4.00 to $5.25 per share
and expiring in five years. The exercise prices were subsequently adjusted to
prices ranging from $2.19 to $2.42 per share in accordance with the
anti-dilution provisions of the warrant agreements. 34
36
The Company entered into this transaction in July 1991, expecting that
this transaction would close by September 30, 1991 so it could apply the
proceeds to repay an interim borrowing which matured on the same date.
Unforeseeable delays prevented the Company from obtaining required consents
from certain creditors which were conditions to closing the transactions. As a
result of these delays, the Company was required to satisfy the maturing
interim borrowing out of working capital. Using working capital to satisfy
these borrowings caused increased strain on the Company's already poor cash
flow which further strained its relationship with its vendors. The Company
closed the above transactions on October 25, 1991 and received an equity
infusion of approximately $40 million. A working capital line of
credit of approximately $30 million had previously been made available to the
Company in July 1991 by a subsidiary of NAR. Although the Company believed that the resulting capital
provided to it would be sufficient to return the Company to profitabilityNAR and enable the Company to pay off $46.1 million of debt that was duerepaid in October
1992, it became apparent thereafter, that due to the Company's high debt
service requirements and other operational difficulties, it still did not
possess the sufficient liquidity to obtain the necessary merchandise on a
timely basis. The Company, therefore, required additional capital to permit it
to maintain satisfactory credit relations with its vendors and other trade
creditors, as well as to satisfy the debt that was due in October 1992.
The stock purchase agreement had granted NAR an option to cause the
Company to conduct a rights offering in the event that the Company did not
achieve certain earnings in the fourth quarter of 1991. In the event that NAR
exercised that option it would have been committed to purchase any shares of
Common Stock not subscribed for in such Rights Offering by the Company's other
shareholders. Thus, it appeared to the Company that the most likely source of
additional capital was NAR. Because the Company had a significant loss in the
fourth quarter of 1991, in December 1991 NAR indicated to the Company that it
would not exercise its option to cause the Company to conduct a Rights Offering
but indicated that it would be willing to make an additional equity investment
in the Company on terms other than those contemplated by the agreement.May, 1993.
In July 1992, the Company and NAR entered into a Definitive Agreement,
the terms of which were subsequently approved by the Company's shareholders on
September 23, 1992, at which time the following transactions were consummated:
- - NAR exchanged its 40,000 shares of the Hanover Preferred Stock and
13,333,334 shares of the Class B Common Stock for 20 million shares of
Common Stock of the Company.
-
- NAR purchased 12,270,503 shares of the Company's Class B Common Stock
and 40,000 shares of a newly-created Class B 8% Cumulative Preferred
Stock (the "Class B Preferred Stock"), for an aggregate purchase price
of $28.4 million. Pursuant to the terms of the Preferred Stock, the
Company had the right to require the exchange of the Hanover Preferred
Stock and the Class B Common Stock into 18,937,169 shares of Common
Stock at any time after the date on which the per-share closing price
had been greater than $6.00 for 20 consecutive trading days.
35
37
- - The Company conducted a rights offering (the "Rights Offering") in
which the Company's shareholders (other than NAR) subscribed to
7,636,905 shares of Common Stock at $1.50 per share for an aggregate
of $11.5 million. NAR purchased the remaining 6,759,893 shares not
subscribed to for $1.50 per share for an aggregate amount of
approximately $10 million. NAR received a standby commitment fee of
$177,000 and an underwriting fee of $405,000 representing 4% of the
offering price of all shares it purchased that were not purchased by
other shareholders in the Rights Offering.
On January 1, 1994, the Company exercised its right to require the
exchange of the 40,000 shares of the Class B Preferred Stock and the 12,270,503
shares of the Class B Common Stock intofor 18,937,169 shares of Common Stock.
3. ACQUISITIONS AND INVESTMENTS
ACQUISITIONS - The Company made the following acquisitions in 1993:
Gump's - In July 1993, the Company acquired substantially all of the
mail order and retail assets of Gump's, Inc. ("Gump's"). Gump's is, an upscale catalog
marketer of exclusive gifts and the legendary San Francisco retailer. The
consideration given for the assets acquired was $13.2 million and consisted of
$6.9 million in cash and 1,327,330 shares of Common Stock valued at $4.78 per
share or $6.3 million. The $6.9 million of cash used for the purchase of the
assets was comprised of (i) proceeds of the sale of Gump's accounts receivable
aggregating $2.8 million; (ii) $2.6 million of Gump's cash acquired by the
Company as part of the assets acquired; and (iii) $1.5 million of additional
credit under the Company's revolving credit facility, as amended.
In connection with the above transaction, the Company amended its
agreement with General Electric Capital Corp. ("GECC") for the sale and
servicing of accounts receivable to include the Gump's accounts receivable
under its $75 million facility.35
36
The Company also amended its revolving credit
facility to increase the maximum credit available by $5 million for Gump's and
to include two wholly-owned subsidiaries of the Company as borrowers under the
revolving credit facility.
The Company Store - In August 1993, the Company acquired certain
assets of Company Store Holdings, Inc. and subsidiaries ("CSH"), The Company Store, Inc., Scandia Down Corporation and
Southern California Comfort Corporations (collectively, "The Company Store").
The Company Store is,
a direct marketer of down comforters, other down products and home furnishings.
The consideration given for the assets acquired was $7 million and consisted of
(i) 516,824 shares of the Company's Common Stock, valued at $4.64 per share or
$2.4 million, and (ii) two promissory notes in the aggregate principal amount
of $1.1 million issued by a subsidiary of the Company, with interest thereon at
six percent (6%) per annum due on October 31, 1994 and $3.5 million principal
amount of secured notes issued by certain subsidiaries of the Company with
interest thereon at six percent (6%) per annum, with principal and interest
payments payable monthly on a fifteen yearfifteen-year amortization, with the remaining
balance due and payable on August 31, 1998.
36
38
In October 1993, the Company amended its revolving credit facility to
increase the maximum credit available by $5 million for The Company Store and
to include The Company Store as a borrower under the facility.
Tweeds - In September 1993, the Company acquired all of the
outstanding shares of Tweeds, Inc. Tweeds is, a well-known, European- inspired women's
fashion catalog. The purchase price was $8.8 million and consisted of: (i) $.1
million in cash; (ii) 771,774 shares of the Company's Common Stock, valued at
$4.60 per share or $3.6 millionmillion; and (iii) the assumption of $5.1 million of
liabilities.
In October 1993, the Company amended its revolving credit facility to increase
its maximum credit available by $2.5 million for Tweeds and to include Tweeds
as a borrower under the facility.
Accounting for Acquisitions - The acquisitions of Gump's, The Company
Store and Tweeds have been accounted for using the purchase method of
accounting with an estimated excess
of cost over net assets of acquired businessesgoodwill of approximately $10.2$11.4 million recorded, based upon
the fair values of the net assets acquired and liabilities assumed. In
addition, the Company recorded $2.5 million representing the fair value of
acquired mailing lists. In accordance with the purchase method of accounting,
the Company updated its estimates of the fair value of the net assets acquired
and increased goodwill by $1.2 million in 1994. The operating results of the
acquired companies are included in consolidated net income from their
respective dates of acquisition.
The following represents the unaudited pro forma results of operations
for the years ended December 26, 1992 and January 1, 1994, as if these three
acquisitions had occurred at the beginning of fiscal years 1992 and 1993:year 1992.
(In thousands, except per share amounts)
(Unaudited)(UNAUDITED)
1992 1993
--------- ------------------ --------
Revenues $ 733,454 $ 723,749
========= ==========$733,454 $723,749
======== ========
Income (loss) before extraordinary
items and cumulative effect of accounting
change for income taxes $ (3,720) $ 10,160
========= ==========
Net income======== ========
Income applicable to
Common
Shareholderscommon shareholders $ 12,284 $ 6,067
========= ================== ========
Per Share:
Income (loss) per share before extraordinary
itemsitem and cumulative effect of accounting
change for income taxes $ (.17) $ .08
Extraordinary items .23 -
Cumulative effect of accounting change
for income taxes .24 -
--------- ------------------ --------
Net income $ .30 $ .08
========= ================== ========
3736
3937
The pro forma information does not purport to be indicative of the
results that actually would have been obtained if the operations were combined
during the periods presented, and is not intended to be a projection of future
results or trends.
INVESTMENTS AND ADVANCES - Investments and advances in the
accompanying Consolidated Balance Sheet include the following:
The Safety Zone - In September 1993, the Company acquired 20% of the
outstanding common stock of Aegis Safety Holdings, Inc. ("Aegis"), a direct
marketer of safety and anti=hazardanti-hazard products through The Safety Zone catalog.
The consideration for the investment was the provision by the Company of
certain catalog fulfillment and financial services to Aegis at the Company's
cost until August 1998, subject to certain early termination provisions. The
Company also acquired an
option to purchase an additional 460,714 shares at $7.00 per share, subject to
anti=dilution provisions which would increase its ownership to 50% of Aegis
common stock. This option expires at the end of 1996. Aegis has an option to
require the Company to acquire all of Aegis' then outstanding stock after
December 31, 1998 if the Company has exercised its option and certain other
conditions have been satisfied. The Company has agreed to extend a secured working capital line of up to $1$1.0
million to Aegis. In September 1994, the working capital line was
restructured due to the violation by Aegis of certain debt covenants. The
covenants were modified through December 31, 1994 and the Company increased the
amount of allowable unsecured advances. The investment in Aegis was accounted
for using the equity method of accounting and the Company recorded an equity
loss of $.1 million in 1994. The Company has outstanding advances of $.7
million to Aegis as of December 31, 1994. In February 1995, the Company
acquired all of the outstanding common stock of Aegis.
Blue Ridge Associates - In January 1994, the Company purchased for
$1.1 million a 50% interest in Blue Ridge Associates ("Blue Ridge"), a
partnership which owns the apparel distribution center in Roanoke, Virginia.
This investment is accounted for by the equity method of accounting. The
Company made annual rent payments to the partnership totaling $.7 million in
1994 as part of a 15 year lease through 2008. The Company has recorded $.1
million in income for its portion of the partnership income in 1994. Aegis had
approximately $9 millionAt
December 31, 1994, the Company's investment in net sales for the eleven months ended January 1,
1994.Blue Ridge was $1.1 million.
Boston Publishing Company - In February 1994, the Company entered into
an agreement with Boston Publishing Company, Inc. ("BPC") whereby the Company
acquired a 20% equity interest in BPC and agreed to provide certain catalog related
services to the
Boston based publisher.BPC. The Company will also provideprovided BPC with a secured three=yearthree-year
revolving credit facility of up to $3 million, a secured $.75 million short=termshort-term
loan, and a $.5 million five yearfive-year convertible note.
On August 3, 1994, BPC filed for protection under Chapter 11 of the
United States bankruptcy laws. As of December 31, 1994, the Company had
advanced $2.3 million to BPC, all of which was loaned prior to the filing of
the bankruptcy petition. Of the $2.3 million, $1.2 million was loaned under
the revolving credit facility, $.6 million was loaned under the short-term loan
and $.5 million was loaned under the five-year convertible note. Subsequent to
the Chapter 11 filing, the Company loaned an additional $.8 million under a
$1.0 million court-approved debtor-in-possession financing (the "DIP
Financing").
As of December 31, 1994, BPC had repaid the outstanding DIP Financing
balance. The note is convertible into equity representing approximately 4%assets of BPC have been pledged to secure $1.2 million of the
pre-petition advances and the Company has written off the unsecured portion.
The Company believes that the assets of BPC are sufficient to secure repayment
of the Company's secured loans to BPC. The Company also acquired an option to acquire an additional 1,536,345 shares at
$2.08 per share subject to anti=dilution provisions which would increase its
ownership to 50%investment in BPC. The BPC shareholders will have the right to require
the Company to purchase their shares in fiscal year 1997 under certain
circumstances.
BPC publishes the Museum Collections catalog featuring unique,
well=valued museum replicas, reproductions and adaptations; and the Finishing
Touches catalog, featuring decorative merchandise for the home. BPC had
approximately $12 million (unaudited) in revenues in 1993.
The investments in Aegis and BPC areis accounted for
byusing the equity method of accounting. The Company has outstanding advances to
BPC of $1.2 million as of December 31, 1994.
Regal Communications, Inc. - During 1994, the Company invested
approximately $2.7 million in convertible debt securities of Regal
Communications, Inc. ("Regal"). It was the Company's intention to hold these
debt securities as a long-term investment and in the future obtain certain
operating subsidiaries of Regal in exchange for these debt securities. As a
result, the Company carried the investment as a long-term investment during
1994. On September 23, 1994, Regal filed for protection under Chapter 11 of the
United States bankruptcy laws. The Company, in accordance with SFAS 115,
established a valuation allowance in the shareholders' equity section of the
Consolidated
37
38
Balance Sheet to record temporary fluctuations in the value of the securities
based on market prices. At September 30, 1994, the valuation allowance was
$1.8 million.
In the fourth quarter of 1994, the Company ceased considering the
exchange of the securities for an equity position and instead began negotiations
as part of the Creditors Committee for an overall settlement. The Company
recorded a non-operating expense of $1.0 million in 1994 reflecting its estimate
of the probable outcome of the settlement. The estimates include valuations of
several subsidiaries of Regal and certain contract rights and claims, as well as
Regal's operating status at the assumed time of dissolution. The Company's net
investment in Regal was $1.7 million as of December 31, 1994.
4. SEARS LICENSING AGREEMENT
In January 1994, the Company entered into a licensing agreement (the
"Sears Agreement") with the direct marketing subsidiary of Sears Roebuck and
Co. ("Sears"), to produce specialty catalogs for customers of the recently
discontinued Sears catalog. The specialty catalogs include: Show Place, based
on the DOMESTICATIONSDomestications catalog, Great Kitchens, based on the COLONIAL GARDEN
KITCHENSColonial Garden
Kitchens catalog, and Beautiful Style, based on the SILHOUETTESSilhouettes catalog and Right
Touch, based on the Tapestry catalog. The Sears Agreement has an initial
three-year term and continues thereafter unless terminated by either party.
Profits and losses from the venture are to be
shared between the parties on an equal
basis.
38
40
The Company also issued to Sears a performance warrant to purchase 3.5
million shares of Common Stock in 1999 if the licensed business with Sears has
revenues of at least $250 million and earnings before interest and taxes
("EBIT") of at least $30 million in 1998. Alternately, Sears will be entitled
to purchase 7 million shares of Common Stock in 1999 if the licensed business
with Sears has revenues of at least $500 million and earnings before interest and taxesEBIT of at least $60
million in 1998. If neither of these goals are achieved, the performance
warrant will expire unexercised in 1999. The Sears specialty catalogs
generated revenues of $71 million and EBIT of $2.9 million in 1994. The
Company will be required to value the performance warrant at such time as it is
deemed to have become measurable for accounting purposes because the required
events have become probable or have occurred (which may be prior to the date
the warrant is exercisable under the Sears Agreement) (the "Measurement Date").
The value would be the difference, if any, between the closing market price of
the Common Stock at the Measurement Date and the exercise price of the
performance warrant, multiplied by the applicable number of shares. The value
would be amortized from the Measurement Date through 1998 and would be subject
to change each reporting period based on the closing market price of the Common
Stock as of such reporting date. The warrant exercise price is $10.57 per
share. Through 1994, no charges have been required to be recorded in
connection with the warrants. The Company is obligated to meet various
operational performance standards and if the Company is unable to meet these
standards, Sears would be entitled to terminate the agreement. The Company
is also entitledhas the right to terminate the agreement in certain circumstances,
including if Sears fails to comply with any material provision of the Sears
Agreement.
5. ACCOUNTS RECEIVABLE, NET
On December 22, 1992, theThe Company repurchased all receivables then
owned by certain trusts ($52.7 million), and concurrently entered intocurrently maintains an agreement with an unrelated third
party which provides for the sale and servicing of accounts receivable
originating from the Company's revolving credit card. The Company remains
obligated to repurchase uncollectible accounts pursuant to the recourse
provisions of the agreement and is required to maintain a specified percentage
of all outstanding receivables sold under the program as a deposit with the
third party to secure its obligations under the agreement.
The Company is required to pay certain servicing fees toAt January 1, 1994 and December 31, 1994, the third
party and the Company earns the finance charge income that is charged to the
accounts.
The uncollected balances of accounts receivable sold
under this program were $51.3$47.0 million and $45.9 million, respectively, of which
$15.3$13.0 million representsand $11.5 million, respectively, represent deposits under
the agreement and $2.7 million are accounts not purchased under the
agreement which are included in Accounts receivable at December 26, 1992. At January 1,
1994, the uncollected balances of accounts receivable under this program were
$47.0 million, of which $13.0 million represents deposits under the agreement.receivable. The total reserve balance
maintained for the repurchase of
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39
uncollectible accounts was $5.5$3.1 million and $3.1$2.3 million at December 26, 1992 and January 1, 1994 and
December 31, 1994, respectively, of which $3.5$1.7 million and $1.7$1.2 million,
respectively, are included in Accrued liabilities and the remaining balance is
included in the allowance for doubtful accounts.
Receivables sold under this agreement are considered financial
instruments with off=balanceoff-balance sheet risk as defined in Statement of Financial
Accounting Standards No. 105.
39
41 Because the Company's sales are primarily made
to individual customers located throughout the United States, the Company
believes there are no concentrations of credit risks.
6. ACCRUED LIABILITIES
Accrued liabilities consists of the following (in thousands):
DECEMBER 26, JANUARY 1, 1992DECEMBER 31,
1994 1994
---------- ------------ ----------
Compensation.............................. $ 3,298 $ 3,642
Interest.................................. 1,033 746
Insurance................................. 1,434 736
Reserve for future sales returns.......... 3,901returns . . . . . . . . . . . . . . $ 4,911 $ 6,023
Compensation . . . . . . . . . . . . . . . . . . . . . . 3,642 3,923
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 888 1,330
Reserve for repurchase of accounts receivable
sold with recourse............ 3,500recourse . . . . . . . . . . . . . . . . . . . . 1,735 Net liabilities of discontinued
operations............................... 4,944 977
Other..................................... 3,253 7,906
---------- ---------
$ 21,363 $ 20,653
========== =========1,180
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,143 7,759
------- -------
$21,319 $20,215
======= =======
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 26, JANUARY 1, 1992DECEMBER 31,
1994 1994
---------- ------------ -----------
Credit Facility:
Revolving Credit Facility................. $ 21,195. . . . . . . . . . . . . . . . . . . . . . . . . $ 230 $ -
Term . . . . . . . . . . . . . . . . . . . . . . . . . . . - 10,000
Industrial Revenue Bonds with variable interest rates
averaging 4.3% in 1992 and 3.7% in 1993 and 4.5% in 1994 due 2003.................................2003 . . . . . 8,000 8,000
6% Notes Payable due 1994.................1994 . . . . . . . . . . . . . . . . . . 1,100 - 1,100
6% Mortgage Notes Payable due 1998........ -1998 . . . . . . . . . . . . . 3,452 3,300
9.25% Senior Subordinated Notes due 1998.. -1998 . . . . . . . . . . 20,000 14,000
7 1/2% Convertible Subordinated Debentures due 2007.................................2007 . . . . . 751 751
14% Senior Subordinated Debentures........ 825 -
8% Subordinated Notes..................... 12,360 -
Other..................................... 76Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 ---------- ----------
43,20740
------- -------
33,589 36,091
Less current portion...................... 23portion . . . . . . . . . . . . . . . . . . . . 1,276 ---------- ----------184
------- -------
Noncurrent portion........................ $ 43,184 $ 32,313
========== ==========portion . . . . . . . . . . . . . . . . . . . . . $32,313 $35,907
======= =======
Revolving Credit Facility On- In May 5, 1993, the Company consummated a
three-year, $40 million credit facility with a financial institution, replacing
the previous facility with Quadrant Capital Corporation ("QCC"), a subsidiary of NAR that had been entered into in
1991. The new facility (the "Revolving Credit Facility")
providesprovided for cash borrowings and letters of credit based on
eligible inventory,
with a $10 million sublimit for letters of credit.inventory. The interest rate on the funds borrowed under the Revolving Credit Facility isthis
facility was the prime rate of
Philadelphia National Bank plus two percent per annum. Subsequent to May 5,
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40
1993, the Company amended the Revolving Credit Facilitythis facility to include Gump's, The Company Store
and Tweeds as borrowers under the agreement and 40
42
the limit was increased to
$52.5 million. The facility iswas guaranteed by the Company and iswas secured by
inventory and other assets of its principal operating subsidiaries.
In addition,October 1994, the Company consummated a subsidiaryfive-year $80 million
unsecured revolving credit facility with a syndicate of NAR providedbanks (the "Credit
Facility") led by NationsBank of North Carolina, N.A., replacing the Company's
$52.5 million credit facility. The Credit Facility provides for a secured limited
guarantee$20 million
sub-facility to be utilized exclusively for acquisitions. The $20 million
sub-facility would be reduced by $5 million per year if it is not used for its
intended purpose. The Credit Facility also provides that $20 million of a $35
million sublimit for letters of credit is to be used as security for term
financing for certain capital expenditures (the "Term Financing Facility").
The rate of interest on the revolving portion of the Credit Facility is
calculated based on the Base Rate of NationsBank of North Carolina, N.A. or by
a LIBOR formula. The rate is also contingent on the length of the borrowing
which can range from 30 to 180 days. At December 31, 1994, the rate for a 90
day borrowing would have approximated 7%.
The Company is required to maintain certain ratios of earnings to fixed
charges and funded indebtedness to earnings as defined in the Credit Agreement
and has a limitation on the issuance of additional indebtedness. The Company
and the Lenders under the Credit Facility have amended the applicable
agreements to, among other things, ease the requirements in certain financial
covenants, increase the interest rate payable by the Company under certain
circumstances and require the Lenders initial consent for certain investments
and acquisitions.
In November 1994, the Company borrowed $10 million which allowedfrom the Company to borrow funds in excess$20 million
Term Financing Facility. The rate of its availability,interest on the Term Financing Facility
will be based on a formula, upthe equivalent rate of A-1 commercial paper existing at the
time of each borrowing. This rate will fluctuate as the borrowing is remarked
as it matures throughout the term of 15 years. At December 31, 1994, the face
rate ranged from 5.85% to 6.30%.
The Term Financing Facility requires annual sinking fund payments of $.5
million beginning October 1996 through October 1999 and increasing to $.8
million for each of the facility's limit. The
guarantee is reduced based upon availabilityten years thereafter, for each $10 million borrowed
under the agreement and the
Company's cash flow, as defined, and accordingly, was reduced by $5.1 million
in the fourth quarter of 1993 and will be eliminated in March 1994.
The loan agreement contains working capital and net worth covenants, debt
incurrence restrictions, dividend restrictions, and prepayment penalties.this facility.
The face amount of unexpired documentary letters of credit at December 26,
1992 and January 1,
1994 and December 31, 1994 were $1.7$5.7 million and $5.7$7.2 million, respectively.
In addition, the Company had issued $5.7$28.5 million of standby letters of credit
at December 26, 1992.31, 1994 which included $3.3 million related to the Gump's retail
store, $8.6 million related to the Industrial Revenue Bonds due 2003 and $10.1
million related to the Term Financing Facility.
Industrial Revenue Bonds due 2003 - The Industrial Revenue Bonds are due
on December 1, 2003 and are secured by the related assets purchased from the
proceeds of the bonds and by an irrevocable letter of credit in the amount of
$8.6 million. The obligations are guaranteed by the Company.
6% Notes Payable due 1994
In connection with the purchase of The Company Store, a subsidiary of the
Company entered into two secured promissory notes in the aggregate amount of
$1.1 million. The promissory notes bear interest at 6% per annum and are due
October 31, 1994. The promissory notes are secured by equipment of The Company
Store.
6% Mortgage Notes Payable due 1998 - In connection with the purchase of The Company Store
certainacquisition, subsidiaries of the Company entered intoexecuted and delivered two secured
notes in the aggregate amount of $3.5 million with interest at 6% per annum
with principal and interest payments payable monthly on a fifteen yearfifteen-year
amortization with the remaining balance due onin August 31, 1998. The mortgage notes
payable are non-recourse notes and are not guaranteed by the Company. The
mortgage notes payable are secured by the manufacturing and office facilities
of The Company Store.
9.25% Senior Subordinated Notes due 1998 On- In August 17, 1993, the Company
issued $20 million of 9.25% Senior Subordinated Notes due 1998 ("9.25% Notes")
in a private placement with an insurance company. The Company utilized the
funds to retire approximately $14 million of other subordinated debt. Under the termsThe
Company redeemed $6 million of the 9.25% Notes the
Company must redeem $6 million without penalty by February 15, 1994,
(subsequently amended to May 1, 1994) if the Company has not established or
acquired a new distribution facility by such date.in April 1994.
40
41
The 9.25% Notes mature onin August 1, 1998, and require quarterly interest
payments. The 9.25% Notes require that the Company to maintain certain minimum
net worth, working capital, debt to earnings and fixed charge coverage ratios.
Underfinancial
covenants on a quarterly basis. As of December 31, 1994, the termsCompany was not
in compliance with one of the related Registration Rights Agreement, the
41
43
Company is required to file a "shelf" registration statementcovenants under the Securities Act9.25% Notes for which it had
received a waiver. The Company and the holder of 1933, by February 13, 1994 (subsequently extended until March
15, 1994) and use its best effortthe Notes have amended the
covenants in the Indenture to causereduce certain financial standards contained in
the registrationcovenants. The covenants will revert in the first quarter of 1996 to be declared
effective by June 13, 1994.those
in effect prior to the amendment.
7 1/2% Convertible Subordinated Debentures due 2007 On- In September 23, 1992,
the Company consummated an exchange offer with holders of these debentures,
pursuant to which the Company issued 40,500 shares of its Common Stock and
13,500 shares of its 7.5% Preferred Stock (hereinafter defined) in exchange for
$540,000 of the debentures that were tendered. This resulted in an
extraordinary gain of $.3 million in 1992.
OnIn November 9, 1992, the Company, with the consent of a majority of holders
of these debentures, amended the indenture to allow, for the 30 day period
ending on December 4, 1992, the holders of the debentures to be able to convert
their debentures into Common Stock at a conversion price of $3.33 per share
instead of $10.31 per share. As a result, the Company converted approximately
$11.4 million of these debentures into 3,408,340 shares of Common Stock and
recorded an extraordinary gain of approximately $1.6 million in 1992 based on
the fair market value of the shares issued.
14% Senior Subordinated Debentures
In 1992, the Company defaulted with respect to the payment of interest on
these debentures. The Company and holders of 75% of the 14% Debentures entered
into an exchange agreement (the "14% Exchange Offer") by which such holders
would exchange their debentures for a combination of cash and 7.5% Preferred
Stock (hereinafter defined) and Common Stock of the Company. On September 23,
1992, the Company consummated the 14% Exchange Offer resulting in the exchange
of $23.5 million (of the $24.3 million) of 14% Debentures outstanding for $4.85
million in cash and 4,099,625 shares of its Common Stock and 403,088 shares of
7.5% Cumulative Convertible Preferred Stock ("7.5% Preferred Stock"). A
subsidiary of QCC owned and exchanged approximately $1.7 million or 7% of these
debentures.
The Company recorded an extraordinary gain in 1992 of approximately $6.2
million as a result of the 14% Exchange Offer. The gain was calculated based
on the cash and the fair market value of the securities issued in exchange for
the debt retired, net of approximately $1.3 million in transaction costs. The
gain also includes interest that was forgiven as part of the 14% Exchange Offer
amounting to approximately $3.7 million.
The defaulted interest was paid to the remaining bondholders on November 4,
1992 and the Company was no longer in default. On August 17, 1993, the Company
paid off the remaining $825,000 of 14% debentures with proceeds from the 9.25%
Notes.
8% Subordinated Notes
The 8% Subordinated Notes were due on October 15, 1994. They had
originally been due in October, 1991, and carried an interest rate of 11%. In
connection with the restructuring of the Company's debt obligations in 1991,
these notes were partially paid down by $5.0 million, and extended to 1994 with
the interest rate lowered to 8%. The Company was required to pay an amount
equal to 3% per year if, at final maturity or earlier redemption, NAR's
compound annual rate of return on the Company's Common Stock, together
42
44
with any dividends on the Class B Preferred, had exceeded 20% after adjustment
to eliminate general market changes as reflected in movements of the Dow Jones
Industrial Average. The Company redeemed all of the outstanding notes at the
face amount plus accrued interest on August 17, 1993, with the proceeds of the
9.25% Notes.
General - At January 1,December 31, 1994, the aggregate annual principal and
sinking fund payments required on all long-term debt were as follows (in
thousands): 1994 - $1,276, 1995 - $161,$184; 1996 - $437,$688; 1997 - $181,$681; 1998 - $22,783$17,287; 1999 - $500
and thereafter $8,751.- $16,751.
8. CAPITAL STOCK
On September 8, 1993, HDI was formed through a series of mergers
involving H&H and THC. The Merger was consummated by (i)THC (see Note 1).
Registration - In July 1993, the exchange to holders of
shares of H&H Common StockCompany filed a Registration Statement on
Form S-3 with the Securities and Exchange Commission registering 3,750,000
shares of the HDI'sCompany's Common Stock (ii)for the exchange
to holders of shares of THC 7.5% Preferred Stock shares of 7.5% Preferred
Stock, and (iii) the exchange to holders of shares of THC Class B Preferred
Stock sharespurpose of the HDI's Class B PreferredGump's acquisition
and future business combination or reserved transactions. As of December 31,
1994, 3,299,187 shares have been issued or reserved for this purpose.
Exchanges of Stock each such distribution being
on a one-for-one-basis.
On- In December 13, 1993, the Company converted all of theits
outstanding 7.5% Preferred Stock into 2,278,128 shares of Common Stock. The
holders of the 7.5% Preferred Stock were paid all outstanding dividends in
cash amounting to $197,000. These
shares had been issued in connection with the 1992 7 1/2% Exchange Offer.cash. Each share was convertible into four shares of Common Stock at the time
on which the per-share closing price of the Common Stock on the American Stock
Exchange exceeded $6.00 for 20 trading days in a consecutive 30 day trading
period, which occurred on November 11, 1993.
On January 1, 1994, 12,270,503 shares of Class B Common Stock and 40,000
shares of Class B Preferred Stock were exchanged intofor 18,937,169 shares of
Common Stock. Dividends on the Class B Preferred Stock aggregated $3.3 million
in fiscal 1993 and were paid through the issuance of 684,890 shares of Common
Stock and $693,000 in cash.
ThePublic Offering - In April 1994, the Company completed a public offering
(the "Public Offering") of 8,045,296 shares of Common Stock issuedfor proceeds of
approximately $47.5 million, net of expenses. Also, in connection with these dividends
was valued at the
average per-share closing pricePublic Offering, Sun Life Insurance Company of America ("Sun Life") exercised
1,960,245 warrants and purchased 1,309,207 shares in a net-issue cashless
exchange, of which 654,604 shares were sold in the Common Stock during
the 20 consecutive trading days immediately preceding the date on which the
dividends were paid. On January 1, 1994,Public Offering with the
Company had accrued dividends
payablenot receiving any of $886,000 on the Class B Preferred Stock which were paid in cash on
February 22, 1994.proceeds related to these shares.
41
42
6% Series A Convertible Preferred Stock - On December 10, 1993, in
connection with the Company's acquisition of Tweeds, the Company entered into
an exchange agreement with a major vendor of Tweeds. Under the exchange
agreement, the Company issued 234,900 shares of its 6% Series A Convertible
Preferred Stock (6% Preferred Stock) for an installment note, dated March 29,
1993, as amended, in the amount of approximately $2.4 million previously issued
by Tweeds. Dividends on the 6% Preferred Stock began accruing on September 30, 1993.
The 6% Preferred Stock shall be convertedis convertible into Common Stock of the Company
over a three yearthree-year period in equal amounts on September 30, 1994, 1995 and 1996.
The 43
45
conversion price shall beis an amount equal to the average of the per share closing
prices for the five trading days proceedingpreceding the conversion dates. On September
30, 1994, the Company converted one-third of the 234,900 outstanding shares of
6% Preferred Stock into 189,818 shares of Common Stock and paid dividends of
$.1 million.
The 6% Preferred Stock has a stated value of $10 per share and has a
liquidation preference ofin an amount equal to the stated value of each share of
the 6% Preferred Stock plus accrued dividends or $2,385,000$1,589,000 at January 1,December 31,
1994. The Company has the right to redeem the 6% Preferred Stock at its initial
stated
value plus accrued dividends, payable in cash.
Warrants - The warrants outstanding at January 1,December 31, 1994 are as
follows:
WARRANTS EXERCISE EXPIRATION
ISSUED PRICE DATE
----------------- -------- ----------
3,151,9451,541,301 $ 2.42 05/5/08/96
349,601 2.19 05/10/96
3,157,884 2.91 07/7/08/96
334,550 2.19 07/7/10/96
----------
6,993,980
==========---------
5,033,735
=========
OfAll of the above warrants issued 5,033,735 warrants are held by NAR and affiliates.
In addition, asAs previously discussed, the Company issued to Sears a performance
warrant to purchase up to 7 million shares of Common Stock in 1999. This
performance warrant is not reflected in the above table.
General - At January 1,December 31, 1994, there were 82,933,17792,737,840 shares of
Common Stock and 234,900156,600 shares of 6% Series A Preferred Stock outstanding.
Additionally, an aggregate of 18,367,71716,211,644 shares of Common Stock were reserved
for issuance pursuant to (i) the exercise of outstanding options (535,250)(621,050), (ii)
the exercise of outstanding warrants (13,993,980) including the Sears performance warrant discussed above,(12,033,735), (iii) the Executive Equity
Incentive Plan (1,736,170)(1,646,170), (iv) the Restricted Stock Award Plan (314,200)(292,152), and
(v) the All Employee Equity Investment Plan (1,788,117)(1,618,537).
Other Transactions
In July 1993, the Company filed a Form S-3 with the Securities and Exchange
Commission registering 3,750,000 shares of the Company's Common Stock for the
purpose of the Gump's acquisition and future business combination transactions.
As of January 1, 1994, 2,615,928 shares have been issued in connection with the
Gump's, The Company Store and Tweeds acquisitions.
On February 16, 1994, the Company entered into an agreement with Sun Life
Insurance Company of America ("Sun Life") whereby Sun Life will exercise its
1,960,245 warrants in a cashless or net-issue exchange with the Company and the
Company will issue 1,309,207 shares of Common Stock. The number of shares of
the Company's Common Stock to be received by Sun Life upon the "cashless"
exercise of its warrants was determined based upon the average closing price of
the Common Stock on the American Stock Exchange for the ten day trading period
ended on February 15, 1994, which is $7.163 per share.
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46
Dividend Restrictions - The Company is restrictedlimited from paying dividends
at any time on its Common Stock beyond 25% of the consolidated net income of
the then preceding four quarters or from acquiring anyin excess of one million
shares of its capital stock by certainCommon Stock under the most restrictive debt covenants contained
in agreements to which the Company is a party.
9. EMPLOYEE BENEFIT PLANS
Stock Option Plan - Pursuant to the Company's Stock Option Plan (the
"Plan"), an aggregate of 2,830,519 shares were approved by shareholders for issuance to
employees and consultants of the Company. The option price and the periods
over which an option is exercisable are specified by the Compensation Committee
of the Board of Directors.
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43
Options expire five years from the date of grant and principallygenerally vest
over three to four years. Payment for shares purchased upon the exercise of an
option shall be in cash or stock of the Company. If paid in cash, a partial
payment may be made with the remainder in installments evidenced by promissory
notes at the discretion of the Compensation Committee.
Changes in options outstanding and options available for grant,
expressed in number of shares, are as follows:
1991 1992 1993 ---------- ----------- ----------1994
-------- --------- ---------
Options outstanding,
beginning of period 1,231,623 945,965 603,765 365,250
Granted - - 162,000
Exercised - - (1,000)
Expired (28,433) (164,200) (214,165) (20,700)
Cancelled (257,225) (178,000) (24,350) (9,500)
--------- --------- ---------
Options outstanding,
end of period 945,965 603,765 365,250 496,050
========= ========= =========
Options exercisable,
end of period 571,833 502,675 365,250 334,050
========= ========= =========
Available for grant of
options, end of period 1,012,118 1,345,318 1,583,833 1,452,033
========= ========= =========
The option prices range from $2.75 per share to $9.625$5.00 per share, with
amounts as follows: $2.75 - 200,000 shares, $3.50 - 162,000 shares and $5.00 -
144,550 shares, $7.00
- -6,200 shares, $8.00 - 7,000 shares and $9.625 - 7,500134,050 shares.
Prior to 1992, three directors were granted non-qualified options
outside of the Plan to purchase a total of 50,000 shares. Of these options
45,000 shares expireexpired in 1994 and the remaining 5,000 shares expire in 1995. The1995 at
an option price ranges
fromof $5.00 per share to $7.25 per share. The table above does not include these
option grants.
OnIn September 23, 1992, six directors were granted options to purchase
20,000 shares each, at the market price, which at that time was $1.75 per
share. These option grants were approved at the 1993 annual meeting of
shareholders and the options expire in 1997. In June 1994, one director was
granted options to purchase 55,000 shares at an exercise price of $6.125 per
share. These options expire in 2000. The table above does not include these
option grants.
Hanover Direct, Inc. Savings Plan - The 401(K) Savings Plan (the
"Plan""401(k) Plan") allows eligible employees to contribute a percentage of their
baseannual compensation to the 401 (k) Plan. The Company makes matching
contributions of one-third of the employees' pre-tax
45
47 contributions. Participants
may invest contributions in various investment funds, in addition to a
guaranteed investment fund or in the Company's Common Stock.
The Company's contributions charged to expense for 1991, 1992, 1993 and 19931994
were $241,000, $265,000, $431,000 and $431,000,$608,000, respectively.
Supplemental Retirement Plan - The Supplemental Retirement Plan (the
"Plan""Retirement Plan") allows eligible employees to make contributions to a trust
where prior to October 1993, they were invested
for each participant in life insurance having a cash surrender value and
carrying a term benefit payable to the beneficiary selected by the participant.
The Company makes matching contributions. In October 1993, the Company amended
and restated the Plan. Participant contributions are invested by the trust for each participant in a tax
free money market fund. The Company makes matching contributions. Company
contributions charged to expense in 1991, 1992, 1993 and 19931994 amounted to $179,000,
$130,000 $179,000 and $130,000,$192,000, respectively.
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44
The Retirement Plan permits eligible employees to contribute up to 4%
of their salary. The Company matches all participant contributions, up to the 4%
threshold. The Retirement Plan is not tax-qualified under the applicable
provisions of the Internal Revenue Code of 1986, as amended.
Incentive Compensation Plan - Bonus arrangements with certain
executives and key employees generally provide for additional compensation based
upon the attainment of certain profit levels, as well as other performance
measures. These bonuses approximated an aggregate of $1.6 million, $.4 million
and $.4$1.1 million in 1992, 1993 and 1993,1994, respectively. There were no bonuses
paid in 1991. Under the bonus plan, 25%
of the bonus is paid in restricted stock that participants vest invests over a three year period. In
fiscal 1993,
89,2201994, 11,467 shares were issued, net of forfeitures, in connection with
the Incentive Compensation Plan.
Executive Equity Incentive Plan On- In December 17, 1992, the Board of
Directors adopted the 1993 Executive Equity Incentive Plan (the "Incentive
Plan"). Such planThe Incentive Plan was approved by Shareholdersshareholders at the 1993 Annual
Meeting. Pursuant to the Incentive Plan, options to purchase shares of the
Company's Common Stock will be granted from time to time by the Compensation
Committee of the Board of Directors to selected executives of the Company or its
affiliates. For each such option granted, the selected executive will receive
the right to purchase on a specified date (the "Tandem Investment Date") a
number of shares of the Company's Common Stock ("Tandem Shares") equal to
one-half the maximum number of shares of the Company's Common Stock covered by
such option. An aggregate of 2,400,000 shares of the Company's Common Stock have
been reserved for issuance under the Incentive Plan. Company financing is
available under the Incentive Plan to pay for the purchase price of the Tandem
Shares.
The Company granted 1,327,660 options in 1993 and 180,000 options in
1994, of which 226,666 and 207,164 were cancelled in 1993 and 1994,
respectively. The purchase priceprices per share of the Company's Common Stock upon
exercise of a stock option wasoptions range from $2.50 ("Option Price") for all options granted before the
ratification of the Incentive Plan by the Shareholders,to $4.94 (Option Price), with amounts
as follows: $2.50 - 795,830 shares, $3.00 - 20,000 shares, $3.89 - 20,000
shares, $4.25 - 100,000 shares, $4.50 - 58,000 shares and the fair market
value of a share of the Company's Common Stock on the date of grant of such
option for all other options.$4.94 - 80,000 shares.
Options granted under the Incentive Plan become exercisable three years after
the datedates of grant and expire six years 46
48
from the datedates of grant. The purchase
price shall be paid in full at the time of purchase in cash or shares of the
Company's Common Stock valued at their fair market value or in a combination
thereof. The difference between the Option Price and the fair market value of
the Common Stock on the Tandem Investment DateDates aggregated $601,000 and is being
amortized over the three yearthree-year period that the options become exercisable.
Forfeitures have reduced this amount by approximately $103,000 through December
31, 1994. The amount of amortization charged to expense was $170,000 and
$137,000 for fiscal 1993 was $170,000.
Inand 1994, respectively, net of forfeitures.
Employees purchased 663,830 and 90,000 shares in 1993 663,830 shares were purchasedand 1994,
respectively, at prices ranging from $3.125 to $4.50$4.94. Total consideration given
for a total consideration of $2,133,156.the shares purchased was $2,133,100 in 1993 and $410,000 in 1994. The
employees paid $710,000 in 1993 and $312,000 in 1994 and the Company accepted
notes in the amount of $1,423,000 which are due in 1999.
The notes bear interest at rates ranging from 3.96% to 5.54%,7.05% in the principal
amounts of $1,707,000 in 1993 and 1,327,660 options were granted
to such employees at prices ranging from $2.50 to $4.50.$328,000 in 1994. Employees repaid $283,000
and $230,000 during 1993 and 1994, respectively.
Restricted Stock Award Plan On- In December 17, 1992, the Board of
Directors adopted the 1993 Restricted Stock Award Plan (the "Restricted Stock
Plan"). Each full-time or permanent part-time employee of the Company or its
affiliates selected by the Compensation Committee who holds a key position that
the Compensation Committee shall have designated for eligibility in the
Restricted Stock Plan, has attained the age of 18, has performed at least 12
months of continuous service with the Company or an affiliate of the Company,
and is not covered by a collective bargaining agreement, may participate in the
Restricted Stock Plan. Pursuant to the Restricted Stock Plan, the Compensation
Committee from time to time may award shares of the Company's Common Stock
("Award Shares") to such participants. The Award Shares received by such
participants are not transferable (other than by will or the laws of descent and
distribution) until the vesting date or when such participant attains the age of
65, dies, or
44
45
becomes permanently disabled, and are subject to forfeiture in the event the
participant ceases to be an employee prior to that date. An aggregate of 500,000
shares of the Company's Common Stock have been reserved for issuance under the
Restricted Stock Plan. During 1993, 185,800224,300 shares were awarded to participants
aggregating $650,000.$785,000. Such amount is being amortized over a three
yearthree-year vesting
period. AmortizationThe amount of amortization charged to expense was $188,000 in 1993 was $188,000.and
$292,000 in 1994, net of forfeitures.
All Employee Equity Investment Plan On- In December 17, 1992, the Board of
Directors adopted the 1993 All Employee Equity Investment Plan (the "Investment
Plan"), subject to. Such plan was approved by the approval of
Shareholdersshareholders at the 1993 Annual Meeting.
Each full-time or permanent part-time employee of the Company or its affiliates
who has attained the age of 18, has met certain standards of continuous service
with the Company or an affiliate of the Company and is not covered by a
collective bargaining agreement may participate in the Investment Plan.
An eligible employee shall be granted a right to purchase a specific
number of shares of the Company's Common Stock by the Compensation Committee,
based on the eligible employee's salary level. The purchase price of the
Company's Common Stock in the Investment Plan shall be the average market value
of a share of the Company's Common Stock during the 20 days prior to the first
day of the subscription period, less a 40% discount. The Sharesshares received by such
participants are not transferable (other than by will or the laws of descent and
distribution) until the vesting date or when such participant attains the age of
65, dies or becomes permanently disabled, and are subject to forfeiture in the
event the participant ceases to be an employee prior to that date. The employees
who choose to participate in the Investment Plan become vested in their shares
equally over a three-year period beginning with the first anniversary of the day
subsequent to the final day of the subscription period or when they reach the
age of 65, die or become permanently disabled. An aggregate of 2,000,000 shares
of the
47
49 Company's Common Stock have been reserved for issuance under the
Investment Plan.
During fiscal 1993,Employees purchased 211,883 shares were purchased by employees at an
average discounteda price of $2.32.$2.32 in 1993, 85,865
shares at $3.73 in February 1994 and 117,146 shares at $3.34 in August 1994. In
1994, 33,431 shares were forfeited and 64,706 shares became vested related to
the 1993 purchases. The difference between the market price and the discounted
price which aggregated $422,000 in 1993, $292,000 in February 1994 and $92,000
in August 1994, net of forfeitures is being amortized over athe three year
vesting period. Amortizationperiod the participants become vested in their shares. The amount of
amortization charged to expense was $46,000 in 1993 was $46,000.
Employee Stock Ownership Plan
The Employee Stock Ownership Plan (the "ESOP") was terminated December 28,
1991. Because the value of the unallocated shares was not sufficient upon
termination to fully satisfy the ESOP's indebtedness to the Company, a charge
of $4.7 million was recognizedand $226,000 in 1991 and is reflected in Other income
(expense). Shares allocated to participants at December 28, 1991 were
approximately 288,000. These shares became vested upon termination of the
ESOP. In November 1992, after receiving approval of the termination from the
Internal Revenue Service, the Company transferred 646,053 non-vested shares
into its Treasury. The vested shares were distributed in 1993.1994.
10. INCOME TAXES
EffectiveAt December 29, 1991, the Company adopted Statement of Financial
Accounting Standards No. 109 - Accounting for Income Taxes (SFAS 109). In
accordance with this statement, for the year ended December 26, 1992, the
Company recognized a deferred tax asset of $10 million, reflecting the
cumulative effect of the accounting change for the benefit expected to be
realized from the utilization of net operating loss carryforwards ("NOLs") and
deductible temporary differences. For the year ended January 1, 1994, the
Company recognized an additional deferred tax asset of $.6 million, reflecting
the effect of the increase in the Federal corporate income tax rate (from 34%
to 35%) on the benefit expected to be realized from the utilization of NOLs
carryforwards and deductible temporary differences.
At January 1,31, 1994, the Company had tax NOLsnet operating loss carryfowards
("NOLs") totalling $147$136 million, which expire as follows: In the year 2000 - $1 million, 2001 - $21$12
million, 2003 - $15$14 million, 2004 - $14 million, 2005 - $21 million, 2006 - $47
million and 2007 - $28 million. The Company also has $.9 million of charitable contribution carryforwards
that expire in 1994 through 1997 and $1.7 million of general
business tax credit carryforwards that expire in 1998 through 2003. UnderThe
Company's available NOLs for tax purposes consists of $86 million of NOLs
subject to a $4 million annual limitation under Section 382 of the Internal
Revenue Code of 1986 certain
transactions the Company entered into during 1991 resulted in an ownership
change with respect to the Company and, thus, in the imposition of an annual
limitation ("the Section 382 limitation") of approximately $4 million on the
amount of taxable income of the Company which may be offset by the Company's
pre-change NOL, charitable contribution and business tax credit carryforwards.
The Company's available NOLs for tax purposes consists of $97 million of
pre-change NOL (subject to the Section 382 limitation) and $50 million of post-change NOL (notNOLs not subject to the Section 382 limitation). The Company's
charitable contribution carryforwards and business tax credit carryforwards are
pre-change items subject to the Section 382a limitation.
The unused portion of the $4 million annual Section 382 limitation for any year may
be carried forward to succeeding years to increase the annual limitation for
those succeeding years. In addition, the Company's entire $97$86 million of pre-change NOLNOLs
subject to the limitation may be used to offset future taxable income 48
50
realized within five years of the date of change of ownershipgenerated
by July 1996 from built-in gains (generally, taxable income from the sale of
appreciated assets held by the Company at the date of its change in ownership)ownership in
July 1991) without reference to the Section 382 limitation.
A reconciliation of the Company's net income for financial statement
purposes to taxable income (loss) for the years ended December 26, 1992 and
January 1, 1994 is as follows (in thousands):
1992 1993
---------- ----------
Net income............................. $ 20,249 $ 17,337
Income tax provision (benefit)........ 219 (130)
---------- ---------
Income before income taxes............. 20,468 17,207
---------- ---------
Differences between income before taxes
for financial statement purposes and
taxable income:
Cumulative effect of accounting
change for income taxes............... (10,000) -
State income taxes.................... (219) (501)
Utilization of carryovers............. - (2,543)
Permanent differences................. 3,687 28
Net change in temporary
differences........................... (41,678) (14,191)
---------- ---------
(48,210) (17,207)
---------- ---------
Taxable income (loss).................. ($ 27,742) $ -
========== =========
Changes during 1992 and 1993 in temporary differences principally relate to
restaurant closing expenses and losses on asset disposals accrued in 1990 and
1991, which are deductible for income tax purposes in the year in which the
assets are actually disposed and expenses are paid.
The components of the net deferred tax asset at January 1, 1994 are as
follows (in millions):
Non-
Current current Total
------- ------- -----
Federal tax NOL, charitable contribution
and business tax credit carryforwards...... $ - $55.2 $55.2
Allowance for doubtful accounts............. .8 - .8
Accrued liabilities......................... 3.6 - 3.6
Tax basis in net assets of discontinued
operations in excess of financial
statement amount........................... .3 - .3
Other....................................... .4 - .4
----- ----- -----
Deferred Tax Asset.......................... 5.1 55.2 60.3
Valuation allowance....................... (2.1) (47.6) (49.7)
----- ----- -----
Deferred Tax Asset, net..................... $ 3.0 $ 7.6 $10.6
===== ===== =====
The Company has established a valuation allowance for a portion of the
deferred tax asset, due to the Section 382 limitation and limiting the
utilization of the remaining deferred tax asset.
SFAS 109 requires that the future tax benefit of such NOLs be recorded
as an asset to the extent that management assesses the utilization of such NOLs
to be "more likely than not". In 1992 management determined, based upon the
conversion of interest-bearing debentures to equity, the issuance of additional
Common Stock, the disposal of unprofitable discontinued restaurant 49
51
operations,
the Company's history of prior operating earnings in the
45
46
direct marketing business and its expectations for the future, that the
operating income of the Company will, more likely than not, be sufficient to
utilize $30 million of deductible temporary differences and NOLs prior to their
expiration. In making such determination, the Company adjusted 1992 income by
eliminating interest expense related to retired debt and assumed that such
adjusted 1992 income level could be obtained in each of the next three years.
The Company maintained a consistent adjusted income level in 1993. In 1994, the
Company continued the practice of estimating the NOLs that it could utilize over
the subsequent three years and estimated that it would be able to utilize up to
$43 million of NOLs over the next three years based on the pre-tax income of the
most recent two years.
As a result of the determination noted above, for the year ended
December 26, 1992, the Company recognized a deferred tax asset of $10 million
(net of a valuation allowance of $53 million), reflecting the cumulative effect
of the accounting change for the benefit expected to be realized from the
utilization of NOLs and deductible temporary differences. For the year ended
January 1, 1994, the Company recognized an additional deferred tax asset of $.6
million, reflecting the effect of the increase in the Federal corporate income
tax rate (from 34% to 35%). For the year ended December 31, 1994, the Company
reduced its valuation allowance by $4.4 million, reflecting the increase in
management's assessment of the future utilization of the Company's NOLs and
deductible temporary differences.
Realization of the future tax benefits is dependent on the Company's
ability to generate taxable income within the carryforward period and the
periods in which net temporary differences reverse. Future levels of operating
income and taxable income are dependent upon general economic conditions,
competitive pressures on sales and margins, postal and other delivery rates, and
other factors beyond the Company's control. Accordingly, no assurance can be
given that sufficient taxable income will be generated for utilization of the NOLs
and reversals of temporary differences.
AtThe Company's Federal income tax provision was zero in 1992, $5.9
million in 1993 and $4.2 million in 1994. The 1993 and 1994 provisions were
offset by utilization of the NOLs. In addition, the Company recognized the $4.4
million benefit in 1994 discussed above. The Company's provision for state
income taxes consists of $.2 million in 1992, $.5 million in 1993 and $.9
million in 1994.
A reconciliation of the Company's net income for financial statement
purposes to taxable income (loss) for the years ended December 26, 1992, January
1, 1994 and December 31, 1994 is as follows (in thousands):
1992 1993 1994
-------- -------- --------
Net income . . . . . . . . . . . . . . . . . . $ 20,249 $ 17,337 $ 14,838
Income tax provision (benefit) . . . . . . . 219 (130) (3,509)
-------- -------- --------
Income before income taxes . . . . . . . . . . 20,468 17,207 11,329
-------- -------- --------
Differences between income before taxes
for financial statement purposes and
taxable income:
Cumulative effect of accounting
change for income taxes . . . . . . . . . . (10,000) - -
State income taxes . . . . . . . . . . . . . (219) (501) (860)
Utilization of carryovers . . . . . . . . . . - (2,543) (12,652)
Permanent differences. . . . . . . . . . . . 3,687 28 717
Net change in temporary
differences . . . . . . . . . . . . . . . . (41,678) (14,191) 1,466
-------- -------- --------
(48,210) (17,207) 11,329
-------- -------- --------
Taxable income (loss) . . . . . . . . . . . . $(27,742) $ - $ -
======== ======== ========
46
47
The components of the net deferred tax asset at December 31, 1994 are
as follows (in millions):
Non-
Current current Total
------- ------- ------
Federal tax NOL and business tax credit
carryforwards . . . . . . . . . . . . . . . . . . . . $ - $ 49.4 $ 49.4
Allowance for doubtful accounts . . . . . . . . . . . . .9 - .9
Prepaid catalog costs . . . . . . . . . . . . . . . . . (0.9) - (0.9)
Excess of net assets of acquired business . . . . . . . - (2.1) (2.1)
Accrued liabilities . . . . . . . . . . . . . . . . . . 3.9 - 3.9
Tax basis in net assets of discontinued operations
in excess of financial statement amount . . . . . . . .9 - .9
Other . . . . . . . . . . . . . . . . . . . . . . . - 1.5 1.5
----- ------ ------
Deferred Tax Asset . . . . . . . . . . . . . . . . . . 4.8 48.8 53.6
Valuation allowance . . . . . . . . . . . . . . . . . (1.6) (37.0) (38.6)
----- ------ ------
Deferred Tax Asset, net . . . . . . . . . . . . . . . $ 3.2 $ 11.8 $ 15.0
===== ====== ======
The Company has maintainedestablished a valuation allowance for a portion of the
$30 million amountdeferred tax asset, due to the limitation on the utilization of expected future operating
income that will "more likely than not" utilize the deductible temporary
differencesNOLs and NOLs prior to their expiration. Management believes that
although the 1993 operating results might justify a higher amount,
in view of its history of operating losses, the $30 million represents
a reasonable conservative
estimate of the future utilization of the NOLs and will continue to evaluate the likelihood of future profit and the
necessity of future adjustments to the deferred tax asset valuation allowance.NOL's.
The Company's tax returns for years subsequent to 1984 have not been
examined by the Internal Revenue Service ("IRS"). Availability of the NOLs might
be challenged by the IRS upon examination of such returns which could affect the
availability of NOLs incurred prior or subsequent to the change in
ownership or both.NOLs. The Company believes, however, that IRS challenges that
would limit the utilization of NOLs will not have a material adverse effect on
the Company's financial position.
The Federal income tax provision was $5.9 million in 1993 which was offset
by the utilization of certain NOLs. In addition, a $.6 million deferred tax
benefit in 1993 was recorded as a result of the increase in the Federal
corporate income tax rates from 34% to 35%. The Company's Federal income tax
provision consists of zero in 1991 and 1992. The Company's provision for
state income taxes consists of $.2 million in 1991, $.2 million in 1992 and
$.5 million in 1993.
50
52
Total tax expense for each of the three fiscal years presented differ
from the amount computed by applying the Federal statutory tax rate of 35% (34% in 1992 and
1991) due to the
following:
1991 1992 1993 1994
PERCENT PERCENT PERCENT
OF PRE-TAX OF PRE-TAX OF PRE-TAX
LOSSINCOME INCOME INCOME
---------- ---------- ----------
Tax (benefit) at Federal statutory rate............................ (34.0%)rate . . . . . . . . . . . . . 34.0% 35.0% 35.0%
Cumulative effect of accounting change for
income taxes.........taxes . . . . . . . . . . . . . . . . . . . . . (16.6) - (16.6) -
State and local taxes............ 0.3taxes . . . . . . . . . . . . . . . . . 1.1 1.9 4.9
Effect of federalFederal rate change on deferred tax asset..............asset . . . - (3.7) -
Stock issuance expenses . . . . . . . . . . . . . . . . . 5.5 - -
(3.7)
Stock issuance expenses..........Reversal of valuation allowance . . . . . . . . . . . . - 5.5 - (38.5)
Net reversal of temporary differences..................... -differences . . . . . . . . . . (69.2) (28.9) Loss for which no tax benefit
could be recognized............. 30.8 - -4.5
Utilization of contribution and NOL carryover................... -carryover . . . . . . - (5.4) (39.1)
Tax NOLNOLs for which no benefit could be recognized............. -recognized 46.1 - Other............................ 3.2-
Other . . . . . . . . . . . . . . . . . . . . . . . . 0.2 0.3 ------- ------- --------
0.3%2.2
---- ------ ------
1.1% (0.8%) ======= ======= ========(31.0%)
==== ====== ======
47
48
11. LEASES
Certain leases to which the Company is a party provide for payment of real
estate taxes and other expenses. Most leases are operating leases and include
various renewal options with specified minimum rentals. Rental expense for
operating leases related to continuing operations were as follows (in
thousands):
1991 1992 1993 1994
-------- -------- ---------------
Minimum rentals $ 6,807 $ 8,910 $ 9,458 $ 13,572
======== ======== ========
Future minimum lease payments under noncancellable operating and capital
leases relating to continuing operations, that have initial or remaining terms
in excess of one year, together with the present value of the net minimum lease
payments as of January 1,December 31, 1994, are as follows (in thousands):
OPERATING CAPITAL
YEAR ENDING LEASES LEASES
------------- ------------ ----------- --------- -------
1994.........................1995 . . . . . . . . . . . . . . . . . . . . . . . $10,227 $ 7,257 $ 873
1995......................... 4,527 732
1996......................... 3,425 694
1997......................... 2,703 454
1998......................... 2,6271996 . . . . . . . . . . . . . . . . . . . . . . . 7,283 698
1997 . . . . . . . . . . . . . . . . . . . . . . . 5,885 536
1998 . . . . . . . . . . . . . . . . . . . . . . . 5,179 24
1999 . . . . . . . . . . . . . . . . . . . . . . . 4,774 -
Thereafter................... 17,706Thereafter . . . . . . . . . . . . . . . . . . . . 36,592 -
------- --------------
Total minimum lease payments.................... $38,245 2,753payments . . . . . . . . . . . $69,940 1,990
=======
Less amount representing interest (a)............... 182
-------- . . . . . . 166
------
Present value of minimum lease payments (b).......... $ 2,571
======== . . . $1,824
======
51
53
(a) Amount necessary to reduce net minimum lease payments to present value
calculated at the Company's incremental borrowing rate at the inception of the
leases.
(b) Reflected in the balance sheet as current and noncurrent capital lease
obligations of $50,000 and $105,000 in 1992 and $748,000 and $1,823,000 in
1993, respectively.
12. DISCONTINUED RESTAURANT OPERATIONS
In 1992, the Company sold substantially all of the properties remaining
from its discontinued restaurant operations. The Company realized net proceeds
from such sales of approximately $17.3 million of which approximately $14.9
million was used to reduce outstanding indebtedness. In addition, in exchange
for notes, cash and stock valued at $3.9 million, the Company was relieved of
$20.4 million in future rent obligations.
Revenues applicable to discontinued operations were $10 million in 1991.
Interest expense allocated to discontinued operations was $1.6 million and $1.9
million for the years 1991 and 1992, respectively. There was no interest
expense allocated to discontinued operations for the year ended January 1,
1994.
At December 26, 1992 and January 1, 1994, reserves for discontinued
restaurant operations approximated $3.5 million and $2.6 million, respectively.
Charges against these reserves were $7.7 million$628,000 and
$0.9 million for the years
ended$1,196,000 at December 26, 1992 and January 1,31, 1994, respectively.
The future minimum lease payments under noncancellable leases that
remain from the discontinued restaurant operations as of January
1,December 31, 1994 are
as follows: 1994 - $1.7 million; 1995 - $1.7 million; 1996 - $1.5 million; 1997 - $1.5 million; 1998
- $1.4 millionmillion; 1999 - $1.4 million; and thereafter $14.8$13.4 million. The above
amounts exclude annual sublease income of $1.8 million from subleases which have
the same expiration as the underlying leases.
13. RESTRUCTURING CHARGES AND TRANSACTION COSTS
In 1991, in connection with the restructuring activities,Company's investment in Blue Ridge, a subsidiary
of the Company recorded charges of approximately $5.8 million. These charges were primarily
relatedis contingently liable with respect to severance costs ($.6 million), the costs associated with the
restructuring of certain catalogs, including inventory costs ($2.6 million),
and other restructuring costs ($2.6 million). The operating results of 1991
also include charges of approximately $4.8 million which were directlylease obligation
related to the stock purchase agreement transaction. These charges includeapparel distribution center in Roanoke, Virginia.
12. RELATED PARTY TRANSACTIONS
In each of 1992, 1993 and 1994, approximately $85,000 was paid each
year for the rental of property pursuant to an operating lease to a partnership
in which the wife of Jack E. Rosenfeld is a partner.
48
49
At December 31, 1994, Company officers and executives owed the Company
approximately $1.7 million of transaction fees which have been classified as
Other income (expense) and increased compensation costs directly relatedapproximately $1.6 million relates to
receivables under the Executive Equity Incentive Plan. These amounts due to the
changeCompany bear interest at rates ranging from 3.96% to 7.05% and are due in control provisions included in certain executive employment
contracts. In addition,1999
and 2000. The remaining $.1 million is due on demand from two officers of the
Company incurredand bears interest at 6%.
Since January 1993, pursuant to a chargeconsulting arrangement, a subsidiary
of $3.1 million inNAR renders management consulting, business advisory and investment banking
services to the Company for an annual fee of $750,000.
At December 31, 1994, NAR owned 51% of the Company's outstanding Common
Stock.
In connection with the settlement of the employment contract of the former
Chairman and CEO of the Company.
14. MANAGEMENT COMPENSATION AGREEMENTS
In connection with consummating the transactions discussed in the stock purchase
agreementNote 2, and as a
condition thereto, the Company entered into an employment agreement (the
"Employment Agreement") with Jack E. Rosenfeld, the President,
52
54
and Chief Executive
Officer and a director of the Company. The Employment Agreement provides for (1) a five-year term commencing on October 25, 1991, at
a base salary of $500,000 per year; (2) a payment to a trust on behalf of Mr.
Rosenfeld of 916,667 shares of Common Stock in lieuall of a cash payment of $1,564,000 to which he would have been entitled in connection with a change in control, 250,000 of
such shares to vest in equal annual installments over three years with theare vested shares distributable to Mr. Rosenfeld at the end of the employment term
or the earlier termination of his employment;and (3) the grant of an option to Mr.
Rosenfeld, which has expired, to purchase shares of Common Stock in the event
the Company achieved certain earnings in the fourth quarter of 1991; and (4) the
grant of registration rights under the Securities Act of 1933 as amended,
for shares of
Common Stock owned by Mr. Rosenfeld. On October 25, 1991, NAR has entered into an agreement with Mr.
Rosenfeld pursuant to which he may purchase from NAR prior to October 25, 1996,
1,213,605 shares of Common Stock at a price$2.00 per share and an additional 1,213,605
shares of $2.00 (subject to adjustment)Common Stock at $1.50 per share plus 10% per year through the exercise
period.
This agreement was amended on September 23, 1992 to provide
that NAR would grant to Mr. Rosenfeld in March 1993 the right to purchase an
additional 1,213,605 shares of Common Stock ("Rights Shares") at a price per
share of $1.50 (subject to adjustment) plus 10% per year from September 1992
through the exercise period.
In connection with the stock purchase agreement, the Company entered into
employment agreements with each of Messrs. Michael P. Sherman, Wayne P. Garten
and Edward J. O'Brien, executive officers of the Company. These agreements
were substantially the same as such officers' existing employment agreements,
except that they provided for cash payments to Messrs. Sherman, Garten and
O'Brien of $281,714, $221,621 and $90,000, respectively, and contribution to a
trust on behalf of such officers of 156,979 shares, 147,812 shares and 60,000
shares of Common Stock of the Company, respectively, in connection with the
change in control effected by the NAR transaction and in lieu of their right to
receive a cash change in control payment. Pursuant to the terms of the trust,
such Common Stock was distributed to each such officer during fiscal 1993.
Messrs. Sherman, Garten and O'Brien were granted certain registration rights
under the Securities Act of 1933, as amended, with respect to the shares of
Common Stock granted to each of them.
15. RELATED PARTY TRANSACTIONS
Approximately $85,000 was paid for the rental of property pursuant to an
operating lease to a partnership in which the wife of the Chief Executive
Officer and President of the Company, Jack E. Rosenfeld, is a partner. Jack E.
Rosenfeld is also a director of the Company.
On September 23, 1992, a transaction was approved by the Company's
shareholders pursuant to which NAR acquired 62% of the Company's Common Stock.
See Note 2 for a description of the transaction. At January 1, 1994, NAR owned
57% of the Company's outstanding Common Stock.
Since January 1993, pursuant to a consulting arrangement, QCC renders
management consulting, business advisory and investment banking services to the
Company for an annual fee of $750,000.
16.13. COMMITMENTS AND CONTINGENCIES
The Company is obligated under various employment contracts with key
executives extending through 1995.1996. The aggregate payments due under such
contracts is $2.0$2.1 million.
53
55
In connection with certain disposal transactions,On or about September 2, 1994, a complaint was filed in the Company remains
contingently liable with respect to lease obligationsUnited
States District Court for 10 restaurant
properties, should the buyers fail to perform under the agreements. The future
minimum lease payments asDistrict of January 1, 1994, are as follows (in thousands):
1994 - $459; 1995 - $445; 1996 - $366; 1997 - $278; 1998 - $192 and thereafter
$737.
In January 1994, the CompanyNew Jersey by Veronica Zucker, an
individual who allegedly purchased for $1.1 million a 50% interest in
Blue Ridge Associates (the "Partnership), a partnership which owns the Tweeds
Roanoke, Virginia fulfillment center. In connection with the Partnership, a
subsidiaryshares of Common Stock of the Company is contingently liable with respectin the
public offering completed on April 7, 1994, against the Company, all of its
directors, certain of its officers, Sun Life Insurance Company of America,
Merrill Lynch, Pierce, Fenner & Smith Incorporated and Alex. Brown & Sons,
Incorporated. The complaint, which purports to be filed on behalf of a class of
all persons who purchased the Common Stock of the Company in the Public
Offering or thereafter through and including August 14, 1994, seeks to recover
monetary damages the class has allegedly suffered as a result of certain
alleged false and material misleading statements contained in the Company's
public offering prospectus dated March 30, 1994. In lieu of an answer,
defendants have filed a motion to dismiss the complaint in its entirety for
failure to state a claim upon which relief can be granted. The Company and its
directors and executive officers believe they have meritorious defenses to the
obligations ofComplaint and intend to defend the Partnership.matter vigorously. The Partnership has a mortgagemotion is scheduled
to be heard by the Court on the Roanoke
fulfillment center in the amount of $6.6 million.April 10, 1995.
In May 1992 the United States Supreme Court reaffirmed an earlier
decision which allowed direct marketing companies to make sales into states
where they do not have a physical presence without collecting sales taxes with
respect to those sales. The Court, however, noted that Congress has the power to
change this law. Forty-six states plus the District of Columbia have sales or
use taxes or authorize local governmental units to impose sales or use taxes.
The Company sells merchandise in all fifty states plus the District of Columbia.
Various states are increasing their efforts by various means, including lobbying
Congress, to impose on direct marketers the burden of collecting sales and use
taxes on the sale of products shipped to state residents. The imposition of a
sales and use tax collection obligation on the Company in states to which it
ships products would result in additional administrative expense to the Company
and higher costs to its customers for the same merchandise currently being
purchased by them. This may have a negative effect on customer response rates
and revenue levels, thereby negatively affecting the Company's
49
50
sales and profitability. Under the law as it presently exists, the Company
believes that it collects sales tax in all jurisdictions that it is required to
do so.
The Company is involved in other various routine lawsuits of a nature
which are deemed customary and incidental to its business. In the opinion of
management, the ultimate disposition of such actions will not have a material
adverse effect on the Company's financial position or results of operations.
17.In connection with certain discontinued restaurant transactions, the
Company remains contingently liable with respect to lease obligations for 10
restaurant properties, should the buyers fail to perform under the agreements.
The future minimum lease payments as of December 31, 1994 are as follows (in
thousands): 1995 - $445; 1996 - $366; 1997 - $278; 1998 - $192; 1999 - $192; and
thereafter $546.
14. SUBSEQUENT EVENT
On February 18,EVENTS
Leichtung, Inc. - In January 1995, the Company acquired
substantially all of the assets of Leichtung, Inc., a direct marketer of
wood-working and home improvement tools and related products, sold under the
Leichtung Workshops and Improvements names, for a purchase price of
approximately $12 million in cash and the assumption of certain liabilities. As
of December 31, 1994, the Company filed a registration statement on Form
S-3had made payments of $1.3 million in
connection with this acquisition which are included in Investments and advances.
The Safety Zone - In February 1995, the Securities and Exchange Commission registering 10 millionCompany acquired the remaining
80% of the outstanding stock of Aegis through the issuance of 634,900 shares of
its Commona newly-created Class B Convertible Preferred Stock including 4,154,604 shares("Series B Stock") with a
stated value of $10 per share. Dividends on behalfthe Series B Stock will accrue at
the rate of two selling
shareholders.5% per annum during each of the first three years of this agreement
provided Aegis attains at least $1 million in earnings before interest and
taxes each year. Dividends are not cumulative during this period. After the end
of this three year period, dividends will accrue at a rate of 7% per annum in
years four and five. The net proceeds from the offering with respect toSeries B Stock is convertible at the Company's shares will be used for general corporate purposes, includingoption
if the expansionmarket value of the Company's business.Common Stock is greater than $6.66 for 20
trading days in any 30 consecutive day trading period. If after five years the
Series B Stock is not converted, it must then be converted into 952,359 shares
of the Company's Common Stock provided the market value of the stock is at
least $6.33 per share. If the market value of the Company's Common Stock does
not meet this minimum, then the conversion is subject to an antidilution
provision which would increase the number of shares to equal a market value of
$6,028,432.
The registration statementCompany will account for these acquisitions using the purchase
method of accounting.
Tiger Direct - In February 1995, the Company entered into an
agreement, by which, upon closing of the transaction, it agreed to make an $8
million investment in Tiger Direct, Inc. ("Tiger") and to provide certain
strategic services to Tiger. The Company will be permitted to nominate four of
Tiger's seven directors. Tiger is a direct marketer of computer software,
peripherals and CD-ROM hardware and software. If the transaction is
consummated, the Company will issue either a convertible debenture or preferred
stock and warrants for its investment. The debenture will pay interest at a
rate of 10% per year for three years, payable in shares of Tiger common stock,
and is convertible into a new class of Tiger convertible preferred stock
(subject to Tiger shareholder approval) whose dividends are also payable at 10%
per year for three years, also payable in shares of Tiger common Stock. Tiger
will also issue warrants to the Company to purchase additional stock over a
three-year period at prices ranging from $1.20 to $1.50 per share. If the
debenture is converted, the Company will own approximately 21.6% of Tiger's
outstanding common stock. If the warrants are also exercised and the interest
and dividend shares are fully issued, the Company will increase its ownership
percentage to approximately 42% of Tigers's outstanding common stock. The
Company also has not yet become
effective.
54the right to acquire additional shares of common stock in the
open market, up to a total of 50.1%. The Company is subject to a five year
standstill. The Company is providing a temporary short-term secured
50
56
18.51
working capital line of credit to Tiger, up to a maximum of $3 million. All
outstanding short-term indebtedness related to this facility will be repaid when
the transaction closes or one year from the date the purchase agreement is
terminated. The Company will account for this investment using the equity method
of accounting upon conversion of the debt to equity.
51
52
15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- --------------- -------- -------- --------
(in thousands, except per share amounts)
1992
- --------
Revenues $128,787 $142,861 $144,769 $170,145
Gross profit 42,698 51,337 48,924 61,887
Income from operations 2,133 3,123 2,291 6,855
Income (loss) from continuing
operations (1,823) (899) (1,246) 5,016
Extraordinary items - 1,209 6,501 1,491
Cumulative effect of
accounting change for
income taxes 10,000 - - -
-------- ------- ------- -------
NET INCOME 8,177 310 5,255 6,507
Preferred stock dividends (700) (700) (800) (997)
-------- ------- ------- -------
Net income (loss) applicable to
Common Shareholders $ 7,477 $ (390) $ 4,455 $ 5,510
======== ======= ======= ========
Net income (loss) per share:
Income (loss) from continuing
operations $ (.09) $ (.05) $ (.07) $ .06
Extraordinary items - .04 .22 .02
Cumulative effect of
accounting change for
income taxes .35 - - -
-------- ------- ------- -------
Net income (loss) $ .26 $ (.01) $ .15 $ .08
======== ======= ======= ========
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(in thousands, except per share amounts)
1993
- --------
Revenues $121,565 $144,319 $147,890 $228,737
Gross profit 43,585 52,578 51,233 86,728
Income from operations 2,937 3,963 3,056 9,120
NET INCOME 2,477 4,356 2,492 8,012
Preferred stock dividends (1,000) (1,005) (1,006) (1,082)
-------- -------- -------- --------
Net income applicable to
Common Shareholders $ 1,477 $ 3,351 $ 1,486 $ 6,930
======== ======== ======== ========
Net income per share $ .02 $ .05 $ .02 $ .09
======== ======== ======== ========
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(in thousands, except per share amounts)
1994
Revenues $179,226 $185,113 $178,282 $226,263
Gross profit 64,942 70,243 62,407 84,815
Income from operations 4,258 4,145 1,159 6,413
NET INCOME 3,144 2,843 640 8,211
Preferred stock dividends (35) (35) (41) (23)
-------- -------- -------- --------
Net income applicable to
Common Shareholders $ 3,109 $ 2,808 $ 599 $ 8,188
======== ======== ======== ========
Net income per share $ 0.04 $ 0.03 $ 0.01 $ 0.09
======== ======== ======== ========
52
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.DISCLOSURE
None
5553
5754
P A R T III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.REGISTRANT
(a) Identification of Directors.
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
(b) Identification of Executive Officers.(a)
TITLE AND OTHER OFFICE HELD
NAME AGE INFORMATIONINFORMATION(A) SINCE
- --------------------- --- --------------------------------------------------------- -----------
JACKJack E. ROSENFELD 55Rosenfeld 56 Chief Executive Officer, 1990
President and Director. Mr.
Rosenfeld served as Executive
Vice President of the Company
from JuneMay 1988 until October 19901990.
He was elected to the Board of
Directors in 1974.
MICHAELMichael P. SHERMAN 41Sherman 42 Executive Vice President, 1990
Corporate Affairs, General
Counsel and Secretary. HeMr. Sherman
joined the Company in 1983 and was
elected Vice President-Assistant Secretary
in the same year. From 1986 to 1990,
Mr. Sherman held the position of
Senior Vice President, General
Counsel and Secretary.
WAYNEWayne P. GARTEN 41Garten 42 Executive Vice President and 1990
Chief Financial Officer since
1990.Officer. From
1989 to 1990, Mr. Garten
previously held the position of Senior
Vice President and Chief Financial
Officer. He joined the Company
in 1983, was elected Vice
President in 1984 and was
elected Vice President-Finance
in 1989.
54
55
Edward J. O'Brien 51 Senior Vice President and 1991
Treasurer. Mr. O'Brien joined the
Company in 1986 and was elected
Vice President in 1984. He was
elected Vice President-Finance
in 1989.
EDWARD J. O'BRIEN 50 Senior1988.
David E. Ullman 37 Vice President, and 1991
Treasurer.Controller. 1992
Mr. O'BrienUllman joined the Company in
19861991 and was elected Vice President
in 1988.
56
58
TITLE AND OTHER OFFICE HELD
NAME AGE INFORMATION SINCE
- ---- --------------- -----------
DAVID E. ULLMAN 36 Vice President, 1992
Controller.1992. Prior to joining the
Company, Mr. Ullman was with
Arthur Andersen & Co. for ten
years, most recently as a manager in
the Audit and Business Advisory
Group.
-------------
(a) All references to dates and positions held by such executive officers
prior to September 1993 refer to the Company's predecessor, The Horn &
Hardart Company ("H&H.&H"). H&H merged with and into the Company in
September 1993, with the Company surviving.
Pursuant to the Company's By-Laws, its officers are chosen annually by
the Board of Directors and hold office until their respective successors are
chosen and qualified.
55
56
ITEM 11. EXECUTIVE COMPENSATION.COMPENSATION
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.MANAGEMENT
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.TRANSACTIONS
The information required by this item is incorporated by reference from the
Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A.
5756
5957
P A R T IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report.
PAGE NO.
--------
1. Index to Consolidated Financial Statements Report of Independent Public Accountants 2526
Hanover Direct, Inc. and Subsidiaries Financial
Statements:Statements
Consolidated Balance Sheets as of December 26, 1992 26
and January 1, 1994 27
and December 31, 1994
Consolidated Statements of Income/(Loss)Income for the 29
three 28 years ended January 1,December 31, 1994
Consolidated Statements of Shareholders' (Deficit) 2930
Equity for the three years ended January 1,December 31, 1994
Consolidated Statements of Cash Flows for the three 3031
years ended January 1,December 31, 1994
Notes to Consolidated Financial Statements 3233
Supplementary Data:
Selected quarterly financial information (unaudited) 52
for the two fiscal years ended January 1,December 31, 1994
2. Index to Financial Statement SchedulesSchedule
Schedule II 61
Schedule VIII 63- Valuation and Qualifying Accounts 60
Schedules other than thosethat listed above are omitted because
they are omitted
because they are not applicable or the required information is
shown in the financial statements or the required
information is shown in the financial statements or
notes thereto.
57
58
3. Exhibits 64
The exhibits required by Item 601 of Regulation S-K
filed as part of, or incorporated by reference in, this report
are listed in the accompanying Exhibit Index.
58
60
(b) Reports on Form 8-K
Current Report on Form 8-K dated July 12, 1993 of H & H
Current Report on Form 8-K dated August 25, 1993 of H & H
Current Report on Form 8-K dated September 30, 1993
Current Report on Form 8-K dated January 1,October 26, 1994 reporting the
Company's third quarter financial results under Item 5 -
Other Events.
(c) Exhibits required by Item 601 of Regulation S-K.
See Exhibit Index.
(d) Financial Statement Schedules
See (a) 2. above.
58
59
SCHEDULE II
HANOVER DIRECT, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1994, JANUARY 1, 1994 AND DECEMBER 26, 1992
-----------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-----------------------------------------------------------------------------------------------------------------------
Additions
--------------------------------
Balance at Charged to
beginning Charged to costs other accounts Deductions - Balance at
Description of period and expenses describe describe end of period
------------------------------------------------------------------------------------------------------------------------
1994:
---------------------------------
Allowance for doubtful
accounts receivable, current $ 4,244,000 $3,931,000 (1) $4,263,000 $3,912,000
Reserves for
discontinued operations 2,558,000 (2) 890,000 1,668,000
Deferred tax asset
valuation allowance 49,700,000 (7) 11,100,000 38,600,000
Allowance for net unrealized
losses on convertible
debt securities 1,000,000 1,000,000
1993:
---------------------------------
Allowance for doubtful
accounts receivable, current $ 6,386,000 3,676,000 (5) $134,000 (1) $5,952,000 $4,244,000
Reserves for
discontinued operations 3,464,000 (2) 906,000 2,558,000
Deferred tax asset
valuation allowance 53,000,000 (6) 2,600,000 (4) 5,900,000 49,700,000
1992:
---------------------------------
Allowance for doubtful
accounts receivable, current 7,040,000 6,024,000 (1) 6,678,000 6,386,000
Reserves for
discontinued operations 11,185,000 (2) 7,721,000 3,464,000
Deferred tax asset
valuation allowance (3) 53,000,000 53,000,000
-----------------------------------------------------------------------------------------------------------------------
(1) Accounts written-off.
(2) Utilization of reserves.
(3) The Company adopted SFAS 109 effective December 29, 1991.
(4) Utilization of valuation allowance.
(5) Represents acquired allowance for doutful accounts receivable.
(6) Represents increase in available NOLs and the effect of the increase in
corporate tax rates from 34% to 35%.
(7) Represents decrease due to: utilization of valuation allowance and
recognition of NOLs estimated to be utilized by future operating results.
60
6160
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
Date: March 9, 199428, 1995 By:s/Jack E. Rosenfeld
---------------------------
Jack E. Rosenfeld, Director
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated.
Principal Financial Officer:
s/Wayne P. Garten
- -----------------------------
Wayne P. Garten
Executive Vice President and
Chief Financial Officer
Board of Directors:
s/Ralph Destino s/Edmund R. Manwell
- ----------------------------- -----------------------------
Ralph Destino, Director Edmund R. Manwell, Director
s/J. David Hakman s/Alan G. Quasha
- ----------------------------- -----------------------------
J. David Hakman, Director Alan G. Quasha, Director
s/S. Lee Kling s/Geraldine Stutz
- ----------------------------- -----------------------------
S. Lee Kling, Director Geraldine Stutz, Director
s/Theodore H. Kruttschnitt s/Jeffrey Laikind
- ----------------------------- -----------------------------
Theodore H. Kruttschnitt Jeffrey Laikind, Director
Director
s/Robert F. Wright
s/Elizabeth Valk Long s/Robert F. Wright, - ----------------------------- -----------------------------Director
Elizabeth Valk Long, Director
Robert F. Wright, Director
Date: March 9, 1994
6028, 1995
59
62
SCHEDULE II
HANOVER DIRECT, INC.
AMOUNTS RECEIVABLE FROM RELATED PARTIES, UNDERWRITERS,
PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
YEAR ENDED JANUARY 1, 199461
ITEM 10. EXHIBIT INDEX
Column A Column B Column C Column D Column E
- ----------------------------EXHIBIT NUMBER
ITEM 601 OF DESCRIPTION OF DOCUMENT AND INCOR- PAGE
REGULATION S-K PORATION REFERENCE WHERE APPLICABLE NO.
-------------- --------------- -------------------- -----------------------
Deductions Balance at end
Balance at -------------------- of period
beginning Amounts Amounts -----------------------
Name of debtor of period Additions Collected written off Current Non Current
- ------------------------- -------------- --------------- ----------- ------------ --------- ----------------------------------------------------------------------- ----
Spence Halper, E.V.P.(a)
Year Ended2.1 Asset Purchase Agreement dated as of December 1, 1994 among the
Company, LWI Holdings, Inc., Bankers Trust Company, Leichtung,
Inc. and DRI Industries, Inc. FILED HEREWITH.
2.2 Stock Purchase Agreement dated as of February 16, 1995 among the
Company, Hanover Holdings, Inc., Aegis Safety Holdings, Inc., F.L.
Holdings, Inc., Roland A. E. Franklin, Martin E. Franklin, Jonathan
Franklin, Floyd Hall, Frederick Field, Homer G. Williams, Frank
Martucci, Norm Thompson Outfitters, Inc. and Capital Consultants,
Inc., (as agent)(collectively, the "Aegis Sellers"). FILED HEREWITH.
3.1 Certificate of Incorporation. Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended January
1, 1994 $ - $100,000 $- $ - $ - $100,000
Wayne P. Garten, E.V.P.(b)
Year Ended1994.
3.2 Certificate of Amendment of the Company's Certificate of
Incorporation together with Certificate of Designation of
Series A Convertible Additional Preferred Stock. Incorporated
by reference to the Company's Annual Report on Form 10-K for
the year ended January 1, 1994 $ - $235,802 $135,802 $ - $ - $100,000
Edward J. O'Brien, Sr.V.P.(c)
Year Ended1994.
3.3 By-laws. Incorporated by reference to the Company's Registration
Statement on Form S-4 filed on April 16, 1993, Registration No.
33-6152.
3.4 Certificate of Designation of Series B Convertible Additional
Preferred Stock of the Company. FILED HEREWITH.
E-1
62
4.1 Indenture between the Company and First Trust National
Association, as Trustee, dated as of August 17, 1993.
Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended January 1, 1994 $ - $113,837 $63,837 $ - $ - $50,000
Charles Pellenberg, E.V.P.(a)
Year Ended1994.
4.2 Registration Rights Agreement dated as of August 17, 1993 by
and between the Company's and Sun Life Insurance Company of
America. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended January 1, 1994 $ - $125,000 $ - $ - $ - $125,000
Jack Rosenfeld, C.E.O.(a)
Year Ended January 1, 1994 $ - $187,500 $ - $ - $ - $187,500
Michael P. Sherman, E.V.P.(d)
Year Ended January 1, 1994 $ - $229,802 $129,802 $ - $ - $100,000
61
63
SCHEDULE II
HANOVER DIRECT, INC.
AMOUNTS RECEIVABLES FROM RELATED PARTIES, UNDERWRITERS,
PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
YEAR ENDED JANUARY 1, 1994
(a) Notes receivable issued in connection with Executive Equity Incentive
Plan. The Notes bear interest at 5.54% and are due March 1999.
(b) Notes receivable represents $100,000 for the Executive Equity
Incentive Plan bearing interest at 5.54% due March 1999. The $135,802
represents a personal loan with interest at 8% and such loan was
repaid in fiscal 1993.
(c) Notes receivable represents $50,000 for the Executive Equity Incentive
Plan bearing interest at 5.54% due March 1999. The remaining $63,837
represents a personal loan with interest at 8% and such loan was
repaid in fiscal 1993.
(d) Notes receivable represents $100,000 for the Executive Equity
Incentive Plan bearing interest at 5.54% due March 1999. The
remaining $129,802 represents a personal loan with interest at 8% and
such loan was repaid in fiscal 1993.
62
64
SCHEDULE VIII
HANOVER DIRECT, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JANUARY 1, 1994, DECEMBER 26, 1992 AND DECEMBER 28, 1991
Column A Column B Column C Column D Column E
- -------------------------- ------------ ---------------------------------- ------------- -------------
Additions
-----------------------------------
Balance at Charged to
beginning Charged to costs other accounts Deductions - Balance at
Description of period and expenses describe describe end of period
- -------------------------- --------------- ---------------- --------------- -------------- --------------
1993:
- -------------------------
Allowance for doubtful
accounts receivable $6,386,000 $3,676,000 (5) $134,000 (1) $5,952,000 $4,244,000
Reserves for
discontinued operations 3,464,000 (2) 906,000 2,558,000
Deferred tax asset
valuation allowance 53,000,000 (6) 2,600,000 (4) 5,900,000 49,700,000
1992:
- ---------------------------
Allowance for doubtful
accounts receivable 7,040,000 6,024,000 (1) 6,678,000 6,386,000
Reserves for
discontinued operations 11,185,000 (2) 7,721,000 3,464,000
Deferred tax asset
valuation allowance (3)53,000,000 53,000,000
1991:
- ---------------------------
Allowance for doubtful
accounts receivable 4,994,000 6,756,000 (1) 4,710,000 7,040,000
Reserves for
discontinued operations 17,270,000 5,229,000 (2) 11,314,000 11,185,000
(1) Accounts written-off.
(2) Utilization of reserves.
(3) The Company adopted SFAS 109 effective December 29, 1991
(4) Utilization of valuation allowance.
(5) Represents acquired allowance for doubtful accounts receivable.
(6) Represents increase in available net operating losses and effect of
increase in coporate income tax rates from 34% to 35%.
63
65
EXHIBIT INDEX
EXHIBIT NUMBER PER
ITEM 601 OF DESCRIPTION OF DOCUMENT AND INCOR-
REGULATION S-K PORATION REFERENCE WHERE APPLICABLE
2.1 Plan of Agreement and Merger dated as of April 15, 1993
between The Horn & Hardart Company and Hanover Direct,
Inc. Incorporated by reference to the Company's*
Registration Statement on Form S-4 filed on April 16,
1993, Registration No. 33-6152.
2.2 Plan of Agreement and Merger dated as of April 15, 1993
between The Hanover Companies and Hanover Direct, Inc.
Incorporated by reference to the Company's* Registration
Statement on Form S-4 filed on April 16, 1993,
Registration No. 33-6152.
2.3 Asset Purchase Agreement dated as of May 21, 1993 among
the Company*, GSF Acquisition Corp. ("GSF") and Gump's,
Inc. Incorporated by reference to the Company's* Current
Report on Form 8-K dated July 12, 1993.
2.4 Asset Purchase Agreement dated as of May 21, 1993 among
the Company*, Gump's By Mail, Inc. ("GBM") and Gump's,
Inc. Incorporated by reference to the Company's* Current
Report on Form 8-K dated July 12, 1993.
2.5 Order Confirming Sale of the Assets of The Company Store
to the Company, entered by the United States Bankruptcy
Court for the Western District of Wisconsin on August 20,
1993 in Bankruptcy No. 92-21810-11. Incorporated by
reference to the Company's* Current Report on Form 8-K
dated August 25, 1993.
2.6 Stock Purchase Agreement dated as of September 7, 1993
among Warburg, Pincus Capital Partners, L.P., WPM, Inc.,
Sprout Capital V, Sprout Technology Fund, DLJ Venture
Capital Fund, DLJ Venture Capital Fund II, L.P., Sprout
Growth, Ltd., Sprout Growth, L.P., Primus Capital Fund II,
L.P., PAS Associates, Tweeds, Inc., the Company* and TW
Acquisitions, Inc. Incorporated by reference to the
Company's Current Report on Form 8-K dated September 30,
1993.
64
66
3.1 Certificate of Incorporation. FILED HEREWITH.
3.2 Certificate of Amendment of the Company's Certificate of
Incorporation together with Certificate of Designation of
Series A Convertible Additional Preferred Stock. FILED
HEREWITH.
3.3 Bylaws. Incorporated by reference to the Company's
Registration Statement on Form S-4 filed on April 16,
1993, Registration No. 33-6152.
4.1 Indenture between the Company and First Trust National
Association, as Trustee, dated as of August 17, 1993.
FILED HEREWITH.
4.2 Registration Rights Agreement dated as of August 17, 1993
by and between the Company* and Sun Life Insurance Company
of America. FILED HEREWITH.1994.
4.3 Warrant Agreement dated as of October 25, 1991 between the
Company* and NAR Group Limited ("NAR"). Incorporated by
reference to the Company's* Current Report on Form 8-K
dated October 25, 1991.
4.4 Registration Rights Agreement dated as of July 8,1991 among
the Company*, NAR and Intercontinental Mining & Resources
Limited ("IMR"). Incorporated by reference to the Company's*
Current Report on Form 8-K Dated July 10, 1991.
4.5 Warrant Agreement dated as of January 1, 1994 between the
Company and Sears Shop At Home Services, Inc. ("Sears"). FILED
HEREWITH.
4.6 Registration Rights Agreement dated as of February 16, 1995
among the Company and the Aegis Sellers. FILED HEREWITH.
10.1 1978 Stock Option Plan, as amended. Incorporated by reference
to the Company's* Annual Report on Form 10-K for the fiscal
year ended December 28, 1991.
10.2 Stock Purchase Agreement dated as of July 8, 1991 between the
Company* and NAR. Incorporated by reference to the
Company's* Current Report on Form 8-K dated October 25,
1991.
4.4 Registration Rights Agreement dated as of July 8,1991
among the Company*, NAR and Intercontinental Mining &
Resources Limited ("IMR"). Incorporated by reference to
the Company's* Current Report on Form 8-K Dated July 10,
1991.
4.5 Shareholders' Agreement dated October 25, 1991 between the
Company* and NAR. Incorporated by reference to the
Company's Current Report on Form 8-K dated October 25,
1991.
4.6 Definitive Agreement dated July 20, 1992 between the
Company* and NAR. Incorporated by reference to the
Company's* Registration Statement on Form S-4 filed on
July 28, 1992, Registration Statement No. 33-50102.
65
67
4.7 Form of Warrant Agreement dated as of January 1, 1994
between the Company and Sears Shop At Home Services, Inc.
("Sears"). Incorporated by reference to the Company's
Current Report on Form 8-K dated January 1, 1994.
10.1 1978 Stock Option Plan, as amended. Incorporated by
reference to the Company's* Annual Report on Form 10-K
for the fiscal year ended December 28, 1991.
10.2 Stock Purchase Agreement dated as of July 8, 1991 among
the Company* and North American Resources ("NAR"). Incorporated by reference to the Company's*
Current Report on Form 8-K dated July 10, 1991.
10.3 Amendment to the Stock Purchase Agreement dated as of
October 14, 1991 between the Company* and NAR.
Incorporated by reference to the Company's Current Report
on Form 8-K dated October 25, 1991.
10.4 Agreement dated as of December 21, 1992 among the
Company*, Hanover Direct Pennsylvania, Inc. ("HDPI"),
Brawn of other than as noted California, Inc. ("Brawn")
and General Electric Capital Corporation ("GECC").
Incorporated by reference to the Company's* Annual Report
on Form 10-K for the fiscal year ended December 26, 1992.
10.5 Amendment to the Account Purchase Agreement dated as of
July 12, 1993 among the Company*, HDPI, Brawn and GECC.
Incorporated by reference to the Company's* Current Report
on Form 8-K dated July 12, 1993.
10.6 Loan and Security Agreement dated as of May 5, 1993 among
Congress Financial Corporation ("Congress"), HDPI and
Brawn. Incorporated by reference to the Companies
Registration Statement on Form S-4 filed on April 16, 1993,
Registration No. 33-6152.
10.7 Amended and Restated Loan and Security Agreement dated as
of July 9, 1993 among HDPI, Brawn, GBM, GSF and Congress.
Incorporated by reference to the Company's* Current
Report on Form 8-K dated July 12, 1993.
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10.8 Second Amended and Restated Loan and Security
Agreement dated as of October 27, 1993 among
Congress, HDPI, Brawn, GBM, Gump's Corp., TCSA, Inc.,
SDSA, Inc. and Tweeds.63
10.3 Agreement dated as of December 21, 1992 among the Company*,
Hanover Direct Pennsylvania, Inc. ("HDPI"), Brawn of
California, Inc. ("Brawn") and General Electric Capital
Corporation ("GECC"). Incorporated by reference to the
Company's* Annual Report on Form 10-K for the fiscal year
ended December 26, 1992.
10.4 Amendment to the Account Purchase Agreement dated as of July
12, 1993 among the Company*, HDPI, Brawn and GECC.
Incorporated by reference to the Company's* Current Report on
Form 8-K dated July 12, 1993.
10.5 Credit Facilities and Reimbursement Agreement dated as of
October 12, 1994 ("Credit Agreement") among the Company
NationsBank of North Carolina, N.A. ("NationsBank"), as agent
for the Lenders, and the Lenders from time to time a party to
the Credit Agreement. FILED HEREWITH.
10.6 Revolving Credit and Term Loan Agreement dated as of October
12, 1994 ("Loan Agreement") among the Company, NationsBank, as
agent for the Lenders, and the Lenders from time to time a
party to the Loan Agreement. FILED HEREWITH.
10.7 Form of Stock Option Agreement between the Company* and
certain Directors of the Company, as amended. Incorporated by
reference to the Company's* Annual Report on Form 10-K for the
fiscal year ended December 28, 1991.
10.8 Executive Employment Agreement dated as of October 25, 1991
among the Company* and Jack E. Rosenfeld. Incorporated by
reference to the Company's Current Report on Form 8-K dated
October 25, 1991.
10.9 Form of Stock Option Agreement between the Company*
and certain Directors of the Company, as amended.
Incorporated by reference to the Company's* Annual
Report on Form 10-K for the fiscal year ended
December 28, 1991.
10.10 Form of Stock Option Agreement between the Company*
and certain Directors of the Company. Incorporated
by reference to the Company's Annual Report on Form
10-K for the fiscal year ended December 28, 1991.
10.11 Executive Employment Agreement dated as of October
25, 1991 among the Company*, HDPI and Jack E.
Rosenfeld. Incorporated by reference to the
Company's Current Report on Form 8-K dated October
25, 1991.
10.12 Stock Option Agreement dated as of January 1, 1992 between the
Company* and Jack E. Rosenfeld, as amended. Incorporated by
reference to the Company's* Annual Report on Form 10-K for the
fiscal year ended December 26, 1992.
10.13 Registration Rights Agreement dated as of October 25,
1991 between the Company* and Jack E. Rosenfeld.
Incorporated by reference to the Company's* Current
Report on Form 8-K dated October 25, 1991.
10.14 Employment Agreement dated as of October 14, 1991
between the Company* and Michael P. Sherman.
Incorporated by reference to the Company's Report on
Form 8-K dated October 28, 1991.
10.15 Amendment No. 1 to the Employment Agreement dated as
of June 18, 1993 between the Company and Michael P.
Sherman. FILED HEREWITH.
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6964
10.10 Registration Rights Agreement dated as of October 25, 1991
between the Company* and Jack E. Rosenfeld. Incorporated by
reference to the Company's* Current Report on Form 8-K dated
October 25, 1991.
10.11 Employment Agreement dated as of October 14, 1991 between the
Company* and Michael P. Sherman. Incorporated by reference to
the Company's* Current Report on Form 8-K dated October 25,
1991.
10.12 Amendment No. 1 to the Employment Agreement dated as of June
18, 1993 between the Company and Michael P. Sherman.
Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended January 1, 1994.
10.13 Registration Rights Agreement dated as of October 14, 1991
between the Company* and Michael P. Sherman. Incorporated by
reference to the Company's* Current Report on Form 8-K dated
October 25, 1991.
10.14 Employment Agreement dated as of October 14, 1991, between the
Company* and Wayne P. Garten. Incorporated by reference to the
Company's* Current Report on Form 8-K dated October 25, 1991.
10.15 Amendment No. 1 to the Employment Agreement dated as of June
18, 1993 between the Company and Wayne P. Garten. Incorporated
by reference to the Company's Annual Report on Form 10-K for
the year ended January 1, 1994.
10.16 Registration Rights Agreement dated as of October 14,
1991 between the Company* and Michael P.Sherman.
Incorporated by reference to the Company's* Current
Report on Form 8-K dated October 25, 1991.
10.17 Employment Agreement dated as of October 14, 1991,
between the Company* and Wayne P. Garten.
Incorporated by reference to the Company's* Current
Report on Form 8-K dated October 25, 1991.
10.18 Amendment No. 1 to the Employment Agreement dated as
of June 18, 1993 between the Company and Wayne P.
Garten. FILED HEREWITH.
10.19 Registration Rights Agreement dated as of October 14, 1991
between the Company* and Wayne P. Garten. Incorporated by
reference to the Company's* Current Report on Form 8-K dated
October 25, 1991.
10.20 Form of Indemnification Agreement among the Company*
and each of the Company's directors and executive
officers. Incorporated by reference to the
Company's* Current Report on Form 8-K dated October
25, 1991.
10.21 Letter Agreement dated May 5, 1989 among the
Company*, Theodore H. Kruttschnitt, J. David Hakman
and Edmund R. Manwell. Incorporated by reference to
the Company's* Current Report on Form 8-K dated May
10, 1989.
10.22 Hanover Direct, Inc. Savings Plan as amended. FILED
HEREWITH.
10.23 Restricted Stock Plan. Incorporated by reference to
the Company's* Registration Statement on Form S-8
filed on February 24, 1993, Registration No.
33-58760.
10.24 All Employee Equity Investment Plan. Incorporated by
reference to the Company's* Registration Statement on
Form S-8 filed on February 24, 1993, Registration No.
33-58756.
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70
10.25 Executive Equity Incentive Plan. Incorporated by
reference to the Company's* Registration Statement on
Form S-8 filed on February 24, 1993, Registration No.
33-58758.
10.26 Form of Supplemental Retirement Plan. FILED HEREWITH.
10.2765
10.17 Form of Indemnification Agreement among the Company* and each
of the Company's directors and executive officers.
Incorporated by reference to the Company's* Current Report on
Form 8-K dated October 25, 1991.
10.18 Letter Agreement dated May 5, 1989 among the Company*,
Theodore H. Kruttschnitt, J. David Hakman and Edmund R.
Manwell. Incorporated by reference to the Company's* Current
Report on Form 8-K dated May 10, 1989.
10.19 Hanover Direct, Inc. Savings Plan as amended. Incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended January 1, 1994.
10.20 Restricted Stock Plan. Incorporated by reference to the
Company's* Registration Statement on Form S-8 filed on
February 24, 1993, Registration No. 33-58760.
10.21 All Employee Equity Investment Plan. Incorporated by reference
to the Company's* Registration Statement on Form S-8 filed on
February 24, 1993, Registration No. 33-58756.
10.22 Executive Equity Incentive Plan. Incorporated by reference to
the Company's* Registration Statement on Form S-8 filed on
February 24, 1993, Registration No. 33-58758.
10.23 Form of Supplemental Retirement Plan. Incorporated by
reference to the Company's Annual Report on Form 10-K for the
year ended January 1, 1994.
10.24 License Agreement dated as of January 1, 1994 between Hanover
Ventures, Inc. and Sears. Incorporated by reference to the
Company's Current Report on Form 8-K dated January 1, 1994.
21.1 Subsidiaries of the Registrant. FILED HEREWITH.
23.1 Consent of Independent Public Accountants. FILED
HEREWITH.
* Hanover Direct, Inc., a Delaware corporation, is the successor by merger to
The Horn & Hardart Company and The Hanover Companies.
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66
21.1 Subsidiaries of the Registrant. FILED HEREWITH.
23.1 Consent of Independent Public Accountants. FILED HEREWITH.
27.1 Financial Data Schedule. FILED HEREWITH.**
-------------
* Hanover Direct, Inc., a Delaware corporation, is the successor by
merger to The Horn & Hardart Company and The Hanover Companies.
** EDGAR filing only.
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