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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)
OF THE SECURITIES EXCHANGE ACT OF 1934
(FEE REQUIRED)
For the fiscal year ended December 31, 199428, 1996
Commission file number 1-12082
HANOVER DIRECT, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-0853260
(State of incorporation) (I.R.S. Employer Identification No.)
1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY 07087
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (201) 863-7300
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
Indicate by check mark whether the registrantregistrant: (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.
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As of March 15, 199524, 1997, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $106 million$38,280,286 (based on the closing price of
the Common Stock on the American Stock Exchange on March 15, 1995)24, 1997).
As of March 15, 199524, 1997, the registrant had 92,816,843144,318,452 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
ItemsThe Company's definitive proxy statement to be filed by the Company pursuant to
Regulation 14A is incorporated into items 10, 11, 12 and 13.13 of Part III of this
Form 10-K.
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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 publishesmarkets, via a portfolio of branded specialty catalogs, offering home
fashion,fashions, general merchandise, men's and apparel.women's apparel and gifts. In December
1996, the Company regrouped its catalog titles so that all significant
decisions, including those regarding market positioning and strategy,
merchandising, circulation levels, catalog design, inventory management and cash
management, are made by six newly-created strategic business units -- Home
Fashions- Mid-Market, Home Fashions-Upscale, General Merchandise, Women's
Apparel, Men's Apparel and Gifts -- consisting of one or more catalog
operations. All of these business units will continue to utilize the Company's
central purchasing, telemarketing, fulfillment, distribution and administrative
functions.
The Company's home fashion catalogs
includefashions-mid-market strategic business unit includes
Domestications(R), the nation'sa leading specialty home textile catalog,
andcatalog. The home
fashions-upscale group includes The Company Store(R), an upscale direct marketer
of down comforters and other down and related products for the home.home, and Kitchen
& Home(R), an upscale kitchen and home product catalog. The Company also publishes
Gump's(R)general merchandise
group includes Improvements(R), the well-known San Francisco retailer and a leading upscaledo-it-yourself home improvements catalog, The
Safety Zone(R), a direct marketer of exclusive gifts, which opened its new retail store in downtown San
Francisco in March 1995. The Company is a market leader in the kitchenware
segment withsafety, prevention and protection products,
and Colonial Garden Kitchens(R), a leading specialty catalog featuring work saving and lifestyle enhancing
items for the kitchen and home,home. The women's apparel group includes
Silhouettes(R), featuring everyday, workout, special occasion and Kitchen
& Home(sm), introduced in 1994, a highly focused upscale kitchencareer
fashions for larger sized women, and home
product catalog. In apparel, the Company's portfolio includes Tweeds(R), the European inspired women's
fashion catalog, andcatalog. The men's apparel group includes International Male(R),
an
authority foroffering unique men's fashions with an international flair.
In 1994, the Company further expanded its catalog offerings by entering
intoflair, Austad's(R), a
venture with Sears, Roebuckdirect marketer of golf equipment, apparel and Co. ("Sears") inaccessories (the remaining
interest which the Company mails
several versionsdid not own was acquired in February 1996 in an asset
exchange), and Undergear(R), a leader in activewear, workout wear and fashion
underwear for men. The gifts group includes Gump's By Mail(R), a leading upscale
catalog of luxury gifts, and Gump's, a leading retail store based in San
Francisco.
The Company reviews its portfolio of catalogs as well as new
opportunities to the more than 20 million mail order and
credit card customers of Sears.acquire or develop catalogs from time to time. In 1994,1995, the
Company generated revenuesdiscontinued six catalogs, One 212(R), Simply Tops(R), Essence By
Mail(R), Hanover House(R), Mature Wisdom(R), and Tapestry(R). No catalogs were
discontinued during the 1996 fiscal year. The Company is developing a new
version of $71 million and operating incomethe Hanover House(R) catalog which will be test mailed in the second
quarter of $2.9 million from this venture.1997.
During 1994,1996, the Company mailed approximately 377332.0 million catalogs and
had total revenues of approximately $769 million and operating income of $16.0
million.catalogs.
The Company maintains a proprietary customer list currently containing
more thanapproximately 14 million names of customers (down from 18 million names in 1995
and 19 million names of customersin 1994)
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who have made purchases from at least one of the Company's catalogs within the
past 36 months. Over 76 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 earlymonths (down from approximately 7 million names in each of 1995 and 1994).
During 1996, the Company, acquired Improvements (R)in connection with its venture with Sears,
Roebuck and Co. ("Sears"), mailed several versions of its catalogs to the more
than 20 million mail order and credit card customers of Sears. Sears exercised
its right to terminate the venture in December 1996, but the Company and Sears
each retain the right to mail catalogs to customers of the venture.
In December 1996, the Company announced a leading
do-it-yourselfplan to reduce its annual
operating costs on continuing catalogs by approximately $50 million starting
January 1, 1997. Under the plan, the Company's fixed overhead would be reduced
by approximately $16 million, its marketing expenditures would be reduced by
approximately $21 million and other operating costs would be reduced by
approximately $13 million. The fixed overhead reductions would result primarily
from the shutdown of excess telemarketing capacity in the Company's Roanoke,
Virginia facility. The Company also announced a reduction in permanent positions
of approximately 550. The marketing expenditures reduction is primarily driven
by elimination of unprofitable circulation and improved customer retention and
target segmentation, but does not contemplate the discontinuance of any of the
current core catalogs. Because of lower prepaid catalog costs and inventory
purchases, working capital requirements are anticipated to be reduced by
approximately $16 million. In December 1996, the Company formulated a plan to
further reduce costs by consolidating its apparel distribution facility in
Roanoke, Virginia and its warehouse operations in Hanover, Pennsylvania with and
into its 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.fashions distribution center in Roanoke, Virginia.
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. NAR Group Limited, a British Virgin Islands
corporation (together with its affiliates, "NAR"), owns approximately 51%55.7% of
the Company's common stock.stock on a fully diluted basis. NAR, a private investment
holding company, 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 2
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luxury goods, tobacco and
other businesses.business ("Richemont"). The Company is a successor in interest to The Horn
& Hardart Company, a restaurant company founded in 1911, and Hanover House
Industries, Inc., founded in 1934.
THE COMPANY'S CATALOGS1997 RIGHTS OFFERING
On March 26, 1997, the Company announced that it entered into a Standby
Purchase Agreement with an affiliate of Richemont under which such affiliate
agreed to purchase all unsubscribed shares pursuant to a $50 million Rights
Offering to be conducted by the
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Company as soon as practicable following regulatory clearance. In connection
with such offering, NAR has agreed to apply $10 million of the Company's
indebtedness held by it to acquire $10 million of the Company's Common Stock
pursuant to such Rights Offering. NAR has not indicated whether it will exercise
Rights to be distributed to it to acquire additional shares. See "Financing --
Future Financing."
The Company's Catalogs
Each of the Company's specialty catalogs targets distinct market
segments offering a focused assortment of merchandise designed to meet the needs
and preferences of its target customers. Through market research and ongoing
testing of new products and concepts, each catalogstrategic business unit determines
itseach catalog's own merchandise strategy, including the appropriate price points, service levels,
mailing plans and presentation of its products. The Company is continuing its
development of exclusive or private label products infor a number of its catalogs,
including Domestications, Tweeds, Austad's and The Company Store, to further
enhance the brand identity of the catalog.catalogs.
The Company's specialty catalogs typically range in size from 32 to 10096
pages with four to sixtwelve new editions per year depending on the seasonality and
fashion content of the products offered. Each edition may be mailed several
times each season with variations in format and content. 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.
TheIn December 1996, the Company's operations arewere divided into two main groups, Non-Apparelsix
strategic business units -- Home Fashions-Mid-Market, Home Fashions-Upscale,
General Merchandise, Women's Apparel, Men's Apparel and Apparel.Gifts -- so that all
significant decisions, including those regarding market positioning and
strategy, merchandising, circulation levels, catalog design, inventory
management and cash management, could be made by the newly-created units in
order to create efficiency and bottom-line accountability. Revenues and the
percent of total revenues for 19931996 and 19941995 for each groupbusiness unit are set forth
below:below; all revenues are net of returns:
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1993 1994
1993 PERCENT OF 1994 PERCENT OF
REVENUES (A) TOTAL REVENUES REVENUES (A) TOTAL REVENUES1996 1995
1996 Percent of 1995 Percent of
Revenues Total Revenues Revenues Total Revenues
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(IN THOUSANDS) (IN THOUSANDS)(in thousands)
NON-APPAREL $483,876 75% $599,408 78%
APPAREL $158,635 25% $169,476 22%
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TOTAL COMPANY $642,511 100% $768,884 100%
======== ==== ======== ====Home Fashions -
Mid-Market $202.2 28.9% $223.7 29.8%
Upscale 97.2 13.9 81.8 10.9
General Merchandise 79.3 11.3 73.5 9.8
Women's Apparel 82.7 11.8 76.7 10.2
Men's Apparel 78.4 11.2 77.9 10.4
Gifts 57.7 8.2 50.7 6.8
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Total Continuing 597.5 85.3 584.3 77.9
Discontinued 102.8 14.7 165.5 22.1
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Total Company $700.3 100.0% $749.8 100.0%
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(a) RevenuesAs a result of the Company's plan to reduce annual operating costs,
revenues from continuing catalogs are netexpected to stay flat in 1997. Total
revenues are expected to decline by 14% in 1997, primarily due to the loss of
returns.
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NON-APPAREL GROUP.revenues from catalogs discontinued in fiscal 1995 and 1996.
The following is a description of the Company's core catalogs comprisingin each
of the Non-Apparel Group are as follows:Company's six strategic business units:
Home Fashions - Mid-Market
Domestications is the nation'sa leading specialty home textile catalog and the preferreda
fashion decorating source book for today's value-oriented and style-conscious
consumer. Domestications features sheets, towels, comforters, tablecloths,
draperies and other items for the home, and offers coordinated decorating ideas
for the home at value prices. During 1996, Domestications iswas also mailed to
Sears customers under the name Show Place.
Home Fashions-Upscale
The Company Store is an upscale direct marketer of down comforters and
other down and related products for the home. The Company Store also features
designer brand name sheets, towels and other bedding accessories.
Kitchen & Home features upscale kitchen and home products.
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General Merchandise
Improvements is a leading do-it-yourself home improvement catalog
featuring home improvement accessories. During 1996, Improvements was also
mailed to Sears customers under the name Sears Improvements.
The Safety Zone is a direct marketer of safety, protection and
prevention products.
Colonial Garden Kitchens features work saving and lifestyle enhancing
items for the kitchen and home. During 1996, Colonial Garden Kitchens iswas also
mailed to Sears customers under the name Great Kitchens.
Kitchen & Home features upscale kitchen and home products.
Gump'sThe Company is developing a new version of the well-known San Francisco retailer and a leading upscaleHanover House(R) catalog
marketerwhich will be test mailed in the second quarter 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.
Tapestry1997.
Women's Apparel
Silhouettes is a value-oriented home accessorieswomen's fashion catalog featuring flatware, dinnerware, furniture, rugseveryday, workout,
special occasion and other home decorating items. Tapestry
is also mailed to Sears customers under the name 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 and featurescareer fashions health care products and other items for easier living.
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 prevention products.
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APPAREL GROUP.
The catalogs comprising the Apparel Group are as follows:larger sized women.
Tweeds is a European inspired women's fashion catalog featuring
relaxed, cosmopolitan 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 is a source for unique apparel, supplying moderate-priced
clothing to women interested in embellished clothing that makes a statement.
One 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. It is a 50% joint
venture with Essence Communications Inc., publisher of Essence magazine. This
catalog will be discontinued after the Summer 1995 mailing.Men's Apparel
International Male is an authority for unique men's fashion with an
international flair.
Undergear is a leader in activewear, workout wear and fashion underwear
for men.
RECENT ACQUISITIONS AND VENTURES
Sears.Austad's, the remaining interest in which was acquired in February
1996, is a direct marketer of golf equipment and related apparel and
accessories.
Gifts
Gump's By Mail is a leading upscale catalog marketer of luxury gifts,
specialized housewares and other unique items.
Gump's is the well-known San Francisco retailer.
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 arewere
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based on existing Company catalogs and containcontained a title page with the Sears
name and logo. The specialty catalogs include:included: Show Place, based on the
Domestications catalog, Great Kitchens, based on the Colonial Garden Kitchens
catalog, and Right Touch,Sears Improvements, based on the TapestryImprovements catalog. The Sears
agreement hasAgreement had an initial three-year term and
continueswith automatic renewals thereafter
unless terminated bycommencing December 31, 1996 either party on various grounds,
includinggave at least 12 months prior
written notice that the Company's failureagreement would terminate at the end of the initial term
or any extended term. The Company was obligated to meet various operational
performance standards. Profits and losses from this licensing agreement are shared betweenstandards under 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.Agreement. If the Company electswas unable to
redeemmeet these standards (after written notice and a 30-day cure period), Sears
would be entitled to terminate the Series B StockSears Agreement. The Company was also
entitled to terminate the Sears Agreement in certain circumstances, including if
Sears failed to comply with any material provision of the Sears Agreement. Sears
exercised its right to terminate the venture in December 1996, since the Company
Common Stock, additional shares may be
issued ifwas not meeting certain of the operational standards, namely the order
fulfillment and reporting standards. The last catalogs were mailed in the first
quarter of 1997. The Company estimates that the termination of the venture will
not have a material impact on 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 warrantsearnings 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 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.1997.
MARKETING AND DATABASE MANAGEMENT
The Company maintains one of the largesta proprietary customer lists in
the industrylist currently containing
more thanapproximately 14 million names of customers (down from 18 million names in 1995
and 19 million names of customersin 1994) 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. This database is selectively enhanced with
demographic, socioeconomic, lifestyle and purchase behavior overlays from other
sources.
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The Company utilizes proprietary modeling and sophisticated
segmentation analysis, on a catalog by catalog basis, to devise catalog
marketing and circulation strategies that are intended to maximize thecustomer
contribution by customer by catalog. This analysis is the basis for the Company's
determination of which of the Company's catalogs (and how frequently)
will be mailed and how
frequently to a particular customer, as well as the promotional incentive
content of the catalog(s) such customer receives. In additionAs part of its plan to mailing to customers currently in its database,reduce
annual operating costs, the Company has an ongoing prospect acquisition program designedintends to attract new
customers on a cost effective basis.reduce catalog circulation and
improve customer retention and target segmentation.
The primary source of new customers for the Company's catalogs is lists
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.
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TELEMARKETING AND CUSTOMER SERVICE
The Company designs its service standards to exceed 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.
In 1994, the Company receivedreceives approximately 70%80% of its orders through its
toll-free telephone service which offers customer access seven days per week, 24
hours per day. The Company has created a telephone network to link its threetwo
primary telemarketing facilities in Hanover, Pennsylvania Roanoke,
Virginia and La Crosse,LaCrosse,
Wisconsin. The Company's telemarketing facilities utilize state-of-the-artstate- of-the-art
telephone switching equipment which enables the Company to route calls between
telemarketing centers and thus provide prompt customer service. SatelliteA satellite
telemarketing centers arecenter is also located in San Diego, California and Cleveland, Ohio.California. The Company
handled approximately 7 million telephone order calls in 1996. As part of its
December 1996 plan to reduce operating costs, the Company shut down its
telemarketing capacity in its Roanoke, Virginia facility in February 1997. In
the first quarter of 1997, the Company entered into a call center services
agreement with MCI Communications Corp. See "Purchasing."
The Company trains its telemarketing service representatives to be
courteous, efficient and knowledgeable about the Company's products.
Telemarketing service representatives 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 how 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 that enables
them to take overflow calls from other catalogs. The Company utilizes customer
surveys as an important measure of 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. In 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 primarypresently operates four distribution centercenters in three
principal locations: two in Roanoke, Virginia for home fashions and apparel, one
in Hanover, Pennsylvania for general merchandise including giftware and twoother
hardgoods, and one in Roanoke, Virginia.LaCrosse, Wisconsin for home fashions. The Company's
facilities processed approximately 1412.7 million packages in 1994.1996. The Company's
plan is to maximize efficiencies in merchandise handling and distribution by
consolidationconsolidating its warehouse and fulfillment centers continued in 1996. The
relocation of Austad's fulfillment operations from Sioux Falls, South Dakota to
other Company facilities was completed by mid-July 1996. The Company incurred
operating inefficiencies in the warehousingnew facilities and distributionoperating expenses related to
maintaining duplicate facilities in 1995 which continued in 1996.
As part of like items in specific fulfillment centers. In
1994,its plan to reduce annual operating costs, the Company
substantially completed the consolidation ofintends to consolidate its women's
apparel catalogs, all of which are now fulfilled from the Company's Roanoke, apparel facility. Also in 1994, the Company completed construction of a 530,000
square foot state-of-the-artVA and its Hanover, PA fulfillment
operations into its home fashions warehouse and distribution facility
on a separate sitecenter in Roanoke. This facility is projectedRoanoke, VA. These
moves are expected to cost approximately
$17 million, of which $12.4 million was incurred in 1994. This facility will
handle all of Domestications' fulfillment needs. Single item orders are
currently being shipped from this facility, which will be fully operationalcompleted in the second half of 1995. The1997. However, there is
no assurance that the Company will alsobe able to complete such moves on a timely
basis, or that it will be executed without disruption to the consolidationbusiness 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.one or
more of the Company's catalogs.
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The Company mails itsit catalogs through the United States Postal Service
("USPS") utilizing pre-sort, bulk mail and other discounts. Most of the
Company's packages are shipped through the USPS. Effective January 1, 1995, the
USPS increased postage rates by approximately 14% to 18%. Overall, catalog mailing and
package shipping costs approximated 16%18% of the Company's net revenues in 1994.1996.
The Company obtains rate discounts from the USPS by automatically weighing each
parcel and sorting and trucking packages to a number of USPS drop points
throughout the country. Some packages are shipped using a consolidator for less
frequently used drop points. On July 1, 1996, the USPS reclassification of
postal rates became effective. The Company also usesutilizes the United Parcel
Service, Federal Express and other delivery services.
PURCHASING
The Company's large sales volume permits it to achieve a variety of
purchasing efficiencies, including the ability to obtain prices and terms that
are more favorable than those available to smaller companies or than would be
available to the Company's individual catalogs were they to operate as
independent 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.three-year period. In the first quarter of
1997, the Company entered into a three-year call center services agreement with
MCI Communications Corp. under which it will obtain a material reduction in the
rate which it has been paying pursuant to the telecommunications contract now in
effect and savings with respect to certain database services to be provided to
it, which savings are expected to aggregate approximately $3 million over the
term of the contract. In that connection, the Company agreed to guarantee
certain levels of call volume with certain exceptions. See "Telemarketing".
The Company generally enters into annual agreementsarrangements for paper and
printing with a limited number of suppliers. These agreementsarrangements permit periodic
price increases or decreases based on prevailing market conditions, changes in
supplier costs and continuous productivity improvements. For 1994,1996, paper costs
approximated 7%8% of the Company's 8
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net revenues. In 1995, paper costs are expected to rise approximately 20% to 30%
due to increasing demand, rising costs of pulp, increased manufacturing costs,
and a lack of new manufacturing plants to meet increasing demand.
The Company believes it has developed and maintains strong
relationships with suppliers for key goods and services.anticipates that
paper prices will increase modestly in the second half of 1997.
MANAGEMENT INFORMATION SYSTEMS
The Company is continuing to upgrade its management information systems
by implementing new integrated software and migrating from a centralized
mainframe to mid-range mini-computers.mid-range-mini-computers. The migration of the Company's business
applications to mid-range mini-computers is an important part of the Company's
overall systems plan which defines the mid-mid and long-term systems and computing
strategy for the Company. In 1994 theThe Company purchased, and in 1995 is
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continuing to modify and install, on a catalog by catalog basis, these new
integrated systems for use in managing all phases of the Company's operations.
These systems have been designed to meet the Company's requirements as a high
volume publisher of multiple catalogs.
The new software system is an on-line, real-time system which includes
order processing, fulfillment, inventory management, list management and
reporting. The software, where implemented, provides the Company with a flexible
system that offers data manipulation and in-depth reporting capabilities. The
new management information systems are designed to permit the Company to achieve
substantial improvements in the way its financial, merchandising, inventory,
telemarketing, fulfillment and accounting functions are performed. Until the new
system is installed Company-wide, the Company will not achieve the full benefits
of the new system. Two catalogs were brought on-line in 1994. The Company
brought several catalogs on line in 1994, and expects to bringeight additional catalogs on-line through early 1996, when the Company expectsin 1995, and one in 1996. The balance
of its catalogs are scheduled to complete the project.be brought on-line in 1997. As of December 31, 1994,28,
1996, the Company invested approximately $9.1$17.9 million of capitalized costs in
such systems. The Company currently estimates thatsystems and anticipates capital expenditures of approximately $1 million
to complete the total cost to install and implement the new systems, including the cost of
dedicated internal personnel, will be approximately $15 million.conversion.
CREDIT MANAGEMENT
Several of the Company's catalogs, including Domestications,
International Male and Gump's, offer their own credit cards. The Company also
offers, for use with almost all catalogs, the use of the Hanover Shop At Home
credit card. The Company has a threefive year $75 million credit facility with
General Electric Credit Corporation ("GECC") expiring in the year 2000, which
provides for the sale and servicing of accounts receivable originating from the
Company's revolving credit cards. GECC's servicing responsibilities include
credit processing, collections, billing/payment processing, reporting and credit
card issuance. The Company is required to maintain certain financial covenants
related to this agreement which the Company failed to maintain, but has
received a waiver for the event of default at December 28, 1996.
INVENTORY MANAGEMENT
TheAlthough 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.season, the Company's inventory levels at the end
of 1996 were in excess of planned amounts. The Company has initiated additional
procedures to reduce its inventory position. 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. Due in
part to the transition to new management information systems, the Company is
currently operating with different systems which increases the difficulty of
optimizing inventory levels.
The Company acquires products for resale in its catalogs from numerous
domestic and foreign vendors. No single source supplied more than 5% of the
Company's products in 1994.1996. The Company's vendors are selected based on their
ability to reliably meet the
10
11
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.
RECENT ACQUISITIONS
Austad's. In May 1995, the Company acquired 67.5% of the outstanding
common stock of Austad Holdings, Inc. ("AHI"), which owned The Austad Company
("TAC"), the publisher of the Austad's catalog featuring golf equipment, apparel
and gifts. In February 1996, David Austad and certain family members surrendered
to AHI their AHI shares, amounting to 32.5% of the outstanding shares, and paid
approximately $1.1 million in exchange for all the outstanding shares of AGS,
Inc. ("AGS"), a South Dakota corporation newly formed by TAC to hold the
existing retail assets and liabilities of TAC. As a result of the
reorganization, AHI became a wholly owned subsidiary of the Company. AGS will
operate the four existing retail stores acquired from TAC, located in Illinois,
Minnesota and South Dakota, as Austad's stores under license from AHI. The
customer service and fulfillment operations of TAC were transferred to other
Company facilities in the first quarter of 1996 and the Company sold the TAC
warehouse and distribution facility in July 1996 for $2.1 million, which
approximated its book value. The net proceeds were used to pay the outstanding
mortgage on the property. In connection with the purchase of TAC, goodwill of
$4.5 million and mailing lists of $1.2 million were acquired. In December 1996,
the Company wrote off these assets.
FINANCING
Credit Facility. In November 1995, the Company entered into a $75
million secured credit facility (the "Credit Facility") with Congress Financial
Corporation ("Congress") consisting of a three-year revolving line of credit of
up to $65 million and two two-year term loans aggregating $10 million. The
revolving facility carries an interest rate of 1.25% above prime and the term
loan carries an interest rate of 1.5% above prime. The Credit Facility is
secured by all assets of the Company. At December 28, 1996, the Company had
approximately $18.2 million of outstanding borrowings under the revolving credit
facility (including documentary and standby letters of credit) and approximately
$8.9 million outstanding under the term loans, which are due in November 1997.
Remaining availability under the Congress facility was $26.0 million at
December 28, 1996. In April 1996, Congress provided the Company with an
additional $4 million over the borrowing base formula up to the maximum $75
million limit of the Credit Facility until the closing of the distribution of
transferable subscription rights (the "Rights") to subscribe for and purchase
additional shares of Common Stock and the sale of shares of Common Stock upon
the exercise of the Rights or pursuant to the Standby Purchase Agreement
executed on and dated as of July 18, 1996 between the Company and NAR (the
"Standby Purchase Agreement"). This distribution and sale of Common Stock is
referred to herein as the "Rights Offering." Under the Credit Facility, the
Company was required to comply with certain restrictive debt covenants including
maintaining minimum net worth of $80 million and working capital of $26 million
as of December 30, 1995. In April 1996, these restrictive debt covenants were
revised to $75 million and $21 million, respectively, in an amendment to the
Credit Facility and, upon the closing of the Rights
11
12
Offering, returned to their previous levels. In December 1996, the minimum net
worth covenant was lowered to $70 million and Congress also agreed to address
the 1997 net worth covenant level after a review of the Company's business plan.
Congress also began lowering the advance rate for inventories in November 1996
and continued to reduce it monthly until a new appraisal was completed in March
1997. The current advance rate for inventories is 52%. On March 26, 1997, the
Company reached an agreement in principle with Congress under which Congress
would waive certain defaults and amend the Credit Facility to (a) reduce the
aggregate amount of required net worth and working capital to be maintained by
the Company and (b) amend the covenant relating to material adverse changes so
that measurement thereunder will commence from December 28, 1996.
In September 1996, Intercontinental Mining & Resources Incorporated, an
affiliate of NAR ("IMR"), loaned the Company $10 million as evidenced by a
subordinated promissory note in the amount of $10 million (the "NAR Promissory
Note"). Such loan bears interest at prime plus 1 1/2%, was due on November 14,
1996 and, if it is not repaid before May 15, 1997, is convertible at the option
of NAR into shares of Common Stock at the lower of the fair market value thereof
on the date of execution or the then current fair market value thereof. The NAR
Promissory Note is subordinate to the Credit Facility and excluded from the
working capital covenant calculation. NAR has agreed to apply this $10 million
note to acquire $10 million of the Company's Common Stock (see Future
Financing).
On December 19, 1996, the Company finalized its agreement (the
"Reimbursement Agreement") with Richemont Finance S.A., an affiliate of
Richemont, together with the family of Alan G. Quasha, Chairman of the Board of
the Company, jointly own NAR, that provided the Company with up to approximately
$28 million of letters of credit which were issued under the Credit Facility.
The letters of credit will expire on February 18, 1998 and carry an interest
rate of 3.5% above the prime rate, currently 11.75%, payable to Richemont
quarterly on amounts drawn under the letters of credit. The Company has agreed
to pay a facility fee equal to 5% of the principal amount of the letters of
credit as well as all other fees incurred in connection with providing the
facility. In the event that the Company has not paid in full, by the expiration
date, any outstanding balances under the letters of credit, Richemont shall have
the option, exercisable at any time prior to payment in full of all amounts
outstanding under the letters of credit to convert such amount into Common Stock
of the Company at the mean of the bid and ask prices of the Company's Common
Stock on November 8, 1996, or the mean of the bid and ask prices of the
Company's Common Stock on each of the thirty days immediately prior to the date
of exercise of the conversion privilege. The Reimbursement Agreement is
subordinate to the Credit Facility. On December 5, 1996, Richemont advanced the
Company $10 million against the anticipated $28 million line of credit. The
Company repaid the $10 million loan after the letter of credit agreement was in
place on December 19, 1996.
Rights Offering. The Company commenced a $50 million rights offering
(the "Rights Offering") on July 19, 1996. Holders of record of the Company's
Common Stock, 6% Series A Convertible Additional Preferred Stock and Series B
Convertible Additional
12
13
Preferred Stock as of July 18, 1996, the record date, were eligible to
participate in the Rights Offering. The Rights were exercisable at a price of
$1.03 per share. Shareholders received .51 Rights for each share of Common
Stock held, 3.72 rights for each share of Series A Convertible Additional
Preferred Stock held and .77 rights for each share of Series B Convertible
Additional Preferred Stock held as of the record date. The Rights Offering
closed on August 23, 1996.
Due to the Company's continued operating losses, the Company requested
that NAR advance up to $25 million against all the Rights distributed to it
and/or its commitment to purchase all of the unsubscribed shares. In May 1996,
NAR advanced the Company $25 million under a promissory note. Under the
provisions of such promissory note, the Company repaid NAR the $25 million
advance plus accrued interest upon the closing of the Rights Offering.
The Company issued 48,748,785 shares as a result of the Rights Offering
which generated proceeds of approximately $48 million, net of expenses. NAR
received Rights entitling it to purchase 24,015,964 shares in the Rights
Offering and exercised such Rights. In addition, the Company and NAR entered
into a Standby Purchase Agreement, pursuant to which NAR purchased 6,898,866
shares not subscribed by shareholders and received approximately $.5 million as
a fee. The proceeds of the Rights Offering were used by the Company: (i) to
repay the $14 million principal amount of 9.25% Senior Subordinated Notes
("9.25% Notes") due on August 1, 1998 held by an affiliate of NAR plus accrued
interest, (ii) to repay the $25 million principal amount advanced under the
promissory note plus accrued interest and (iii) to repay approximately $9
million under the credit facility with Congress. The Company recorded an
extraordinary expense related to the early extinguishment of the 9.25% Notes,
representing a write-off of the unamortized debt issuance costs of approximately
$1.1 million.
Future Financing. The Company has announced that it intends to
distribute transferable subscription rights to subscribe for and purchase
additional shares of Common Stock to the holders of record of the Company's
Common Stock and Series B Convertible Additional Preferred Stock (the "1997
Rights Offering") as soon as it has filed with and has declared effective by the
SEC a registration statement with respect thereto. The Rights will be
exercisable at a price of $.90 per share. NAR has agreed to subscribe for and
purchase shares of Common Stock having a value of at least $10 million and to
pay for such shares by the surrender of the NAR Promissory Note in the principal
amount of $10 million held by its affiliate. Richemont has agreed to purchase
all shares of Common Stock which have not been subscribed for and purchased by
shareholders in the 1997 Rights Offering. Richemont has agreed to advance up to
$30 million against its commitment to purchase all of the unsubscribed shares.
In connection with the agreement the Company named two Richemont
representatives, Messrs. Jan du Plessis and Howard Tanner, to its Board of
Directors (the "Board") and Executive Committee, and will nominate a third
Richemont representative to the Board at the next annual meeting. The new Board
members fill positions vacated by the recent resignations of Geraldine Stutz and
Jeffery R. Laikind. In addition, Mr. du Plessis has been named to the Audit
Committee of the Board.
13
14
EMPLOYEES
The Company currently employs approximately 3,3002,800 persons on a full
time basis and approximately 600900 persons on a part time basis. In December 1996,
the Company announced a plan to reduce annual operating costs which included a
plan to reduce permanent positions by approximately 550. Approximately 150160
employees at one of the Company's subsidiaries are represented by a union. The
Company believes its relations with its employees are good.
SEASONALITY
AlthoughThe Company has experienced substantially increased sales in the fourth
quarter of each year as compared to the first three quarters, due in part to 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 mailsmailing more catalogs in the second halfpart of the year.year and decreasing
apparel sales as a percentage of total sales.
COMPETITION
The mail order catalog business is highly competitive.
The Company believes that the principal basesprinciple basis upon which it competes
are quality, value, service, product offerings, catalog design, convenience efficiency and
safety.efficiency. 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 of women's fashions,apparel, home furnishings,fashions, general merchandise,
men's apparel and men's fashions.gifts. A number of the Company's competitors have
substantially greater financial, distribution and marketing resources than the
Company. However, the
Company believes that the recent substantial growth in the costs of doing
business in the direct marketing industry, especially with respect to the
increased costs of paper and postal expenses, may cause a consolidation in the
industry as smaller catalogs face the difficult cost increases.
TRADEMARKS
Each of the Company's catalogs has its own federally registered
trademark. 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 and 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 with respect to any goods it directly imports.
To date,
such governmental regulations have not had a material adverse effect on the
Company's business.14
15
The imposition of a sales and use tax collection obligation on
out-of-state catalog companies in states to which they ship products was the
subject of a case decided in 1994 by the United States Supreme Court. While the
Court reaffirmed an earlier decision that 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-foot85,000-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.officers. The Weehawken facility is leased for a
15-year term expiring in 2005. The Company intends to vacate these premises in
1997 as part of its plan to further reduce costs. The Company operates warehousefour
warehouses and fulfillment facilities in twothree principal locations: two in
Roanoke, Virginia for home fashions and women's apparel, andone in Hanover, Pennsylvania
for general merchandise, including giftware and other hardgoods, and men's apparel.one in
LaCrosse, Wisconsin for upscale home fashions.
In Roanoke, the Company owns a newly constructedcompleted 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 fullybecame operational in the second half
of 1995. This facility will handle1995 and handles all of Domestications' fulfillment needs.processing. Also in
Roanoke, the Company leases itsa 175,000 square-foot apparel distribution and telemarketing center
from a partnership in which it owns a 50% interest. As part of the Company's
plan to further reduce costs, the Company intends to consolidate the apparel
distribution facility in Roanoke, Virginia and the Hanover, PA distribution
facility with and into the home fashions distribution center in Roanoke,
Virginia in the third quarter of 1997. See "Distribution."
In Hanover, the Company owns a distribution center of approximately
265,000 square feet and leases a telemarketing and administrative office
facility of 123,000 square feet and a warehouse facility of 433,000 square feet.
Renewal terms through 2009 remain on the first lease; the secondtelemarketing center extend through 2009. The warehouse
lease expires November 30, 1995 and is expected to be extended for an additional
period.in May 1997 with two short-term renewal periods.
In addition to these principal facilities, the Company leases
administrative facilities for men's apparel in San Diego, California and for
women's apparel in Edgewater, New Jersey. The San Diego facility also serves
as a telemarketing and customer service facility for men's apparel. The Company
also operates a telemarketing and fulfillment facility in Cleveland, Ohio for
the Improvements and Leichtung Workshops catalogs.
In La Crosse,LaCrosse, Wisconsin, the Company also owns a 150,000 square-foot
home fashions manufacturing and assembly facility and a 58,000 square-foot
telemarketing and customer service facility, and leases a warehouse and
fulfillment center of 185,000 square feet under a short-term lease.
11In addition to these principal facilities, the Company leases
administrative facilities for men's apparel in San Diego, California. The San
Diego facility also serves as a telemarketing and customer service facility.
15
1216
The Company's principalprinciple retail operations consist of the newly
relocated Gump's retail
store, which occupies approximately 30,000 square feet in a building in downtown
San Francisco, California. The Gump's facility, which is leased pursuant to a
15-year lease, also includes approximately 15,000 square feet of administrative
offices for
retail and mail order functions.offices. The Company also operates and leases 79 other retail and outlet stores
at various locations.
12
13
The following chart lists eachCompany leases premises in Edgewater, New Jersey and owns a
building subject to a lease in Cleveland, Ohio. The Company is actively seeking
to sell its interest in the Cleveland facility. The Company has sublet a portion
of the Company's principal properties:Edgewater facility and is actively seeking to sub-lease the remainder.
16
17
APPROXIMATE
CATALOG
LOCATIONLOCATION(a) STATUS SQUARE FOOTAGE
USE
------------------------ -------------- ----------- ------ --------------
-------
Warehouse and Fulfillment
Centers:
Roanoke, VA Owned 530,000
Roanoke, VA Leased 175,000
Hanover, PA Leased 433,000
(a)
Hanover, PA Leased/OwnedOwned(c) 265,000
(a) and (b)
Roanoke, VA Owned 530,000 Domestications
Roanoke, VA Leased 175,000 Women's Apparel(c)
La Crosse,LaCrosse, WI Leased 185,000 The Company Store
Corporate and
Administrative Offices:
Weehawken, NJ Leased 85,000
San Diego, CA Leased 30,000 Men's Apparel(d)30,000(b)
San Francisco, CA Leased 15,000 Gump's(e)
Edgewater, NJ15,000(c)
Beachwood, OH Leased 65,000 Women's Apparel
Weehawken, NJ Leased 85,000 Corporate Headquarters
Cleveland, OH Leased/Owned 40,000 Leichtung Workshops
and Improvements(f)7,740
Telemarketing and
Customer Service:
Hanover, PA Leased 123,000
(a)
La Crosse,LaCrosse, WI Owned 58,000
The Company Store
Roanoke, VASan Diego, CA Leased 175,000 Women's Apparel(c)
Beachwood, OH Leased 7,800 Leichtung Workshops
and Improvements30,000(b)
Retail Stores:
San Francisco, CA Leased 30,000 Gump's30,000(c)
San Diego, CA Leased 3,800
West Hollywood, CA Leased 3,600
Tysons Corner, VA Leased 1,700
The Safety Zone
San Diego, CAMayfield Heights, OH Leased 3,800 International Male
West Hollywood, CA3,750
Hanover, PA Leased 3,600 International Male24,000
Kenosha, WI Leased 4,708
LaCrosse, WI Leased 13,326
Madison, WI Leased 5,206
Oshkosh, WI Leased 2,000
Manufacturing and
Assembly:
La Crosse,LaCrosse, WI Owned 150,000 The Company Store
13(a) Does not include the Sioux Falls, South Dakota (closed 1996),
Cleveland, Ohio (closed 1995) or Edgewater, New Jersey (closed 1995),
in conjunction with the consolidation of the Company's warehouse
facilities.
17
14
-------------
(a) Used for Gump's, Colonial Garden Kitchens, Kitchen & Home, Tapestry,
Hanover House, Mature Wisdom and Men's Apparel.18
(b) The building is owned by the Company and the property is subject to a
ground lease.
(c) Telemarketing and warehouse/fulfillmentcorporate/administrative functions are all located
and performed at the one facility. Square footage stated represents the
entire facility.
(d) Also a telemarketing center for Men's Apparel.
(e)(c) 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
15
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various routine lawsuits of a nature which
isare 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 bewas purportedly 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, seekssought to recover monetary
damages the class hashad allegedly suffered as a result of certain alleged false
and materialmaterially 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 cancould be granted. The motion is scheduledOn May 23, 1995, the United States District Court for
the District of New Jersey dismissed the plaintiff's claim, with prejudice, for
failure to state a claim upon which relief could be heard bygranted. On June 22, 1995,
plaintiff filed a notice of appeal of the May 23, 1995 decision to the United
States Court of Appeals for the Third Circuit. On March 26, 1996, the Court on April 10, 1995.of
Appeals rendered its decision affirming the District Court's decision. On or
about July 8, 1996, a petition for certiorari was filed by plaintiff with the
United States Supreme Court. The Company and its directors and executive
officers believe they have meritorious defensesfiled a brief in opposition to the
Complaint and intend to
defendpetition on August 13, 1996. On October 7, 1996, the matter vigorously.United States Supreme Court
denied the plaintiff's petition.
18
19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
15The Board of Directors of the Company and NAR Group Limited, the holder
of 54.3% of the Company's Common Stock, approved on September 26, 1996, pursuant
to Sections 242 and 228 of the Delaware Business Corporation Law, an amendment
to the Company's Certificate of Incorporation increasing the number of shares of
Common Stock which the Company shall have authority to issue from 150,000,000 to
225,000,000 shares. This action became effective upon the filing of a
Certificate of Amendment to the Certificate of Incorporation on October 31,
1996. The increase in authorized shares was necessary to provide enough shares
of Common Stock for issuance pursuant to options and warrants previously granted
by the Company to directors and officers, including options to purchase an
aggregate of 7,530,000 shares granted by the Company on August 23, 1996 to the
Company's President and Chief Executive Officer, Rakesh K. Kaul. The additional
shares of Common Stock not used for such purpose, together with the shares of
Common Stock held in treasury, are available for general corporate purposes, as
determined by the Board of Directors, without (except as otherwise required by
law) further authority from shareholders.
As of September 26, 1996, the record date for the action (the "Record
Date"), there were 143,044,492 shares of Common Stock and 634,900 shares of
Series B Convertible Additional Preferred Stock, par value $.01 and stated value
$10.00 per share (the "Series B Preferred Stock"), outstanding. The approval of
the holders of a majority of the outstanding shares of Common Stock and Series B
Preferred Stock, voting together as a single class, was necessary to adopt the
amendment to the Certificate of Incorporation. Each outstanding share of Common
Stock was entitled to one vote on the proposal to adopt the amendment and each
outstanding share of Series B Preferred Stock was entitled to 1.5 votes on the
amendment. NAR, as the holder of 78,004,954 shares of Common Stock, or 54.3% of
the voting power of the Common Stock and the Series B Preferred Stock voting
together as a class, therefore, had the requisite power to approve the amendment
by written consent. Such consent was executed and delivered on September 26,
1996. Under Delaware law, shareholders who did not consent to the amendment did
not have appraisal rights with respect to the shares held by them.
19
1620
P A R T II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.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.
1995 HIGH LOW
- ---- -------- ---------------
1993
First Quarter $ 4 $$3 5/8 $2 1/2
Second Quarter 3 1/16 2 5/16
Third Quarter 2 13/16 1 15/16
Fourth Quarter 2 1/16 1 1/2
1996
First Quarter 1 3/4 1 1/8
Second Quarter 42 1 1/2 2 3/48
Third Quarter 5 1/2 4 1/61 5/8 7/8
Fourth Quarter 71 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 limitedrestricted 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 in excess of one million shares of its Common
Stockcapital stock by the most restrictivecertain debt covenants contained in debt
agreements to which the Company is a party.
As of March 15, 1995,24, 1997, there were approximately 4,5674,600 holders of record
of Common Stock.
1620
1721
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data for each of the years
indicated:
1990 1991 1992 1993 1994 --------- ---------- ---------- ---------- ----------1995 1996
---- ---- ---- ---- ----
(in thousands, except share and per share data)
INCOME STATEMENT DATA:
REVENUES $555,770 $623,650 $586,562 $642,511 $768,884Income Statement Data:
Revenues $ 586,562 $ 642,511 $ 768,884 $ 749,767 $ 700,314
Depreciation and amortization 2,681 3,279 6,157 9,020 12,192
Operating (loss) income 10,190 (26,078) 14,402 19,076 15,975 (22,619) (94,497)
Interest expense, net . . . . . . . . 11,426 18,341 13,135 2,757 2,813 Other income (expense) . . . . . . . - (6,437) - 888 (1,833)
Income (loss) from continuing
operations . . . . . . . . . . . . . . (2,136) (51,081) 1,048 17,337 14,838
(Loss) from discontinued operations . . . (115,921) (21,119) - - -
-------- -------- -------- -------- --------4,531 8,398
Income (loss) before extraordinary
items and cumulative effect of
accounting change for income taxes . . . (118,057) (72,200) 1,048 17,337 14,838 (28,153) (103,895)
Extraordinary items . . . . . . . . . . . 2,146 6,915 9,201 - --- -- (1,837) (1,134)
Cumulative effect of accounting
change for income taxes . . . . . . . . - - 10,000 - -
-------- -------- -------- -------- --------
NET INCOME (LOSS) . . . . . . . . . . . . (115,911) (65,285)-- -- -- --
----------- ----------- ----------- ----------- -------------
Net income (loss) 20,249 17,337 14,838 (29,990) (105,029)
Preferred stock dividends . . . . . . . . - (466) (3,197) (4,093) (135) -------- -------- -------- -------- --------(240) (225)
----------- ----------- ----------- ----------- -------------
Net income (loss) applicable to
common shareholders . . . . . . . . . . ($115,911) ($65,751)stockholders $ 17,052 $ 13,244 $ 14,703 ========= ======== ======== ======== ========$ (30,230) $ (105,254)
=========== =========== =========== =========== =============
Per Share:
Income (loss) from continuing
operations . . . . . . . . . . . . . . ($ .15) ($ 3.16) ($ .06) $ .17 $ .16
(Loss) from discontinued operations . . (8.24) (1.30) - - -
-------- -------- -------- -------- --------share:
Income (loss) before extraordinary
items . . . . . . . . . . . . . . . . . (8.39) (4.46)and cumulative effect of
accounting change for income
taxes $ (.06) .17 .16$ 0.17 $ 0.16 $ (.30) $ (.93)
Extraordinary items . . . . . . . . . . . .15 .43 .24 - --- -- (.02) (.01)
Cumulative effect of accounting
change for income taxes . . . . . . . . - - .26 - -
-------- -------- -------- -------- ---------- -- -- --
----------- ----------- ----------- ----------- -------------
Net (loss) income . . . . . . . . . . . . ($ 8.24) ($ 4.03)(loss) $ .44 $ .17 $ .16 ========= ======== ======== ======== ========$ (.32) $ (.94)
=========== =========== =========== =========== =============
Weighted average number of shares
outstanding:
Primary . . . . . . . . . . . . . . . 14,068,460 16,287,723 38,467,015 75,625,330 93,285,190 ========== ========== ========== ========== ==========93,029,816 111,441,247
=========== =========== =========== =========== =============
Fully diluted . . . . . . . . . . . . . . 14,068,460 16,287,723 38,467,015 77,064,131 93,285,190
========== ========== ========== ========== ==========
BALANCE SHEET DATA
(END OF PERIOD)93,235,190 93,029,816 111,441,247
=========== =========== =========== =========== =============
Balance Sheet Data (end of period):
Working capital (deficit) . . . . . . . . $ 8,913 ($37,636) $ 31,566 $ 25,180 $ 58,501 28,774 (1,507)
Total assets . . . . . . . . . . . . . . 234,761 162,800 134,352 188,838 262,246 279,009 220,827
Total debt . . . . . . . . . . . . . . . 155,649 127,918 43,362 36,160 37,915 62,802 65,189
Preferred stock of subsidiary . . . . . . - 35,247 32,842 - --- -- -- --
Shareholders' (deficit) equity . . . . . (61,484) (113,632) (19,758) 45,868 109,725 87,210 31,740
There were no cash dividends declared on the Common Stock in any of the periods.
See Notes to Consolidated Financial Statements.
1721
1822
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
Statements of Income:
Fiscal Year
--------------------------------------------
1992 1993FISCAL YEAR
---------------------------------
1994 -------- -------- --------1995 1996
----- ----- -----
Revenues 100.0% 100.0% 100.0%
Cost of sales and operating expenses . . . . . . . . . . 65.1 63.6 63.362.9 64.5 68.4
Write-down of inventory of
discontinued catalogs -- 1.1 .2
Special charges -- .3 5.2
Selling expenses . . . . . . . . . . . . . . . . . . . . 23.6 24.6 25.7 27.4 27.9
General and administrative expenses . . . . . . . . . . . 8.9 8.9 9.08.5 8.5 10.1
Depreciation and amortization .8 1.2 1.7
----- ----- -----
Income (loss) from operations . . . . . . . . . . . . . . . . . 2.5 3.0 2.1 (3.0) (13.5)
Interest expense, net . . . . . . . . . . . . . . . . . 2.2 .4 .4.6 1.2
Other income/income (expense) . . . . . . . . . . . . . . . . . - .1 (.2) -- --
Net income . . . . . . . . . . . . . . . . . . . . . . . 3.5% 2.7%(loss) 1.9% (4.0%) (15.0%)
RESULTS OF OPERATIONS
19941996 COMPARED WITH 19931995
Net Income.Income(Loss). The Company reported a net incomeloss before extraordinary
items of $14.8$103.9 million, or $.16$(.93) per share for the year ended December 31, 1994,28,
1996 compared to a net incomeloss before extraordinary items of $17.3$28.2 million, or
$.17$(.30) per share in 1993.1995. Including the effect of the extraordinary losses of
$1.1 million and $1.8 million for the early extinguishment of debt, the Company
reported net losses of $105.0 million and $30.0 million, or $(.94) and $(.32)
per share for the years ended December 28, 1996 and December 30, 1995,
respectively. Per share amounts are expressed after deducting preferred
dividends of $.1$.2 million in 1994both 1996 and $4.1 million in 1993.1995. The weighted average number of
shares outstanding increased approximately 21%
to 93,285,190 shareswas 111,441,247 for the year ended December 31, 1994,28, 1996 compared
to 77,064,131 shares93,029,816 in 1995.
In December 1996, after a review of its fourth quarter and year-to-date
operating results and in connection with formulating its 1997 business plan, the
Company announced its intentions to realign its operating units into six
decentralized operating units, Home Fashions - Upscale, Home Fashions - Mid-
Market, General Merchandise, Gifts, Women's Apparel, and Men's Apparel. The
Company believes that this new business structure will increase business unit
accountability, through improved working capital management, and provide
increased service levels to the Company's core customers. This new structure
will also result in reduced fixed overhead costs as the Company's centralized
services will be utilized more efficiently. During the latter part of the year,
the Company began to implement this plan, completed an assessment of
recoverability of long-lived assets for certain underperforming catalogs and
recorded special charges that totaled $36.7 million. These charges included a
provision for the same periodconsolidation of distribution centers and relocation of
facilities and severance expenses approximating $14.7 million. Also included in
1993,these charges was the write-off of certain long-lived assets that Company's
management determined were impaired of approximately $22.0 million.
22
23
The net loss in 1996, after considering special charges, was primarily the
result of (i) increased inventory write-downs due to the public
offeringCompany's inability to
properly sustain its inventory in-stock position due to liquidity problems, and,
in certain instances, the purchase of inventory quantities in excess of demand
(ii) lower response rates as a result of increased order cancellations, (iii)
increased fulfillment and telemarketing costs due to inventory handling costs
associated with the higher backorder levels and increased merchandise returns
and (iv) the fixed cost infrastructure which the Company's continuing catalogs
could not fully absorb. The Company does not expect these problems to continue
in 1997, however, there is no assurance that these or similar problems will not
recur in 1997.
Revenues. Revenues decreased 6.6 % in 1996 to $700 million from $750
million in 1995. Revenues of continuing catalogs increased approximately 2% from
$584 million in 1995 to $597 million in 1996, which was offset by a 38% decline
to $103 million in revenues from discontinued catalogs. The Company circulated
332 million catalogs in 1996. Although this represents a 10% reduction from the
prior year, continuing catalog circulation increased 1% from the prior year.
The following table summarizes the Company's revenues and the conversionpercent of
total revenues for 1996 and 1995 for each business unit; all revenues are net of
returns:
1996 1995
PERCENT PERCENT
1996 OF TOTAL 1995 OF TOTAL
Business Unit (in thousands) REVENUES REVENUES REVENUES REVENUES
Home Fashions -
Mid-Market $202.2 28.9% $223.7 29.8%
Upscale 97.2 13.9 81.8 10.9
General Merchandise 79.3 11.3 73.5 9.8
Woman's Apparel 82.7 11.8 76.7 10.2
Men's Apparel 78.4 11.2 77.9 10.4
Gifts 57.7 8.2 50.7 6.8
------ ----- ------ -----
Total Continuing 597.5 85.3 584.3 77.9
Discontinued 102.8 14.7 165.5 22.1
------ ----- ------ -----
Total Company $700.3 100.0% $749.8 100.0%
====== ===== ====== =====
Revenues from the Home Fashions - Mid Market group decreased 10% to $202.2
million for the current year from $223.7 million in 1995. Domestications'
revenues decreased in 1996 due to a 6% increase in order cancellation, while
filling backorders resulted in a 3% increase in merchandise returns and a
decrease in average order size. This decrease was partially offset by an
increase in response rates. Revenues from the Home Fashions-Upscale group
increased 19% to $97.2 million as customer response rates and average order size
increased in the current year. The General Merchandise group's revenues
increased 8% due mainly to an increase in
23
24
Improvements revenues which were partially offset by decreases in Colonial
Garden Kitchens and The Safety Zone revenues. The increase in Improvements
revenues is due to increased average order size and a 29% increase in
circulation which was partially offset by a decrease in response rates. Revenues
generated by the Men's Apparel group increased .5% to $78.4 million. Revenues
for the Women's Apparel group increased 7.8% to $82.7 million due to a 12%
increase in circulation, increased response rates, and average order size.
Revenues for the Gifts group increased 14% to $57.7 million mainly due to
increased response rates and average order size of the Gump's By Mail catalog.
Revenues from the catalogs discontinued in 1995 and the discontinued Sears
venture decreased by $62.6 million to $102.9 million in 1996.
Operating Costs and Expenses. Cost of sales and operating expenses,
which include fulfillment and telemarketing costs, as a percentage of revenues
increased to 68.4% in 1996 from 64.5% in 1995. This increase is primarily
attributable to lower product margins due to lower recovery rates experienced
from accelerated disposition of inventory as a result of poor in-stock positions
resulting from liquidity problems, as well as the Company's decision to
continue to reduce inventory levels. Also, inventory write-downs for continuing
catalogs were $11.2 million in 1996, compared to $4.4 million in 1995, primarily
for Domestications, Tweeds and Austad's. These incremental write-downs were
recorded as part of the Company's plans to reduce its inventory levels and the
resulting expectation of lower recovery rates. In addition, fulfillment costs
were higher in 1996 as a result of increased backorder levels and operating
inefficiencies for most of the year in the Company's Roanoke, Va. fulfillment
center.
The write-down of inventory of discontinued catalogs was $1.1 million in
1996 compared to $8.6 million in 1995. These write-downs consisted of
incremental inventory write-downs in excess of normal seasonal write-downs.
During 1995, the Company discontinued six poorly performing catalogs which had
incurred substantial losses and which the Company believed could not overcome
increased paper and postage prices. The write-down in 1996 was recorded due to
the significantly lower recovery rates than previously anticipated experienced
on the liquidation of inventory related to these catalogs.
Special charges taken by the Company in 1996 totaled $36.7 million.
These charges consist, in part, of severance ($3.2 million), facility
exit/relocation costs and fixed assets write-offs ($11.5 million). These charges
were recorded due to the Company's decision to move to a decentralized business
structure with a streamlined infrastructure. This plan calls for the
consolidation of several inefficient fulfillment facilities into existing
underutilized facilities and the relocation of corporate offices. In addition,
the Company's review of the carrying value of certain long-lived assets of
Tweeds, Austad's and The Safety Zone's led to the write-off of approximately $22
million. The Company recorded charges of $1.5 million in 1995 consisting
primarily of facility exit costs ($.7 million), lease termination fees ($.3
million) and severance expenses ($.5 million) in connection with the closing of
some of its facilities.
Selling expenses decreased $10.6 million but increased to 27.9% of
revenues in 1996 from 27.4% of revenues in 1995. The total expense decreased
mainly due to a 10% reduction in catalog circulation. This decrease was offset
by increased catalog postage expense and lower response rates in the current
year for the discontinued catalogs. This expense as a percentage of
24
25
revenues increased due to lower response rates as a result of weak customer
demand and increased order cancellations. Catalog postage and paper expense
increased as the Company increased the number of sale pages in its catalogs
which was designed to speed the sale of slow moving inventory.
General and administrative expenses increased $6.5 million, or 10% in 1996
to $70.6 million. The increase is primarily attributable to costs associated
with hiring the Company's new management team and to increased bad debt
expense, reflecting higher losses on the Company's private label credit card.
Depreciation and amortization increased $3.2 million to $12.2 million in
1996 from $9.0 million in 1995. The increase was attributable to amortization
charges associated with the Roanoke, Virginia fulfillment facility, the
management information system, the new Gump's retail store and the goodwill and
mailing lists associated with the 1995 acquisitions that did not impact the 1995
operating results for the entire year.
Income (Loss) from Operations. Loss from operations increased to $94.5
million in 1996 from a loss of $22.6 million in 1995. Losses from operations for
discontinued catalogs decreased to $4.8 million in 1996 from $18.1 million in
1995.
The increased loss from operations was mainly due to an overall erosion of
the Company's product margin. This was caused by increased promotional activity
and higher fulfillment costs. The Company's loss from operations was also
negatively impacted by increased catalog costs due to increased catalog mailing
costs, lower response rates and increased order cancellations.
Interest Income (Expense). Interest expense increased approximately $3.8
million to $8.9 million in 1996 from $5.1 million in 1995. This increase was due
to a higher level average borrowings outstanding under the Company's revolving
credit facility in 1996 which is attributable to the Company's deteriorating
financial performance in 1996 and increased demands on its working capital
throughout most of the year. Interest income was $.5 million in 1996 and 1995.
Income Taxes. The Company did not record a Federal income tax provision in
1996 or 1995 based on each years' net operating losses. The Company's state tax
provision was $1.0 million in 1996 and 1995.
Shareholders' Equity. The number of shares of Common Stock outstanding
increased by 51,195,130 in 1996 due to shares issued in connection with the
Company's Right's Offering, its equity and incentive plans, the exchange of the
6% Series A Convertible Preferred Stock and other activities. At December 28,
1996, there were 144,647,898 shares of Common Stock outstanding compared to
93,452,768 shares of Common Stock outstanding at December 30, 1995.
Extraordinary Items. The extraordinary loss of $1.1 million in 1996
represented a loss on the early extinguishment of debt which arose in connection
with the payment of the Company's 9.25% Senior Subordinated Notes due 1998 with
proceeds from the Rights Offering. The extraordinary loss of $1.8 million in
1995 represented a loss on the early extinguishment of debt which arose in
connection with the refinancing of the Company's $75 million Revolving Credit
Facility and its $14 million 9.25% Senior Subordinated Notes due 1998.
25
26
1995 COMPARED WITH 1994
Net Income (Loss). The Company reported a net loss before extraordinary
items of $28.2 million or $(.30) per share for the year ended December 30, 1995
compared to net income of $14.8 million or $.16 per share in 1994. Including the
effect of the extraordinary loss of $1.8 million for the early extinguishment of
debt, the Company reported a net loss of $30 million or $(.32) per share for the
year ended December 30, 1995. Per share amounts are expressed after deducting
preferred stocks.dividends of $.2 million in 1995 and $.1 million in 1994. The weighted
average number of shares outstanding was 93,029,816 for the year ended December
30, 1995 compared to 93,285,190 in 1994.
The net loss in 1995 was primarily the result of the cumulative impact on
the Company of the 14% to 18% increase in USPS rates, a 43% increase in paper
prices and weak consumer demand. As a result of these factors, the Company
discontinued six poorly performing catalogs in 1995 which incurred substantial
losses. The Company believed that the discontinued catalogs could not overcome
these obstacles. Including an incremental write-down of inventory associated
with discontinuing these catalogs of $8.6 million, these catalogs lost $20
million in 1995 compared to $4.7 million in the prior year. In addition, the
Company also incurred costs, aggregating $2.7 million, in connection with the
consolidation of facilities into its new Roanoke, VA fulfillment center. These
costs included operating expenses related to maintaining duplicate facilities of
$1.0 million and $1.7 million of costs related to start-up problems, operating
down-time and inefficiencies in the new facility. Due to these cost pressures,
the Company implemented a cost reduction program in 1995 whereby the Company
instituted a salary freeze, reduced its work force by approximately 10%, closed
5 facilities and reduced other administrative and overhead expenses. In
connection with the closing of these 5 facilities, the Company incurred
non-recurring costs of $1.5 million. The Company also incurred one-time
severance and employee separation expenses of $2.0 million.
Revenues. Revenues increased $126decreased 2.5% in 1995 to $750 million or 20%, from $643 million
in 1993 to $769
million in 1994. This significantRevenues of continuing catalogs increased approximately 2% from
$651 million in 1994 to $662 million in 1995, which was offset by a 26% decline
to $88 million in revenues from discontinued catalogs. The Company circulated
370 million catalogs in 1995, a 2% reduction from the prior year.
Non-Apparel continuing catalog revenues increased 1% to $528 million, due
to a 14% increase in revenues was
primarily a result of an increase of $48 million from the Company's venture with Sears to $81
million and increased$68 million of revenues from the 1995 acquisitions of $88 million from Gump's,Improvements,
The Company StoreSafety Zone and TweedsAustad's which were acquiredoffset revenue reductions in the second half of 1993 ("the 1993
acquisitions"). Revenues fromother
Non-Apparel catalogs, discontinued in 1993principally Domestications and Colonial Garden Kitchens.
Domestications revenues were $20 million
in 1993 and $1 million in 1994.
Revenues were negatively impacted in 1994 by an increase indown 28% as improved 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 returnsresponse rates
partially offset a decline in the second half of 1994.
Non-Apparel continuing catalog revenues increased $122 million, or
26%, from $477 millionaverage order and a 31% reduction 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.circulation. Revenues from discontinued catalogs were $7decreased $11.7 million and $.2from
$77.7 million in 19931994 to $66 million in 1995. The Company discontinued the
Mature Wisdom catalog in mid-1995 and 1994, respectively.the Tapestry and Hanover House catalogs in
the fourth quarter of 1995.
Apparel continuing catalog revenues increased $23$5 million, or approximately
16%4%, from $146$129 million in 19931994 to $169$134 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 Apparel1995, as all continuing
catalog revenues increased 6% which is mainly attributable tocatalogs, International Male, Undergear, Silhouettes and Tweeds reported higher
sales than the prior year. Revenues from
26
27
discontinued Apparel catalogs declined 46% from $40 million in 1994 to $22
million in 1995, including the effect of discontinuing Essence by Mail, 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.Simply Tops.
Operating Costs and Expenses. Cost of sales and operating expenses as a
percentage of revenues decreasedincreased from 63.6%62.9% in 19931994 to 63.3%64.5% in 1994. The
decrease1995. This
increase is primarily attributable to higherlower overall profitproduct margins due to
greater sale activity as a result of the generally weak consumer demand and lowerthe
impact of write-downs for the discontinued catalogs. In addition, fulfillment
costs were higher in 1995 due to the start up of the new facility in Roanoke and
higher outbound freight expenses of approximately $7 million or 15% as a result
of the increase in USPS rates.
The write-down of inventory for the discontinuance of six of the Company's
catalogs of $8.6 million primarily consisted of incremental inventory
write-downs in excess of normal seasonal write-downs and severance expenses.
During 1995, the Company recorded a Provision for Facility Closings totalling
$1.5 million consisting primarily of facility exit costs ($.7 million), lease
termination fees ($.3 million) and severance expenses ($.5 million),
substantially all of which were paid in 1995. No such charges were recorded in
1994.
Selling expenses increased $8.2 million or 4.2% in 1994 to 27.4% of
revenues for the current year, primarily due to a 43% increase in average paper
costs and a 15% increase in the average cost of mailing a catalog which more
than offset the 2.0% reduction in catalog circulation and higher customer
response rates. As a result of these price increases, the Company incurred
approximately $18.0 million of higher costs to prepare and deliver its catalogs
in 1995.
General and administrative expenses declined $1.1 million or 2% in 1995
although they remained constant as a percentage of revenues at 8.5% in both
years. Excluding the impact of one-time severance expenses of $2.0 million,
these expenses declined as a percentage of sales to 8.3% due to the Company's
cost reduction program instituted in early 1995. This reduction was partially
offset by higher delivery costsbad debt expenses, reflecting increased losses on major credit
cards and the Company's private label credit card.
Depreciation and amortization increased $2.8 million from $6.2 million in
1994 based
on sales mix.
Selling expenses increased from 24.6% of revenues forto $9.0 million in 1995. The increase was attributable to new amortization
charges associated with the year ended
January 1, 1994 to 25.7% of revenues forRoanoke, Virginia fulfillment facility, the
year ended December 31, 1994 asmanagement information system, the Company increased catalog circulation 17% in an effort to increasenew Gump's retail store and the number of active customers on itsgoodwill and
mailing lists in anticipation ofassociated with 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 (Loss) from Operations. Income from operations decreaseddeclined from $19.1
million in 1993, or 3.0% of revenues, to $16.0
million in 1994 or 2.1%to a loss of revenues.$22.6 million in 1995. Losses from discontinued
catalogs were $3.9increased from $4.7 million in 1993 compared1994 to $.1$20 million in 1994.1995.
Non-Apparel income from operations decreased $5.7 million from $25.9$20.5 million in 19931994 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$7.8 million in 1995. The most significant contributor to the decrease
in profitability was Domestications, which in addition to being significantly
impacted by the higher postage and paper costs also incurred additional costs in
connection with the move of its operations into the new Roanoke facility. These
costs included start-up costs, down time due to equipment problems, temporary
labor costs, higher shipping, damages and replacement costs. Additionally,
Domestications' product margin was adversely impacted by product mix changes,
increased
27
28
promotional activities and higher obsolescence charges. The loss from
discontinued Non-Apparel catalogs increased from $1.3 million in 1994 to $10.1
million in 1995. Profitability from the Sears venture increased by $.1 million
to $3 million in 1995 and the 1995 acquisitions contributed income of $2.5
million. The Company Store and Gump's also had higher operating profits in 1995
compared to break even1994.
Apparel results in 1993 related to the
Gump's retailof 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 $3.3declined $7.7 million from a loss of $1.4 million in 1993 to
income of $1.9$.5
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 wasto a loss of $4.3$8.2 million in 1993 and
income of $.21995. This decrease is mainly
attributable to the discontinued Apparel catalogs whose losses increased $6.5
million from $3.4 million in 1994.
The Company's venture with Sears generated $1.4 million of income from
operations in 1993 versus $2.91994 to $9.9 million in 1994.1995. Mens Apparel
operating income increased 35% to $2.6 million which offset lower earnings at
Tweeds and an operating loss at Silhouettes, where credit problems in the fourth
quarter of 1995 contributed to its loss.
Interest Income (Expense). Interest expense decreasedincreased approximately $1.4$1.5
million from $4.9 million in 1993 to $3.5 million in 1994.1994 to $5.0 million in 1995. This decreaseincrease was due
to higher average borrowings outstanding under the resultCompany's revolving credit
facility in 1995 as well as an increase in the basis point of approximately 3%
in the Company's borrowing rate which is attributable to the Company's
deteriorating financial performance in 1995. Interest income declined by $.2
million to $.5 million in 1995 because 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.
19
20had less cash available for
investment.
Other Income (Expense). Other income decreased $2.7 million from
income of $.9 millionexpenses in 1993 to1994 totaled a loss ofnet $1.8 million
while there were no similar expenses in 1994. The income of
$.9 million in 1993 represents a settlement of a claim in bankruptcy.1995. The loss in 1994 iswas comprised of
$2.5$1.2 million of charges duerelated to losses on investmentsthe Company's investment in Boston Publishing Company
and advances as partially$1.3 million related to its investment in Regal Communications, Inc. offset
by other income of $.7 million. The Company acquired a 20% ownership in Boston
Publishing Company in February 1994. The Company made this investment with the
intention of possibly acquiring Boston Publishing Company at some point in the
future. During 1994 the Company made an investment in debt securities of Regal
Communications, Inc. It was the Company's intention to hold these debt
securities as a long-term investment and perhaps at some point in the future
obtain certain operating subsidiaries of Regal in exchange for such securities.
Income Taxes. The Company recordeddid not record a Federal income tax benefitprovision in
1995 based on the current year net operating loss. The Federal income tax
provision of $4.4$5.9 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, werewas offset by the utilization of NOLs in 1993 and 1994.net operating
loss carry forwards. The Company's state tax provision was $.5$1.0 million and $.9
million in 19931995 and 1994, respectively.
Shareholders' Equity. The number of shares of Common Stock outstanding
increased by 9,804,663714,928 in 19941995 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) 450,160to 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, 1994,30, 1995 there
were 92,737,84093,452,768 shares of Common Stock outstanding compared to 82,933,17792,737,840 shares
of Common Stock outstanding at January 1,December 31, 1994.
Extraordinary Items. The dividendsextraordinary loss of $.1$1.8 million in 1994 represent dividend requirements1995
represented a loss on the 6% Preferred Stock issued in September 1993 while the dividendsearly extinguishment of $4.1
million in 1993 represent dividend requirements on the 7.5% Preferred Stock and
the Class B Preferred Stock, both ofdebt 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 Tweeds in the
second half of 1993. Revenues from discontinued catalogs were $63 million and
$20 million in 1992 and 1993, respectively.
Non-Apparel revenues increased 23% from $395 million in 1992 to $484
million in 1993. This increase was a result of $38 million of revenues
generated by Gump's and The 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 Kitchens and Tapestry, of which
approximately 40% was attributable to the Sears venture. Revenues from
discontinued catalogs (assuming such catalogs were discontinued at the
beginning of 1992) were $10 million and $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 Tweeds in the
fourth quarter of 1993 contributed $9 million to revenues. As discussed below,
the Company restructured its Apparel catalogs.
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21
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 Domestications (which increased the size of
its 12 month customer list by 14%) and from the addition of the selling
expenses for the Gump'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 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 were 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.
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
21
22
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. 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 issuedarose 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, iii) 2,278,128 shares issued upon the conversionrefinancing of the 7.5%
Preferred Stock, iv) 18,937,169 shares issued in connection with the exchange
of the Class B Preferred StockCompany's $75 million Revolving Credit Facility 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 $3.2its $14 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.9.25% Senior Subordinated Notes due 1998.
28
29
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The Company had $2.6$5.2 million and $24.1$2.7 million in cash and cash
equivalents at the end of January 1, 1994December 28, 1996 and December 31, 1994,30, 1995, respectively. Working
capital deficit and the current ratio were $25.2($1.5) million and 1.23 to 1 at
January 1, 1994 versus $58.5 million and 1.51.99 to 1 at
December 31, 1994.28, 1996 versus working capital of $28.8 million and current ratio of
1.22 to 1 at December 30, 1995.
The primary sources of cash in 19941996 were the $49.3 million of proceeds
from the issuance of Common Stock, $10.0 million of proceeds
from the issuance of debt, the $11.7 million of borrowings under the Company's
credit facility, the $50 million of proceeds from the Rights Offering and $25.4
million due to a $10.5 million increasereduction in accounts payable,inventories and operating profits.prepaid catalog costs. Cash was
used primarily to support increases of: i) $23.9fund: (i) the Company's 1996 operating loss, (ii) $8.9 million
inof capital expenditures, ii) $8.1(iii) $13.7 million for the reduction of accounts
payable, and (iv) $19.6 million for payments of long-term debt and debt issuance
costs.
Due to the Company's continued poor financial performance it was necessary
to obtain an equity infusion in investments1996 which would (i) restore the Company's
equity base, (ii) reduce long-term debt and advances, iii) $6.2(iii) provide the Company with
additional liquidity. As a result, the Company conducted a $50 million Rights
Offering which was completed in accounts receivable,August 1996. The proceeds of the Rights Offering
were used by the Company to (i) repay the $14 million principal amount of the
9.25% Notes held by an affiliate of NAR plus accrued interest, (ii) to repay the
$25 million principal amount advanced under the promissory note plus accrued
interest and iv) $8.2(iii) to repay approximately $9 million in prepaid catalog costs.under the Congress
Facility. The Company continued to experience operating losses in 1996 which
have eroded the recently increased equity base. This resulted in continued high
levels of back orders (unfilled orders) and increased order cancellations due to
the Company's poor in-stock position throughout 1996. In December 1996, the
Company closed its agreement (the "Reimbursement Agreement") with Richemont
Finance S.A. ("Richemont") that provides the Company with approximately $28
million of letters of credit to replace letters of credit which were issued
under the Credit Facility with Congress. Although this agreement provided the
Company added liquidity, its timing, December 19, 1996, had a minimal effect on
reducing back orders in the 1996 fiscal year. This agreement will expire in
February 1998. When the final 1996 results became known to the Company, it
concluded such results would have further negative impact on the Company's
ability to conduct business on normal trade terms. Therefore, the Company
decided that it was necessary to obtain an equity infusion which would restore
the Company's equity base that had deteriorated in 1996 and provide the Company
with additional liquidity. As a result of the equity infusion, the $10 million
NAR Promissory Note would also used $8.0be satisfied.
On March 26, 1997, the Company announced that it intends to distribute
subscription rights to subscribe for and purchase additional shares of
Common Stock to the holders of record of the Company's Common Stock and
Series B Convertible Additional Preferred Stock (the "1997 Rights Offering") as
soon as it has filed with and had declared effective by the SEC a registration
statement with respect thereto. The Rights will be exercisable at a price of
$.90 per share. NAR has agreed to apply $10 million of the Company's
indebtedness to payacquire $10 million of the Company's Common Stock. Richemont has
agreed to purchase all shares of Common Stock which have not been subscribed for
and purchased by shareholders other than NAR in the 1997 Rights Offering. Any
offering will be made solely by means of a prospectus. Richemont has agreed to
advance $30 million against its commitment to purchase all of the unsubscribed
shares. In connection with the agreement the Company named two Richemont
29
30
representatives, Messrs. Jan du Plessis and Howard Tanner, to its Board of
Directors (the "Board) and Executive Committee, and it is intended that a third
Richemont representative for election to the Board at the next annual meeting.
The new Board members fill vacancies created by the recent resignations of
Geraldine Stutz and Jeffery R. Laikind. In addition, Mr. du Plessis has been
named to the Audit Committee of the Board.
At December 28, 1996, the Company had outstanding $11.5 million of
current borrowings. This balance, consisting primarily of the $8.9 million
Revolving Term Notes under the Congress Facility, will be paid down various debt obligations during
1994.with cash
generated from operations in 1997.
The Company has received waivers for the December 1996 events of default
under the Congress Facility related to the working capital and net worth
covenants as of and through December 28, 1996. In addition, the Company received
a waiver for any event of default relating to the material adverse change
provision that was in effect through and including December 28, 1996. The
Company received working capital and net worth covenant amendments for fiscal
1997 which are less restrictive.
The Company is required to maintain certain financial covenants
related to this agreement which the Company failed to maintain, but has
received a waiver for the event of default at December 28, 1996.
The Company believes that the 1997 Rights Offering (with Richemont's
commitment to advance $30 million against its purchase of all unsubscribed
shares) together with the Congress Facility financial covenant modifications
will ease vendor/credit concerns about the Company's viability. The Company
believes that upon the conclusion of the 1997 Rights Offering, the Company will
return to normal trade terms with all suppliers and will be able to obtain
normal trade terms with its suppliers and obtain sufficient merchandise on a
timely basis to satisfy customer demand. The Company's ability to sufficiently
improve upon its prior year's performance and implement its business strategy,
including realignment of business units and expense reductions, is critical to
maintaining adequate liquidity.
Operating Plan. The Company has begun an operational realignment plan that
it believes will better enable it to capitalize on its internal strengths. The
Company is moving to a decentralized structure whereby the individual catalogs
will be better able to manage their resources and capitalize on business
opportunities. This plan provides for each catalog's management team to be
responsible for its financial results, working capital resources and future
business investment needs. The Company believes that this structure will result
in better management of vendor relationships, inventories and working capital.
The Company experiences seasonality in its working capital requirements
and fluctuations in the revolving credit facility willCredit Facility which occur usually within the
first and fourth quarters of the year.
22
23
Public Offering of Common Stock. In April 1994, the Company
consummated a public offering of 8,045,296 shares of its Common Stock resulting
in proceeds net of expenses of approximately $47.5 million. The Company has
used the net proceeds to reduce outstanding indebtedness, to fund certain
infrastructure investments and for general corporate purposes. In April 1994,
the Company repaid $6 million of the $20 million of 9.25% Notes and paid down
the then existing revolving credit facility using the proceeds of the public
offering.
Infrastructure Investments. In 1994,early 1995, the Company substantially completed the
construction of a new fulfillment centerfacility on a 53 acre site in Roanoke,
Virginia to primarily support the Domestications catalog. The center
is projectedtotal cost of the facility
was $18.3 million. The Company experienced operating inefficiencies and start-up
problems in conjunction with bringing this facility into service. The Company
continued to cost $17 million. Asexperience inefficiencies in 1996, and made an additional
investment of Decemberapproximately $3 million to help improve these operating problems
before the end of 1996.
30
31
1994,The Company's plan to restructure its catalog's into strategic business
groups and concentrate its mailing efforts on profitable customers will result
in excess capacity throughout its fulfillment centers. Therefore, the Company
had
incurred costsintends to consolidate certain of its fulfillment operations into its new
Roanoke fulfillment center. This will require a capital investment of
approximately $12.4 million in the construction of this
facility.$5.0 million.
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 upgradingcontinued its management information systems at a total
cost estimated to be approximately $15 million.up-grade in 1996.
The new system began
successful operationwas operational in twoten catalogs at the end of the Company's catalogs during the second half of
1994 and the1996. The Company
expects to complete the roll outroll-out of the system to the restremaining catalogs in 1997
for an additional capital investment of its
catalogs through early 1996.approximately $1 million. The Company
expectsincurred higher MIS costs in 1996 due to incur certain duplicate
system costs during a period in 1995 as theythe continued transition to the new
computer
system. As of December 31, 1994,28, 1996, the Company had incurred capitalized costs of
approximately $9.1$17.9 million as part of this plan, including capitalized leases$2.0 million in
1996. Such costs included hardware and software costs aggregating $2.4$14.2 million
and internal costs of $1.7$3.7 million related to production of this new system that have been capitalized.system.
The Company will
beginbegan to amortize all systemthese costs as the system becomes operationalover 5 years in 1995.
As of December 31, 1994, the Company was 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 new $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 a 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 covenants under these 9.25% Notes, for which it has received a
waiver from the holder of the notes. The Company and the 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 agreement 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 business and infrastructure investments.
Investments and Acquisitions. In 1994, the Company invested in debt
and equity securities of two companies and also made cash advances to one of
the companies. 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, Inc.
("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 United States bankruptcy laws.
While the Company believes that it has recorded a conservative estimate of the
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 re-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 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 and Cost Increases. The Company normally experiences
increased costs of sales and operating expenses as a result of the general rate
of inflation in the economy. Operating margins are generally maintained through
internal cost reductions and operating efficiencies and then through selective
price increases where market conditions permit. The Company's inventory is
mailordermail-order merchandise which undergoes sufficiently high turnover so that the
costs of goods sold approximatesapproximate 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.
Paper and Postage. 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%18% 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.1996. Paper costs represented approximately 7%8% of revenues in 24
25
1994. These cost increases1995.
Cautionary Statements
The following statements constitute forward looking statements which
involve risks and uncertainties:
This new structure will also result in reduced fixed overhead costs as
the Company's centralized services will be utilized more efficiently.
The Company is moving to a decentralized structure whereby the
individual catalogs will be better able to manage their resources and
capitalize on business opportunities.
The following are important factors, among others, that could cause the
Company's actual results to differ materially from those expressed in any
forward-looking statements made by, or on behalf, of the Company:
The Company's new decentralized structure represents a significant
change in the manner in which management of the newly created business
units are accustomed to operate and the duplicate costs associated with the
consolidationprincipal managers of the
distribution facilitiesbusiness units may not be able to effectively manage their businesses
in a decentralized environment, particularly with respect to monitoring
and implementing financial controls adequately to maintain appropriate
working capital levels due to their limited experience or because of
other factors which the transitionCompany may not have anticipated.
Many of the managers of the Company's business units have not operated
in a decentralized environment in the past and it may take substantial
time before they are able to take advantage of the business
opportunities, if any, that may inhere in the new structure.
A general deterioration in the economic conditions in the United States
leading to increased competitive activity including a business failure
of a substantial size company in the retail industry, a reduction in
consumer spending generally or specifically with reference to the new
system discussed earlier will adversely impacttypes
of merchandise that the Company's margins and
earnings particularlyCompany offers in its catalogs.
An increase in the first halffailure rate of 1995.
As a result,consumer indebtedness generally; an
increase in credit sales by the Company has implemented a planaccompanied by an increase in
its bad debt experience with respect 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.
25consumer debt.
31
2632
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 January 1, 1994December 28, 1996
and December 31, 1994,30, 1995, 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 December 31, 1994.28, 1996. These consolidated financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule 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 January 1, 1994December 28, 1996 and December 31, 1994,30, 1995, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 31, 199428, 1996 in conformity with generally accepted accounting
principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
financial statement schedule is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing procedures
applied in the auditsaudit of the basic financial statements and, in our opinion,
fairly states 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 LLP
New York, New York
February 21, 1995March 26, 1997
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2733
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of January 1, 1994December 30, 1995 and December 31, 199428, 1996
JANUARY 1, DECEMBER 31,
1994 1994
---------- ------------
(IN THOUSANDS)December 30, December 28,
1995 1996
-------- --------
(in thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 2,5832,682 $ 24,0535,173
Accounts receivable, net of allowance for
doubtful accounts of $2,509$2,597 in 19931995 and
$2,730$5,030 in 1994 19,043 25,2471996 30,176 29,399
Inventories 80,429 83,65379,281 67,610
Prepaid catalog costs 25,571 33,72537,118 23,401
Deferred tax asset, net 2,975 3,2003,300 3,300
Other current assets 1,858 2,6586,170 3,148
-------- --------
Total Current Assets 132,459 172,536158,727 132,031
-------- --------
Property and Equipment, at costcost:
Land 1,171 1,9174,811 4,797
Buildings and building improvements 7,862 7,99419,353 16,554
Leasehold improvements 6,242 6,80714,001 9,956
Furniture, fixtures and equipment 22,551 24,10339,508 31,510
Construction in progress 3,042 21,3585,479 8,315
-------- --------
40,868 62,17983,152 71,132
Accumulated depreciation and amortization (18,341) (19,708)(26,090) (22,523)
-------- --------
Property and Equipment, net 22,527 42,47157,062 48,609
-------- --------
Goodwill 18,463 19,02636,586 17,901
Deferred tax asset, net 7,656 11,800
Investments and advances - 6,00011,700 11,700
Other assets net 7,733 10,41314,934 10,586
-------- --------
Total Assets $188,838 $262,246$279,009 $220,827
======== ========
See Notes to Consolidated Financial Statements.
2733
2834
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
As of January 1, 1994December 30, 1995 and December 31, 199428, 1996
JANUARY 1, DECEMBER 31,
1994 1994
----------30, DECEMBER 28,
1995 1996
------------ ------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt and capital
lease obligations $ 2,0243,546 $ 81211,452
Accounts payable 78,905 89,36693,291 79,587
Accrued liabilities 21,319 20,21525,969 37,782
Customer prepayments and credits 5,031 3,642
--------- ---------7,147 4,717
-------- --------
Total Current Liabilities 107,279 114,035
--------- ---------129,953 133,538
-------- --------
Noncurrent Liabilities:
Long-term debt 32,313 35,90757,283 53,255
Capital lease obligations 1,823 1,1961,973 482
Other 1,555 1,383
--------- ---------2,590 1,812
-------- --------
Total Noncurrent Liabilities 35,691 38,486
--------- ---------61,846 55,549
-------- --------
Total Liabilities 142,970 152,521
--------- ---------191,799 189,087
-------- --------
Commitments and Contingencies (Note 17)
Shareholders' Equity:Equity
Preferred Stock:
6% Series A Convertible Additional
Preferred Stock, convertible, $10 stated value,
authorized 5,000,000 shares; issued 234,900and
outstanding 78,300 shares in 19931995 795 --
Series B Convertible Additional Preferred Stock,
$.01 par value, authorized, issued and 156,600outstanding
634,900 shares in 1994 2,378 1,5891995 and 1996 5,558 5,748
Common Stock, $.66 2/3 par value, authorized
150,000,000225,000,000 shares; issued 83,136,54293,693,162 shares in
19931995 and 92,978,234145,039,915 shares in 1994 55,423 61,9851996 62,461 96,693
Capital in excess of par value 209,834 253,210255,390 270,097
Accumulated deficit (215,805) (201,102)
--------- ---------
51,830 115,682(231,332) (336,586)
-------- --------
92,872 35,952
Less:
Treasury stock, at cost (1,120,032(1,157,061 shares in 19931995
and 1,157,061392,017 shares in 1994) (3,130)1996) (3,345) (813)
Notes receivable from sale of Common Stock (1,774) (1,912)(2,023) (3,399)
Deferred compensation (1,058) (700)
--------- ---------(294) --
-------- --------
Total Shareholders' Equity 45,868 109,725
--------- ---------87,210 31,740
-------- --------
Total Liabilities and Shareholders' Equity $ 188,838 $262,246
=========$279,009 $220,827
======== ========
See Notes to Consolidated Financial Statements.
28Statements
34
2935
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
For The Years Ended December 26, 1992, January 1, 1994 andthe years ended December 31, 1994, December 30, 1995 and December 28, 1996
1992 1993 1994 --------- -------- --------1995 1996
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
REVENUES $586,562 $642,511Revenues $768,884 $749,767 $ 700,314
-------- -------- -----------------
Operating costs and expenses:
Cost of sales and operating expenses 381,716 408,387 486,477484,059 483,493 479,155
Write-down of inventory of
discontinued catalogs -- 8,580 1,100
Special charges -- 1,563 36,724
Selling expenses 138,494 157,811 197,436 205,618 195,032
General and administrative expenses 51,950 57,237 68,99665,257 64,112 70,608
Depreciation and amortization 6,157 9,020 12,192
-------- -------- --------
572,160 623,435---------
752,909 772,386 794,811
-------- -------- -----------------
INCOME (LOSS) FROM OPERATIONS 14,402 19,076 15,975 (22,619) (94,497)
Interest expense (13,379) (4,925) (3,544) (5,050) (8,858)
Interest income 244 2,168 731 519 460
Other income (expense) - 888 (1,833) -- --
-------- -------- -----------------
Income (loss) before income taxes 1,267 17,207 11,329 (27,150) (102,895)
Income tax provision (benefit) 219 (130) (3,509) 1,003 1,000
-------- -------- -----------------
Income (loss) before extraordinary items and
cumulative effect of accounting change 1,048 17,337item 14,838 (28,153) (103,895)
Extraordinary items 9,201 - -
Cumulative effect of accounting change for
income taxes 10,000 - -item (Note 8) -- (1,837) (1,134)
-------- -------- -----------------
NET INCOME 20,249 17,337(LOSS) 14,838 (29,990) (105,029)
Preferred stock dividends (3,197) (4,093) (135) (240) (225)
-------- -------- -----------------
Net income (loss) applicable to
Common Shareholders $ 17,052 $ 13,244 $ 14,703 $(30,230) $(105,254)
======== ======== ========= ========
Net income (loss) per share:
Income (loss) before extraordinary items
and cumulative effect of accounting changeitem $ (0.06).16 $ 0.17(.30) $ 0.16(.93)
Extraordinary items 0.24 - -
Cumulative effect of accounting change for
income taxes 0.26 - -item -- (.02) (.01)
-------- -------- --------
Net income per share---------
NET INCOME (LOSS) PER SHARE $ 0.44.16 $ 0.17(.32) $ 0.16(.94)
======== ======== =========
Weighted average common shares
outstanding 93,285 93,030 111,441
======== ======== =========
See Notes to Consolidated Financial Statements.
2935
36
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996
(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
ClassSeries B, 8% Cumulative 7.5% Cumulative Series A, 6.0%
Shares Amount Shares Amount
Shares Amount
---------------------------------------------------------------------------------------------------------------
Balance at December 28, 1991 0 $0 0 $0 0 $0
Net income applicable 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
7.5% 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 & THC into Hanover Direct, Inc. 40,000 25,516 569,532 7,158
Exchange of Class B 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
=================================================================Net income/(loss) applicable to common shareholders
Issuance of Preferred Stock 634,900 5,400
Fair market value of warrant extensions
Preferred stock dividends and accretion 158 83
Conversion of one-third of the 6% Preferred Stock (78,300) (877)
Issuance of Common Stock for Employee Benefit Plans, net
----------------------------------------------
Balance at December 30, 1995 634,900 $5,558 78,300 $ 795
Net income/(loss) applicable to common shareholders
Shares issued in Rights Offering
Preferred stock dividends and accretion 190 35
Conversion of the 6% Preferred Stock (78,300) (830)
Purchase of treasury stock
Transfer of treasury stock related to employement agreement
Sale of treasury stock
Issuance of Common Stock for Employee Benefit Plans, net
----------------------------------------------
Balance at December 28, 1996 634,900 $5,748 0 $ 0
==============================================
Capital
Class B Common Stock Common Stock in Excess
$.01 par value
$.66 2/3 par value of Par Shares AmountAccum.
Shares Amount Value -----------------------------------------------------(Deficit)
--------------------------------------------------------
Balance at December 28, 1991 13,333,334 $133 16,094,321 $10,728 $135,612January 1, 1994 83,136,542 $55,423 $209,834 $(215,805)
Net income applicable to common shareholders Issuance of Common Stock to and redemption of
Class B Common Stock by NAR (13,333,334) (133) 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
7.5% Exchange Offer 3,448,840 2,299 5,773
Stock Dividend to NAR (3,764)
Issuance of Common Stock 115,000 77 (237)
Transfer of ESOP shares to treasury
-----------------------------------------------------
Balance at December 26, 1992 12,270,503 $123 58,154,584 $38,774 $178,149
Net income applicable to common shareholders
Mergers of H & H & THC into Hanover Direct, Inc.
Exchange of Class B 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)
Amortization of deferred compensation
Issuance of Common Stock 3,766,661 2,505 13,470
-----------------------------------------------------
Balance at January 1, 1994 0 $0 83,136,542 $55,423 $209,834
Net income applicable to common shareholders14,703
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 $253,210 =====================================================$(201,102)
Net income/(loss) applicable to common shareholders (30,230)
Issuance of Preferred Stock
Fair market value of warrant extensions 1,200
Preferred stock dividends and accretion
Conversion of one-third of the 6% Preferred Stock 427,785 285 592
Issuance of Common Stock for Employee Benefit Plans, net 287,143 191 388
--------------------------------------------------------
Balance at December 30, 1995 93,693,162 $62,461 $255,390 $(231,332)
Net income/(loss) applicable to common shareholders (105,254)
Shares issued in Rights Offering 48,748,785 32,499 16,467
Preferred stock dividends and accretion
Conversion of the 6% Preferred Stock 819,733 546 284
Purchase of treasury stock
Transfer of treasury stock related to employement agreement (2,750)
Sale of treasury stock 28
Issuance of Common Stock for Employee Benefit Plans, net 1,778,235 1,187 678
--------------------------------------------------------
Balance at December 28, 1996 145,039,915 $96,693 $270,097 $(336,586)
========================================================
Notes
Receivable
From Sale
Accum.
Treasury Stock of Common Deferred
(Deficit) Shares Amount Stock Comp. Total
-----------------------------------------------------------------------------------------------------------------------------
Balance at December 28, 1991 ($246,101) (2,169,899) ($11,601) $0 ($2,403) ($113,632)January 1, 1994 (1,120,032) $(3,130) $(1,774) $(1,058) $ 45,868
Net income applicable 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
7.5% 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 & THC into Hanover Direct, Inc. 32,674
Exchange of Class B 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) $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) $109,725
===================================================================$(3,345) $(1,912) $ (700) $ 109,725
Net income/(loss) applicable to common shareholders (30,230)
Issuance of Preferred Stock 5,400
Fair market value of warrant extensions 1,200
Preferred stock dividends and accretion 241
Conversion of one-third of the 6% Preferred Stock (0)
Issuance of Common Stock for Employee Benefit Plans, net (111) 406 874
----------------------------------------------------------
Balance at December 30, 1995 (1,157,061) $(3,345) $(2,023) $ (294) $ 87,210
Net income/(loss) applicable to common shareholders (105,254)
Shares issued in Rights Offering 48,966
Preferred stock dividends and accretion 225
Conversion of the 6% Preferred Stock 0
Purchase of treasury stock (301,623) (396) (396)
Transfer of treasury stock related to employement agreement 916,667 2,750 0
Sale of treasury stock 150,000 178 206
Issuance of Common Stock for Employee Benefit Plans, net (1,376) 294 783
----------------------------------------------------------
Balance at December 28, 1996 (392,017) $ (813) $(3,399) $ 0 $ 31,740
==========================================================
See Notes to Consolidated Financial StatementsStatements.
36
3137
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended December 26, 1992, January 1, 1994 andthe years ended December 31, 1994, December 30, 1995, and December 28,
1996
1992 1993 1994 --------- -------- --------
(IN THOUSANDS)1995 1996
---- ---- ----
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . .(loss) $ 20,249 $ 17,337 $ 14,838 $(29,990) $(105,029)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation and amortization . . . . . . . . . . . 5,188 4,122including
deferred fees 6,499 Noncash portion9,419 13,277
Provision for doubtful accounts 3,697 4,448 6,805
Provision for catalog and facility closings -- 10,143 14,720
Write-off of extraordinary gains. . . . . . . (9,201)long-lived assets -- 500 22,000
Extraordinary item - -
Noncash portionearly extinguishment of
cumulative effect of an
accounting change . . . . . . . . . . . . . . . . (10,000) - -debt -- 1,837 1,134
Provision for losses on notes receivable and
marketable securities . . . . . . . . . . . . . . - - 2,121 -- 888
Deferred transaction costs . . . . . . . . . . . . - - (837) -- (1,211)
Deferred taxes . . . . . . . . . . . . . . . . . . - (631) (4,369) -- --
Other, net . . . . . . . . . . . . . . . . . . . . 368 (33) 43 76 94
Changes in assets and liabilities, net of effects of
acquired businesses and dispositions of assets:
Payment for repurchase of mail order customer
receivables . . . . . . . . . . . . . . . . . . . (35,301) - -
Net proceeds from sale of mail order
customer receivables . . . . . . . . . . . . . . 37,008 - -
Accounts receivable, net . . . . . . . . . . . . . 13,321 8,907 (6,204)(9,901) (6,161) (7,863)
Inventories . . . . . . . . . . . . . . . . . . . . (9,854) (12,081) (3,424) 8,679 11,671
Prepaid catalog costs . . . . . . . . . . . . . . . 9,470 (5,305) (8,154) 206 13,717
Other current assets . . . . . . . . . . . . . . . (671) 282 (1,220) (3,131) 1,332
Accounts payable . . . . . . . . . . . . . . . . . (17,292) 24,530 10,518 (8,671) (13,704)
Accrued liabilities . . . . . . . . . . . . . . . . (12,821) (10,650) 185 Dividend payable . . . . . . . . . . . . . . . . . - 886 -(1,583) 1,219
Customer prepayments and credits . . . . . . . . . (3,508) 684 (1,389) 3,134 (2,430)
-------- -------- ---------
Net cash provided (used) by operating activities . . . (13,044) 28,048 8,607 (11,094) (43,380)
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Decrease in restricted cash . . . . . . . . . . . . . 5,765 - -Cash flows from investing activities:
Acquisitions of property and equipment . . . . . . . (1,431) (4,239) (23,856) (13,686) (8,862)
Purchase of businesses . . . . . . . . . . . . . . . - (100) -
Net proceeds-- (13,008) --
Proceeds from sales of property . . . . . . . . . 17,256 - -businesses -- -- 1,980
Proceeds from investment -- -- 794
Purchase of convertible debt securities . . . . . . . - - (2,693) -- --
Investments in affiliates . . . . . . . . . . . . . . - - (3,183) -- --
Advances . . . . . . . . . . . . . . . . . . . . . . - - (2,300) -- --
Other, net . . . . . . . . . . . . . . . . . . . . . - (313) (3,293) (1,387) --
-------- -------- ---------
--------
Net cash provided (used) by(used by) investing activities . . . 21,590 (4,652) (35,325) (28,081) (6,088)
-------- -------- --------- --------
See Notes to Consolidated Financial Statements.
3137
3238
HANOVER DIRECT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 26, 1992, January 1,31, 1994, December 30, 1995 and December 31, 199428, 1996
1992 1993 1994 -------- -------- --------
(IN THOUSANDS)1995 1996
---- ---- ----
(in thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:Cash flows from financing activities:
Net paymentsproceeds (payments) under revolving credit
facility . . . $ - $(20,965) $ (230) $ -- $ 11,699
Proceeds from issuance of debt . . . . . . . . . . 9,583 20,000 10,000 Net proceeds from issuance of Preferred
Stock and Class B Common Stock . . . . . . . . . 27,533 - -20,685 10,000
Payments of long-term debt and capital lease
obligations . . . . . . . . . . . . . . . . . . . (68,720) (19,856) (8,015) Proceeds from Rights Offering . . . . . . . . . . . 19,748 - -(1,419) (17,625)
Cash dividends paid . . . . . . . . . . . . . . . . - (890) (1,027) -- --
Payment of debt issuance costs . . . . . . . . . . (825) (1,560) (1,458) (2,202) (1,990)
Repurchase of Common Stock . . . . . . . . . . . . - - (215) -- --
Proceeds from issuance of Common Stock . . . . . . - 912 49,305 400 50,653
Other, net . . . . . . . . . . . . . . . . . . . . - (1,007) (172) --------340 (778)
------- -------- --------
Net cash provided (used) by financing activities . . (12,681) (23,366) 48,188 --------17,804 51,959
------- -------- --------
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . (4,135) 30 21,470 (21,371) 2,491
Cash and cash equivalents, at the beginning of the year . . . . . . . . . . . . . . . . . . . . . 6,688 2,553 2,583 --------24,053 2,682
------- -------- --------
Cash and cash equivalents, at end of the year . . . .$24,053 $ 2,5532,682 $ 2,583 $ 24,0535,173
======= ======== ========
========
SUPPLEMENTAL CASH FLOW DISCLOSURES:Supplemental cash flow disclosure:
Interest paid . . . . . . . . . . . . . . . . . . . $ 12,547 $ 4,883 $ 2,923 $ 4,586 $ 6,224
Income taxes paid . . . . . . . . . . . . . . . . . $ 226 $ 71 $ 701 $ 1,318 $ 1,096
See Notes to Consolidated Financial Statements.
3238
3339
HANOVER DIRECT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 26, 1992, JANUARY 1,31, 1994, DECEMBER 30, 1995 AND DECEMBER 31, 199428, 1996
1. BACKGROUND OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MergerPOLICIES.
Nature of Operations - Hanover Direct, Inc., a Delaware company, ("HDI")
was formedis a direct specialty retailer in connectionthe United States that publishes a portfolio
of branded specialty catalogs offering home fashions, general merchandise, men's
and women's apparel and gifts. HDI also operates several retail operations in
the United States which comprised approximately 4% of HDI's net revenues for the
year ended December 28, 1996.
The Company has experienced significant operating losses during 1995 and
1996 which resulted in numerous issues, including liquidity and vendor
concern. The Company completed a Rights Offering in August 1996 (Note 9) which
helped to alleviate these issues and concerns, however, continued operating
losses through the remainder of fiscal 1996 has resulted in the Company
proceeding with the September 8, 1993 merger (the "Merger") involving HDI, The Horn & Hardart
Company ("H&H")a 1997 Rights Offering and The Hanover Companies ("THC"), a wholly-owned subsidiary of
H&H. The Merger consistedmodification of the mergerCongress
Facility financial covenants to less restrictive terms (Note 18). The Company's
ability to significantly improve upon its prior year's performance and
implement its business strategy, including realignment of H&H into HDI, followed by the
merger of THC into HDI. The financial statements of THC had previously been
included in the consolidated financial statements of H&H.
The Merger was consummated by (i) the exchangebusiness units and
expense reductions, is critical 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.
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.maintaining adequate liquidity.
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 52/52 or 53 - week fiscal year. The
years ended December 26, 199228, 1996, December 30, 1995 and December 31, 1994 were 52
- week years.
Use of Estimates - The year ended January 1, 1994 was a 53 - week year.preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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. The Company considers slow moving
inventory to be surplus and calculates a loss on the impairment as the
difference between an individual item's cost and the net proceeds anticipated to
be received upon disposal. Such inventory is written down to its net realizable
value. The costs capitalized by the Company are the costs of the product and
freight-in charges.
Prepaid Catalog Costs - Costs related to mail order catalogs and
promotional material are capitalized and amortized over their estimated
productive lives, generally not exceeding six months. Total catalog expense was
$193.5 million, $197.3 million and $191.8 million, respectively, in 1996, 1995
and 1994.
Depreciation and Amortization - Depreciation and amortization of property
and equipment areis provided on the straight-line method over the following lives:
buildings and building improvements, 3030-40 years; furniture, fixtures and
equipment, 3-10 years; and leasehold improvements, over the lowershorter 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.
Purchased softwareincurred.
39
40
Capitalized development costs of $3.6 million at December 31, 1994 included
in Construction in progress relate tofor the Company's new management
information systems. Capitalized developmentsystems aggregated $6.4 million at December 30, 1995. Such costs of $5.5 million are
included in Other assets as of December 31, 1994. All such costs will beand are being amortized over a five year period
commencing in 1995 when the system is operational.July 1995. No such costs were capitalized during 1996.
Goodwill - Excess of cost over the net assets of acquired businesses is
being amortized on a straight-line basis over periods of up to forty years.
Accumulated amortization was $3.9$3.0 million and $4.5$5.6 million at January 1, 1994December 28, 1996
and December 31, 1994,30, 1995, 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, amounted to $2.5$1.2
million and $3.5 million at January 1, 1994December 28, 1996 and December 31, 199430, 1995,
respectively, and are carried net of accumulated amortization of $.2$1.5 million
and $.7$1.6 million, respectively.
Accounting for the Impairment of Long-Lived Assets - Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long- Lived Assets to Be Disposed Of" was issued by
the Financial Accounting Standards Board in March 1995. This Statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. The Company reviews the carrying values of its long-lived and
identifiable intangible assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of assets may not be
recoverable. Based upon the assessment of cash flows for certain underperforming
catalogs, the Company recorded a charge related to impaired assets of $22.0
million for the fiscal year ended December 28, 1996 (Note 3).
Accounting for Stock Based Compensation - In October 1995, the Financial
Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based
Compensation," which is effective in 1996. The Statement encourages entities to
adopt the fair value-based method of accounting for employee stock option plans,
as opposed to the method which measures compensation cost for those plans using
the intrinsic value-based accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." In accordance with the provisions of
SFAS No. 123, the Company recorded a compensation charge of $.5 million in
fiscal 1996.
Accounting for Income Taxes - The Company accounts for income taxes in
accordance with Statement of Financial Accounting StandardsSFAS No. 109, -
Accounting"Accounting for Income Taxes ("SFAS 109").Taxes." This pronouncement
established financial accounting and reporting standards for the effects of
income taxes that result from the Company's activities during the current and
preceding years. It requires an asset and liability approach for financial
accounting and reporting for income taxes. The provision for income taxes is
based upon income after adjustment for those temporary and permanent items which
are not considered in the determination of taxable income. Deferred taxes result
when the Company recognizes revenue or expenses for income tax purposes in a
different year than for financial reporting purposes.
Cash and Cash Equivalents - For purposes of the Consolidated
Statements of Cash Flows, the Company considersand cash equivalents include cash and
all highly liquid temporary
investments with an original maturitymaturities of less than ninety days as cash
equivalents.or less.
40
41
Net Income Per Share - Net income per share wasis 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 per share in 19921996, 1995 and 1994 were 38,467,015was 111,441,247, 93,029,816 and
93,285,190, shares,
respectively. For 1993 the weighted average number of shares for primary and
fully diluted net income per share were 75,625,330 and 77,064,131 shares, respectively. Common share equivalents for purposes of net
income per share consist of stock options and warrants.
Supplemental EarningsRecently Issued Accounting Standard - Subsequent to December 28, 1996,
the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per
Share - Assuming that the rights offeringShare." This statement establishes standards for computing 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, andpresenting
earnings per share ("EPS"), replacing the presentation of currently required
primary EPS with a presentation of Basic EPS. For entities with complex capital
structures, the statement requires the dual presentation of both Basic EPS and
Diluted EPS on the face of the statement of operations. Under this new standard,
Basic EPS is computed based on weighted average shares outstanding and excludes
any potential dilution. Diluted EPS reflects potential dilution from the
exercise or conversion of securities into common stock or from other contracts
to issue common stock and is similar to the currently required fully diluted
EPS. SFAS No. 128 is effective for 1992 would have been $.09
per sharefinancial statements issued for periods
ending after December 15, 1997, including interim periods, and $.37 per share, respectively.
Assumingearlier
application is not permitted. When adopted, the Company will be required to
restate its EPS data for all periods presented. The Company does not expect the
impact of the adoption of this statement to be material to previously reported
EPS amounts.
Revenues - The Company recognizes revenue at the time the merchandise is
shipped to the customer. Amounts billed to customers for postage and handling
charges are recognized as revenue at the time that the conversion ofrevenues on 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 consummatedproduct
shipment are recognized. The Company provides a reserve for expected future
returns at the beginningtime the sale is recorded based upon historical experience.
Fair Value of fiscal year 1993,
the weighted average numberFinancial Instruments - The fair value 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.financial
instruments does not materially differ from their carrying values.
Supplemental Disclosure of Noncash Activities
1992 1993 1994 -------1995 1996
------ -------- ---------------
(IN THOUSANDS)
Exchange of THC 8% cumulative 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 . . . . . . . . . . . . . . . . . . $ 30,475 $ - $ -
======== ======== ========
Dividend on Class B 8% Preferred Stock paid in THC Common
Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ - $ 2,508 $ -
======== ======== ========
Exchange of 8% Class B Preferred Stock and 7.5%
Convertible Preferred Stock for HDI Common Stock . . . . . . . . . . . $ - $ 32,674 $ -
======== ======== ========
Capital lease obligations . . . . . . . . . . . . . . . . . . . . . . ........... $ --- $ 2,5411,155 $ ---
====== ======== ======== ===============
Other equity issuances and exchanges . . . . . . . . . . . . . . . . .$1,823 $ -1,456 $ 4,990 $ 1,8232,855
====== ======== ======== ===============
Acquisition of businesses:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . ..... $ --- $ 38,57845,165 $ ---
Fair value of liabilities assumed . . . . . . . . . . . . . . . . . . - (26,180) -
Common-- (26,757) --
Preferred stock issued . . . . . . . . . . . . . . . . . . . . . . . . . - (12,298) -
---------........... -- (5,400) --
------ -------- ---------------
Net cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................... $ --- $ 10013,008 $ ---
====== ======== ======== ===============
3441
3542
2. TRANSACTIONS WITH NAR GROUP LIMITED
In October 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 7.5% Convertible Subordinated Debentures due March 1,
2007 (valued under the Purchase Agreement at $7.5 million) plus $31.3 million
in 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. 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 and was repaid in 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.
- 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 Class B Preferred Stock and the 12,270,503
shares of Class B Common Stock for 18,937,169 shares of Common Stock.
3. ACQUISITIONS AND INVESTMENTS
ACQUISITIONS - During fiscal 1995, the Company acquired the entities
described below, which were accounted for by the purchase method of accounting.
The Company madeoperating results of these acquired businesses have been included in the
following acquisitions in 1993:
Gump's - In July 1993,consolidated statements of income from the date of acquisition:
Improvements--In January 1995, the Company acquired substantially all of
the mail order and retail assets of Gump's,Leichtung, Inc. ("Gump's"), 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.
35
36
The Company Store - In August 1993, the Company acquired certain
assets of Company Store Holdings, Inc. and subsidiaries ("The Company Store"), a direct marketer of down comforters, other down productswood-working and home
furnishings.
The consideration givenimprovement tools and related products sold under the Improvements and Leichtung
Workshops names, 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-year amortization, with the remaining
balance due and payable on August 31, 1998.
Tweeds - In September 1993, the Company acquired all of the
outstanding shares of Tweeds, Inc., a well-known, European- inspired women's
fashion catalog. The purchase price was $8.8 million and consisted of: (i) $.1of approximately $12.8 million in cash; (ii) 771,774 shares of the Company's Common Stock, valued at
$4.60 per share or $3.6 million;cash and (iii)
the assumption of $5.1 million ofcertain liabilities. Accounting for Acquisitions - The acquisitions of Gump's, The Company
Store and Tweeds have been accounted for using theexcess purchase method of
accounting with goodwill of approximately $11.4 million recorded, based uponprice over the fair
values of the net assets acquired and liabilities assumed.(goodwill) was $7.3 million. Approximately
$1.4 million of customer mailing list intangible assets were also purchased in
this transaction.
In addition,the first quarter of 1996, the Company recorded $2.5sold the assets of the
Leichtung Workshops catalog for $.9 million representingin cash and short-term notes and
relocated all Improvements' telemarketing and fulfillment operations to the
Company's Hanover, PA facility. There was no gain or loss recognized on the sale
of the assets of the Leichtung Workshops catalog. The distribution facility in
Ohio, which is being held for sale, was written down to its estimated net
realizable value of $.1 million, as of December 28, 1996. In 1996, the Company
provided $.7 million, included as a component of special charges, to write-down
this facility (Note 3).
The Safety Zone--In February 1995, the Company acquired the remaining 80%
of the outstanding common stock it did not already own of Aegis Safety Holdings,
Inc. ("Aegis"), publisher of The Safety Zone catalog, through the issuance of
634,900 shares of a newly-created Series B Convertible Additional Preferred
Stock ("Series B Stock") of the Company with a stated value of $10 per share.
Dividends are payable on the Series B Stock at various rates and times and are
contingent on specific earnings targets. The Series B Stock is also convertible,
subject to antidilution, as discussed in Note 10. The excess purchase price over
the fair value of
acquired mailing lists. In accordance with the purchase method of accounting,
the Company updated its estimates of the fair valuevalues of the net assets acquired (goodwill) was $7.1 million. In
December 1996, the Company wrote-off the goodwill related to this acquisition
in accordance with SFAS No. 121 (Note 3).
Austad's--In May 1995, the Company acquired 67.5% of the outstanding
shares of Austad's Holdings, Inc. ("Austad's"), which owned The Austad Company
("TAC"), the publisher of the Austad's catalog featuring golf equipment, apparel
and increased goodwillgifts, for a purchase price of $1.8 million in cash. The Company also lent
TAC, on a subordinated basis, $2.2 million which bears interest at the rate of
10% per annum and is due by May 2000. The Company also provided a $.4 million
loan to TAC which bears interest at a fluctuating rate (8.75% at December 28,
1996 and December 30, 1995) and is secured by a second mortgage on TAC's office
and warehouse. The excess purchase price over the fair values of the net assets
acquired (goodwill) was $4.5 million. Approximately $1.2 million of customer
mailing list intangible assets were also acquired in 1994. The operating resultsthis transaction. In
December 1996, the Company wrote-off the goodwill and mailing lists in
accordance with SFAS No. 121 (Note 3).
42
43
On February 16, 1996, former minority shareholders surrendered to
Austad's their Austad's shares, amounting to 32.5% of the acquired companies are includedoutstanding shares,
and paid approximately $1.1 million in consolidatedexchange for all the outstanding shares
of AGS, Inc. ("AGS"), a South Dakota corporation formed by TAC to hold the
existing retail assets and liabilities of TAC. The transaction assumed a value
for Austad's and TAC based on the Company's purchase price in the May 1995
acquisition, as adjusted by adding the net income of Austad's and TAC from their
respective datesMay
25, 1995 through February 16, 1996.
As a result of acquisition.the reorganization, Austad's became a wholly owned
subsidiary of the Company. In connection with the reorganization, TAC was
released from all future obligations under all store leases. AGS will operate
the four existing retail stores acquired from TAC as Austad's stores under
license from Austad's. The customer service and fulfillment operations of
Austad's were transferred to other Company facilities in the first quarter of
1996, and the Company sold the Austad's South Dakota warehouse and distribution
facility in July 1996 for $2.1 million which approximated its book value. The
net proceeds were used to pay the outstanding mortgage on the property (Note 8).
TAC had a revolving credit facility that was secured by substantially all
of TAC's assets that expired on February 26, 1996. Such facility was paid off at
the February 16th closing with the proceeds from the sale of the retail
operations and from the Company's revolving credit facility (Note 8).
The following represents the unaudited pro forma results of operations
for the years ended December 26, 199231, 1994 and January 1, 1994,December 30, 1995 as if these three
acquisitions had occurred at the beginning of fiscal year 1992.1994.
(In thousands, except per share amounts)
(UNAUDITED)
1992 1993(Unaudited)
1994 1995
-------- --------
Revenues $733,454 $723,749$840,295 $763,786
======== ========
Income (loss) before extraordinary items and cumulative effect of accounting
change for income taxesitem $ (3,720) $ 10,16014,305 $(28,083)
======== ========
Income applicable to
common shareholdersNet income (loss) $ 12,284 $ 6,06714,170 $(30,160)
======== ========
Per Share:
Income (loss) per share before extraordinary item and cumulative effect of accounting
change for income taxes $ (.17).15 $ .08(.30)
Extraordinary items .23 -
Cumulative effect of accounting change
for income taxes .24 -item -- (.02)
-------- --------
Net income (loss) $ .30.15 $ .08(.32)
======== ========
36
37
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. Per share amounts are expressed after deducting preferred
stock dividends of $.1 and $.2 million in 1994 and 1995, respectively.
OTHER INVESTMENTS AND ADVANCES - Investments and advancesOther investments, which are recorded in Other assets
in the accompanying Consolidated Balance Sheetconsolidated balance sheets, 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-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 agreed to extend a secured working capital line of up to $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.43
44
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. The remaining
50% interest is held by an unrelated third party. This investment is accounted
for by the equity method of accounting. The Company made annual rent payments to
the partnership totalingof approximately $.7 million in 1994both 1996 and 1995 as part of a
15 year lease through 2008. The Company hasalso recorded $.1 million in income for
its portion of the partnership income in 1994. At
December 31, 1994, theboth 1996 and 1995. The Company's
investment in Blue Ridge was $1.1 million.
Boston Publishing Company -approximately $.9 million and $1 million at
December 28, 1996 and December 30, 1995, respectively. In February 1994,December 1996, the
Company entereddecided to consolidate this facility into an agreement with Boston Publishing Company, Inc. ("BPC") whereby the Company
acquired a 20% equity interest and agreed to provide certain catalog related
services to BPC. The Company also provided BPC with a secured three-year
revolving credit facility of up to $3 million, a $.75 million short-term
loan, and a $.5 million five-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 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 investment in BPC is accounted for
using the equity method of accounting. The Company has outstanding advances to
BPC of $1.2 million as of December 31, 1994.its new Roanoke, Virginia
distribution facility.
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. OnIn September 23, 1994, Regal filed for protection
under Chapter 11 of the United States bankruptcy laws.Code. As a result, during 1994, the
Company wrote down the convertible debentures to the estimated fair value of
$1.7 million. The Company,$1 million decline 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 thefair value of the investment was
considered an other- than-temporary impairment and included in the income
statement in 1994. The convertible debt matures on June 15, 2008. In December
1995, a plan of reorganization was confirmed by the Bankruptcy Court and the
Company expected to recover the $1.7 million carrying value of its investment,
however, only $.8 million of distributions were received through 1996. During
1996, a federal income tax refund due to Regal was reviewed by the Internal
Revenue Service (the "IRS"), and the results of this review have been submitted
to the Joint Committee of the IRS for approval. Due to the uncertainty that
recoverability of substantially all of the remaining investment balance is
subject to a favorable outcome, in December 1996, the Company wrote-off the
remaining $.9 million balance as the decline in fair value was considered an
other than temporary impairment.
Tiger Direct - In February 1995, the Company entered into an agreement to
acquire certain securities based on market prices. Atof Tiger Direct, Inc. ("Tiger"), a direct marketer of
computer software, peripherals and CD-ROM hardware and software. In February
1995, the Company entered into a loan and security agreement with Tiger pursuant
to which the Company provided a secured working capital line of credit to Tiger,
up to a maximum of $3.0 million, which was loaned under such agreement. In
September 30, 1994,1995, due to the valuation allowance was
$1.8continued deterioration of Tiger's financial
condition, the Company terminated the securities purchase agreement and sold the
loan to a third party and received payment in full for the principal of the loan
and interest to the date of sale.
During the period from February 1995 to September 1995, the Company
provided certain services to Tiger and also incurred certain costs related to
entering into the loan and security agreements aggregating $.5 million. Under
the terms of the agreement, Tiger is required to reimburse the Company for such
costs and services rendered. Tiger refused to reimburse the Company for these
costs causing the Company to institute an action to recover such costs, which
were carried at their estimated realizable value. In February 1997, the fourth quarterCompany
recovered $.2 million in settlement of such action.
Boston Publishing Company - In February 1994, the Company ceased considering the
exchangeacquired a 20%
equity interest in Boston Publishing Company ("BPC") and provided secured and
unsecured loans to BPC. In August 1994, BPC filed for protection under Chapter
11 of the securitiesUnited States Code.
44
45
In 1995, the Company received inventory and the customer mailing list of BPC in
payment of its $1.2 million loan and subsequently realized $.3 million upon
disposition of these assets and wrote-off the remaining assets.
3. SPECIAL CHARGES
In December 1996, the Company recorded special charges aggregating
approximately $36.7 million. These charges consist of severance ($3.2 million)
and facility exit/relocation costs and fixed asset write-offs ($11.5 million)
related to the previously announced downsizing of the Company, as discussed in
its December 1996 press release. In addition, the Company's review of the
impairment of its long-lived assets of certain under-performing catalogs led to
a write-off of $22.0 million.
Severance - The cost of employee severance includes termination benefits
for an equity positionline and instead began negotiations
assupervisory personnel in fulfillment, telemarketing, MIS,
merchandising, and various levels of corporate and catalog management. These
costs are recorded in Accrued liabilities in the accompanying consolidated
balance sheet at December 28, 1996.
Facility Exit/Relocation Costs and Fixed Asset Write-Offs - These costs
are primarily composed of the Company's decision to relocate from its Weehawken,
NJ corporate facility, and consolidate its Roanoke, VA apparel distribution
center and Hanover, PA distribution center into its Roanoke home fashion
distribution center. The consolidation of these distribution centers and the
relocation of the corporate operations is expected to be completed by the end of
fiscal 1997. Approximately $6.3 million of these costs are recorded in Accrued
liabilities in the accompanying consolidated balance sheet at December 28, 1996.
In 1995, the Company incurred costs, aggregating approximately $1.5
million, in connection with the consolidation of its fulfillment facilities.
These costs include moving expenses, lease termination fees and severance
expenses, substantially all of which were paid in 1995. There were no such
charges incurred by the Company in 1994.
Impairment of long-lived assets - The Company considers a history of
catalog operating losses to be its primary indicator of potential impairment.
Assets are grouped and evaluated for impairment at the lowest level for which
there are identifiable cash flows that are independent of the cash flows of
other groups of assets. The Company has identified the appropriate grouping of
assets to be individual catalogs, except where certain catalogs are a part of a
group that, together, generate joint cash flows. The assets are deemed to be
impaired if a forecast of undiscounted future operating cash flows is less than
the Creditors Committee for an overall settlement.carrying amounts. The loss is measured as the amount by which the carrying
amount of the assets exceeds its fair value. The Company generally measures fair
value by discounting estimated future cash flows. Considerable management
judgment is necessary to estimate discounted future cash flows and, accordingly,
actual results could vary significantly from such estimates. The impairment loss
was approximately $22.0 million and is primarily composed of the write-off of
goodwill and mailing lists associated with Tweeds, Austad's and The Safety Zone
(Note 2). No such charges were recorded by the Company in 1995 and 1994.
45
46
4. WRITE-DOWN OF INVENTORY OF DISCONTINUED CATALOGS
In 1995, the Company made a non-operating expensedecision to discontinue six catalogs. The six
discontinued catalogs generated revenues of $1.0$20 million, $88 million and $118
million and losses of $5.1 million, $20 million and $4.7 million in 1996, 1995
and 1994, reflecting its estimaterespectively. These losses are attributable to falling revenues due to
poor sales on the discontinued catalogs, increasing operating costs and expenses
and increasing selling expenses predominantly incurred to create liquidation
catalogs. The losses in 1996 and 1995 include provisions of approximately $1.1
million and $8.6 million, respectively, primarily related to the write-down of
inventory associated with these catalogs to their net realizable value based on
the planned liquidation of such inventory. The $8.6 million write-down in 1995
occurred because the Company anticipated mailing fewer catalogs than originally
planned for 1996, which resulted in significantly more merchandise on-hand that
needed to be moved through non-catalog channels. The inventory write-down of
$1.1 million in 1996 was required due to lower than anticipated recovery rates
on liquidation of such inventory. The Company utilizes various methods to
dispose of the probable outcomeinventory related to discontinued catalogs, including special
sale catalogs, sales sections in other catalogs and liquidations of remaining
inventory through off-price merchants. This liquidation process typically takes
from six to nine months. These losses represent an incremental provision in
excess of the settlement. The estimates include valuationsoriginal provision included in cost of several subsidiariessales expense. There were
no such charges incurred by the Company in 1994. Fixed overhead expenses,
primarily telemarketing and fulfillment costs, that were allocated to the six
discontinued catalogs have been absorbed by the operations of Regalthe 1995
acquisitions and certain contract rights and claims, as well as
Regal's operating status atthrough cost containment measures instituted by the assumed time of dissolution. The Company's net
investment in Regal was $1.7 million as of December 31, 1994.
4.Company.
5. SEARS LICENSING AGREEMENTAGREEMENT.
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:included: Show Place, based on the
Domestications catalog, Great Kitchens, based on the Colonial Garden Kitchens
catalog, Beautiful Style,and Sears Improvements, based on the Silhouettes catalog and Right
Touch, based on the TapestryImprovements catalog. The Sears
Agreement hashad an initial three-year term and continueswas to continue thereafter unless
terminated. In December 1996, the Sears Agreement was terminated by either party.Sears with
the last catalogs to be mailed in the first quarter of 1997. Sears terminated
the agreement based on the Company's non-compliance with certain operating
standards in order fulfillment and certain reporting standards.
Profits and losses from the venture are shared between the parties on an
equal basis.basis until the venture is completed in the first quarter of 1997. In
accordance with the Sears Agreement, earnings before interest and taxes ("EBIT")
generated by the Sears catalogs is the basis for dividing these profits. The
Sears specialty catalogs generated revenues of $82 million, $81 million and $71
million and EBIT of $.3 million, $3.0 million and $2.9 million in 1996, 1995 and
1994, respectively.
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 hashad
revenues of at least $250 million and earnings before interest and taxes
("EBIT")EBIT of at least $30 million in 1998.
Alternately, Sears will bewould have been entitled to purchase 7 million shares of
Common Stock in 1999 if the licensed business with Sears hashad revenues of at
least $500 million and EBIT 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
46
47
price iswas $10.57 per share. Through 1994,1996, no charges have been required to be recorded in
connection with the warrants. The Company is obligatedDue 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
also has the right to terminate the agreement in certain circumstances,
including if Sears fails to comply with any material provisiontermination of the Sears Agreement.
5.Agreement, the
Company believes that the venture wind-up activities will not generate
sufficient financial performance to enable Sears to exercise these warrants. The
Company believes that the termination of this venture will not have a material
impact on the Company's 1997 operating results.
6. ACCOUNTS RECEIVABLE, NETNET.
The Company currently 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.cards. The agreement expires in
December 2000. 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 maintain certain financial covenants
related to this agreement and has received a waiver for the events of default at
December 28, 1996.
The proceeds to the Company relating to the sale of receivables for 1996,
1995 and 1994 were $39.2 million, $46.2 million and $56.1 million, respectively.
At January 1, 1994December 28, 1996 and December 31, 1994,30, 1995, the uncollected balances under this
program were $47.0$33.5 million and $45.9$38.6 million, respectively, of which $13.0$4.8
million, and $11.5$5.5 million respectively, represent deposits under the agreement
which are included in Accounts receivable.receivable, net. The total reserve balance
maintained for the repurchase of 38
39
uncollectible accounts was $3.1$2.5 million and
$2.3$2.4 million at January 1, 1994December 28, 1996 and December 31, 1994,30, 1995, respectively, of which
$1.7$1.4 million and $1.2 million,
respectively, arein both years is 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-balance sheet risk as defined in Statement of Financial
Accounting Standards No. 105. 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.
6.47
48
7. ACCRUED LIABILITIESLIABILITIES.
Accrued liabilities consistsconsist of the following (in thousands):
JANUARY 1, DECEMBER 31,
1994 1994
---------- ------------December 30, December 28,
1995 1996
---- ----
Restructuring $ -- $ 9,504
Reserve for future sales returns . . . . . . . . . . . . . . $ 4,911 $ 6,0235,535 9,036
Compensation . . . . . . . . . . . . . . . . . . . . . . 3,642 3,9235,795 3,968
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 888 1,3303,007 2,696
Reserve for repurchase of accounts
receivable sold with recourse . . . . . . . . . . . . . . . . . . . . 1,735 1,1801,391 1,389
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,143 7,75910,241 11,189
------- -------
$21,319 $20,215Total $25,969 $37,782
======= =======
7.8. LONG-TERM DEBTDEBT.
Long-term debt consists of the following (in thousands):
JANUARY 1, DECEMBER 31,
1994 1994
---------- ------------December 30, December 28,
1995 1996
---- ----
Congress Facility $ 9,931 $22,627
Term Financing Facility 20,000 19,000
TAC Revolving Credit Facility:
Revolving . . . . . . . . . . . . . . . . . . . . . . . . . $ 230 $ -
Term . . . . . . . . . . . . . . . . . . . . . . . . . . . -Facility 2,011 --
NAR Promissory Note -- 10,000
6% Mortgage Notes Payable due 1998 3,139 2,969
Industrial Revenue Bonds with variable interest rates
averaging 3.7%4.1% in 19931995 and 4.5%3.6% in 19941996 due
2003 . . . . . 8,000 8,000
6% Notes7.5% Convertible Subordinate Debentures due
2007 751 751
8.75% Mortgage Note Payable due 1994 . . . . . . . . . . . . . . . . . . 1,100 -
6% Mortgage Notes Payable due 1998 . . . . . . . . . . . . . 3,452 3,3002003 1,718 --
9.25% Senior Subordinated Notes due 1998 . . . . . . . . . . 20,000 14,000 7 1/2% Convertible Subordinated Debentures due 2007 . . . . . 751 751--
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 4019 16
------- -------
33,589 36,09159,569 63,363
Less current portion . . . . . . . . . . . . . . . . . . . . 1,276 1842,286 10,108
------- -------
Noncurrent portion . . . . . . . . . . . . . . . . . . . . . $32,313 $35,907$57,283 $53,255
======= =======
Revolving Credit Facility - In May 1993,November 1995, the Company consummated a
three-year, $40 million credit facility with a financial institution, replacing
thereplaced their previous facility with a subsidiary of NAR that had been entered into in
1991. The facility provided for cash borrowings and letters of credit based on
eligible inventory. The interest rate on the funds borrowed under this
facility was the prime rate plus two percent per annum. Subsequent to May 5,
39
40
1993, the Company amended this facility to include Gump's, The Company Store
and Tweeds as borrowers under the agreement and the limit was increased to
$52.5 million. The facility was guaranteed by the Company and was secured by
inventory and other assets of its principal operating subsidiaries.
In October 1994, the Company consummated a five-year $80 million
unsecured revolving credit facility (the "Revolver") with a syndicatenew $75 million
secured credit facility (the "Congress Facility") with Congress Financial
Corporation ("Congress"), and repaid all amounts outstanding under the Revolver.
In addition, all standby letters of banks (the "Creditcredit issued under the previous arrangement
were replaced with letters of credit issued by Congress under the Congress
Facility.
48
49
Congress Facility - The Congress Facility is comprised of a revolving
line of credit of up to $65 million with a three year term ("Congress Revolving
Credit Facility") ledand two year term loans aggregating $10 million ("Revolving
Term Notes"). The amount that can be borrowed under the Congress Facility is
based on percentages of eligible inventory and accounts receivable from time to
time. Beginning in November 1996, Congress lowered the advance rate by NationsBankwhich the
available inventory is calculated by $4.4 million. This calculation was further
reduced by $2.0 million, pending completion of North Carolina, N.A.a new inventory appraisal which
was completed in March 1997. The Congress Revolving Credit Facility bears
interest at 1.25% above CoreStates' prime rate and the Revolving Term Notes
bears interest at 1.5% above CoreStates' prime rate. The Congress Facility is
secured by all assets of the Company, and the Company was required to maintain a
minimum net worth of $80 million, and working capital of $26 million. In
addition, the Congress Facility places limitations on the incurrence of
additional indebtedness. The rates of interest related to the Congress Revolving
Credit Facility and Revolving Term Notes at such dates were 9.50% and 9.75%,
replacingrespectively. At December 28, 1996 and December 30, 1995, the Company had $13.7
million and no outstanding borrowings under the Congress Revolving Credit
Facility and $8.9 million and $9.9 million outstanding under the Revolving Term
Notes, respectively. The face amount of unexpired documentary letters of credit
at December 28, 1996 and December 30, 1995, were $4.5 million and $4.2 million,
respectively. At December 28, 1996 unused borrowing capacity under the Congress
Facility was $26.0 million. In 1995, the Company issued under the Congress
Facility, $31.2 million of standby letters of credit which included
$8.6 million related to the Industrial Revenue Bonds due 2003, and
$20.3 million related to the Term Financing Facility.
The Congress Facility was amended in February 1996 to permit the
reorganization of Austad's (Note 2) and was further amended in April 1996 to
permit borrowings of an additional $4 million over the borrowing base formula
until the closing of the Company's $52.5$50 million credit facility. The Creditrights offering (the "Rights
Offering") in August 1996 (Note 9), subject to the $75 million limit of the
Congress Facility. Also in April 1996, the minimum working capital and net worth
requirements contained in the Congress Facility provides for a $20 million
sub-facilityand in the indenture relating to
be utilized exclusively for acquisitions. The $20 million
sub-facility would bethe 9.25% Senior Subordinated Notes due 1998 ("9.25% Notes") were reduced by $5
million per year if it is not used forto $21 million and $75 million, respectively. In May 1996, the net worth
and working capital covenants were further amended to take into account a $25
million advance by NAR Group Limited ("NAR") until its intended purpose. The Credit Facility also provides that $20repayment with the
proceeds of the Rights Offering in August 1996 (Note 9). In September 1996,
working capital was amended again to take into account the $10 million advance
by Intercontinental Mining & Resources Incorporated, an affiliate 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"NAR
("IMR"). The rate of interest onnet worth covenant was further amended to $70 million in December
1996 and Congress agreed to address the revolving portion1997 net worth covenant level after a
review of the Credit Facility is
calculated based on the Base Rate of NationsBank of North Carolina, N.A. or byCompany's business plan. As a LIBOR formula. The rate is also contingent on the lengthresult 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 definedoperating losses
incurred 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 by1996, the Company under certain
circumstanceswas not in compliance with the working capital and
requirenet worth covenants for which the Lenders initial consent for certain investments
and acquisitions.
In November 1994, theCompany received waivers from Congress (Note
18).
Term Financing Facility - The Company borrowed $10 million from the $20 millionin each of
1994 and 1995 under a Term Financing Facility. The interest rate of interest on the Term
Financing Facility will beis based on the 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, theThe face rate ranged from 5.85%5.47% to
6.30%.5.73%, and 5.73% to 6.02% at December 28, 1996 and December 30, 1995,
respectively. The Term Financing Facility was reduced by an annual sinking fund
payment of $1.0 million in October 1996 and requires annual sinking fund
payments of $.5$1.0 million beginningfrom October 1996 through1997 though October 1999 andwith this amount
increasing to $.8$1.6 million for each of the ten years thereafter, for each $10thereafter. The Term
Financing Facility continues to be outstanding and in effect under its original
terms.
49
50
In December 1996, the Company finalized its agreement (the
"Reimbursement Agreement") with Richemont Finance S.A. ("Richemont"), who along
with the family of Alan G. Quasha, Chairman of the Board of the Company, jointly
own NAR, that provided the Company with approximately $27.9 million borrowed
under this facility.
The face amount of unexpired documentary letters
of credit at January 1,
1994 and December 31, 1994 were $5.7 million and $7.2 million, respectively.
In addition, the Company had issued $28.5 million of standbythrough Swiss Bank Corporation's, New York Branch, to replace letters
of credit at December 31, 1994 which included $3.3 million related towere issued under the Gump's retail
store,Congress Facility. These letters of credit
were issued for $8.6 million related to the Industrial Revenue Bonds due 2003
and $10.1$19.3 million related to the Term Financing Facility. Industrial Revenue Bonds due 2003 - The Industrial Revenue Bonds are dueletters of credit
will expire on February 18, 1998 and carry an interest rate of 3.5% above the
prime rate, currently 11.75%, payable to Richemont quarterly on amounts drawn
under the letters of credit. The Company paid a facility fee of $1.4 million
which was equal to 5% of the principle amount of the letters of credit as well
as other fees incurred in connection with providing the facility as of December
1, 2003 and are secured28, 1996. In the event that the Company has not paid in full, by the related assets purchased fromexpiration
date, any outstanding balances under the proceedsletters of credit, Richemont shall have
the option, exercisable at any time prior to payment in full of all amounts
outstanding under the letters of credit to convert such amount into common stock
of the bondsCompany at the mean of the bid and by an irrevocableask prices of the Company's Common
Stock on November 8, 1996, or the mean of the bid and ask prices of the
Company's Common Stock on each of the thirty days immediately prior to the date
of exercise of the conversion privilege. The Reimbursement Agreement is
subordinate to the Congress Facility. On December 5, 1996, Richemont advanced
the Company $10 million against the anticipated $27.9 million line of credit.
The Company repaid the $10 million loan after the letter of credit agreement was
in place on December 19, 1996.
The TAC Revolving Credit Facility - The TAC Revolving Credit Facility
was paid off with the amountproceeds from the Congress Facility and with the proceeds
from the sale of $8.6 million.the retail operations, on February 16, 1996 (Note 2), and was
classified as a long-term obligation at December 30, 1995.
NAR Promissory Note - In September 1996, IMR loaned the Company $10
million as evidenced by a subordinated promissory note (the "NAR Promissory
Note"). This loan bears interest at prime plus 1.5%, was due on November 14,
1996 and, if it is not repaid before May 15, 1997, is convertible at the option
of NAR into shares of Common Stock at the lower of the fair market value thereof
on the date of execution or the then current fair market value thereof. The obligations are guaranteed byNAR
Promissory Note is subordinate to the Company.Congress Facility and is excluded from the
working capital covenant calculation. NAR has agreed to apply $10 million of the
Company's indebtedness to acquire $10 million of the Company's Common Stock
pursuant to the 1997 Rights Offering (Note 18). As a result, the classification
of this debt remains long-term.
6% Mortgage Notes Payable due 1998 - In connection with The Company
Store acquisition, subsidiaries of the Company executed 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-year
amortization schedule with the remaining balance due in August 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. The amounts outstanding were $3.0 million and
$3.1 million at December 28, 1996 and December 30, 1995, respectively.
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
50
51
an irrevocable letter of credit in the amount of $8.6 million. The obligations
are guaranteed by the Company.
8.75% Mortgage Note Payable due 2003 - TAC's 8.75% Mortgage Note
Payable is reflected as an obligation of the Company at December 30, 1995 in
consequence of the corporate reorganization, completed in February 1996 (Note
2). Pursuant to the reorganization, TAC's retail business was split off to Mr.
David Austad and certain of his family members, in exchange for their 32.5%
interest in Austad's (and a cash payment of $1.1 million) and the Company became
the owner of all the outstanding capital shares of TAC. The 8.75% Mortgage Note
Payable was secured by the TAC warehouse and distribution facility in South
Dakota. That facility's operations were largely transferred to other Company
facilities. This note was paid in July 1996 from the proceeds of the sale of the
facility.
9.25% Senior Subordinated Notes due 1998 - In August 1993,At December 28, 1996 and
December 30, 1995, the Company issued $20had $0 and $14.0 million of 9.25% Senior Subordinated Notes
outstanding, respectively. In August 1996, the principal amount due 1998 ("under the
9.25% Notes")Notes was repaid from the proceeds of the Rights Offering (Note 9).
In November 1995, IMR purchased the 9.25% Notes from a third party in
a private placementconnection with an insurance company.the refinancing of the indebtedness under the Congress Facility.
The Company utilizedpaid NAR a commitment fee of $105,000 upon the funds to retire approximately $14 millionsigning of other subordinated debt. The
Company redeemed $6 milliona
repurchase and option agreement and a fee of $210,000 (1.5% of the outstanding
principal amount of the 9.25% Notes without penaltyacquired by IMR) upon the funding, as well
as all expenses incurred by NAR in April 1994.
40
41performing its obligation. The 9.25% Notes mature in August 1998, and require quarterly interest
payments. The 9.25% Notes requireCompany also
extended by two years the Company to maintain certain financial
covenants on a quarterly basis. As of December 31, 1994, the Company was not
in compliance with oneterms of the covenants underwarrants to purchase 5,033,735 shares
held by NAR and IMR to August 1, 1998. The Company recorded as debt issuance
costs approximately $1.2 million, representing the fair value of the warrant
extensions as determined using the Black Scholes model. Such costs were being
amortized over the life of the 9.25% Notes. The Company has also agreed to
indemnify NAR against any and all claims or losses asserted against it or
incurred by it relating to the transactions contemplated by the repurchase and
option agreement.
Extraordinary Items - As a result of the replacement of the Revolver,
the purchase by IMR of the 9.25% Notes for which it had
received a waiver. The Company and early repayment of 9.25% Notes from
the holderproceeds of the Notes have amendedRights Offering, the covenants in the Indenture to reduce certain financial standards contained in
the covenants. The covenants will revert in the first quarterCompany wrote-off approximately $1.8
million and $1.1 million of 1996 to those
in effect priorunamortized debt issuance costs as extraordinary
items due to the amendment.
7 1/2% Convertible Subordinated Debentures due 2007 - In September 1992,
the Company consummated an exchange offer with holdersearly extinguishment of these debentures,
pursuant to which the Company issued 40,500 shares of its Common Stockdebt for 1995 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.
In November 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.1996, respectively.
General - At December 31, 1994,28, 1996, the aggregate annual principal and
sinking fund payments required on all long-term debt wereinstruments are as follows
(in thousands): 1995 - $184; 1996 - $688; 1997 - $681;$10,102; 1998 - $17,287;$27,497; 1999 - $500$1,000; 2000 - $1,600;
2001 - $1,600 and thereafter - $16,751.
8. CAPITAL STOCK
On September 8, 1993, HDI was formed through a series$21,551.
9. RIGHTS OFFERING.
The Company commenced its $50 million Rights Offering on July 19, 1996.
Holders of mergers
involving H&H and THC (see Note 1).
Registration - In July 1993, the Company filed a Registration Statement on
Form S-3 with the Securities and Exchange Commission registering 3,750,000
sharesrecord of the Company's Common Stock, 6% Series A Convertible
Additional Preferred Stock and Series B Convertible Additional Preferred Stock
as of July 18, 1996, were eligible to participate in the Rights Offering. The
Rights were exercisable at a price of $1.03 per share.
51
52
Shareholders received 0.51 Rights for the purposeeach share of Common Stock held, 3.72
rights for each share of Series A Convertible Additional Preferred Stock held
and 0.77 rights for each share of Series B Convertible Additional Preferred
Stock held as of the Gump's acquisitionrecord date. The Rights Offering closed on August 23, 1996.
Due to the Company's continued operating losses, the Company requested
that NAR advance up to $25 million against all the Rights distributed to it
and/or its commitment to purchase all of the unsubscribed shares. In May 1996,
NAR advanced the Company $25 million under a promissory note (Note 8). Under the
provisions of the promissory note, the Company repaid NAR the $25 million
advance plus accrued interest upon the closing of the Rights Offering.
The Company issued 48,748,785 shares pursuant to the Rights Offering
which generated proceeds of approximately $48 million, net of expenses. NAR
received rights entitling it to purchase 24,015,964 shares in the Rights
Offering and future business combination or reserved transactions. Asexercised such rights. In addition, the Company and NAR entered
into a Standby Purchase Agreement, pursuant to which NAR purchased 6,898,866
shares not subscribed by shareholders and received approximately $.5 million as
a fee. The proceeds of December 31,
1994, 3,299,187 shares have been issued or reserved for this purpose.
Exchangesthe Rights Offering were used by the Company: (i) to
repay the $14 million principal amount of 9.25% Notes held by an affiliate of
NAR plus accrued interest, (ii) to repay the $25 million principal amount
advanced under the promissory note plus accrued interest and (iii) to repay
approximately $9 million under the Congress Facility. The Company recorded an
extraordinary expense related to the early extinguishment of the 9.25% Notes,
representing a write-off of the unamortized debt issuance costs of approximately
$1.1 million.
10. CAPITAL STOCK.
6% Series A Convertible Additional Preferred Stock - In December 1993, the Company converted all of its
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. 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 for 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.
Public Offering - In April 1994, the Company completed a public offering
(the "Public Offering") of 8,045,296 shares of Common Stock for proceeds of
approximately $47.5 million, net of expenses. Also, in connection with the
Public 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 Public Offering with the
Company not receiving any of 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, Inc. ("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 Additional Preferred Stock (6%("6% Preferred Stock)Stock") for an installment
note, dated March 29, 1993, as amended, in the amount of approximately $2.4
million previously issued by Tweeds. Dividends began accruing on September 30,
1993.
The 6% Preferred Stock iswas convertible into Common Stock of the Company
over a three-yearthree year period in equal amounts on September 30, 1994, 1995 and 1996.
The conversion price iswas an amount equal to the average of the per share closing
prices for the five trading days preceding the conversion dates. On September
30, 1994, theThe Company
converted one-thirdeach of the one third equal portions of the 234,900 outstandingissued shares of
the 6% Preferred Stock into 819,733, 427,785 and 189,818 shares of Common Stock
plus accrued dividends on September 30, 1996,1995 and paid1994, respectively. The
Company elected to pay cash dividends of $.1 million.million related to the September
1994 conversion.
Series B Convertible Additional Preferred Stock - In February 1995, the
Company issued 634,900 shares of its Class B Convertible Additional Preferred
Stock ("Series B Stock") to acquire the remaining 80% of the outstanding common
stock of Aegis Safety Holdings, Inc. ("Aegis"), publisher of The 6% PreferredSafety Zone
catalog. The Series B Stock has a stated value of $10
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53
per share. Non-cumulative dividends will accrue and be paid at 5% per annum
during each of the first three years if Aegis attains at least $1 million in
earnings before interest and taxes each year. In years four and five, dividends
are cumulative and will accrue and be paid at 7% per annum and are not
contingent on the achievement of any earnings target. Dividends were not paid in
1996 and 1995 based on The Safety Zone catalog's operating results in each
respective year.
The Series B Stock is convertible at any time, at $6.66 per share,
subject to antidilution, at the option of the holder and hasis convertible at the
Company's option if the market value of the Company's Common Stock is greater
than $6.66 per share, subject to antidilution, for 20 trading days in any
consecutive 30 day trading period or at the holder's option from time to time.
If, after five years, the Series B Stock is not converted, it is mandatorily
redeemable, at the Company's option, in cash or for 952,352 shares of the
Company's Common Stock provided the market value of the stock is at least $6.33
per share, subject to antidilution. If the market value of the Company's Common
Stock does not meet this minimum, the redemption rate is subject to adjustment
which would increase the number of shares for which the Series B Stock is
redeemed. In December 1996, the Company filed a liquidation preference inregistration statement on form
S-3 with the Securities and Exchange Commission registering 952,352 shares of
the Company's Common Stock related to the future conversion of the Series B
Stock.
The fair value of the Series B Stock, which is based on an amount equal toindependent
appraisal, was $.9 million less than the stated value at February 1995. This
discount is being amortized over a five year period and resulted in a charge of
each share$.2 million to preferred stock dividends in the statement of the 6% Preferred Stock plus accrued dividends or $1,589,000 at December 31,
1994. The Company has the right to redeem the 6% Preferred Stock at its stated
value plus accrued dividends, payableincome in cash.1996 and
1995.
Warrants - The warrants outstanding at December 31, 199428, 1996 are as
follows:
WARRANTS EXERCISE EXPIRATION
ISSUED PRICE DATE
--------- -------- ----------
1,541,301 $ 2.42 5/08/96
3,157,884 2.91 7/08/96
334,550 2.19 7/10/961,728,923 $2.16 8/01/98
3,542,292 2.59 8/01/98
375,275 1.95 8/01/98
---------
5,033,7355,646,490
=========
All of the above issued warrants are held by NAR and its affiliates.
As previously discussed,The Company agreed to extend the Company issuedterms of the warrants held by NAR and its
affiliates by two years in consideration of IMR's purchase of the 9.25% Notes
from a third party in November of 1995 (Note 8). The original terms of these
warrant agreements contain certain antidilution provisions which increased, in
aggregate, the warrants by 612,755 from 5,033,735 to Sears a performance
warrant5,646,490 due to purchase upthe Rights
Offering (Note 9). The antidilution provisions resulted in an adjustment to 7 million sharesthe
previous exercise prices of Common Stock in 1999. This
performance warrant is not reflected in the above table.$2.42, $2.91 and $2.49, respectively.
General - At December 31, 1994,28, 1996, there were 92,737,840144,647,898 shares of Common
Stock and 156,600634,900 shares of 6% Series A PreferredB Stock outstanding. Additionally, an
aggregate of 16,211,64418,810,956 shares of Common Stock were reserved for issuance
pursuant to (i) the exercise of outstanding options (621,050),11,045,000, (ii) the
exercise of outstanding warrants (12,033,735),5,646,490, (iii) the Executive Equity Incentive
Plan (1,646,170),640,498, and (iv) the Restricted Stock Award Plan (292,152), and
(v) the All Employee Equity Investment Plan (1,618,537).1,478,968.
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Dividend Restrictions - The Company is limitedrestricted 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 in excess of one million
shares of its Common Stock under the most restrictivecapital stock by certain debt
covenants contained in agreements to which the Company is a party.
9. EMPLOYEE BENEFIT11. STOCK BASED COMPENSATION PLANS
At December 28, 1996, the Company has thirteen stock based compensation
plans. In accordance with the provisions of SFAS No.123, the Company has
recorded a compensation charge of $.5 million. The effects of applying SFAS No.
123 for recognizing compensation costs are not indicative of future amounts.
SFAS No. 123 does not apply to awards prior to 1996 and additional awards in the
future are anticipated. The information below details each of the respective
plans, including the changes during the years presented.
1978 Stock Option Plan - Pursuant to the Company's Stock Option Plan
(the "Plan""1978 Plan"), an aggregate of 2,830,519 shares were approved 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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Options expire five years from the date of grant and generally 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 numbernumbers of shares, are as follows:
1992 1993 1994 -------- --------- ---------1994 1995 1995 1996 1996
---- ---- ---- ---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Options outstanding,
beginning of period 945,965 603,765 365,250 $3.95 496,050 $3.60 90,000 $2.42
Granted - - 162,000 $3.50 70,000 $2.11 -- --
Exercised - - (1,000) $5.00 -- -- -- --
Forfeited (9,500) $5.00 (142,000) $3.50 -- --
Expired (164,200) (214,165) (20,700) Cancelled (178,000) (24,350) (9,500)
--------- --------- ---------$8.29 (334,050) $3.65 (20,000) $3.50
------- -------- -------
Options outstanding,
end of period 603,765 365,250 496,050 ========= ========= =========$3.60 90,000 $2.42 70,000 $2.11
======== ======== =======
Options exercisable, end
of period 502,675 365,250 334,050 ========= ========= =========
Available for grant of
options, end of period 1,345,318 1,583,833 1,452,033
========= ========= =========$3.65 20,000 $3.50 23,333 $2.11
======== ======== =======
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The optionoptions outstanding at December 28, 1996 have exercise prices
range from $2.75 per share to $5.00 per share,between $1.75 and $2.25 with amounts as follows: $2.75 - 200,000 shares, $3.50 - 162,000 shares and $5.00 -
134,050 shares.
Prior to 1992, three directors werea weighted average contractual life of 3.8 years.
In June 1994, one director was granted non-qualified options outside of the Plan to
purchase a totalshares at an exercise price of $6.125 per share, of which 50,000 shares. Of these options
45,000 shares
expired in 1994 and the remaining 5,000 shareswill expire in 1995 at
an option price of $5.00 per share. The table above does not include these
option grants.March 2000. In September 1992, six directors were granted options
to purchase 20,000 shares each, at the market price, which at thatthe time was $1.75
per share. These option grants were approved at the 1993 annual meetingAnnual Meeting of
shareholdersShareholders 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
"401(k) Plan") allows eligible employees to contribute a percentage of their
annual compensation to the 401 (k) Plan. The Company makes matching
contributions of one-third of the employees' pre-tax 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 1992, 1993 and 1994
were $265,000, $431,000 and $608,000, respectively.
Supplemental Retirement Plan - The Supplemental Retirement Plan (the
"Retirement Plan") allows eligible employees to make contributions to a trust
where the 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 1992, 1993 and 1994 amounted to $179,000,
$130,000 and $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 $1.1 million in 1992, 1993 and 1994, respectively. Under the bonus plan, 25%
of the bonus is paid in restricted stock that vests over a three year period. In
fiscal 1994, 11,467 shares were issued, net of forfeitures, in connection with
the Incentive Compensation Plan.
Executive Equity Incentive Plan - In December 1992, the Board of
Directors adopted the 1993 Executive Equity Incentive Plan (the "Incentive
Plan"). The Incentive Plan was approved by shareholders 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 up to a maximum of 250,000, 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
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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. Changes in shares and options outstanding,
expressed in numbers of shares, for the Incentive Plan are as follows:
1994 1994 1995 1995 1996 1996
---- ---- ---- ---- ---- ----
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ ----- ------ ----- ------ -----
Shares outstanding,
beginning of period 663,830 753,830 877,163
Shares purchased 90,000 143,333 200,000
Shares forfeited -- (20,000) (16,667)
--------- --------- ----------
Shares outstanding, end
of period 753,830 877,163 1,060,496
========= ========= ==========
Options outstanding,
beginning of period 1,101,000 $2.69 1,073,836 $2.98 1,021,170 $2.66
Granted 180,000 $4.56 286,666 $2.53 350,000 $1.00
Forfeited (207,164) $2.70 (339,332) $3.59 (730,672) $2.68
--------- --------- ----------
Options outstanding, end
of period 1,073,836 $2.98 1,021,170 $2.66 640,498 $1.73
========= ========= ==========
Options exercisable, end
of period -- -- -- -- 173,832 $2.56
========= ========= ==========
Weighted average fair
value of options granted
during the year $ .67 --
The Companyfair value of each option granted 1,327,660 optionsis estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1993 and 180,000 options in
1994,1996: risk free interest rate of which 226,666 and 207,164 were cancelled in 1993 and 1994,
respectively.6.06% - 6.37%,
expected lives of 6 years, expected volatility of 39.07% - 40.81%, expected
dividends of $0.
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The purchase prices per share of the Company's Common Stock upon
exercise offollowing table summarizes information about stock options range from $2.50 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 $4.94 - 80,000 shares.outstanding at
December 28, 1996:
Options Outstanding Options Exercisable
Weighted Average
Range of Number Outstanding Remaining Weighted Average Number Exercisable Weighted Average
Exercise Prices at 12/28/96 Contractual Life Exercise Price at 12/28/96 Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
$1.00 350,000 5.5 $1.00 0 $1.00
$2.50 to $3.00 290,498 3.1 $2.61 173,832 $2.56
$1.00 to $3.00 640,498 4.4 $1.73 173,832 $2.56
Options granted under the Incentive Plan become exercisable three years
after the dates of grant and expire six years from the dates 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 Dates aggregated $601,000 and is being
amortized over the three-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
$170,000approximately $(.3) million, $.1 million and $137,000$.1 million for 19931996, 1995 and
1994, respectively, net of forfeitures.
EmployeesChanges to the notes receivable related to the Incentive Plan are as
follows:
1994 1995 1996
---------- ---------- ----------
Notes receivable balance beginning of period $1,424,000 $1,522,000 $1,651,000
Additions 328,000 229,000 200,000
Payments (230,000) (100,000) (111,000)
---------- ---------- ----------
Notes receivable end of period $1,522,000 $1,651,000 $1,740,000
========== ========== ==========
Under the terms of the Incentive Plan, the purchase price for shares is
based upon the market price at the date of purchase, and payment is made in the
form of a 20% cash down payment and a six year note that bears interest at the
mid-term applicable federal rate, as determined by the Internal Revenue Service,
as of the month of grant of such shares. The Incentive Plan participants
purchased 663,830 and 90,000 shares in 1993 and 1994,
respectively, at prices ranging from $3.125$1.00 to $4.94. Total consideration given
for 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$4.94 with the Company
acceptedaccepting notes which bearbearing interest at rates ranging from 3.96%5.00% to 7.05% in the principal
amounts of $1,707,000 in 1993 and $328,000 in 1994. Employees repaid $283,000
and $230,000 during 1993 and 1994, respectively.
Restricted Stock Award Plan - In December 1992, the Board of
Directors adopted the 1993 Restricted Stock Award Plan (the "Restricted Stock
Plan")7.75%. 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, 224,300 shares were awarded to participants
aggregating $785,000. Such amount is being amortized over a three-year vesting
period. The amount of amortization charged to expense was $188,000 in 1993 and
$292,000 in 1994, net of forfeitures.
All Employee Equity Investment Plan - In December 1992, the Board of
Directors adopted the 1993 All Employee Equity Investment Plan (the "Investment
Plan"). Such plan was approved by the shareholders 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 shallwill 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
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58
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 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 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 vestedvest 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 Company's Common Stock have been reserved
for issuance under the Investment Plan.
Employees purchased 211,883Changes in shares at a priceoutstanding and available for grant, expressed in
numbers of $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 tofor the 1993 purchases.Investment Plan are as follows:
1994 1995 1996
--------- --------- ---------
Shares outstanding, beginning of
period 211,883 380,563 508,134
Shares purchased 260,124 216,931 80,550
Shares Forfeited (91,444) (89,360) (67,652)
--------- --------- ---------
Shares outstanding end of period 380,563 508,134 521,032
========= ========= =========
Shares available for grant, end of
period 1,619,437 1,491,866 1,478,968
========= ========= =========
The difference between the market price and the discounted price
which aggregated $422,000approximately $0, $.2 million and $.4 million in 1996, 1995 and 1994,
respectively. These amounts have been reduced by approximately $.3 million in
1996 and $.2 million in 1995 and have been charged to amortization expense.
Restricted Stock Award Plan - In December 1992, the Board of Directors
adopted the 1993 $292,000 in February 1994 and $92,000
in August 1994, netRestricted Stock Award Plan (the "Restricted Stock Plan"). An
aggregate of forfeitures is being500,000 shares of the Company's Common Stock have been reserved for
issuance under the Restricted Stock Plan. During 1993, 224,300 shares were
awarded to participants aggregating $.8 million. Such amount has been amortized
over the three year
period the participants become vested in their shares.a three-year vesting period. The amount of amortization charged to expense
was $46,000approximately $.2 million in 19931995, net of forfeitures.
Incentive Compensation Plan - Bonus arrangements with certain
executives and $226,000key 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 $.5 million, $1.5 million
and $1.1 million in 1994.
10.1996, 1995 and 1994, respectively. Under the bonus plan, 25%
of the bonus is deferred and payable in cash or restricted stock that vests over
a three year period.
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59
The Chief Executive Officer (the "CEO") Tandem Plan - Pursuant to the
Company's Tandem Plan (the "Tandem Plan") the right to purchase an aggregate of
1,000,000 shares of Common Stock and an option to purchase 2,000,000 shares of
Common Stock was approved for issuance to the CEO. The option price represents
the average of the low and high fair market value of the common stock on August
23, 1996, the date of the closing of the Rights Offering. The option is subject
to antidilution provisions and due to the Company's 1996 Rights Offering were
adjusted to 1,510,000 shares of Common Stock and 3,020,000 options.
The options expire 10 years from the date of grant and vest over four
years. Payment for shares purchased upon the exercise of the option shall be in
cash or stock of the Company.
Options outstanding, granted and the weighted average exercise prices
are as follows:
1996
----
Weighted
Average
Exercise
Shares Price
------ -----
Options outstanding, beginning of period --
Granted 3,020,000 1.16
Forfeited -- --
Expired -- --
----------
Options outstanding, end of period 3,020,000 1.16
==========
Options exercisable, end of period -- --
Weighted average fair value of options,
granted during year $ .77 --
The options outstanding at December 28, 1996 have an exercise price of
$1.16 with a weighted average contractual life of 9.25 years.
The fair value of each option granted is estimated on the date of grant
using the Black- Scholes option-pricing model with the following weighted
average assumptions for grants in 1996: risk free interest rate of 6.79%,
expected lives of 9.85 years, expected volatility of 45.02% and expected
dividends of $0.
The CEO Performance Year Plan - Pursuant to the Company's Performance
Year Plan (the "Performance Plan") an option to purchase an aggregate of
1,000,000 shares of Common Stock was approved for issuance to the CEO. The
option price represents the average of the low and high fair market value of the
Common Stock on August 23, 1996, the date of the closing of the Rights Offering.
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60
The options expire 10 years from the date of grant and vest over four
years. The options are based upon performance as defined by the Compensation
Committee of the Board of Directors. Should a performance target not be
attained, the option is carried over to the succeeding year in conjunction with
that year's option until the expiration date. Payment for shares purchased upon
the exercise of the options shall be in cash or stock of the Company.
Options outstanding, granted and the weighted average exercise prices
are as follows:
1996
----
Weighted
Average
Exercise
Shares Price
------ -----
Options outstanding, beginning of period -- --
Granted 1,000,000 $1.16
Forfeited -- --
Expired -- --
----------
Options outstanding, end of period 1,000,000 $1.16
==========
Options exercisable, end of period -- --
Weighted average fair value of options
granted during the year $ .77 --
The options outstanding at December 28, 1996 have an exercise price of
$1.16 with a weighted average contractual life of 9.25 years.
The fair value of each option granted is estimated on the date of grant
using the Black- Scholes option-price model with the following weighted average
assumptions or grants in 1996: risk free interest rate of 6.79%, expected lives
of 9.85 years, expected volatility of 45.02% and expected dividends of $0.
The CEO Closing Price Option Plan - Pursuant to the Company's Closing
Price Option Plan (the "Closing Price Plan") an option to purchase an aggregate
of 2,000,000 shares of Common Stock was approved for issuance to the CEO. The
option price represents the average of the low and high fair market value of the
Common Stock on August 23, 1996, the date of the closing of the Rights Offering.
The options expire 10 years from the date of grant and vest based upon
the performance of the Company's stock price over a consecutive 91 calendar day
period as defined by the Compensation Committee of the Board of Directors. The
performance period has a range of 6 years beginning August 23, 1996, the date of
the closing Rights Offering. Payment for shares purchased upon the exercise of
the options shall be in cash or stock of the Company.
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Options outstanding, granted and the weighted average exercise prices
are as follows:
1996
----
Weighted
Average
Exercise
Shares Price
------ -----
Options outstanding, beginning of period -- --
Granted 2,000,000 $1.16
Cancelled -- --
Expired -- --
----------
Options outstanding, end of period 2,000,000 $1.16
==========
Options exercisable, end of period -- --
Weighted average fair value of options
granted during the year $ .17 --
The options outstanding at December 28, 1996 have an exercise price of
$1.16 with a weighted average contractual life of 9.25 years.
The fair value of each option granted is estimated on the date of grant
using the Black Scholes option-price model utilizing a Monte Carlo simulation
with the following weighted average assumptions for grants in 1996: risk free
interest rate of 6.79%, expected lives of 9.85 years, expected volatility of
45.02% and expected dividends of $0.
The CEO Six Year Stock Option Plan - Pursuant to the Company's Six Year
Stock Option Plan (the "Six Year Plan") an option to purchase an aggregate of
250,000 shares of Common Stock was approved for issuance to the CEO from NAR.
The option price represents the average of the low and high fair market value of
the Common Stock on August 23, 1996, the date of the closing of the Rights
Offering. The option is subject to antidilution provisions and due to the
Company's 1996 Rights Offering was adjusted to 377,500 options.
The options expire 6 years from the date of grant and vest after one
year. Payment for shares purchased upon the exercise of the options shall be in
cash or stock of the Company.
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Options outstanding, granted and the weighted average exercise prices
are as follows:
1996
----
Weighted
Average
Exercise
Shares Price
------ -----
Options outstanding, beginning of period -- --
Granted 377,500 $1.16
Forfeited -- --
Expired -- --
--------
Options outstanding, end of period 377,500 $1.16
========
Options exercisable, end of period -- --
Weighted average fair value of options -- --
granted during the year $ .60 --
The options outstanding at December 28, 1996 have an exercise price of
$1.16 with a weighted average contractual life of 5.25 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996: risk free interest rate of 6.42%, expected lives
of 5.85 years, expected volatility of 45.02% and expected dividends of $0.
The CEO Seven Year Stock Option Plan - Pursuant to the Company's Seven
Year Stock Option Plan (the "Seven Year Plan") an option to purchase an
aggregate of 250,000 shares of Common Stock was approved for issuance to the CEO
from NAR. The option price represents the average of the low and high fair
market value of the Common Stock on August 23, 1996, the date of the closing of
the Rights Offering. The option is subject to antidilution provisions and due to
the Company's 1996 Rights Offering was adjusted to 377,500 options.
The options expire 7 years from the date of grant and vest after two
years. Payment for shares purchased upon the exercise of the options shall be in
cash or stock of the Company.
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Options outstanding, granted and the weighted average exercise
prices are as follows:
1996
----
Weighted
Average
Exercise
Shares Price
------ -----
Options outstanding, beginning of period -- --
Granted 377,500 $1.16
Forfeited -- --
Expired -- --
--------
Options outstanding, end of period 377,500 $1.16
========
Options exercisable, end of period -- --
Weighted average fair value of options
granted during the year $ .65 --
The options outstanding at December 28, 1996 have an exercise price of
$1.16 with a weighted average contractual life of 6.25 years.
The fair value of each option granted is estimated on the date of grant
using the Black - Scholes option-pricing model with the following weighted
average assumptions for grants in 1996: risk free interest rate of 6.53%,
expected lives of 6.85 years, expected volatility of 45.02% and expected
dividends of $0.
The CEO Eight Year Stock Option Plan - Pursuant to the Company's Eight
Year Stock Option Plan (the "Eight Year Plan") an option to purchase an
aggregate of 250,000 shares of Common Stock was approved for issuance to the CEO
from NAR. The option price represents the average of the low and high fair
market value of the Common Stock on August 23, 1996, the date of the closing of
the Rights Offering. The option is subject to antidilution provisions and due to
the Company's 1996 Rights Offering was adjusted to 377,500 options.
The options expire 8 years from the date of grant and vest after three
years. Payment for shares purchased upon the exercise of the options shall be in
cash or stock of the Company.
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Options outstanding, granted and the weighted average exercise prices
are as follows:
1996
----
Weighted
Average
Exercise
Shares Price
------ -----
Options outstanding, beginning of period -- --
Granted 377,500 $1.16
Forfeited --
Expired -- --
--------
Options outstanding, end of period 377,500 $1.16
========
Options exercisable, end of period -- --
Weighted average fair value of options
granted during the year $ .69 --
The options outstanding at December 28, 1996 have an exercise price of
$1.16 with a weighted average contractual life of 7.25 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996: risk free interest rate of 6.62%, expected lives
of 7.85 years, expected volatility of 45.02% and expected dividends of $0.
The CEO Nine Year Stock Option Plan - Pursuant to the Company's Nine
Year Stock Option Plan (the "Nine Year Plan") an option to purchase an aggregate
of 250,000 shares of common stock was approved for issuance to the CEO from NAR.
The option price represents the average of the low and high fair market value of
the common stock on August 23, 1996, the date of the closing of the Rights
Offering. The option is subject to antidilution provisions and due to the
Company's 1996 Rights Offering was adjusted to 377,500 options.
The options expire 9 years from the date of grant and vest after four
years. Payment for shares purchased upon the exercise of the options shall be in
cash or stock of the Company.
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Options outstanding, granted and the weighted average exercise prices
are as follows:
1996
----
Weighted
Average
Exercise
Shares Price
------ -----
Options outstanding, beginning of period -- --
Granted 377,500 $1.16
Forfeited -- --
Expired --
--------
Options outstanding, end of period 377,500 $1.16
========
Options exercisable, end of period -- --
Weighted average fair value of options
granted during the year $ .74 --
The options outstanding at December 28, 1996 have an exercise price of
$1.16 with a weighted average contractual life of 8.25 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996: risk free interest of 6.73%, expected lives of
8.85 years, expected volatility of 45.02% and expected dividends of $0.
1996 Stock Option Plan - Pursuant to the Company's 1996 Stock Option
Plan (the "1996 Plan"), an aggregate of 3,445,000 shares were approved for
issuance to employees of the Company. The option exercise price shall be the
fair market value as of the date of grant. The total options granted to an
employee is one half performance based. The changes for each type of option
(performance based and non-performance based) are presented in separate tables
that follow.
Options expire after 10 years, unless an employee owns stock possessing
more than 10% of the total combined voting power of all classes of stock, in
which case the option would expire after 5 years. Payment for shares purchased
upon the exercise of an option shall be in cash or stock of the Company.
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NON-PERFORMANCE BASED
1996
----
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ -----
Options outstanding, beginning of period -- --
Options granted 1,722,500 $.98
Options forfeited -- --
Options expired -- --
----------
Options outstanding, end of period 1,722,500 $.98
==========
Options exercisable, end of period -- --
Weighted average fair value of options
granted during the year $ .67 --
The options outstanding at December 28, 1996 have exercise prices
between $.69 and $1.00 with a weighted average contractual life of 9.9 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996: risk free interest rate of 6.80%, expected lives
of 7 years, expected volatility of 45.35% and expected dividends of $0.
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PERFORMANCE BASED
1996
----
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ -----
Options outstanding, beginning of period -- --
Options granted 1,722,500 $.98
Options forfeited -- --
Options expired -- --
----------
Options outstanding, end of period 1,722,500 $.98
==========
Options exercisable, end of period -- --
Weighted average fair value of options
granted during the year $ .67 --
The options outstanding at December 28, 1996 have exercise prices
between $.69 and $1.00 with a weighted average contractual life of 9.9 years.
The fair value of each option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for grants in 1996: risk free interest rate of 6.80%, expected lives
of 7 years, expected volatility of 45.35% and expected dividends of $0.
12. EMPLOYEE BENEFIT PLANS.
Hanover Direct, Inc. Savings Plan - The 401(k) Savings and Retirement
Plan (the "401(k) Plan") allows eligible employees to contribute a percentage of
their annual compensation to the 401(k) Plan. The Company makes matching
contributions of one-third of the employees' pre-tax contributions up to a
maximum of 6%. Participants may invest contributions in various investment funds
or in the Company's Common Stock.
The Company's contributions charged to expense for 1996, 1995 and 1994
were approximately $.4 million, $.6 million and $.6 million, respectively.
Supplemental Retirement Plan - The Supplemental Retirement Plan (the
"Retirement Plan") allows eligible employees to make contributions to a trust
where the 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 1996, 1995 and 1994 amounted to
approximately $.1 million, $.2 million and $.2 million, respectively.
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68
The Retirement Plan permits eligible employees to contribute up to 4%
of their salary. The Company matches all participant contributions, up to 50% of
their contributions with a cap of 2%. The Retirement Plan is not tax-qualified
under the applicable provisions of the Internal Revenue Code of 1986, as
amended.
13. INCOME TAXES - At December 31, 1994,28, 1996, the Company had net operating loss
carryfowards ("NOLs") totalling $136$241.2 million, which expire as follows: In the
year 2001 - $12$17.3 million, 2003 - $14$14.6 million, 2004 - $14$14.3 million, 2005 -
$21$20.6 million, 2006 - $47$46.9 million, 2007 - $27.7 million, 2010 - $22.7 million
and 20072011 - $28$77.1 million. The Company also has $1.7$1 million of general business
tax credit carryforwards that expire in 19982000 through 2003.2009. The Company's
available NOLs for tax purposes consists of $86$91.4 million of NOLs subject to a
$4 million annual limitation under Section 382 of the Internal Revenue Code of
1986 and $50$149.8 million of NOLs not subject to a limitation. The unused portion
of the $4 million annual 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 $86 million of NOLs
subject to the limitation may be used to offset future taxable income generated
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 in
July 1991) without reference to the limitation.
SFAS No. 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 1992Despite incurring additional NOLs of
$22.7 million in 1995 and $77.1 million in 1996, management determined, based upon the
conversion of interest-bearing debentures to equity, the issuance of additional
Common Stock, the disposal of unprofitable discontinued restaurant operations,
the Company's history of prior operating earnings in the
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46
direct marketing business and its expectations for the future,believes 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 overbased upon the
next threeCompany's assessment of numerous factors, including its planned restructuring
and future operating plans.
For the 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, 1992,30, 1995 and December 28, 1996, the
Company recognized amaintained its deferred tax asset of $10$15 million (net of a valuation
allowance of $53 million), reflecting$48.5 million in 1995 and $82.6 million in 1996). Management
believes that 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$15 million net 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 assessmentstill represents a
reasonable, conservative estimate of the future utilization of the Company's NOLs and deductible temporary differences.the
reversal of timing items and will continue to routinely evaluate the likelihood
of future profits and the necessity of future adjustments to the deferred tax
asset valuation allowance.
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 NOLs
and reversals of temporary differences.
The Company's Federal income tax provision was zero in 1992, $5.9
million in 1993 and $4.2 million in 1994.1994 and
zero in 1995 and 1996. The 1993 and 1994 provisions wereprovision was 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 andwas $.9 million in 1994.1994, $1.0
million in 1995 and $1.0 million in 1996.
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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 and December 30, 1995 is as follows (in thousands):
1992 1993 1994 1995 1996
-------- -------- -----------------
Net income . . . . . . . . . . . . . . . . . .(loss) $ 20,249 $ 17,337 $ 14,838 $(30,230) $(105,254)
Income tax provision (benefit) . . . . . . . 219 (130) (3,509) -------- -------- --------1,003 1,000
Income (loss) before income taxes . . . . . . . . . . 20,468 17,207 11,329 -------- -------- --------(29,227) (104,254)
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) (1,003) (1,000)
Utilization of carryovers . . . . . . . . . . - (2,543) (12,652) -- --
Differences attributable to subsidiary not
included in Company's tax return -- (313) --
Permanent differences. . . . . . . . . . . . 3,687 28differences 717 1,011 7,630
Net change in temporary
differences . . . . . . . . . . . . . . . . (41,678) (14,191) 1,466 6,881 20,484
-------- -------- --------
(48,210) (17,207) 11,329---------
(11,329) 6,576 27,114
-------- -------- -----------------
Taxable income (loss) . . . . . . . . . . . . $(27,742) $ --- $(22,651) $ -
======== ======== ========(77,140)
-------- -------- ---------
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The components of the net deferred tax asset at December 31, 199428, 1996 are
as follows (in millions):
Non-
Current current Total
------- ------- -----------
Federal tax NOL and business tax credit
carryforwards . . . . . . . . . . . . . . . . . . . .................................... $ - $ 49.4 $ 49.4-- $85.5 $85.5
Allowance for doubtful accounts . . . . . . . . . . . . .9 - .9.................. 1.6 -- 1.6
Inventories ...................................... 1.9 -- 1.9
Prepaid catalog costs . . . . . . . . . . . . . . . . . (0.9) - (0.9)............................ (3.1) -- (3.1)
Property and equipment ........................... -- (1.2) (1.2)
Excess of net assets of acquired business . . . . . . . - (2.1) (2.1)........ -- (2.9) (2.9)
Accrued liabilities . . . . . . . . . . . . . . . . . . 3.9 - 3.9.............................. 11.3 -- 11.3
Customer prepayments and credits ................. 3.0 -- 3.0
Tax basis in net assets of discontinued operations
in excess of financial statement amount . . . . . . . .9 - .9......... 0.8 -- 0.8
Other . . . . . . . . . . . . . . . . . . . . . . . - 1.5 1.5............................................ -- 0.7 0.7
----- ------ ----------- -----
Deferred Tax Asset . . . . . . . . . . . . . . . . . . 4.8 48.8 53.6............................... 15.5 82.1 97.6
Valuation allowance . . . . . . . . . . . . . . . . . (1.6) (37.0) (38.6)............................ (12.2) (70.4) (82.6)
----- ------ ----------- -----
Deferred Tax Asset, net . . . . . . . . . . . . . . . $ 3.2 $ 11.8 $ 15.0.......................... 3.3 $11.7 $15.0
===== ====== =========== =====
The Company has established a valuation allowance for a portion of the
deferred tax asset, due to the limitation on the utilization of the NOLs and its
estimate of the future utilization of the NOL's.NOLs.
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70
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. 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.
Total tax expense for each of the three fiscal years presented differ
from the amount computed by applying the Federal statutory tax rate due to the
following:
1992 1993 1994 1995 1996
PERCENT PERCENT PERCENT
OF PRE-TAX OF PRE-TAX OF PRE-TAX
INCOME INCOME INCOMELOSS LOSS
---------- ---------- ----------
Tax (benefit) at Federal statutory rate . . . . . . . . . . . . . 34.0%........... 35.0% 35.0%
Cumulative effect of accounting change for
income taxes . . . . . . . . . . . . . . . . . . . . . (16.6) - -(35.0%) (35.0%)
State and local taxes . . . . . . . . . . . . . . . . . 1.1 1.9............................. 4.9 Effect of Federal rate change on deferred tax asset . . . - (3.7) -
Stock issuance expenses . . . . . . . . . . . . . . . . . 5.5 - -2.2 0.6
Reversal of valuation allowance . . . . . . . . . . . . - -................... (38.5) -- --
Net reversal ofincrease in (reversal of) temporary differences
. . . . . . . . . . (69.2) (28.9) 4.5Depreciation and amortization ................ 3.5 (5.4) 0.3
Deferred compensation ........................ 11.4 -- (0.2)
Restructuring reserves ....................... -- -- 8.7
Other ........................................ (10.4) 15.1 (2.0)
Utilization of contribution and NOL carryover . . . . . . - (5.4)..... (39.1) -- --
Tax NOLs for which no benefit could be recognized 46.1 - -. -- 25.3 25.9
Other . . . . . . . . . . . . . . . . . . . . . . . . 0.2 0.3............................................. 2.2 1.2 2.7
---- ------ ------
1.1% (0.8%)---- ----
(31.0%) 3.4% 1.0%
==== ====== ========== ====
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11.14. 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):
1992 1993 1994 -------- -------- --------1995 1996
------- ------- -------
Minimum rentals $ 8,910 $ 9,458 $ 13,572
======== ======== ========$13,572 $13,070 $12,931
======= ======= =======
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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 December 31, 1994,28, 1996, are as follows (in thousands):
OPERATING CAPITAL
YEAR ENDING LEASES LEASES
- ----------- --------- -------
1995 . . . . . . . . . . . . . . . . . . . . . . . $10,227 $ 732
1996 . . . . . . . . . . . . . . . . . . . . . . . 7,283 698
1997 . . . . . . . . . . . . . . . . . . . . . . . 5,885 536...................................... $10,646 $1,438
1998 . . . . . . . . . . . . . . . . . . . . . . . 5,179 24...................................... 7,493 482
1999 . . . . . . . . . . . . . . . . . . . . . . . 4,774 -...................................... 6,257 21
2000 ...................................... 5,129 --
2001 ...................................... 4,817 --
Thereafter . . . . . . . . . . . . . . . . . . . . 36,592 -................................ 33,792 --
------- ------
Total minimum lease payments . . . . . . . . . . . $69,940 1,990.............. $68,134 1,941
======= ======
Less amount representing interest (a) . . . . . . 166..... 115
------
Present value of minimum lease payments (b) . . . $1,824$1,826
======
(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 $748,000$1,260,000 and $1,823,000 at January 1, 1994, and $628,000 and
$1,196,000$1,973,000 at December 31, 1994,30, 1995 and $1,344,000 and
$482,000 at December 28, 1996, respectively.
The future minimum lease payments under noncancellable leases that
remain from the discontinued restaurant operations as of December 31, 199428, 1996 are
as follows: 1995 - $1.7 million; 1996 - $1.5 million; 1997 - $1.5$.9 million; 1998 - $1.4$.8 million; 1999 - $1.4$.8 million; 2000 -
$.8 million; 2001 - $.8 million; and thereafter $13.4$2.5 million. The above amounts
exclude annual sublease income of $1.8$1.0 million from subleases which have the
same expiration as the underlying leases.
In connection with the Company's investment in Blue Ridge, a subsidiary
of the Company is contingently liable with respect to the lease obligation
related to the apparel distribution center in Roanoke, Virginia. 12.The Company
does not guarantee the indebtedness associated with the Roanoke apparel center
held by Blue Ridge Associates.
15. CHANGES IN MANAGEMENT AND EMPLOYMENT AGREEMENTS
Jack E. Rosenfeld resigned as President and Chief Executive Officer and
as a Director of the Company effective December 30, 1995. In connection with
such resignation, the Company and Mr. Rosenfeld entered into a Termination of
Employment Agreement, dated December 30, 1995 (the "Termination Agreement"),
providing for the termination of (i) the Employment Agreement, dated as of
October 25, 1991, between the Company and Mr. Rosenfeld, and (ii) all benefits,
salary and prerequisites provided for therein except for (a) benefits, salary
and prerequisites earned and accrued up to December 30, 1995, (b) salary of
$500,000 through December 31, 1996, and (c) benefits including (I) continued
disability and term life insurance in amounts not less than the amounts in force
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on the date of the Termination Agreement for a three-year period and (II) the
right to continue to participate in the Company's medical plans to the extent he
is eligible for up to three years from the date of the Termination Agreement.
The Termination Agreement calls for Mr. Rosenfeld to serve as a Director
Emeritus of the Company and will allow Mr. Rosenfeld to attend meetings of the
Board of Directors and participate in Board discussions for a one-year period,
but Mr. Rosenfeld has no right to vote on any matters that come before the Board
of Directors. The Termination Agreement will preclude Mr. Rosenfeld for a
one-year period from competing with the Company under certain circumstances.
On March 7, 1996, Rakesh K. Kaul was named President and Chief
Executive Officer and elected to the Board of Directors of the Company.
Effective that date, Mr. Kaul entered into an Executive Employment Agreement
(the "Employment Agreement") which provides for an "at will" term commencing on
March 7, 1996 at a base salary of $525,000 per year. The Employment Agreement
also provides for Mr. Kaul's participation in the Short-Term Incentive Plan for
Rakesh K. Kaul. That plan, which was approved by the shareholders at the June
20, 1996 shareholders meeting, provides for an annual bonus of between 0% and
125% of Mr. Kaul's base salary, depending on the attainment of various
performance objectives as determined in accordance with the objective formula or
standard to be adopted by the Compensation Committee as part of the performance
goals for each such year. The Employment Agreement also provides for Mr. Kaul's
participation in the Long-Term Incentive Plan for Rakesh K. Kaul. That plan,
which was approved by the shareholders at the June 20, 1996 shareholders
meeting, provides for the purchase by Mr. Kaul of 1,000,000 shares of Common
Stock at their fair market value; an option expiring March 7, 2006 for the
purchase of 2,000,000 shares of (the "Tandem Stock Purchase Right") Common
Stock; an option expiring March 7, 2006 to purchase 2,000,000 shares of Common
Stock (the "Tandem Option") exercisable only upon satisfaction of the condition
that the closing price of the Common Stock has attained an average of $7.00 per
share during a 91-day period ending on or before March 7, 2002; an option
expiring March 7, 2006 to purchase 1,000,000 shares of Common Stock at their
fair market value, subject to the attainment of certain objective performance
goals to be set by the Compensation Committee; and four options expiring March
7, 2002, and the first three anniversaries thereof, respectively, for the
purchase of 250,000 shares of Common Stock each, to be granted by NAR, the
Company's majority shareholder ("the NAR Options"). As a result of the Rights
Offering, Mr. Kaul was granted an additional .51 shares for each share of Common
Stock he was granted under the Tandem Stock Purchase Right, the Tandem Option,
and the NAR Options (collectively, the "Award Shares") which resulted in his
being granted 1,510,000 shares, 3,020,000 options and 1,510,000 options,
respectively. The Employment Agreement also provides for the grant of
registration rights under the Securities Act of 1993, as amended (the
"Securities Act"), for shares of Common Stock owned by Mr. Kaul. Pursuant to the
Employment Agreement, the Company will make Mr. Kaul whole, on an after-tax
basis, for various relocation and temporary living expenses related to his
employment with the Company. In the event that Mr. Kaul's employment is actually
or constructively terminated by the Company, other than for cause, he will be
entitled for a 12-month period commencing on the date of his termination to (i)
a continuation of his base salary, (ii) continued participation in the Company's
medical, dental, life insurance and retirement plans offered to senior
executives of the Company, and (iii) a bonus, payable in 12 equal installments,
equal to 100% of his base salary (at the rate in effect immediately prior to
such termination). In addition, Mr. Kaul will be entitled to receive (i) to the
extent not previously paid, the short-term bonus payable to Mr. Kaul
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for the year preceding the year of termination and (ii) for the year in which
Mr. Kaul's employment is terminated, an additional bonus equal to his annual
base salary for such year, pro-rated to reflect the portion of such year during
which Mr. Kaul is employed. Mr. Kaul's employment will be deemed to be
constructively terminated by the Company in the event of a change in control (as
defined in the Employment Agreement), the Company's bankruptcy, a material
diminution of his responsibilities, or a relocation of the Company's
headquarters outside the New York metropolitan area without his prior written
consent. In the event that Mr. Kaul's employment terminates other than as a
result of a termination by the Company, Mr. Kaul will not be entitled to any
payment or bonus, other than any short-term bonus he is entitled to receive from
the year prior to termination.
In April 1996, the Executive Vice President, Secretary and General
Counsel resigned. Also, in April 1996, the Executive Vice President and Chief
Financial Officer indicated his intention to resign his position in order to
pursue other interests. He remained with the Company until the closing of the
Rights Offering. In connection therewith, the Company entered in a settlement of
his employment agreement. The Chief Information Officer resigned in June 1996.
The General Counsel position is currently being filled on a part-time basis by
an individual who has served as a service provider to the Company. The Company
has hired a new Chief Financial Officer and promoted an executive to the
position of Chief Information Officer.
16. 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.
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49
At December 31, 1994, Company28, 1996, current and former officers and executives of the
Company owed the Company approximately $1.7$3.1 million of which approximately $1.6$1.7
million relates to receivables under the Executive Equity Incentive Plan. These
amounts due to the Company bear interest at rates ranging from 3.96%5.00% to 7.05%7.75%
and are due infrom 1999 and 2000.to 2002. The remaining $.1$1.4 million is due on demand from two officersrelates to a
receivable under the Long Term Incentive Plan for Rakesh K. Kaul.
In May 1996, NAR advanced the Company $25 million under a promissory
note against all the Rights distributed to it /or its commitment to purchase all
unsubscribed shares in the Rights Offering (Notes 8 and 9). NAR purchased
24,015,964 shares available to it pursuant to the terms of the Rights Offering
and received a fee of $.5 million for purchasing an additional 6,898,866 shares
not subscribed to by other shareholders. On August 23, 1996, the Rights Offering
closing date, the Company paid the principle and interest amounts outstanding
under the $25 million promissory note and the $14 million of 9.25% Notes held by
IMR (Notes 8 and 9).
In September 1996, IMR loaned the Company $10 million as evidenced by a
subordinated promissory note which is subordinate to the Credit Facility. Such
loan bears interest at 6%prime plus 1.5%, was due on November 14, 1996, and, if it
is not repaid before May 15,1997, is convertible at the option of IMR into
shares of Common Stock (Note 8). NAR has agreed to apply $10 million of the
Company's indebtedness to acquire $10 million of the Company's Common Stock
pursuant to the 1997 Rights Offering (Note 18).
In December 1996, Richemont finalized its agreement with the Company
that will provide approximately $27.9 million of letters of credit to replace
letters of credit which were issued under the Congress Facility. The Company
paid a facility fee of $1.4 million to Richemont in connection
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74
with providing the facility. On December 5, 1996, Richemont advanced the Company
$10 million against the anticipated $27.9 million line of credit which was
repaid after the letter of credit facility was in place on December 19, 1996
(Note 8).
Since January 1993, pursuant to a consulting arrangement, a subsidiary
of NAR renders management consulting, business advisory and investment banking
services to the Company for an annual fee of $750,000. NAR did not collect such
a fee in 1996 as no such services were performed and will not collect such a fee
in 1997.
At December 31, 1994,28, 1996, NAR owned 51%approximately 54% of the Company's
outstanding Common Stock.
In connection with the transactions discussed in Note 2,Stock and as a
condition thereto, the Company entered into an employment agreement (the
"Employment Agreement") with Jack E. Rosenfeld, President, Chief Executive
Officer and a director of the Company. The Employment Agreement provides for (1)
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 Stockwould own 56% upon exercising all of which are vested and (3) the
grant of registration rights under the Securities Act of 1933 for shares of
Common Stock owned by Mr. Rosenfeld. 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 $2.00 per share and an additional 1,213,605
shares of Common Stock at $1.50 per share plus 10% per year through the exercise
period.
13.their
outstanding warrants.
17. COMMITMENTS AND CONTINGENCIES
The Company is obligated under various employment contracts with key
executives extending through 1996. The aggregate payments due under such
contracts is $2.1 million.
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 bewas purportedly filed on behalf of a class
of all persons who purchased the Common Stock of the Company in the Public
Offeringpublic
offering or thereafter through and including August 14, 1994, seekssought to recover
monetary damages the class hashad allegedly suffered as a result of certain alleged
false and materialmaterially 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. On May 23, 1995, the United States District
Court for District of New Jersey dismissed the plaintiff's claim, with
prejudice, for failure to state a claim upon which relief could be granted. On
June 22, 1995, plaintiff filed a notice of appeal of the May 23, 1995 decision
to the United States Court of Appeals for the Third Circuit. On March 26, 1996,
the Court of Appeals rendered its decision affirming the District Court's
decision. On or about June 24, 1996, a petition for certiorari was filed by
plaintiff with the United States Supreme Court. The Company and its
directors and executive officers believe they have meritorious defensesfiled a brief in
opposition to the Complaint and intend to defend the matter vigorously. The motion is scheduled
to be heard by the Courtpetition on April 10, 1995.August 12, 1996. In May 1992October 7, 1996, 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 hasdenied 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
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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.plaintiff's petition.
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.
The imposition of a sales and use tax collection obligation on
out-of-state catalog companies in states to which they ship products was the
subject of a case decided in 1994 by the United States Supreme Court. While the
Court reaffirmed an earlier decision that 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.
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In connection with certain discontinued restaurant transactions, the
Company remains contingently liable with respect to lease obligations for 106
restaurant properties, should the buyers fail to perform under the agreements.
The future minimum lease payments as of December 31, 199428, 1996 are as follows (in
thousands): 1995 - $445; 1996 - $366; 1997 - $278;$375; 1998 - $192;$375; 1999 - $192;$375; 2000 - $375; 2001 - $365; and
thereafter $546.
14.$1,185.
18. SUBSEQUENT EVENTS
Leichtung, Inc.1997 Rights Offering - In January 1995,On March 26, 1997, the Company acquired
substantially all of the assets of Leichtung, Inc., a direct marketer of
wood-workingannounced that it
intends to distribute transferable subscription rights to subscribe for 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 had 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 Company acquired the remaining
80% of the outstanding stock of Aegis through the issuance of 634,900additional shares of a newly-created Class B Convertible PreferredCommon Stock ("Series B Stock") with a
stated valueto the holders of $10 per share. Dividends on the Series B Stock will accrue at
the rate of 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 Series B Stock is convertible at the Company's option
if the market valuerecord of the
Company's Common Stock is greater than $6.66 for 20
trading days in any 30 consecutive day trading period. If after five years theand Series B Convertible Additional Preferred Stock is not converted,(the
"1997 Rights Offering") as soon as it must thenhas filed with and has declared effective
by the SEC a registration statement with respect thereto. The Rights will be
converted into 952,359 sharesexercisable at a price of $.90 per share. NAR has agreed to apply $10 million of
the Company's indebtedness to acquire $10 million of the Company's Common Stock
providedpursuant to the market value1997 Rights Offering (Note 18). Richemont has agreed to purchase
all shares of Common Stock which have not been subscribed for and purchased by
shareholders in the 1997 Rights Offering. Due to the Company's liquidity issues
and to alleviate vendor concerns, Richemont has agreed to advance $30 million
against its commitment to purchase all of the stock isunsubscribed shares. In connection
with the agreement the Company named two Richemont representatives, Messrs. Jan
du Plessis and Howard Tanner, to its Board of Directors (the "Board") and
Executive Committee, and will nominate a third Richemont representative to the
Board at least $6.33 per share. If the market valuenext annual meeting. The new Board members fill positions vacated
by the recent resignations of Geraldine Stutz and Jeffery R. Laikind. In
addition, Mr. du Plessis has been named to the Audit Committee of the Company's Common Stock does
not meet this minimum, thenBoard.
Waiver and Amendment to the conversion is subject to an antidilution
provision which would increase the number of shares to equal a market value of
$6,028,432.Congress Facility - The Company will accounthas
received waivers for these acquisitions using the purchase
methodDecember 1996 events of accounting.
Tiger Direct -default under the Congress
Facility related to the working capital and net worth covenants as of and
through December 28, 1996. In February 1995,addition, the Company entered into an
agreement, by which, upon closingreceived a waiver for any
event of default relating to the material adverse change provision that was in
effect through and including December 28, 1996. The calculation 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 the 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
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 whencovenant excludes the transaction closes or one year from the date the purchase agreement is
terminated.Congress Revolving Term Notes. The Company will accountworking
capital and net worth covenants for this investment using the equity method
of accounting upon conversion of the debt to equity.
51fiscal 1997 are as follows (in 000's):
Working Capital Amount
--------------- ------
January through May 1997 $ (5,000)
June through November 1997 $(10,000)
December 1997 thereafter $(20,000)
Net Worth Amount
--------- ------
January through May 1997 $14,000
June 1997 thereafter $11,500
75
52
15.76
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
1993
1995
Revenues $121,565 $144,319 $147,890 $228,737$176,592 $182,774 $169,175 $221,227
Gross profit 43,585 52,578 51,233 86,728
Income62,905 63,003 54,285 79,565
Loss 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)(4,147) (5,988) (6,042) (6,442)
-------- -------- -------- --------
Net incomeloss (4,903) (7,490) (9,586) (8,011)
Preferred stock dividends (45) (59) (66) (70)
-------- -------- -------- --------
Net loss applicable to
Common Shareholders $ 1,477(4,948) $ 3,351(7,549) $ 1,486(9,652) $ 6,930(8,081)
======== ======== ======== ========
Net incomeloss per share $ .02(.05) $ .05(.08) $ .02(.10) $ .09(.09)
======== ======== ======== ========
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share amounts)
1994
1996
Revenues $179,226 $185,113 $178,282 $226,263$165,527 $180,195 $156,732 $197,860
Gross profit 64,942 70,243 62,407 84,815
Income55,989 59,912 41,152 63,006
Loss from operations 4,258 4,145 1,159 6,413(7,733) (9,896) (25,621) (51,247)
-------- -------- -------- --------
NET INCOME 3,144 2,843 640 8,211LOSS (9,477) (12,520) (29,565) (53,467)
Preferred stock dividends (35) (35) (41) (23)(59) (59) (59) (48)
-------- -------- -------- --------
Net incomeloss applicable to
Common Shareholders $ 3,109 $ 2,808 $ 599 $ 8,188(9,536) $(12,579) $(29,624) $(53,515)
======== ======== ======== ========
Net incomeloss per share $ 0.04(.10) $ 0.03(.13) $ 0.01(.26) $ 0.09(.37)
======== ======== ======== ========
5276
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
53
54
P A R T77
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors.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.Officers:
TITLE AND OTHER OFFICE HELD
NAME AGE INFORMATION(A)INFORMATION(a) SINCE
------------------ ---- --- ------------------------------------------ ------------------------- -----
Jack E. Rosenfeld 56Rakesh K. Kaul 45 President, Chief Executive Officer 1990
President1996
and Director.Director since March 7, 1996.
From 1995 until February 1996, Mr.
Rosenfeld served as ExecutiveKaul was the Vice PresidentChairman and Chief
Operating Officer of the Company
from May 1988Fingerhut
Companies, Inc. From January 1992
until October 1990.
HeMarch 1995, Mr. Kaul was elected toalso
the Board of
Directors in 1974.
Michael P. Sherman 42 Executive Vice President, 1990
Corporate Affairs, General
Counsel and Secretary. Mr. 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.
Wayne P. Garten 42 Executive Vice President and
1990
Chief Financial Officer. From
1989Administrative Officer of
Fingerhut. Prior to 1990,January 1992,
Mr. Garten
heldKaul was the position ofSenior Vice
President, Strategy and Finance and
a director at Shaklee Corporation.
Larry J. Svoboda 48 Senior Vice President and Chief 1996
Financial Officer. HeOfficer since September
25, 1996. From 1987 to September
1996, Mr. Svoboda was the Chief
Financial Officer of the Florsheim
Shoe Company. Prior to 1987, Mr.
Svoboda was with the Sara Lee
Corporation.
Michael Lutz 54 Executive Vice President Operations 1994
since September 1994. Prior to
September 1994, Mr. Lutz held
various positions with New Hampton,
Inc./Avon Direct Response.
Chuck Hudson 51 Executive Vice President, Men's 1993
Apparel since September 1993. Mr.
Hudson joined the Company in 1983, was elected1986 as
Vice President, in 1984 and was
elected Vice President-Finance
in 1989.Marketing.
54
5578
Edward J. O'Brien 5153 Senior Vice President and Treasurer 1991
Treasurer.since March 1991. Mr. O'Brien joined
the Company in 1986 and was elected
Vice President in 1988.
David E. Ullman 37Michael D. Contino 36 Senior Vice President Controller. 1992and Chief 1996
Information Officer since December
1996. Mr. UllmanContino joined the Company
in 19911995 as Director of Computer
Operations and Telecommunications.
Prior to 1995, Mr. Contino was electedthe
Senior Manager of I.S. Operations at
New Hampton, Inc. a subsidiary of
Spiegel, Inc.
Ralph Bulle 47 Senior Vice President - Human 1996
Resources since June 1996. Mr. Bulle
joined the Company in 1992.1993 as Vice
President - Human Resources. Prior
to joining the
Company,1993, Mr. UllmanBulle was with
Arthur AndersenSenior Vice
President - Operations & Co.Human
Resources for ten
years, most recently as a manager in
the Audit and Business Advisory
Group.Seaman Furniture
Company.
-------------
(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 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
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
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.
79
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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.
56
57
P A R TPART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.8-K
(a) The following documents are filed as part of this report.
PAGE NO.
--------
1. Index to Financial Statements
Report of Independent Public Accountants 26 Hanover Direct, Inc.
and Subsidiaries Financial Statements 32
Consolidated Balance Sheets as of January 1, 1994 27December 30, 1995 and
December 31, 199428, 1996 33
Consolidated Statements of Income (Loss) for the 29 three years
ended December 31, 199428, 1996 35
Consolidated Statements of Shareholders' (Deficit) 30 Equity for
the three years ended December 31, 199428, 1996 36
Consolidated Statements of Cash Flows for the three 31
years
ended December 31, 199428, 1996 37
Notes to Consolidated Financial Statements 3339
Supplementary Data:
Selected quarterly financial information (unaudited) 52
for the
two fiscal years ended December 31, 199428, 1996 76
2. Index to Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts 60-- Valuation and Qualifying Accounts
80
Schedules other than that listed above are omitted because
they are not applicable or the required information is shown
in the financial statements or notes thereto.
57
58
3. Exhibits
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.
(b) Reports on Form 8-K
Current Report on Form 8-K dated 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)(c) 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
6081
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 28, 19951997 By:s/Jack E. Rosenfeld
Jack E. Rosenfeld, Director /s/ Rakesh K. Kaul
----------------------
Rakesh K. Kaul
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.indicated and on the date indicated below.
Principal Financial Officer:
s/Wayne P. Garten
Wayne P. Garten
Executive/s/ Larry J. Svoboda
----------------------------------
Larry J. Svoboda
Senior Vice President and
Chief Financial Officer
Board of Directors:
s//s/ Ralph Destino s//s/ Edmund R. Manwell
---------------------------------- ------------------------------
Ralph Destino, Director Edmund R. Manwell, Director
s/---------------------------------- ------------------------------
J. David Hakman, s/Alan G. Quasha
J. David Hakman,Director Jan du Plessis, Director
/s/ Rakesh K. Kaul
---------------------------------- ------------------------------
Rakesh K. Kaul, Director Alan G. Quasha, Director
s//s/ S. Lee Kling s/Geraldine Stutz/s/ Howard Tanner
---------------------------------- ------------------------------
S. Lee Kling, Director Geraldine Stutz,Howard Tanner, Director
s//s/ Robert F. Wright
---------------------------------- ------------------------------
Theodore H. Kruttschnitt, s/Jeffrey Laikind
Theodore H. Kruttschnitt Jeffrey Laikind, Director
Director
s/Robert F. Wright
s/Elizabeth Valk Long Robert F. Wright, Director
/s/ Elizabeth Valk Long
----------------------------------
Elizabeth Valk Long, Director
Date: March 28, 1995
591997
61
ITEM 10.82
SCHEDULE II
HANOVER DIRECT
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 28, 1996, DECEMBER 30,1995 AND DECEMBER 31,1994
- -----------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------------------------------------
ADDITIONS
----------------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- -----------------------------------------------------------------------------------------------------------------------------------
1996:
- -------------------------------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS RECEIVABLE, CURRENT $ 3,988,000 2,431,000 $ 6,419,000
RESERVES FOR
DISCONTINUED OPERATIONS 1,639,000 (2) 83,000 1,722,000
RESTRUCTURING RESERVE 9,504,000 9,504,000
RESERVES FOR
SALES RETURNS 5,535,000 106,836,000 (2) 103,335,000 9,036,000
DEFERRED TAX ASSET
VALUATION ALLOWANCE 48,500,000 (5) 34,100,000 82,600,000
ALLOWANCE FOR NET UNREALIZED
LOSSES ON CONVERTIBLE
DEBT SECURITIES 1,000,000 888,000 1,888,000
1995:
- -------------------------------
ALLOWANCE FOR DOUBTFUL
ACCOUNTS RECEIVABLE, CURRENT $ 3,912,000 4,796,00(3) 42,000(1) 4,762,000 $ 3,988,000
RESERVES FOR
DISCONTINUED OPERATIONS 1,668,000 (2) 29,000 1,639,000
RESERVES FOR
SALES RETURNS 6,023,000 103,602,000 (2) 104,090,000 5,535,000
DEFERRED TAX ASSET
VALUATION ALLOWANCE 38,600,000 (5) 9,900,000 48,500,000
ALLOWANCE FOR NET UNREALIZED
LOSSES ON CONVERTIBLE
DEBT SECURITIES 1,000,000 1,000,000
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
RESERVES FOR
SALES RETURNS 4,911,000 114,665,000 (2) 113,553,000 6,023,000
DEFERRED TAX ASSET
VALUATION ALLOWANCE 49,700,000 (4) 11,100,000 38,600,000
ALLOWANCE FOR NET UNREALIZED
LOSSES ON CONVERTIBLE
DEBT SECURITIES 1,000,000 1,000,000
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Accounts written -off.
(2) Utilization of reserves.
(3) Represents acquired allowance for doubtful accounts receivable.
(4) Represents decrease due to: utilization of valuation allowance and
recognition of NOL's estimated to be utilized by future operating results.
(5) Represents the increase in the valuation allowance offset by an increase
in the gross tax asset.
83
EXHIBIT INDEX
EXHIBIT NUMBER
ITEM 601 OF DESCRIPTION OF DOCUMENT AND INCOR- PAGEINCORPORATION
REGULATION S-K PORATIONBY REFERENCE WHERE APPLICABLE
- -------------- -----------------------------
PAGE
NO.
-------------- ------------------------------------------------------------ -------
2.1 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.Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
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.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, (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,December 31, 1994.
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.
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.
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.
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.
10.22.3 Stock Purchase Agreement dated as of July 8, 1991 betweenMay 19, 1995 by and
among the Company* and NAR.Company, Austad Holdings, Inc. ("AHI"), The Austad
Company ("TAC"), David B. Austad ("DBA"), Denise Austad
("DA"), David Austad, as custodian ("DBAC"), Oscar Austad,
Dorothy Austad, Randall Austad, Kristi Austad, Lori Miller,
Robin Miller, Kerri Derenge, Sharon Stahl, Lori Miller, as
custodian, Dorothy Austad, as attorney-in-fact, and
84
Kara Miller (collectively, the "Austad Individuals").
Incorporated by reference to the Company's Annual Report on
Form 10-K for the year ended December 30, 1995.
2.4 Agreement and Plan of Corporate Separation and
Reorganization dated as of February 16, 1996 by and among
the Company, AHI, TAC, DBA, DBAC, and DA. Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 30, 1995.
3.1 Restated Certificate of Incorporation. FILED HEREWITH.
3.2 By-laws. FILED HEREWITH.
4.1 Warrant Agreement dated as of October 25, 1991 ("NAR
Warrant") between the Company* and NAR Group Limited ("NAR")
for 279,110 shares of Common Stock. Incorporated by
reference to the Company's* Current Report on Form 8-K dated
October 25, 1991.
4.2 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.
4.3 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 Annual Report on
Form 10-K for the year ended December 31, 1994.
85
4.4 Registration Rights Agreement dated as of February 16, 1995
among the Company and the Aegis Sellers. Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
4.5 Warrant Agreement dated as of July 8, 1991 between the
Company and IMR for 1,750,000 shares of Common Stock.
Incorporated by reference to the Company's Current Report on
form 8-K dated July 10, 1991.
E-24.6 Warrant Agreement dated as of October 25, 1991 between the
Company and NAR for 931,791 shares of Common Stock.
Incorporated by reference to the Company's Current Report on
form 8-K dated October 25, 1991.
4.7 Second Amendment to Warrant Agreement and Warrant
Certificate for 931,791 shares of Common Stock, between the
Company and NAR dated as of November 13, 1995. Incorporated
by reference to the Company's Annual Report on Form 10-K for
the year ended December 30, 1995.
4.8 First Amendment to Warrant Agreement and Warrant Certificate
for 1,750,000 shares of Common Stock, between the Company
and IMR dated as of November 13, 1995. Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 30, 1995.
4.9 First Amendment to Warrant Agreement and Warrant Certificate
for 279,110 shares of Common Stock, between the Company and
NAR dated as of November
63
10.386
13, 1995. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 30, 1995.
4.10 [Numbered in error]
4.11 Second Amendment to Warrant Agreement between the Company
and NAR dated as of August 23, 1996. FILED HEREWITH.
4.12 Third Amendment to Warrant Agreement between the Company and
NAR dated as of August 23, 1996. FILED HEREWITH.
10.1 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 Account Purchase 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 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.
E-310.3 Amendment No. 1 to the Account Purchase Agreement dated as
of July 12, 1993 among the Company*, HDPI, Brawn, Gump's By
Mail, Gump's, Gump's Holdings and GECC. Incorporated by
reference to the Company's* Current Report on Form 8-K dated
July 12, 1993.
64
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 Wayne P. Garten.87
10.4 Amendment No.2 to the Account Purchase Agreement dated as of
June 1, 1995 among the Company, HDPI, Brawn, Gump's, Gump's
By Mail, Gump's Holdings and GECC. Incorporated by reference
to the Company's Annual Report on Form 10-K for the year
ended December 30, 1995.
10.5 Waiver and Amendment No. 3 to the Account Purchase Agreement
dated as of December 14, 1995 among the Company, HDPI, Brawn
and GECC. Incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 30, 1995.
10.6 Amendment No. 4 to the Amended and Restated Account Purchase
Agreement dated as of June 28, 1996 among the Company, HDPI,
Brawn, Gump's, Gump's by Mail, Gump's Holdings and GECC.***
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 Termination of Employment Agreement and Employment and
Consulting Agreement dated as of December 31, 1995 between
the Company and Jack E. Rosenfeld. FILED HEREWITH.
10.9 Registration Rights Agreement
between the Company and Rakesh K. Kaul, dated as of August
23, 1996.***
88
10.10 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.
E-4
65
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.
10.1910.11 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.
10.12 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.
E-510.13 Restricted Stock Award Plan. Incorporated by reference to
the Company's* Registration Statement on Form S-8 filed on
February 24, 1993, Registration No. 33-58760.
10.14 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.
10.15 Executive Equity Incentive Plan, as amended. FILED HEREWITH.
10.16 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.
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.**
-------------89
10.17 1996 Stock Option Plan. Incorporated by reference to the
Company's 1996 Proxy Statement.
10.18 Loan and Security Agreement dated as of November 14, 1995 by
and among Congress Financial Corporation ("Congress"),
Hanover Direct Pennsylvania, Inc. ("HDPA"), Brawn of
California, Inc. ("Brawn"), Gump's by Mail, Inc. ("Gump's by
Mail"), Gump's Corp.("Gump's"), The Company Store, Inc.
("The Company Store") , Tweeds, Inc. ("Tweeds"), LWI
Holdings, Inc.("LWI"), Aegis Catalog Corporation ("Aegis"),
Hanover Direct Virginia, Inc. ("HDVA") and Hanover Realty
Inc. ("Hanover Realty"). Incorporated by reference to the
Company's Annual Report on Form 10-K for the year ended
December 30, 1995.
10.19 First Amendment to Loan and Security Agreement dated as of
February 22, 1996 by and among Congress, HDPI, Brawn, Gump's
by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA
and Hanover Realty.***
10.20 Second Amendment to Loan and Security Agreement dated as of
April 16, 1996 by and among Congress, HDPI, Brawn, Gump's by
Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA
and Hanover Realty.***
10.21 Third Amendment to Loan and Security Agreement dated as of
May 24, 1996 by and among Congress, HDPI, Brawn, Gump's by
Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA
and Hanover Realty.***
90
10.22 Fourth Amendment to Loan and Security Agreement dated as of
May 31, 1996 by and among Congress, HDPI, Brawn, Gump's
by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA
and Hanover Realty. ***
10.23 Fifth Amendment to Loan and Security Agreement dated as of
September 11, 1996 by and among Congress, HDPI, Brawn,
Gump's by Mail, Gump's, The Company Store, Tweeds, LWI,
Aegis, HDVA and Hanover Realty. ***
10.24 Sixth Amendment to Loan and Security Agreement dated as of
December 5, 1996 by and among Congress, HDPI, Brawn, Gump's
by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA
and Hanover Realty. ***
10.25 Seventh Amendment to Loan and Security Agreement dated as of
December 18, 1996 by and among Congress, HDPI, Brawn, Gump's
by Mail, Gump's, The Company Store, Tweeds, LWI, Aegis, HDVA
and Hanover Realty. ***
10.26 Subordination Agreement, dated as of November 14, 1995,
among Congress, IMR, and the Trustee. Incorporated by
reference to the Company's Annual Report on Form 10-K for
the year ended December 30, 1995.
10.27 Long-Term Incentive Plan for Rakesh K. Kaul. ***
10.28 Short-Term Incentive Plan for Rakesh K. Kaul. Filed
herewith.
91
10.29 Employment Agreement dated as of March 7, 1996 between the
Company and Rakesh K. Kaul. FILED HEREWITH.
10.30 Tandem Option Plan dated as of August 23, 1996 between the
Company and Rakesh K. Kaul. FILED HEREWITH.
10.31 Closing Price Option dated as of August 23, 1996 between the
Company and Rakesh K. Kaul. FILED HEREWITH.
10.32 Performance Price Option dated as of August 23, 1996 between
the Company and Rakesh K. Kaul. FILED HEREWITH.
10.33 Six-Year Stock Option dated as of August 23, 1996 between
NAR and Rakesh K. Kaul. FILED HEREWITH.
10.34 Seven-Year Stock Option dated as of August 23, 1996 between
NAR and Rakesh K. Kaul. FILED HEREWITH.
10.35 Eight-Year Stock Option dated as of August 23, 1996 between
NAR and Rakesh K. Kaul. FILED HEREWITH.
10.36 Nine-Year Stock Option dated as of August 23, 1996 between
NAR and Rakesh K. Kaul. FILED HEREWITH.
10.37 Letter of Credit, dated December 18, 1996, from Swiss Bank
Corporation, New York Branch ("Swiss Bank") in favor of
Fleet National Bank, as trustee ("Fleet Bank"). FILED
HEREWITH.
10.38 Reimbursement Agreement, dated as of December 18, 1996, by
and among Swiss Bank and the Company. FILED HEREWITH.
92
10.39 Hanover Indemnity Agreement, dated as of December 18, 1996,
between Richemont Finance S.A. ("Richemont") and the
Company, HDPI, Brawn, Gump's, Gump's by Mail, The Company
Store, Tweeds, LWI, Aegis, HDVA and Hanover Realty. FILED
HEREWITH.
10.40 Subordination Agreement, dated as of December 18, 1996,
between Congress and Swiss Bank. ***
10.41 Subordination Agreement, dated as of December 18, 1996
between Congress and Richemont. ***
10.42 Series A Note Agreement, dated as of November 9, 1994,
between the Company and Norwest Bank Minnesota, N.A.
("Norwest"), as trustee. ***
10.43 Placement Agreement, dated as of November 9, 1994, by and
between the Company and NationsBank of North Carolina, N.A.
***
10.44 Remarketing and Interest Services Agreement, dated as of
November 9, 1994, by and between the Company and NationsBank
of North Carolina, N.A. ***
10.45 First Supplemental Series A Note Agreement, dated as of
December 29, 1995, between the Company and Norwest. ***
10.46 First Amendment to Placement Agreement, dated as of December
29, 1995 by and between the Company and NationsBank of North
Carolina, N.A. ***
93
10.47 First Amendment to Remarketing and Interest Services
Agreement, dated as of December 29, 1995 by and between the
Company and NationsBank of North Carolina, N.A. ***
10.48 Second Supplemental Series A Note Agreement, dated as of
December 18, 1996, between the Company and Norwest. FILED
HEREWITH.
10.49 Second Amendment to Series A Note, dated December 18, 1996
made by the Company. FILED HEREWITH.
10.50 Second Amendment to Placement Agreement, dated as of
December 18, 1996 by and between the Company and NationsBank
of North Carolina, N.A. FILED HEREWITH.
10.51 Second Amendment to Remarketing Agreement, dated as of
December 18, 1996 by and between the Company and NationsBank
of North Carolina, N.A. FILED HEREWITH.
10.52 Series B Note Agreement dated as of April 25, 1995, between
the Company and Norwest. ***
10.53 Placement Agreement, dated as of April 25, 1995, by and
between the Company and NationsBank of North Carolina, N.A.
***
10.54 Remarketing and Interest Services Agreement, dated as of
April 25, 1995, by and between the Company and NationsBank
of North Carolina, N.A. ***
10.55 First Amendment to Series B Note Agreement, dated as of
December 29, 1995, between the Company and Norwest. ***
94
10.56 Second Supplemental to Series B Note Agreement, dated as of
December 18, 1996, between the Company and Norwest. ***
10.57 Second Amendment to Series B Note, dated December 18, 1996
made by the Company. FILED HEREWITH.
10.58 Series B Letter of Credit, dated as of December 18, 1996,
issued by Swiss Bank. FILED HEREWITH.
10.59 Series A Letter of Credit, dated as of December 18, 1996.
***
10.60 NAR Promissory Note dated as of September 11, 1996. FILED
HEREWITH.
10.61 Series A Letter of Credit, dated as of December 18, 1996,
issued by Swiss Bank. FILED HEREWITH.
10.62 First Amendment to Series A Note, dated as of December 29,
1995 made by Hanover Direct, Inc. ***
10.63 $10,000,000 Series B Note, dated as of April 27, 1995 and
made by Hanover Direct, Inc. ***
10.64 First Supplemental Series B Note Agreement, dated as of
December 29, 1995. ***
11 Computation of Per Share Earnings. FILED HEREWITH.
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.
E-6*** To be filed by amendment.