-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EwO3iw9EdcMUmPXh76X2jVS53+9iOBjaCFV8ccxj3yjYbkWab8POaUWOODXQpD// Sdw5kNOYBC3h4oIpiksh6w== 0000950117-96-000461.txt : 19960515 0000950117-96-000461.hdr.sgml : 19960515 ACCESSION NUMBER: 0000950117-96-000461 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19960330 FILED AS OF DATE: 19960514 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANOVER DIRECT INC CENTRAL INDEX KEY: 0000320333 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 138053260 STATE OF INCORPORATION: NV FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08056 FILM NUMBER: 96564377 BUSINESS ADDRESS: STREET 1: 1500 HARBOR BLVD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 BUSINESS PHONE: 2018653800 MAIL ADDRESS: STREET 1: 1500 HARBOR BLVD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 FORMER COMPANY: FORMER CONFORMED NAME: HORN & HARDART CO /NV/ DATE OF NAME CHANGE: 19920703 10-Q 1 HANOVER DIRECT, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended MARCH 30, 1996 -------------- Commission file number 1-12082 HANOVER DIRECT, INC. ---------------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 13-0853260 - ----------------------------------- ------------------------------------------- (State of incorporation) (IRS Employer Identification No.) 1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY 07087 - ---------------------------------------------------------- --------------- (Address of principal executive offices) (Zip Code) (201) 863-7300 ---------------------- (Telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Common stock, par value $.66 2/3 per share: 93,590,646 shares outstanding as of May 10, 1996. HANOVER DIRECT, INC. FORM 10-Q MARCH 30, 1996 INDEX
Page ---- Part I - Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets - December 30, 1995 and March 30, 1996.................... 3 Condensed Consolidated Statements of Income (Loss) - thirteen weeks ended April 1, 1995 and March 30, 1996.............................................................. 5 Condensed Consolidated Statements of Cash Flows - thirteen weeks ended April 1, 1995 and March 30, 1996............................................................................ 6 Notes to Condensed Consolidated Financial Statements for the thirteen weeks ended April 1, 1995 and March 30, 1996........................................................ 8 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations....................................................................... 15 Part II - Other Information Item 5. Other Information.......................................................................... 20 Item 6. Exhibits and Reports on Form 8-K........................................................... 20 Signatures.......................................................................................... 21
2 PART I - FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 30, 1995 AND MARCH 30, 1996 (UNAUDITED) (IN THOUSANDS)
December 30, March 30, 1995 1996 ------------ --------- ASSETS Current Assets: Cash and cash equivalents $ 2,682 $ 2,750 Accounts receivable, net 30,176 31,245 Inventories 79,281 87,479 Prepaid catalog costs 37,118 40,683 Deferred tax asset, net 3,300 3,300 Other current assets 6,170 4,107 -------- -------- Total Current Assets 158,727 169,564 -------- -------- Property and equipment, at cost Land 4,811 4,816 Buildings and building improvements 19,353 19,369 Leasehold improvements 14,001 14,075 Furniture, fixtures and equipment 39,508 40,041 Construction in progress 5,479 5,741 -------- -------- 83,152 84,042 Accumulated depreciation and amortization (25,525) (27,528) -------- -------- Net Property and Equipment 57,627 56,514 -------- -------- Goodwill, net 36,586 36,173 Deferred tax asset, net 11,700 11,700 Other assets, net 14,369 14,446 -------- -------- Total Assets $279,009 $288,397 ======== ========
See Notes to Condensed Consolidated Financial Statements. 3 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED) AS OF DECEMBER 30, 1995 AND MARCH 30, 1996 (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 30, MARCH 30, 1995 1996 ------------ --------- LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt and capital lease obligations $ 3,546 $ 3,554 Accounts payable 93,291 91,705 Accrued liabilities 25,969 24,928 Customer prepayments and credits 7,147 8,022 --------- --------- Total Current Liabilities 129,953 128,209 --------- --------- Noncurrent Liabilities: Long-term debt 57,283 79,180 Capital lease obligations 1,973 1,498 Other 2,590 1,649 --------- --------- Total Noncurrent Liabilities 61,846 82,327 --------- --------- Total Liabilities 191,799 210,536 --------- --------- Commitments and Contingencies Shareholders' Equity: 6% Series A Preferred Stock, convertible, $.01 par value, authorized 5,000,000 shares; issued 78,300 shares in 1995 and 1996. 795 806 Series B Preferred Stock, convertible, $.01 par value, authorized and issued 634,900 shares in 1995 and 1996. 5,558 5,606 Common Stock, $.66 2/3 par value, authorized 150,000,000 shares; issued 93,706,508 shares in 1995 and 93,757,045 shares in 1996. 62,461 62,504 Capital in excess of par value 255,390 255,397 Accumulated deficit (231,332) (240,868) -------- -------- 92,872 83,445 Less: Treasury stock, at cost (1,157,061 shares in 1995 and 1996) (3,345) (3,345) Notes receivable from sale of Common Stock (2,023) (1,962) Deferred compensation (294) (277) --------- --------- Total Shareholders' Equity 87,210 77,861 --------- --------- Total Liabilities and Shareholders' Equity $279,009 $288,397 ========= =========
See Notes to Condensed Consolidated Financial Statements. 4 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS) (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
13 WEEKS ENDED ------------------ APRIL 1, MARCH 30, 1995 1996 ----------- ----------- REVENUES $ 176,592 $ 165,527 ----------- ----------- Operating costs and expenses: Cost of sales and operating expenses 112,714 108,438 Provision for catalog and facility closings 316 1,100 Selling expenses 50,503 45,391 General and administrative expenses 15,755 15,333 Depreciation and amortization 1,451 2,998 ----------- ----------- 180,739 173,260 ----------- ----------- INCOME (LOSS) FROM OPERATIONS (4,147) (7,733) ----------- ----------- Interest expense (751) (1,663) Interest income 85 169 ----------- ----------- (666) (1,494) ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES (4,813) (9,227) Income tax provision (90) (250) ----------- ----------- NET INCOME (LOSS) (4,903) (9,477) Preferred Stock dividends and accretion (45) (59) ----------- ----------- Net income (loss) applicable to common shareholders $ (4,948) $ (9,536) =========== =========== Primary and fully diluted net income (loss) per share $ (0.05) $ (0.10) =========== =========== Weighted average shares outstanding for primary and fully diluted earnings per share 92,790,015 93,493,937 =========== ===========
See Notes to Condensed Consolidated Financial Statements. 5 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
13 WEEKS ENDED ------------------- APRIL 1, MARCH 30, 1995 1996 --------- ---------- (IN THOUSANDS) Cash flows from operating activities: Net (loss) $ (4,903) $ (9,477) Adjustments to reconcile net (loss) to net cash (used) by operating activities: Depreciation and amortization including deferred fees 1,775 3,406 Other -- (34) Changes in assets and liabilities, net of acquisitions: Accounts receivable 4,920 (1,543) Inventories (94) (8,198) Prepaid catalog costs 31 (3,565) Other assets (687) 299 Accounts payable (10,001) (1,586) Accrued liabilities (1,016) (1,041) Customer prepayments and credits 141 875 -------- -------- NET CASH (USED) BY OPERATING ACTIVITIES (9,834) (20,864) -------- -------- Cash flows from investing activities: Acquisitions of property (7,161) (980) Proceeds from sale of businesses -- 1,164 Proceeds from sale of securities -- 474 Payments for businesses acquired, net of cash acquired (11,555) -- Notes receivable and investments with affiliated companies (1,688) -- Other, net (2,155) 37 -------- -------- NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES $(22,559) $ 695 -------- --------
See Notes to Condensed Consolidated Financial Statements. 6 HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (UNAUDITED)
13 WEEKS ENDED ----------------- APRIL 1, MARCH 30, 1995 1996 ---------- ---------- (IN THOUSANDS) Cash flows from financing activities: Net borrowings under credit facility $ 10,000 $ 22,092 Payments of long-term debt and capital lease obligations (207) (662) Proceeds from issuance of Common Stock 80 104 Payment of debt issuance costs -- (356) Other, net (318) (941) -------- -------- Net cash provided by financing activities 9,555 20,237 -------- -------- Net increase (decrease) in cash and cash equivalents (22,838) 68 Cash and cash equivalents at the beginning of the year 24,053 2,682 -------- -------- Cash and cash equivalents at the end of the period $ 1,215 $ 2,750 ======== ======== Supplemental cash flow disclosures: Interest paid $ 1,038 $ 1,474 ======== ======== Income taxes paid $ 566 $ 362 ======== ======== Supplemental disclosure of non cash investing and financing activities: Issuance of Common Stock for notes receivable $ 208 $ 81 ======== ======== Acquisition of businesses: Fair value of assets acquired $ 24,943 $ -- Fair value of liabilities assumed (7,888) -- Preferred stock issued (5,500) -- -------- -------- Net cash paid $ 11,555 $ -- ======== ========
See Notes to Condensed Consolidated Financial Statements. 7 HANOVER DIRECT, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THIRTEEN WEEKS ENDED APRIL 1, 1995 AND MARCH 30, 1996 (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a fair presentation of financial condition, results of operations and cash flows in conformity with generally accepted accounting principles. Reference should be made to the annual financial statements, including the footnotes thereto, included in the Hanover Direct, Inc. (the "Company") Annual Report on Form 10-K for the fiscal year ended December 30, 1995. In the opinion of management, the accompanying unaudited interim condensed consolidated financial statements contain all material adjustments, consisting of normal recurring accruals, necessary to present fairly the financial condition, the results of operations and cash flows of the Company and its consolidated subsidiaries for the interim periods. Operating results for interim periods are not necessarily indicative of the results that may be expected for the entire year. Certain prior year amounts have been reclassified to conform with the current year presentation. 2. RETAINED EARNINGS RESTRICTIONS The Company is restricted from paying dividends at any time on its Common Stock or from acquiring its capital stock by certain debt covenants contained in agreements to which the Company is a party. 3. EARNINGS PER SHARE Net income per share - Net income per share was computed using the weighted average number of shares outstanding. Due to the net loss for the thirteen weeks ended April 1, 1995 and March 30, 1996, warrants, stock options and convertible preferred stock are excluded from the calculations of both primary and fully diluted earnings per share. Supplemental earnings per share - The following represents the pro forma results of operations for the thirteen weeks ended April 1, 1995 as if the Leichtung, The Safety Zone and Austad's acquisitions, which were made in the first half of 1995, had occurred at the beginning of the fiscal year (in thousands, except per share data). The pro forma results include the impact of accounting for the acquisitions, including amortization of goodwill and customer lists, amortization of the discount related to the Series B Preferred Stock issued to acquire Safety Zone and interest on the cash used to acquire Leichtung and Austad's.
FOR THE THIRTEEN WEEKS ENDED APRIL 1, 1995 ------------- AS REPORTED PRO FORMA ----------- --------- Revenues $176,592 $186,693 Net income (loss) $ (4,903) $ (4,990) Net income (loss) per share $ (.05) $ (.05)
8 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. 4. SALE OF ASSETS Businesses 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 gifts, for a purchase price of $1.8 million in cash. On February 16, 1996, David Austad and certain family members surrendered to Austad's their Austad's 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. 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 May 25, 1995 through February 16, 1996. There was no gain or loss recognized on this transaction. As a result of 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 three of four store leases. The Company expects that a similar release will be obtained in the near future regarding the fourth lease. AGS will operate the four existing retail stores acquired from TAC as Austad's stores under license from Austad's. The license grants Mr. Austad exclusive retail rights to the Austad's name in 37 states and Canada. Austad's retains all direct marketing rights and all other rights. Mr. Austad will continue to work together with TAC on joint buying and other cooperative efforts. The customer service and fulfillment operations of Austad's were transferred to other Company facilities during the first quarter of 1996. The Company is negotiating the sale of the Austad's South Dakota warehouse and distribution facility at its approximate book value. To the extent that the proceeds from both the sale of such facility and certain computer equipment produces any gain or loss, Mr. Austad will share therein to the extent of his previous 32.5% interest in Austad's. TAC had a revolving credit facility that was secured by substantially all of TAC's assets that was to expire 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. Leichtung Workshops. In January 1995, the Company acquired substantially all of the assets of Leichtung, Inc., a direct marketer of wood-working and home improvement tools and related products sold under the Improvements and Leichtung Workshops names, for a purchase price of approximately $12.8 million in cash and the assumption of certain liabilities. In connection with this acquisition, the Company sold the assets of the Leichtung Workshops catalog in April 1996 for $.9 million in cash and short-term notes and relocated all telemarketing and fulfillment operations to the Company's Hanover, PA facility in the first quarter of 1996. The former distribution facility in Ohio which is being held for sale is carried at its estimated net realizable value of $.8 million, at March 30, 1996. There was no gain or loss recognized on the sale of the assets of the Leichtung Workshops catalog. Debt Securities During 1994, the Company invested approximately $2.7 million in convertible debt securities of Regal Communications, Inc. ("Regal"). In September 1994, Regal filed for protection under Chapter 11 of the United States Code. As a result, during 1994, the Company established a valuation allowance against the securities 9 reflecting their estimated fair value of $1.7 million. During 1995, certain assets of Regal were liquidated at or above the estimates established in 1994 and the Company continues to expect to recover the $1.7 million carrying value of its investment that is included in other assets. To date in 1996, the Company received approximately $.7 million from asset distributions made by Regal. 5. RIGHTS OFFERING In March 1996, the Company announced that the Board of Directors had voted to conduct a rights offering (the "Rights Offering") for $40 million of the Company's Common Stock. On April 23, 1996, the Company filed a Registration Statement on Form S-3 with the Securities and Exchange Commission registering 40,996,590 shares of the Company's Common Stock for the Rights Offering. The securities will be offered and sold only pursuant to the prospectus contained therein. The rights will be exercisable at a price to be determined at the time of commencement of the Rights Offering equal to 75% of the then-current market price, but not less than $1.00 nor more than $1.50 per share. NAR Group Limited ("NAR"), the Company's majority shareholder, will receive rights entitling it to purchase approximately 50% of the shares to be offered in the Rights Offering and has agreed to exercise such rights. In addition, NAR has agreed to standby and purchase all shares not subscribed by common shareholders and will receive a fee as a result. The proceeds of the Rights Offering will be used by the Company to repay the 9.25% Senior Subordinated Notes ("9.25 % Notes") due on August 1, 1998 held by an affiliate of NAR, and for other general corporate purposes, including repaying outstanding indebtedness under its revolving credit facility. At such time the Company will record an extraordinary expense related to the early extinguishment of this debt, representing the write-off of the unamortized debt issuance costs of approximately $1.2 million. In May 1996, the Company and NAR agreed in principle to increase the Rights Offering to $50 million. Such action, which is subject to approval by the Company's Board of Directors, is intended to provide the Company with greater financial flexibility. As was the case previously, NAR has agreed to standby and purchase any shares not subscribed for by common shareholders. 6. CHANGES IN MANAGEMENT AND EMPLOYMENT AGREEMENTS 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 is subject to Shareholder approval, 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 is subject to Shareholder approval, 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 Common Stock; an option expiring March 7, 2006 to purchase 2,000,000 shares of Common Stock 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 largest shareholder. The Employment Agreement also provides for the grant of registration rights under 10 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 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. 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 have agreed in principal to enter into a Termination of Employment Agreement, to be dated as of 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 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 will call 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 will have 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. 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 has agreed to stay with the Company until his replacement can be found. In connection therewith, the Company entered into a settlement of his employment agreement. 7. LONG-TERM DEBT In November 1995, the Company entered into a three-year $75 million secured revolving credit facility (the "Credit Facility") with Congress Financial Corporation. The Company is required to maintain minimum net worth and working capital levels. In addition, the Credit Facility places limitations on the Company's ability to incur additional indebtedness. The Credit Facility was amended in February 1996 to permit the reorganization of Austad and was further amended in April 1996 to permit borrowing of an additional $4 million over the borrowing base formula until the closing of the Rights Offering, subject to the $75 million limit of the Credit Facility. In addition, the minimum working capital and net worth requirements contained in the Credit Facility and in the Indenture relating to the 9.25% Notes were reduced by $5 million for the same period. 11 At March 30, 1996, the Company had $24.1 million of borrowings outstanding under the revolving line of credit and $9.8 million outstanding under the revolving term notes. The rates of interest related to the revolving line of credit and term notes were 9.75% and 10.0%, respectively, at March 30, 1996. The face amount of unexpired documentary letters of credit at March 30, 1996, was $4.1 million. In addition, the Company had issued $28.9 million of standby letters of credit at March 30, 1996. 8. INCOME TAXES At March 30, 1996, the Company had a net deferred tax asset of $15 million, including a deferred tax asset valuation allowance of approximately $52 million, which was recorded in prior years primarily relating to the realization of certain net operating loss carryforwards ("NOLs"). At March 30, 1996, the Company had $172 million of NOLs. Realization of the future tax benefits associated with the NOLs 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 all of the NOLs and reversals of temporary differences. In assessing the realizability of the $15 million net deferred tax asset, the Company has considered numerous factors, including its future operating plans and its recent history of operating results (including pre-tax income in 1994 as well as the losses incurred in 1995 and the quarter ended March 30, 1996). Management believes that the $15 million net deferred tax asset represents a reasonable, conservative estimate of the future utilization of the NOLs and the Company will continue to routinely evaluate the likelihood of future profits and the necessity of future adjustments to the deferred tax asset valuation allowance. 9. ACCOUNTING FOR STOCK-BASED COMPENSATION In October 1995, the Financial Accounting Standards Board ("FASB") 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 options, 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." The Company has decided to adopt the recognition provisions of SFAS No. 123 for the first quarter of 1996. However, as there were no employee stock options granted during the interim period, there is no income statement or balance sheet impact related to the adoption of SFAS No. 123 at this time. 12 A summary of the status of the Company's two stock option plans as of December 30, 1995 and March 30, 1996 and changes during the periods ending on those dates is presented below. Executive Equity Incentive Plan
December 30, 1995 March 30, 1996 ----------------- -------------- Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- Options outstanding beginning of period 1,073,836 $2.98 1,021,170 $2.66 Options granted 286,666 $2.53 -- -- Options cancelled (339,332) $3.59 (266,000) $2.53 ---------- --------- Options outstanding end of period 1,021,170 $2.66 755,170 $2.70 ========== ========= Options exercisable end of period -- -- 478,498 $2.50 ========= Options exercised end of period -- -- -- -- Weighted average fair value of options granted during the year -- $1.19 -- -- Stock Option Plan December 30, 1995 March 30, 1996 ----------------- -------------- Weighted Average Weighted Average Shares Exercise Price Shares Exercise Price ------ -------------- ------ -------------- Options outstanding beginning of period 496,050 $3.60 90,000 $2.42 Options granted 70,000 $2.11 -- -- Options cancelled (142,000) $3.50 -- -- Options expired (334,050) $3.65 (20,000) $3.50 --------- ------- Options outstanding end of period 90,000 $2.42 70,000 $2.11 ========= ======= -- Options exercisable end of period 20,000 $3.50 -- ========= Options exercised end of period -- -- -- -- Weighted average fair value of options granted during the year -- $.90 -- --
13 The following table summarizes information with regard to stock options outstanding at March 30, 1996. Executive Equity Incentive Plan
WEIGHTED-AVERAGE REMAINING EXERCISE PRICE OPTIONS OUTSTANDING CONTRACTUAL LIFE -------------- ------------------- ---------------- $1.75 30,000 5.75 Years $2.50 510,504 3.25 Years $2.63 50,000 5.25 Years $2.75 66,666 5.00 Years $3.00 20,000 3.00 Years $3.89 20,000 3.25 Years $4.50 58,000 3.05 Years
There are 478,498 options exercisable at the end of the first quarter at a weighted average exercise price of $3.25. Stock Option Plan
Weighted-Average Remaining Exercise Price Options Outstanding Contractual Life -------------- ------------------- ---------------- $1.75 20,000 4.5 Years $2.25 50,000 4.5 Years
There are no options exercisable at the end of the first quarter under this plan. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth, for the fiscal periods indicated, the percentage relationship to revenues of certain items in the Company's condensed consolidated statements of income.
13 Weeks Ended April 1, March 30, 1995 1996 ---- ---- Revenues 100.0% 100.0% Cost of sales and operating expenses 63.9 65.5 Provision for catalog and facility closings .2 .7 Selling expenses 28.6 27.4 General and administrative expenses 8.9 9.3 Depreciation and amortization .8 1.8 Income (loss) from operations (2.4) (4.7) Interest expense, net (.4) (.9) Net income (loss) (2.8%) (5.7%)
RESULTS OF OPERATIONS THIRTEEN WEEKS ENDED MARCH 30, 1996 COMPARED WITH THIRTEEN WEEKS ENDED APRIL 1, 1995 Net Income (Loss). The Company reported a net loss of $(9.5) million or $(.10) per share for the quarter ended March 30, 1996 compared to a net loss of $(4.9) million or $(.05) per share in the same period last year. The higher loss was primarily a result of: (i) paper costs which were 21% higher than in the first quarter of 1995; (ii) higher telemarketing and fulfillment costs due to weather related issues and continued operating problems in the new Roanoke fulfillment center; and (iii) $1.8 million of additional inventory obsolescence provisions. Revenues. Revenues decreased 6% in the quarter ended March 30, 1996 to $166 million from $177 million for the same period last year, due to a $14 million decline in revenues of the Company's discontinued catalogs. Continuing catalog revenues increased 2% to $154 million in the current quarter from $151 million for the same period last year, on a 7% reduction in catalog circulation. Overall, the Company circulated 99 million catalogs in 1996, a reduction of 12% from the prior year. Non-apparel continuing catalog revenues increased 3% to $125.2 million, due to an increase in revenues from the Company's venture with Sears, and from The Company Store, Improvements and Austad's, which offset reductions in the other non-apparel catalogs, principally Domestications and Colonial Garden Kitchens. Domestications revenues were down 20%, as improved response rates partially offset a decline in the average order and a 25% reduction in catalog circulation. The decline in Colonial Garden Kitchens' revenues was due to lower circulation and higher backorder levels due to merchandise delivery problems caused by the Company's credit situation, which more than offset improved response rates and a higher average order. Revenues from discontinued catalogs decreased 44% to $10.2 million. The Company discontinued the Mature Wisdom, Tapestry and Hanover 15 House catalogs in 1995. Apparel continuing catalog revenues declined 3% from $29.5 million for the first quarter of 1995 to $28.8 million in the current period as increased backorder levels in Silhouettes, also attributable to the Company's credit situation, more than offset sales improvements in Tweeds and International Male. Revenues from discontinued apparel catalogs declined by $6.0 million from 1995 to $1.3 million in 1996. The Company discontinued the Essence By Mail, One 212, and Simply Tops catalogs in 1995. Operating Costs and Expenses. Cost of sales and operating expenses increased to 65.5% of revenues compared to 63.9% for the same period in 1995. The increase is primarily attributable to lower overall product margins due to higher inventory obsolescence provisions and the impact of mark downs for the discontinued catalogs. In addition, fulfillment and telemarketing costs increased significantly due to the severe winter weather conditions during much of the first quarter which caused the periodic shut down of the call centers in Wisconsin, Pennsylvania and Virginia, as well as slowed shipments of both inbound and outbound freight. In addition, the Company continued to experience significant operating problems in connection with the new Roanoke fulfillment center, which will continue to impact the Company's operating results for the balance of the year. The Provision for catalog and facility closings increased from $.3 million in 1995 to $1.1 million in 1996. In the current quarter, higher provisions for the disposal of the remaining inventory for the discontinued Simply Tops and One 212 catalogs were recorded as the Company experienced significantly lower recovery rates on liquidation of such inventory than had been anticipated. The prior year amount reflected expenses incurred for relocation and severance costs related to several facility closings which did not occur in the current period. Selling expenses decreased to 27.4% of revenues in the first quarter of 1996 from 28.6% for the same quarter last year. This decrease was attributable to a 12% decline in circulation and higher response rates, which helped offset a 21%, or $2.3 million increase in paper prices. General and administrative expenses were 9.3% of revenues in the first quarter of 1996, compared to 8.9% in 1995, due to costs associated with the hiring of the Company's new Chief Executive Officer, and $.6 million attributable to the settlement of an executive's employment agreement. Depreciation and amortization increased to 1.8% of revenues in the first quarter of 1996 from .8% of revenues for the same period in 1995. The total expense increased $1.5 million or 107% from 1995 to 1996 as a result of depreciation charges related to the Gump's retail store, the Roanoke distribution facility and the Austad acquisition, all of which had no impact in the 1995 quarter. Income (Loss) from Operations. The Company recorded a loss from operations of $(7.7) million in the first quarter of 1996, or (4.7)% of revenues, compared to a loss from operation of $(4.1) million for the same period in 1995, or (2.4)% of revenues. The Non-Apparel group's results of operations decreased $3.4 million, from a loss of $(.9) million in the first quarter of 1995 to a loss of $(4.3) million in the same period in 1996 due primarily to the sales and cost increases mentioned above. The increase in the loss was primarily due to the results of operations at Domestications which were adversely affected by the higher telemarketing and fulfillment costs related to its problems with its new Roanoke distribution center. In addition, its product margin continued to be negatively impacted by product mix changes, promotional activities and an increase in its obsolescence provision due to a decision not to continue to offer certain products in future catalogs. These factors more than offset improved catalog productivity. The discontinued catalogs lost ($.7) million in 1996 compared to ($1.4) million in the prior year. 16 The Apparel group's results of operations improved $.4 million from a loss of $(2.3) million in the first quarter of 1995 to a loss of $(1.9) million for the same period in 1996. The Men's Apparel catalogs generated income of $.4 million in the first quarter of 1995 compared to break even results for the same period in 1996. The Women's Apparel continuing catalogs generated a loss of $(.4) million in the first quarter of 1995 compared to a loss of $(.7) million for the same period in 1996. The Women's Apparel discontinued catalogs generated a loss of $(2.2) million in the first quarter of 1995 compared to a loss of $(1.2) million for the same period in 1996. Interest Expense, Net. Interest expense, net increased to $1.5 million in the first quarter of 1996 from $.7 million in the first quarter of 1995 due to the Company's higher cost of credit under its new Credit Facility and increased borrowings related to the Company's increased working capital requirements. Income Taxes. In assessing the realizability of the $52 million net deferred tax asset, the Company has considered numerous factors, including its future operating plans and its recent history of operating results (including pre-tax income in 1994 as well as the losses incurred in 1995). The Company believes that the $15 million net deferred tax asset represents a reasonable, conservative estimate of the future utilization of the tax 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. LIQUIDITY AND CAPITAL RESOURCES Working Capital. At March 30, 1996, the Company had $2.8 million in cash and cash equivalents, compared to $2.7 million at December 30, 1995. Working capital and the current ratio were $41.4 million and 1.32 to 1 at March 30, 1996 versus $28.8 million and 1.22 to 1 at December 30, 1995. The $20.9 million of cash used in operations in the first quarter of 1996, which was provided from additional borrowings under the Credit Facility, was primarily utilized to fund the operating losses incurred in 1996 and a working capital increase. This working capital increase is in part a seasonal increase in inventory and in part a reaction to the tightening of vendor credit terms that the Company began to experience in 1995. In addition, the Company expanded its deferred billing program that is offered to customers of certain catalogs which caused an increase in its accounts receivable. As a result of the operating losses incurred in 1995 and 1996, the Company's financial condition has deteriorated, which has caused a tightening of vendor credit during this period and resulted in an increase in long-term debt. Nevertheless, backorder levels have increased only marginally although certain catalogs have been affected more than others, and the Company has managed to receive merchandise shipments in most cases in sufficient quantities to satisfy customer demand. However, back order levels have negatively affected initial fulfillment which has resulted in an increase in split shipments and higher customer inquiry calls which contributed to the higher fulfillment expense experienced in 1996. In addition the Company has had to utilize more working capital than had previously been anticipated, due to a tightening in trade terms. Also in March 1996, the Company concluded that its recent operating results would have a 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: (i) restore the Company's equity base that had deteriorated due to the operating losses since the beginning of 1995, (ii) reduce long-term debt, and (iii) provide the Company with additional liquidity. As a result, the Company announced in March that it would conduct a $40 million rights offering after the first quarter to be underwritten by NAR, the Company's largest shareholder. The Company will utilize $14 million of the net proceeds to repay its 9.25% Senior Subordinated Notes due 1998 owned by an affiliate of NAR. At such time, the Company will record an extraordinary expense related to the early extinguishment of debt, representing the write-off of the unamortized debt issuance costs of approximately $1.2 million. The balance of the proceeds will be used for general corporate purposes, including the repayment of outstanding revolver indebtedness under the Credit Facility. 17 The announcement of this Rights Offering has generally eased vendor/creditor concerns about the Company's viability as indicated by the significant increase in inventory receipts in the first quarter of 1996. However, the Company believes that because of the continued operating losses and the problems being encountered in its Roanoke distribution center it should increase the amount of the Rights Offering to $50 million to provide it with additional financial flexibility in dealing with its vendors. Accordingly in May, the Company agreed with NAR, subject to approval by the Company's Board of Directors, to such an increase. The Company believes that, upon the conclusion of the Rights Offering, it will return to normal trade terms with suppliers and will be able to obtain sufficient merchandise on a timely basis to satisfy customer demand as well as have adequate capital to support its operations. The Company experiences seasonality in its working capital requirements and fluctuations in the Credit Facility will occur usually within the first and fourth quarters of the year. Infrastructure Investments. The Company continued its management information systems up-grade in 1996. The new system was operational in ten catalogs at the end of 1995 and the Company expects to complete the roll-out of the system to the remaining catalogs in 1996, although this could be affected by the problems in the Roanoke facility. The Company will incur higher MIS costs in 1996 due to the completion of the new system. As of March 30, 1996, the Company had incurred costs of approximately $16.2 million as part of this plan, including $.3 million in the first quarter of 1996. Such costs included hardware and software costs aggregating $10.3 million and internal costs of $5.9 million related to production of this new system that have been capitalized. The Company currently anticipates making additional expenditures of approximately $3 million in its Roanoke facility in 1996 to alleviate certain problems it is currently experiencing. Overall, the Company's level of capital spending has been reduced in 1996 and will focus on these projects. Effect of Inflation and Cost Increases. The Company normally experiences increased costs of sales and operating expenses as 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 mail-order merchandise which undergoes sufficiently high turnover so that the cost of goods sold approximates replacement cost. Because sales are not dependent upon a particular supplier or product brand, the Company can adjust product mix to mitigate the effects of inflation on its overall merchandise base. Paper and Postage. The Company mails its catalogs and ships most of its merchandise through the United States Postal Service ("USPS"). In 1996, the USPS announced a reclassification of postal rates that will become effective on July 1, 1996. It is anticipated that this will favorably impact the Company's postage expenses by approximately 2% - 3% on an annualized basis. Paper costs represented approximately 8% and 7% of revenues in 1995 and the first quarter of 1996 respectively. Since January of 1996, paper prices have begun to decline from their record levels in 1995. While this is a favorable development for the Company, there can be no assurance that this decline will continue nor that prices will not increase later in the year. 18 Cautionary Statements The following statements constitute forward looking statements which involve risks and uncertainties: "...the Company believes that, upon the conclusion of the Rights Offering, the Company will return to normal trade terms with all suppliers and will be able to obtain sufficient merchandise on a timely basis to satisfy customer demand, as well as have adequate capital to support its operations" "In 1996, the USPS announced a reclassification of postal rates that will become effective on July 1, 1996. It is anticipated that this will favorably impact the Company's postage expenses by approximately 2%-3% on an annualized basis." 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: 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; and a reduction in consumer spending generally or specifically with reference to the types of merchandise that the Company offers in its catalogs; an increase in the failure rate of consumer indebtedness generally; and an increase in credit sales by the Company accompanied by an increase in its bad debt experience with respect to consumer debt; a delay in the implementation of the actions to be taken by the Company to increase the efficiency of operations; rapid increases and decreases in the volume of merchandise that passes through the Company's warehouse facilities; the failure of the Rights Offering to be consummated on a timely basis; the failure of the Company to achieve quarterly profitable operating results by the end of fiscal 1996; the failure of the Company to solve the operating problems at the new Roanoke fulfillment center; and a delay or reversal in the implementation of postal rate decreases or an increase in paper costs. 19 PART II - OTHER INFORMATION Item 5. Other Information In November 1995, the Company entered into the Credit Facility with Congress. The Credit Facility was amended in February 1996 to permit the reorganization of Austad. In addition, the Credit Facility was amended in April 1996 to permit the borrowing of an additional $4 million over the borrowing base formula until the closing of the Rights Offering, subject to the $75 million limit of the Credit Facility. In addition, the minimum working capital and net worth requirements contained in the Credit Facility and in the Indenture relating to the 9.25% Notes were reduced by $5 million until the closing of the Rights Offering. Item 6. Exhibits and Reports on Form 8-K Exhibits 10 (a) First Amendment to Loan and Security Agreement, dated as of February 22, 1996, among Congress Financial Corporation and certain subsidiaries of the Company. (b) Second Amendment to Loan and Security Agreement, dated as of April 16, 1996, among Congress Financial Corporation and certain subsidiaries of the Company. (c) Third Supplemental Indenture dated as of April 16, 1996, to the Indenture, dated as of August 17, 1993, as supplemented, among the Company and First Trust National Association, as Trustee. 27 Financial Data Schedule (EDGAR filing only). Reports on Form 8-K - There were no reports on Form 8-K filed during the first quarter ended March 30, 1996. However, on April 17, 1996, the Company filed an Amendment No. 1 to its current report on form 8-K dated May 25, 1995 attaching, pursuant to Item 7(a) (i) of such form, financial statement for the Austad Company reported on by Arthur Andersen LLP, together with a consent of such firm. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HANOVER DIRECT, INC. -------------------- Registrant By: /s/Wayne P. Garten ------------------------ Wayne P. Garten Executive Vice President and Chief Financial Officer (on behalf of the Registrant and as principal financial officer) May 14, 1996 21 EXHIBIT INDEX
PAGE EXHIBIT NUMBER NO. -------------- ---- 10(a) First Amendment to Loan and Security Agreement, dated as of February 22, 1996, among Congress Financial Corporation and certain subsidiaries of the Company. (b) Second Amendment to Loan and Security Agreement, dated as of April 16, 1996, among Congress Financial Corporation and certain subsidiaries of the Company. (c) Third Supplemental Indenture dated as of April 16, 1996, to the Indenture, dated as of August 17, 1993, as supplemented, among the Company and First Trust National Association, as Trustee. 27 Financial Data Schedule (EDGAR filing only)
E-1 EX-10 2 EXHIBIT 10(A) Exhibit 10(a) FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT, dated as of February 22, 1996, by and among CONGRESS FINANCIAL CORPORATION, a California corporation ("Lender"), HANOVER DIRECT PENNSYLVANIA, INC., a Pennsylvania corporation ("HDPI"), BRAWN OF CALIFORNIA, INC., a California corporation ("Brawn"), GUMP'S BY MAIL, INC., a Delaware Corporation ("GBM"), GUMP'S CORP., a California corporation ("Gump's"), THE COMPANY STORE, INC., a Wisconsin corporation ("TCSI"), TWEEDS, INC., a Delaware corporation ("Tweeds"), LWI HOLDINGS, INC., a Delaware Corporation ("LWI"), AEGIS CATALOG CORPORATION, a Delaware corporation ("Aegis"), HANOVER DIRECT VIRGINIA INC., a Delaware corporation ("HDV"), and HANOVER REALTY, INC., a Virginia corporation ("Hanover Realty"; and together with HDPI, Brawn, GBM, Gump's, TCSI, Tweeds, LWI, Aegis and HDV, each individually referred to herein as an "Existing Borrower" and collectively, "Existing Borrowers") and HANOVER DIRECT, INC., a Delaware corporation ("Hanover"), AEGIS RETAIL CORPORATION, a Delaware corporation, AEGIS SAFETY HOLDINGS, INC., a Delaware corporation ("Aegis Holding"), AEGIS VENTURES, INC., a Delaware corporation, AMERICAN DOWN & TEXTILE COMPANY, a Wisconsin corporation, BRAWN WHOLESALE CORP., a California corporation, THE COMPANY FACTORY, INC., a Wisconsin corporation, THE COMPANY OFFICE, INC., a Wisconsin corporation, COMPANY STORE HOLDINGS, INC., a Delaware corporation ("CSHI"), D.M. ADVERTISING, INC., a New Jersey corporation, GUMP'S CATALOG, INC., a Delaware corporation, GUMP'S HOLDINGS, INC., a Delaware corporation, HANOVER CASUALS, INC., a Delaware corporation, HANOVER CATALOG HOLDINGS, INC., a Delaware corporation ("Hanover Catalog"), HANOVER DIRECT NEW JERSEY, INC., a Delaware corporation, HANOVER FINANCE CORPORATION, a Delaware corporation ("Hanover Finance"), HANOVER HOLDINGS, INC., a Delaware corporation, HANOVER LIST MANAGEMENT INC., a New Jersey corporation, HANOVER VENTURES, INC., a Delaware corporation, LEICHTUNG OF MICHIGAN, INC., a Michigan corporation, LWI RETAIL, INC., an Ohio corporation, SCANDIA DOWN CORPORATION, a Delaware corporation ("Scandia"), SKANDIA DOWNSALES, INC., a Wisconsin corporation, TW ACQUISITIONS INC., a Delaware corporation, TWEEDS OF VERMONT, INC., a Delaware corporation, and YORK FULFILLMENT COMPANY, INC., a Pennsylvania corporation (each individually an "Existing Guarantor" and collectively, "Existing Guarantors"), THE AUSTAD COMPANY, a South Dakota corporation ("Austad"; as hereinafter further defined) and AUSTAD HOLDINGS, INC., a Delaware corporation ("Austad Holdings"; as hereinafter further defined). Each Existing Borrower, together with Austad, shall hereinafter be referred to individually as a "Borrower" and collectively as "Borrowers", and each Existing Guarantor, together with Austad Holdings, shall hereinafter be referred to individually as a "Guarantor" and collectively as "Guarantors." W I T N E S S E T H: WHEREAS, Existing Borrowers, Existing Guarantors and Lender entered into the Loan and Security Agreement, dated November 14, 1995 (the "Loan Agreement"), pursuant to which Lender has made loans and advances to Existing Borrowers; and WHEREAS, Existing Borrowers, Existing Guarantors and Lender contemplated, pursuant to Section 2.11 of the Loan Agreement, that Austad may become a Revolving Loan Borrower under the Loan Agreement and that Austad Holdings may become a Guarantor under the Loan Agreement; and WHEREAS, Hanover, Austad, Austad Holdings, David B. Austad, individually and as custodian for certain members of his immediate family, and Denise Austad (the "David Austad Group", as hereinafter further defined) have agreed, among other things, to a plan of corporate separation and restructure of the mail order and retail businesses of Austad; and WHEREAS, to provide working capital financing for the mail order business retained by Austad following such corporate separation and reorganization, Austad has requested that it become a Revolving Loan Borrower under the Loan Agreement and Austad Holdings has requested that it become a Guarantor under the Loan Agreement; and WHEREAS, Existing Borrowers and Existing Guarantors have also requested that Austad become a Revolving Loan Borrower pursuant to the terms and conditions of the Loan Agreement, as amended hereby, and that Austad Holdings become a Guarantor pursuant to the terms and conditions of the Loan Agreement, as amended hereby; and WHEREAS, the parties to the Loan Agreement desire to enter into a this Amendment to the Loan Agreement to amend and modify certain provisions thereof in order to: (a) include Austad as a Revolving Loan Borrower and Austad Holdings as a Guarantor thereunder, subject to the provisions set forth herein, (b) provide that Lender shall have a security interest in and lien upon all of the assets and properties of each of Austad and Austad Holdings to secure their Obligations to Lender, and (c) make certain other amendments to the Loan Agreement; NOW, THEREFORE, in consideration of the premises and covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: -2- 1. Definitions. (a) Additional Definitions. As used herein or in any of the other Financing Agreements, the following terms shall have the respective meanings given to them below, and the Loan Agreement shall be deemed and is hereby amended to include, in addition and not in limitation, each of the following definitions: (i) "AGS" shall mean AGS, Inc., a South Dakota corporation, and its successors and assigns. (ii) "Austad Catalog Division" shall mean all of the assets and properties of Austad related to or used in connection with the sale of golf equipment, golf supplies, golf apparel and related goods and services through its "Austad's" mail order catalog. (iii) "Austad Eligible Inventory" shall mean all Inventory of Austad in the merchandise categories of golf equipment, golf supplies, golf apparel and related finished goods offered for sale by Austad in its "Austad's" catalog, or such other catalogs created or acquired by Austad covering substantially similar merchandise which Austad has requested Lender to include in this Inventory category. (iv) "Austad Escrow Agreement" shall mean the Escrow Agreement, dated February 16, 1996, by and among The First National Bank in Sioux Falls, Austad and David Austad in his individual capacity and on behalf of the other members of the David Austad Group, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (v) "Austad Holdings" shall mean Austad Holdings, a Delaware corporation, and its successors and assigns. (vi) "Austad Reorganization Agreements" shall mean, collectively, the Agreement and Plan of Corporate Separation and Reorganization, dated as of February 16, 1996, by and among Hanover, Austad Holdings, Austad and the David Austad Group, the Escrow Agreement and all other agreements, documents and instruments now or at any time hereafter executed and/or delivered by any Person in connection therewith or related thereto, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (vii) "Austad Retail Division" shall mean all assets and properties of Austad related to or used in connection with the retail sale of golf equipment, golf supplies, apparel and related goods and services through one retail store located in Sioux Falls, South Dakota, two retail stores located in Blaine and Edina, Minnesota and one retail store located in -3- Oak Brook, Illinois, but only to the extent such assets and properties are transferred to AGS pursuant to the Austad Reorganization Agreements, and, in the case of Inventory of Austad, limited to only such Inventory that is located on the premises of the foregoing retail stores and such Inventory that is located on the premises of the Sioux Falls, South Dakota fulfillment center of Austad that was specifically purchased for the retail division of Austad. (viii) "Austad Subordinated Notes" shall mean, collectively, (A) the Promissory Note, dated May 25, 1995, by Austad payable to Hanover Finance in the original principal amount of $400,000, the payment of which is guaranteed by Austad Holdings, and (B) the Subordinated Promissory Note, dated May 25, 1995, by Austad payable to Hanover Finance in the original principal amount of $2,200,000, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. (ix) "David Austad" shall mean David B. Austad, and his heirs, executors, administrators, successors and assigns. (x) "David Austad Group" shall mean, individually and collectively, (A) David B. Austad, individually and as custodian for certain members of his immediate family under the South Dakota Uniform Transfer to Minors Act, (B) Denise Austad, individually and (C) each of their respective heirs, executors, administrators, successors and assigns. (xi) "FNBO" shall mean First National Bank of Omaha, a national banking association, successor in interest to First Bank of South Dakota, N.A., and its successors and assigns. (xii) "HDV" shall mean Hanover Direct Virginia Inc., a Delaware corporation, and its successors and assigns. (b) Amendments of Certain Definitions. (i) Section 1.117 of the Loan Agreement is hereby amended to include Austad within the definition of "Revolving Loan Borrowers" as set forth therein. (ii) Section 1.100 of the Loan Agreement is hereby amended such that neither Austad nor Austad Holdings shall be considered Non-Guarantor Subsidiaries. (iii) Austad and Austad Holdings shall each be deemed included in the definition of "Guarantors" set forth in Section 1.51 of the Loan Agreement, and the parties hereto agree -4- that Austad and Austad Holdings are each hereby included as a Guarantor under the Loan Agreement. (iv) Section 1.34 of the Loan Agreement is hereby amended to include Austad Eligible Inventory within the definition of "Eligible Inventory" as set forth therein. (v) Section 1.13 of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "1.13 "Austad" shall mean The Austad Company, a South Dakota corporation, and its successors and assigns." (c) Interpretation. For purposes of this Amendment, unless otherwise defined herein, all capitalized terms used herein which are defined in the Loan Agreement shall have the meaning given to such terms in the Loan Agreement. 2. Assumption of Obligations; Amendments to Guarantees and Financing Agreements. (a) Austad hereby expressly (i) assumes and agrees to be directly liable to Lender, jointly and severally with the other Borrowers, for all Obligations under, contained in, or arising out of the Loan Agreement and the other Financing Agreements applicable to all Borrowers and as applied to Austad as a Borrower and Guarantor, (ii) agrees to perform, comply with and be bound by all terms, conditions and covenants of the Loan Agreement and the other Financing Agreements applicable to all Borrowers and as applied to Austad as a Borrower and Guarantor, with the same force and effect as if Austad had originally executed and been an original Borrower and Guarantor party signatory to the Loan Agreement and the other Financing Agreements, and (iii) agrees that Lender shall have all rights, remedies and interests, including security interests in and to the Collateral granted pursuant to Section 3(a) hereof, the Loan Agreement and the other Financing Agreements, with respect to Austad and its properties and assets with the same force and effect as Lender has with respect to the other Borrowers and their assets and properties as if Austad had originally executed and had been an original Borrower and Guarantor party signatory to the Loan Agreement and the other Financing Agreements. (b) Austad Holdings hereby expressly (i) assumes and agrees to be directly liable for all Obligations under, contained in, or arising out of the Loan Agreement, the General Security Agreement, dated November 14, 1995, by the Existing Guarantors, other than Hanover and Borrowers, in favor of Lender (the "Subsidiary General Security Agreement") and the other Financing Agreements applicable to all Guarantors and as applied to Austad Holdings as a Guarantor, (ii) agrees to perform, comply with and be bound by all terms, conditions and covenants of the -5- Loan Agreement, the Subsidiary General Security Agreement and the other Financing Agreements applicable to all Guarantors and as applied to Austad Holdings as a Guarantor with the same force and effect as if Austad Holdings had originally executed and been an original Guarantor or Debtor, as the case may be, party signatory to the Loan Agreement, the Subsidiary General Security Agreement and the other Financing Agreements, and (iii) agrees that Lender shall have all rights, remedies and interests, including security interests in the Collateral granted pursuant to Section 3(b) hereof, the Loan Agreement, the Subsidiary General Security Agreement, and the other Financing Agreements, with respect to Austad Holdings and its properties and assets with the same force and effect as if Austad Holdings had originally executed and had been an original Guarantor or Debtor, as the case may be, party signatory to the Loan Agreement, the Subsidiary General Security Agreement and the other Financing Agreements. (c) Each of the Existing Borrowers, in their capacities as Guarantors, hereby agrees that each of their respective Guarantee and Waivers, dated November 14, 1995 (collectively, the "Borrower Guarantees") is hereby amended to include Austad as an additional Guarantor party signatory thereto. Austad hereby expressly (i) assumes and agrees to be directly liable to Lender, jointly and severally with the other Borrowers signatories thereto and the Guarantors, for all Obligations (as defined in the Borrower Guarantees), (ii) agrees to perform, comply with and be bound by all terms, conditions and covenants of the Borrower Guarantees with the same force and effect as if Austad had originally executed and been an original party signatory to each of the Borrower Guarantees, and (iii) agrees that Lender shall have all rights, remedies and interests with respect to Austad and its property under the Borrower Guarantees with the same force and effect as if Austad had originally executed and been an original party signatory to each of the Borrower Guarantees. (d) Each of the Existing Guarantors which is a party to the Guarantee and Waiver, dated November 14, 1995, executed by the Existing Guarantors, other than Hanover and the Existing Borrowers, in favor of Lender (the "Subsidiary Guarantee"), hereby agrees that such Guarantee is hereby amended to include Austad Holdings as an additional Guarantor party signatory thereto. Austad Holdings hereby expressly (i) assumes and agrees to be directly liable to Lender, jointly and severally with the other Guarantors signatories thereto and the Borrowers, for all Obligations (as defined in the Subsidiary Guarantee), (ii) agrees to perform, comply with and be bound by all terms, conditions and covenants of the Subsidiary Guarantee with the same force and effect as if Austad Holdings had originally executed and been an original party signatory to the Subsidiary Guarantee, and (iii) agrees that Lender shall have all rights, remedies and interests with respect to Austad Holdings and its property with the same force and effect as if Austad Holdings had -6- originally executed and been an original party signatory to the Subsidiary Guarantee. (e) Each Guarantor, including without limitation, Austad, in its capacity as Guarantor, and Austad Holdings, hereby expressly and specifically ratifies, restates and confirms the terms and conditions of its respective Guarantees in favor of Lender and its liability for all of the Obligations (as defined in its Guarantees), and other obligations, liabilities, agreements and covenants thereunder. (f) Each Borrower, including, without limitation, Austad, and each Guarantor, including, without limitation, Austad Holdings, hereby agrees that all references to Borrower or Borrowers contained in any of the Financing Agreements are hereby amended to include Austad as an additional Borrower. Each Borrower, including, without limitation, Austad, and each Guarantor, including, without limitation, Austad Holdings, hereby agrees that all references to Guarantor or Guarantors or Debtor or Debtors contained in any of the Financing Agreements are hereby amended to include Austad Holdings as an additional Guarantor or Debtor, as the case may be. 3. Collateral. (a) Austad Collateral. Without limiting the provisions of Section 2(a) hereof, the Loan agreement and the other Financing Agreements, as collateral security for the prompt performance, payment and performance when due of all of the Obligations of Austad to Lender, Austad hereby grants to Lender, a continuing security interest in, and liens upon, and rights of setoff against, and Austad hereby pledges and assigns to Lender, all now owned and hereafter acquired and arising assets and properties of Austad, all of which shall be included in the definition of Collateral as set forth in the Loan Agreement (which definition is hereby amended accordingly), including, without limitation, the following: (i) all of the following, whether now owned or hereafter acquired or arising: (A) all Accounts, including, without limitation, all MasterCard/VISA Receivables and all other Third Party Credit Card Receivables, and all monies, credit balances and other amounts due from or through or held by Third Party Credit Card Issuers, or other parties to the Third Party Credit Card Agreements, all monies paid by or through the Private Credit Card Purchaser, all rentals or license fees receivable in respect of sale, lease, or license of Customer Lists, all monies, securities and other property and the proceeds thereof, now or hereafter held or received by, or in transit to, Lender from or for Austad, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all of Austad's deposits (general or special), balances, sums and credits with Lender at any time existing; (B) all right, title -7- and interest, and all rights, remedies, security and liens, in, to and in respect of the Accounts and other Collateral, including, without limitation, rights of stoppage in transit, replevin, repossession and reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, guarantees or other contracts of suretyship with respect to the Accounts, deposits or other security for the obligations of any Account Debtor, all credit and other insurance; (C) all right, title and interest in, to and in respect of all goods relating to, or which by sale have resulted in, Accounts, including, without limitation, all goods described in invoices, documents, contracts or instruments with respect to, or otherwise representing or evidencing, any Account or other Collateral, including, without limitation, all returned, reclaimed or repossessed goods; (D) all deposit accounts; and (E) all other general intangibles of every kind and description, including, without limitation, (1) tradenames and trademarks, and the goodwill of the business symbolized thereby, (2) patents, (3) copyrights, (4) licenses, (5) Federal, State and local tax and duty refund claims of all kinds, (6) catalogs and promotional materials, (7) all Customer Lists, and (8) all right, title and interest of Austad in and to Mail Order Joint Ventures, and other joint ventures, partnerships and other Persons; (ii) Inventory; (iii) Equipment; (iv) Real Property, other than the real property located at 4500 East 10th Street, Sioux Falls, South Dakota; (v) all present and future books, records, ledger cards, computer software (including all manuals, upgrades, modifications, enhancements and additions thereto), computer tapes, disks, other electronic data storage media, documentation of file and record formats and source code, documents, other property and general intangibles evidencing or relating to any of the above, any other Collateral or any Account Debtor, together with the file cabinets or containers in which the foregoing are stored; and (vi) all present and future products and proceeds of the foregoing, in any form whatsoever, including, without limitation, any insurance proceeds and any claims against third persons for loss or damage to or destruction of any or all of the foregoing. Notwithstanding the foregoing, the Collateral does not include any leasehold interests of Austad. (b) Austad Holdings Collateral. Without limiting the provisions of Section 2(b) hereof, the Loan Agreement, the -8- Subsidiary General Security Agreement and the other Financing Agreements, as collateral security for the prompt payment and performance when due of all of the Obligations of Austad Holdings, Austad Holdings hereby grants to Lender, a continuing security interest in, and liens upon, and rights of setoff against, and Austad Holdings hereby pledges and assigns to Lender, all now owned and hereafter acquired and arising assets and properties of Austad Holdings, all of which shall be included in the definition of Collateral as set forth in the Subsidiary General Security Agreement (which definition is hereby amended accordingly), including, without limitation, the following: (i) all present and future: (A) accounts, credit card receivables (including credit card charge records and other evidences of credit card transactions), contract rights, general intangibles, chattel paper, documents and instruments (collectively, "Accounts"), including, without limitation, all obligations for the payment of money arising out of the sale, lease or other disposition of goods or other property or rendition of services, all monies, all credit balances, reserve balances and other monies due from or held by factors or credit card issuers or servicing agents or financial intermediaries; (B) all monies, securities and other property and the proceeds thereof, now or hereafter held or received by, or in transit to, Lender or any participant from or for Austad Holdings, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all of Austad Holding's deposits (general or special), balances, sums and credits with Lender or any participant at any time existing; (C) all of Austad Holding's right, title and interest, and all of Austad Holding's rights, remedies, security and liens, in, to and in respect of the Accounts and other collateral, including, without limitation, rights of stoppage in transit, replevin, repossession and reclamation and other rights and remedies of an unpaid vendor, lienor or secured party, guaranties or other contracts of suretyship with respect to the Accounts, deposits or other security for the obligation of any account debtor, credit and other insurance; (D) all of Austad Holding's right, title and interest in, to and in respect of all goods relating to, or which by sale have resulted in Accounts, including, without limitation, all goods described in invoices, documents, contracts or instruments with respect to, or otherwise representing or evidencing, any Account or other collateral, including, without limitation, all returned, reclaimed or repossessed goods; (E) all deposit accounts; and (F) all other general intangibles of every kind and description, including, without limitation, (1) trade names and trademarks, and the goodwill of the business symbolized thereby, (2) patents, (3) copyrights, (4) licenses, (5) claims and other choses in action, (6) Federal, State, local and foreign tax refund claims of all kinds, (7) catalogs and promotional materials, customer and mailing lists, and (8) all right, title and interest in and to joint ventures and partnerships; -9- (ii) all Inventory; (iii) all Equipment; (iv) all Real Property; (v) all present and future books, records, ledger cards, computer programs and other property and general intangibles evidencing or relating to any of the above, any other collateral or any account debtor, together with the file cabinets or containers in which the foregoing are stored; and (vi) all present and future products and proceeds of the foregoing, in any form, including, without limitation, any insurance proceeds and any claims against third persons for loss or damage to or destruction of any or all of the foregoing. Notwithstanding the foregoing, the Collateral does not include any leasehold interests of Austad Holdings. (c) Additional Collateral. Without limiting the foregoing, or the other grants of Collateral pursuant to the Loan Agreement or any of the other Financing Agreements, in order to induce Lender to extend loans, advances and other financial accommodations to Borrowers under the Loan Agreement, and as additional collateral for the payment and performance when due of all Obligations of Austad, Austad Holdings and Hanover Finance, as the case may be, (i) each of Austad and Austad Holdings by its execution below, hereby pledges and assigns to Lender and grants to Lender a security interest in, all of its now existing and hereafter arising (A) rights, remedies, claims for monies, indemnification claims and claims for damages or other relief pursuant to or in respect of the Austad Escrow Agreement and the other Austad Reorganization Agreements, (B) rights, remedies, claims for monies, indemnification claims and claims for damages or other relief under or in respect of the documents and instruments referred to in the Austad Escrow Agreement and the other Austad Reorganization Agreements, and (C) all proceeds, collections, recoveries and rights with respect to the foregoing and (ii) Hanover Finance by its signature below hereby pledges and assigns to Lender all of its right, title and interest in and to, and agrees to indorse to Lender, each of the Austad Subordinated Notes. Nothing set forth herein, and no act taken by Lender pursuant to the pledges, assignments and grants of security interests set forth herein shall constitute an assumption by Lender of any obligation or liability of Austad or Austad Holdings pursuant to or in connection with the Escrow Agreement and the other Austad Reorganization Agreements or otherwise, or of Hanover Finance pursuant to or in connection with the Austad Subordinated Notes or otherwise. -10- 4. Austad Inventory Advance Rate. Section 2.1(b) of the Loan Agreement is hereby deleted in its entirety and replaced with the following: "(b) Revolving Inventory Loans. Subject to, and upon the terms and conditions contained herein and in the other Financing Agreements, Lender shall, from time to time, make Revolving Inventory Loans (i) to each Revolving Loan Borrower, other than Gump's and Austad's, at such Revolving Loan Borrower's request, of up to the lesser of (A) sixty percent (60%) of the Value of the Eligible Inventory of such Revolving Loan Borrower or (B) the Net OLV Percentage of the Value of such Eligible Inventory, and (ii) to Gump's, at its request, of up to the lesser of (A) sixty percent (60%) of the Value of Eligible Inventory of Gump's or (B) the Net GOB Percentage of the Value of Eligible Inventory of Gump's, and (iii) to Austad, at its request, of up to the lesser of (A) forty percent (40%) of the Value of Eligible Inventory of Austad or (B) the Net OLV Percentage of the Value of such Eligible Inventory, or, in each of clauses (b)(i), (b)(ii) or (b)(iii), such greater or lesser percentages thereof as Lender shall, in its sole discretion, determine from time to time (the "Inventory Loan Formulas"). Without limiting the foregoing, the sixty percent (60%) lending formula component referred to in clauses (b)(i)(A) and (b)(ii)(A) and the forty percent (40%) lending formula component referred to in clause (b)(iii)(A) may be adjusted downward by Lender based upon any adverse change, individually or in the aggregate, in the turnover of Eligible Inventory or deterioration in mix, nature or quality of Eligible Inventory in the respective categories of Eligible Inventory, and any such downward adjustment made for such reason(s) (or on the basis of the lending formula component set forth in clauses (b)(i)(B), (b)(ii)(B) or (b)(iii)(B) above) shall not be considered solely discretionary for purposes of the provision contained in the definition of Interest Rate and Section 2.7(c) hereof." 5. Inventory Sublimits. Section 2.2(j) of the Loan Agreement is hereby redesignated Section 2.2(k) and a new Section 2.2(j) of the Loan Agreement is added as follows: "(j) Subject to, and upon the terms and conditions contained herein, the aggregate principal amount of Revolving Loans and Letter of Credit Accommodations made available to Austad shall not exceed Three Million Dollars ($3,000,000) at any one time outstanding." -11- 6. Letter of Credit Accommodations. Without limiting the rights of Lender to establish a greater percentage in connection with Letter of Credit Accommodations established for the purchase of goods pursuant to Sections 2.3(b) and 2.3(d) of the Loan Agreement, Austad and the Existing Borrowers agree for purposes of clarity that the reference to forty percent (40%) set forth in Sections 2.3(b)(i)(A)(1) and 2.3(d)(i)(A) of the Loan Agreement shall apply only to Existing Borrowers and that it is hereby agreed that such percentage as applied to Austad shall be sixty percent (60%) in such Sections. 7. Guarantees. Section 4.2 of the Loan Agreement is hereby deleted in its entirety and replaced with the following, effective November 14, 1995: "4.2 Guarantees Concurrently herewith, in order to induce Lender to enter into this Agreement and the other Financing Agreements to be entered into on the date hereof, each Borrower shall execute and deliver to Lender the Guarantee by Borrowers, and Borrowers shall cause Guarantors to execute and deliver to Lender the Guarantees by the Guarantors, each in form and substance satisfactory to Lender, as provided therein (as all of such Guarantees, now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, individually a "Guarantee" and collectively the "Guarantees"). In its capacity as a party signatory to such Guarantees, each Borrower shall be considered a Guarantor hereunder." 8. Additional Amendments. (a) Section 2.11(c), (d) and (e) of the Loan Agreement are hereby redesignated Sections 2.11(a), (b) and (c), respectively. (b) The name of the signatory party identified on signature page 123 to the Loan Agreement as Skandia Down Sales, Inc. is hereby corrected to be Skandia Downsales, Inc. 9. Exhibits. (a) Exhibits A, B-1, B-4, C, D, F, G, H-1 and H-3, to the Loan Agreement are hereby amended to include, in addition and not in limitation, the information set forth on the First Supplements to each of such Exhibits attached hereto. (b) Exhibit A to the Subsidiary General Security Agreement is hereby amended to include, in addition and not in limitation, the information set forth on the First Supplement to Exhibit A attached hereto. -12- 10. Representations and Warranties. Borrowers represent, warrant and covenant with and to Lender as follows, which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof, the truth and accuracy of, or compliance with each, together with the representations, warranties and covenants in the other Financing Agreements, being a continuing condition of the making of any Revolving Loans or Letter of Credit Accommodations by Lender to Borrowers: (a) As of the date hereof, Austad does not have a Deferred Billing Option Program. (b) This Amendment and each other agreement or instrument to be executed and delivered by each of Austad, Austad Holdings, the other Borrowers and/or the other Guarantors hereunder have been duly authorized, executed and delivered by all necessary action on the part of each of Austad, Austad Holdings, the other Borrowers and the other Guarantors which is a party hereto and thereto and, if necessary, their respective stockholders, and is in full force and effect as of the date hereof, as the case may be, and the agreements and obligations of each of Austad, Austad Holdings, the other Borrowers and/or the other Guarantors, as the case may be, contained herein and therein constitute legal, valid and binding obligations of each of Austad, Austad Holdings, the other Borrowers and/or the other Guarantors, as the case may be, enforceable against them in accordance with their terms. (c) Neither the execution and delivery of the Austad Reorganization Agreements, nor the consummation of the transactions contemplated by the Austad Reorganization Agreements, nor compliance with the provisions of the Austad Reorganization Agreements, shall result in the creation or imposition of any lien, claim, charge or encumbrance upon any assets of the Austad Catalog Division or any other Collateral, except in favor of Lender pursuant to this Amendment. (d) Neither the execution and delivery of the Austad Reorganization Agreements, nor the consummation of the transactions therein contemplated, nor compliance with the provisions thereof, (i) has violated or shall violate any Bulk Sales Act, Bulk Transfer Act or Article 6 of the UCC, if applicable, or any Federal or State securities laws or any other law or regulation or any order or decree of any court or governmental instrumentality in any respect or (ii) does, or shall conflict with or result in the breach of, or constitute a default in any respect under any mortgage, deed of trust, security agreement, agreement or instrument to which Austad or Austad Holdings or any other Borrower or other Guarantor is a party or may be bound, or (iii) shall violate any provision of the Certificates of Incorporation or By-Laws of Austad, Austad Holdings, or any other Borrower or other Guarantor. -13- (e) All of the outstanding shares of capital stock of each of Austad and Austad Holdings have been duly authorized, validly issued and are fully paid and non-assessable, free and clear of all claims, liens, pledges and encumbrances of any kind. Hanover is the beneficial and direct owner of record of one hundred (100%) percent of the issued and outstanding capital stock of Austad Holdings. Austad Holdings is the beneficial and direct owner of record of one hundred (100%) percent of the issued and outstanding capital stock of Austad. After giving effect to the consummation of the Austad Reorganization Agreements, there is no debt outstanding that is convertible into capital stock of Austad or Austad Holdings, and there are no outstanding rights, options or warrants to acquire any capital stock or debt convertible into capital stock of Austad or Austad Holdings. (f) No action of, or filing with, or consent of any governmental or public body or authority, other than the filing of UCC financing statements, and no approval or consent of any other party, is required to authorize, or is otherwise required in connection with, the execution, delivery and performance of this Amendment. (g) All of the representations and warranties set forth in the Loan Agreement and the other Financing Agreements, each as amended hereby, are true and correct in all material respects on and as of the date hereof as if made on the date hereof, except as affected by transactions expressly contemplated or permitted by this Amendment and except to the extent any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true and correct as of such date. (h) As of the date hereof, and after giving effect to the provisions of this Amendment, no Event of Default, and no condition or event which, with the giving of notice or lapse of time, or both, would constitute an Event of Default, exists or has occurred and is continuing. (i) Austad Holdings is a Delaware corporation, duly organized and validly existing in good standing under the laws of the State of Delaware. Austad is a South Dakota corporation, duly organized and validly existing in good standing under the laws of the State of South Dakota. Each of Austad and Austad Holdings (i) is duly licensed or qualified to do business as a foreign corporation and is in good standing in each of the jurisdictions set forth in the First Supplement to Exhibit A to the Loan Agreement annexed hereto, which are the only jurisdictions wherein the character of the properties owned or licensed or the nature of the business of Austad and/or Austad Holdings, makes such licensing or qualification to do business necessary; and (ii) has all requisite power and authority to own, -14- lease and operate its properties and to carry on its business as it is now being conducted and will be conducted in the future. (j) The assets and properties of Austad and Austad Holdings are owned by them, free and clear of all security interests, liens and encumbrances of any kind, nature or description, as of the date hereof, except those security interests granted pursuant hereto in favor of Lender and except for Liens (if any) permitted under Section 6.4 of the Loan Agreement or the other Financing Agreements. 11. Conditions Precedent. Concurrently with the execution hereof (except to the extent otherwise indicated below), and as a further condition to the effectiveness of this Amendment and the agreement of Lender to the modifications and amendments set forth in this Amendment: (a) Lender shall have received, in form and substance satisfactory to Lender, evidence that (i) the Austad Reorganization Agreements have been duly executed and delivered by and to the appropriate parties thereto and (ii) the transactions contemplated under the terms of the Austad Reorganization Agreements have been consummated prior to, or contemporaneously with, the execution of this Amendment, including, without limitation, the receipt by FNBO of the amount, to be paid by or on behalf of the David Austad Group and/or AGS, representing a portion of the outstanding obligations owed by Austad to FNBO under the financing arrangements between FNBO and Austad, referred to as the "Balance Due Amount" in the Austad Reorganization Agreements; (b) Lender shall have received, in form and substance satisfactory to Lender, all releases, terminations and such other documents as Lender may request to evidence and effectuate the termination by FNBO of its financing arrangements with Austad and Austad Holdings, and the termination and release by FNBO of any interest in and to any assets and properties of Austad and Austad Holdings, duly authorized, executed and delivered by FNBO, including, but not limited to (i) UCC-3 Termination Statements for all UCC-1 Financing Statements previously filed by FNBO for its predecessors, as secured party, and Austad or Austad Holdings, as debtor, and (ii) satisfactions and discharges of any mortgages, deeds of trust or deeds to secure debt by Austad or Austad Holdings in favor of FNBO, in form acceptable for recording in the appropriate governmental office; (c) Lender shall have received, in form and substance satisfactory to Lender, all consents, waivers, acknowledgments and other agreements from third persons which Lender may deem necessary or desirable in order to permit, protect and perfect its security interests in and liens upon the Collateral or to effectuate the provisions of this Amendment and -15- the other Financing Agreements, including, without limitation, a Mortgagee Waiver by Valley Bank as mortgagee of Austad's Sioux Falls, South Dakota distribution center real property; (d) Each of Austad, Austad Holdings, Borrowers and Guarantors shall have delivered to Lender, in form and substance satisfactory to Lender, each of the following agreements duly authorized, executed and delivered: (i) First Amendment to Trademark Collateral Assignment and Security Agreement, dated November 14, 1995, by and among Hanover, Hanover Catalog, Scandia, Aegis Holdings, CSHI and Lender, providing for the addition of Austad Holdings as a Debtor thereunder and the grant by Austad Holdings of a security interest in any trademarks, and any such documents, instruments or filings with respect thereto with the U.S. Patent and Trademark Office to protect such Collateral; (ii) five (5) Special Powers of Attorney (Trademark) by Austad Holdings in favor of Lender; (iii) amendments to the Third Party Credit Card Acknowledgments setting forth such acknowledging parties' agreement to transfer to the Blocked Accounts all monies due and other funds payable to or for the account of Austad and/or Austad Holdings under any applicable Third Party Credit Card Agreements; (iv) evidence that all existing Customer Lists, including the Customer Lists of Austad and/or Austad Holdings, have been delivered by HDI to the Customer List Escrow Agent and are being held by the Customer List Escrow Agent pursuant to the Customer List Escrow Agreement; (v) Amended and Restated Intercompany Subordination Agreement between Hanover and Lender; (vi) Amended and Restated Agency Agreement by and among Hanover, Austad and certain Borrowers; (vii) Guarantee and Waiver by Borrowers, other than Austad, in favor of Lender with respect to the Obligations of Austad to Lender; (viii) Guarantee and Waiver by Guarantors, other than Borrowers, Hanover and Austad, in favor of Lender with respect to the Obligations of Austad to Lender; (ix) Guarantee and Waiver by Hanover in favor of Lender with respect to the Obligations of Austad to Lender; (x) Amended and Restated Blocked Account Agreement by and among The First National Bank of Maryland, -16- Borrowers, certain Guarantors and Lender providing for the establishment of a Blocked Account for Austad; and (xi) the delivery by Hanover Finance to Lender of each of the Austad Subordinated Notes with an Allonge Indorsement affixed to each such note providing for the payment of any amounts due under each Austad Subordinated Note to the order of Lender; (e) Austad and Austad Holdings and all other Borrowers and Guarantors shall have duly executed and delivered to Lender such UCC financing statements and other documents and instruments which Lender in its sole discretion has determined are necessary to perfect the security interests of Lender in all assets now or hereafter owned by Austad and Austad Holdings; (f) Lender shall have received a current Appraisal with respect to the Inventory of Austad, prepared at Revolving Loan Borrowers' expense by the Appraiser in form, scope and methodology acceptable to Lender and addressed to Lender, or upon which Lender is expressly permitted to rely, that is satisfactory to Lender and will enable Lender to calculate the Net Orderly Liquidation Value of such Inventory and the Net OLV Percentage with respect thereto; (g) Each of Austad and Austad Holdings shall have delivered to Lender (i) a copy of its Certificate of Incorporation, and all amendments thereto, certified by the Secretary of State of its jurisdiction of incorporation as of the most recent practicable date certifying that each of the foregoing documents remains in full force and effect and has not been modified or amended, except as described therein, (ii) a copy of its By-Laws, certified by the secretary of each of Austad and Austad Holdings, and (iii) a certificate from the secretary of each of Austad and Austad Holdings dated the date hereof certifying that each of the foregoing documents remains in full force and effect and has not been modified or amended, except as described therein; (h) Each of Austad and Austad Holdings shall have delivered to Lender evidence, as of the most recent practicable date, that it is duly qualified and in good standing in each jurisdiction set forth on the First Supplement to Exhibit A to the Loan Agreement annexed hereto; (i) Lender shall have received Secretary's Certificates of Directors' Resolutions with Shareholders' Consent evidencing the adoption and subsistence of corporate resolutions approving the execution, delivery and performance by Austad, Austad Holdings and the other Borrowers and other Guarantors of this Amendment and the agreements, documents and instruments to be delivered pursuant to this Amendment, together with such opinions of counsel to Austad, Austad Holdings, the other -17- Borrowers and other Guarantors with respect thereto, addressed to Lender as Lender shall reasonably require, all in form and substance and satisfactory to Lender; (j) Each of Borrowers and Guarantors shall deliver, or cause to be delivered, to Lender a true and correct copy of any consent, waiver or approval to or of this Amendment, which any Borrower or Guarantor is required to obtain from any other Person, and such consent, approval or waiver shall be in a form reasonably acceptable to Lender; and (k) Hanover shall have delivered to Lender, in form and substance satisfactory to Lender, consolidating pro forma opening balance sheets as of February 16, 1996 for Austad and Austad Holdings reflecting the separation of the Austad Catalog Division and the Austad Retail Division. 12. Effect of this Amendment. This Amendment and the instruments and agreements delivered pursuant hereto constitute the entire agreement of the parties with respect to the subject matter hereof and thereof, and supersede all prior oral or written communications, memoranda, proposals, negotiations, discussions, term sheets and commitments with respect to the subject matter hereof and thereof. Except as expressly amended pursuant hereto, and except for the acknowledgements expressly set forth herein, no other changes or modifications to the Financing Agreements or waivers of or consents under any provisions thereof are intended or implied, and in all other respects the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent that any provision of the Loan Agreement or any of the other Financing Agreements are inconsistent with the provisions of this Amendment, such other provision shall be deemed to be amended so that it is made consistent with the provisions of this Amendment. 13. Further Assurances. (a) Borrower shall execute and deliver such additional documents and take such additional action as may be reasonably requested by Lender to effectuate the provisions and purposes of this Amendment. (b) Without limiting the provisions of Section 13(a) hereof, Austad shall, or Borrowers and Hanover shall cause Austad to, (i) obtain and deliver to Lender, within thirty (30) days from the date hereof, (A) evidence that Austad has qualified to do business as a foreign corporation in each of the State of Pennsylvania and the State of California and (B) the Final Closing Balance Sheet (as defined in the Austad Reorganization Agreements) and (ii) cause FNBO to remit to an account designated by Lender the balance of any collections or other amounts received by FNBO in respect of the financing arrangements between -18- FNBO and Austad being terminated pursuant to Section 11(b) hereof, after FNBO first applies any such amounts to any checks made by Austad that are presented to FNBO for payment. 14. Governing Law. The rights and obligations hereunder of each of the parties hereto shall be governed by and interpreted and determined in accordance with the internal laws of the State of New York (without giving effect to principles of conflicts of laws). 15. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 16. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed on the day and year first written. CONGRESS FINANCIAL CORPORATION By:_________________________ Title:______________________ HANOVER DIRECT PENNSYLVANIA, INC. By:_________________________ Title:______________________ BRAWN OF CALIFORNIA, INC. By:_________________________ Title:______________________ GUMP'S BY MAIL, INC. By:_________________________ Title:______________________ [SIGNATURES CONTINUE ON FOLLOWING PAGE] -19- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] GUMP'S CORP. By:_________________________ Title:______________________ THE COMPANY STORE, INC. By:_________________________ Title:______________________ TWEEDS, INC. By:_________________________ Title:______________________ LWI HOLDINGS, INC. By:_________________________ Title:______________________ AEGIS CATALOG CORPORATION By:_________________________ Title:______________________ HANOVER DIRECT VIRGINIA INC. By:_________________________ Title:______________________ HANOVER REALTY, INC. By:_________________________ Title:______________________ [SIGNATURES CONTINUE ON FOLLOWING PAGE] -20- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] THE AUSTAD COMPANY By:_________________________ Title:______________________ By their signatures below, the undersigned Guarantors acknowledge and agree to be bound by the applicable provisions of this Amendment: HANOVER DIRECT, INC., a Delaware corporation By:____________________________ Title:_________________________ AEGIS RETAIL CORPORATION By:____________________________ Title:_________________________ AEGIS SAFETY HOLDINGS, INC. By:____________________________ Title:_________________________ AEGIS VENTURES, INC. By:____________________________ Title:_________________________ AMERICAN DOWN & TEXTILE COMPANY By:____________________________ Title:_________________________ [SIGNATURES CONTINUED ON FOLLOWING PAGE] -21- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] BRAWN WHOLESALE CORP. By:____________________________ Title:_________________________ THE COMPANY FACTORY, INC. By:____________________________ Title:_________________________ THE COMPANY OFFICE, INC. By:____________________________ Title:_________________________ COMPANY STORE HOLDINGS, INC. By:____________________________ Title:_________________________ D.M. ADVERTISING, INC. By:____________________________ Title:_________________________ GUMP'S CATALOG, INC. By:____________________________ Title:_________________________ GUMP'S HOLDINGS, INC. By:____________________________ Title:_________________________ [SIGNATURES CONTINUE ON FOLLOWING PAGE] -22- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER CASUALS, INC. By:____________________________ Title:_________________________ HANOVER CATALOG HOLDINGS, INC. By:____________________________ Title:_________________________ HANOVER DIRECT NEW JERSEY, INC. By:____________________________ Title:_________________________ HANOVER FINANCE CORPORATION By:____________________________ Title:_________________________ HANOVER HOLDINGS, INC. By:____________________________ Title:_________________________ HANOVER LIST MANAGEMENT, INC. By:____________________________ Title:_________________________ HANOVER VENTURES, INC. By:____________________________ Title:_________________________ [SIGNATURES CONTINUE ON FOLLOWING PAGE] -23- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] LEICHTUNG OF MICHIGAN, INC. By:____________________________ Title:_________________________ LWI RETAIL, INC. By:____________________________ Title:_________________________ SCANDIA DOWN CORPORATION By:____________________________ Title:_________________________ SKANDIA DOWNSALES, INC. By:____________________________ Title:_________________________ TW ACQUISITIONS, INC. By:____________________________ Title:_________________________ TWEEDS OF VERMONT, INC. By:____________________________ Title:_________________________ YORK FULFILLMENT COMPANY, INC. By:____________________________ Title:_________________________ [SIGNATURES CONTINUE ON FOLLOWING PAGE] -24- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] AUSTAD HOLDINGS, INC. By:____________________________ Title:_________________________ -25- EX-10 3 EXHIBIT 10(B) Exhibit 10(b) SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT, dated as of April 16, 1996, by and among CONGRESS FINANCIAL CORPORATION, a California corporation ("Lender"), HANOVER DIRECT PENNSYLVANIA, INC., a Pennsylvania corporation ("HDPI"), BRAWN OF CALIFORNIA, INC., a California corporation ("Brawn"), GUMP'S BY MAIL, INC., a Delaware Corporation ("GBM"), GUMP'S CORP., a California corporation ("Gump's"), THE COMPANY STORE, INC., a Wisconsin corporation ("TCSI"), TWEEDS, INC., a Delaware corporation ("Tweeds"), LWI HOLDINGS, INC., a Delaware Corporation ("LWI"), AEGIS CATALOG CORPORATION, a Delaware corporation ("Aegis"), HANOVER DIRECT VIRGINIA INC., a Delaware corporation ("HDV"), HANOVER REALTY, INC., a Virginia corporation ("Hanover Realty"), and THE AUSTAD COMPANY, a South Dakota corporation ("Austad"; and together with HDPI, Brawn, GBM, Gump's, TCSI, Tweeds, LWI, Aegis, HDV and Hanover Realty, each individually referred to herein as a "Borrower" and collectively, "Borrowers") and HANOVER DIRECT, INC., a Delaware corporation ("Hanover"), AEGIS RETAIL CORPORATION, a Delaware corporation, AEGIS SAFETY HOLDINGS, INC., a Delaware corporation ("Aegis Holding"), AEGIS VENTURES, INC., a Delaware corporation, AMERICAN DOWN & TEXTILE COMPANY, a Wisconsin corporation, BRAWN WHOLESALE CORP., a California corporation, THE COMPANY FACTORY, INC., a Wisconsin corporation, THE COMPANY OFFICE, INC., a Wisconsin corporation, COMPANY STORE HOLDINGS, INC., a Delaware corporation, D.M. ADVERTISING, INC., a New Jersey corporation, GUMP'S CATALOG, INC., a Delaware corporation, GUMP'S HOLDINGS, INC., a Delaware corporation, HANOVER CASUALS, INC., a Delaware corporation, HANOVER CATALOG HOLDINGS, INC., a Delaware corporation, HANOVER FINANCE CORPORATION, a Delaware corporation, HANOVER LIST MANAGEMENT INC., a New Jersey corporation, HANOVER VENTURES, INC., a Delaware corporation, LEICHTUNG OF MICHIGAN, INC., a Michigan corporation, LWI RETAIL, INC., an Ohio corporation, SCANDIA DOWN CORPORATION, a Delaware corporation, TWEEDS OF VERMONT, INC., a Delaware corporation, YORK FULFILLMENT COMPANY, INC., a Pennsylvania corporation, and AUSTAD HOLDINGS, INC., a Delaware corporation (each individually a "Guarantor" and collectively, "Guarantors"). W I T N E S S E T H: WHEREAS, Borrowers, Guarantors and Lender entered into the Loan and Security Agreement, dated November 14, 1995, as amended by the First Amendment to Loan and Security Agreement, dated February 22, 1996 (the "Loan Agreement"), pursuant to which Lender has made loans and advances to Borrowers; and WHEREAS, Borrowers and Guarantors have requested that Lender (a) provide temporary, supplemental revolving loans to HDPI of up to the maximum amount of Four Million Dollars ($4,000,000) at any one time outstanding, (b) reduce, on a temporary basis, the required maintenance levels under certain financial covenants contained in the Loan Agreement, (c) release a portion of certain loan availability reserves previously established, and establish a permanent availability reserve in the amount of One Million Dollars ($1,000,000), and (d) enter into certain related amendments to the Loan Agreement and agreements in connection therewith; WHEREAS, the parties to the Loan Agreement desire to enter into this Second Amendment to Loan and Security Agreement (this "Amendment") to evidence and effectuate the foregoing, to the extent set forth herein, and subject to the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the premises and covenants set forth herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Definitions. (a) Additional Definitions. As used herein or in any of the other Financing Agreements, the following terms shall have the respective meanings given to them below, and the Loan Agreement shall be deemed and is hereby amended to include, in addition and not in limitation, each of the following definitions: (i) "Supplemental Revolving Inventory Loans" shall have the meaning given in Section 2(a) of this Amendment. (ii) "Hanover Rights Offering" shall mean the proposed offering by Hanover of rights to purchase shares of common stock of Hanover, for an aggregate gross issuance price of approximately $40,000,000, as described in the press release, dated March 7, 1996, issued by Hanover, a copy of which is annexed as Exhibit A hereto, and the consummation of the transactions involving the exercise of such rights and the issuance of Hanover's common stock in respect of such exercise, including the standby purchase of any of such common stock by NAR. (iii) "Permanent Availability Reserve" shall have the meaning given in Section 3(a) of this Amendment. (iv) "Temporary Loan Period" shall mean the period commencing on the date hereof and ending on the earlier of (A) June 15, 1996 and (B) the first date of issuance of common stock of Hanover upon the exercise of the rights under, and/or in the case of NAR, its standby purchase of common stock of Hanover pursuant to, the Hanover Rights Offering (regardless of the actual number of rights exercised or shares issued or the amounts received by Hanover from such issuance or exercise). (b) Interpretation. For purposes of this Amendment, unless otherwise defined herein, all capitalized terms -2- used herein that are defined in the Loan Agreement, shall have the respective meanings given to such terms in the Loan Agreement. 2. Supplemental Revolving Inventory Loan Availability. (a) Subject to the terms and conditions contained herein and all of the terms and conditions of the Loan Agreement as amended hereby, Lender agrees that, after giving effect to the adjustments to certain availability reserves described in Section 3 hereof, to make available to HDPI from time to time during the Temporary Loan Period and permit to remain outstanding during the Temporary Loan Period, additional Revolving Inventory Loans in the aggregate principal amount of Four Million Dollars ($4,000,000) at any one time outstanding in excess of the aggregate amount of Revolving Inventory Loans otherwise determined by Lender to be available to HDPI pursuant to Section 2.1(b) of the Loan Agreement (the "Supplemental Revolving Inventory Loans"). (b) The Supplemental Revolving Inventory Loans (i) shall constitute part of and shall be deemed Revolving Inventory Loans, and as such shall constitute Obligations of HDPI, for all purposes under the Loan Agreement and the other Financing Agreements, except that during the Temporary Loan Period the sublimit on Revolving Inventory Loans to HDPI contained in Section 2.2(b) shall not be applicable to the Supplemental Revolving Inventory Loans, (ii) shall be subject to (A) Lender's right to establish reserves against availability of Revolving Loans and Letter of Credit Accommodations pursuant to Section 2.6 of the Loan Agreement, and all the other terms and conditions set forth herein and in the Loan Agreement and the other Financing Agreements, except as expressly set forth in clause (i) of this Section, (iii) shall be repaid on or prior to the expiration of the Temporary Loan Period in accordance with the provisions of this Amendment, the Loan Agreement as amended hereby and the other Financing Agreements, and (iv) shall be secured by all of the Collateral. 3. Release of Part of Existing Availability Reserves; Establishment of Permanent Availability Reserve. (a) In place of Lender's continued maintenance of the reserve against Revolving Loan Availability as provided in paragraph 2 of the letter agreement re: Post-Closing Items, dated November 14, 1995, among Lender and Borrowers, Lender shall release the remaining unreleased portion of such reserve, except for $1,000,000 thereof, which shall be maintained at all times hereafter by Lender as a permanent reserve against the Revolving Loan availability of HDPI (the "Permanent Availability Reserve"), and the provisions of such letter agreement providing for release of such previously established availability reserve shall be of no further force and effect. -3- (b) The Permanent Availability Reserve shall be in addition to, and not in limitation of, the rights of Lender to establish other and further reserves against the availability of Revolving Loans and Letter of Credit Accommodations under the Loan Agreement and the other Financing Agreements. 4. Amendment Fee. In addition to all other fees, charges, interest and expenses payable by Borrowers to Lender under the Loan Agreement and the other Financing Agreements, HDPI shall pay to Lender a fee for entering into this Amendment in the amount of Forty Thousand Dollars ($40,000), which amount is fully earned and payable as of the date hereof and may be charged directly to HDPI's loan account maintained by Lender in respect of the Revolving Loans. 5. Consolidated Working Capital. Notwithstanding Section 6.19 of the Loan Agreement, as of the end of each fiscal month occurring during the period commencing on the date hereof and ending on the last day of the Temporary Loan Period, Hanover shall only be required to maintain Consolidated Working Capital, calculated on a consolidated basis for Hanover and its Subsidiaries, of not less than Twenty One Million Dollars ($21,000,000). As of the end of each fiscal month ending after the last day of the Temporary Loan Period, Hanover shall maintain Consolidated Working Capital as provided in Section 6.19 of the Loan Agreement. 6. Consolidated Net Worth. Notwithstanding Section 6.20 of the Loan Agreement, as of the end of each fiscal month occurring during the period commencing on the date hereof and ending on the last day of the Temporary Loan Period, Hanover shall only be required to maintain Consolidated Net Worth, calculated on a consolidated basis for Hanover and its Subsidiaries, of at least Seventy-Five Million Dollars ($75,000,000). As of the end of each fiscal month ending after the last day of the Temporary Loan Period, Hanover shall maintain Consolidated Net Worth as provided in Section 6.20 of the Loan Agreement. 7. Hanover Rights Offering. Upon receipt of proceeds of the Hanover Rights Offering, net of commissions and expenses relating thereto, Hanover shall use all such net proceeds, to the extent necessary to satisfy fully the following requirement, to make a capital contribution or intercompany advance (i) to HDPI to be used by HDPI to repay to Lender all Supplemental Revolving Inventory Loans then outstanding, and (ii) to the Borrowers (including HDPI), to the extent the outstanding Obligations (excluding the aggregate outstanding principal amount of the Term Loans) exceeds the aggregate amount of Revolving Loans determined by Lender pursuant to the lending formulas and subject to the sublimits and reserves provided for or established pursuant to the Loan Agreement as amended hereby, to be used by the respective Borrowers to repay to Lender such excess, in each case under clauses (i) and (ii) before using any such proceeds for any -4- other purpose, whether contemplated by the March 7, 1996 press release annexed hereto as Exhibit A, or otherwise. 8. New Collateral Locations. For purposes of clarifying the scope of Section 5.7(b) of the Loan Agreement, the movement of Inventory or Equipment or other Collateral of a Borrower or Guarantor to a location which has been disclosed on Exhibit C to the Loan Agreement as a location of Collateral of that type of another Borrower or Guarantor, but not that particular Borrower or Guarantor, shall be considered the opening of a new location, subject to the prior notice and other requirements provided in or contemplated by Section 5.7(b). Concurrently herewith, Borrowers and Guarantors shall deliver an updated Exhibit C to the Loan Agreement and shall execute or cause to be executed and/or delivered such additional UCC financing statements and other agreements provided in or contemplated by Section 5.7(b) or in connection with the mergers referred to in Section 9 hereof, in each case as Lender shall require with respect to any Collateral locations for particular Borrowers or Guarantors that were not originally shown on Exhibit C to the Loan Agreement as Collateral locations as to any type(s) of Collateral for those particular Borrowers or Guarantors. 9. Certain Mergers. Anything contained in Section 6.7 of the Loan Agreement to the contrary notwithstanding, the mergers of certain Guarantors as described in the footnotes appearing on the updated Exhibit C to the Loan Agreement delivered pursuant to Section 8 of this Amendment are hereby acknowledged and approved by Lender, Borrowers and Guarantors as of the effective dates thereof. 10. Pledge of Note Payable to LWI. Upon execution and delivery of the promissory note to be executed by Woodworkers Supply, Inc., payable to LWI Holdings, Inc. in connection with the Asset Purchase Agreement, dated March 29, 1996, by and among LWI Holdings, Inc., Hanover and Woodworkers Supply, Inc., LWI Holdings, Inc. shall deliver to Lender, as pledgee pursuant to the Loan Agreement, such note together with an allonge indorsement affixed to such note providing for the payment of all amounts due thereunder to the order of Lender. 11. Representations and Warranties. Borrowers represent, warrant and covenant with and to Lender as follows, which representations, warranties and covenants are continuing and shall survive the execution and delivery hereof, the truth and accuracy of, or compliance with each, together with the representations, warranties and covenants in the other Financing Agreements, being a condition of the effectiveness of this Amendment and a continuing condition of the making or providing of any Revolving Loans or Letter of Credit Accommodations by Lender to Borrowers: (a) This Amendment has been duly authorized, executed and delivered by all necessary action of each of the Borrowers and Guarantors which is a party hereto, and is in full -5- force and effect, and the agreements and obligations of Borrowers and Guarantors, as the case may be, contained herein constitute legal, valid and binding obligations of Borrowers and Guarantors, as the case may be, enforceable against them in accordance with their terms. (b) All of the representations and warranties set forth in the Loan Agreement as amended hereby, and the other Financing Agreements, are true and correct in all material respects, and except to the extent any such representation or warranty is made as of a specified date, in which case such representation or warranty shall have been true and correct as of such date. (c) After giving effect to the provisions of this Amendment, no Event of Default or Incipient Default exists or has occurred and is continuing. 12. Conditions Precedent. Concurrently with the execution hereof, and as a further condition to the effectiveness of this Amendment and the agreement of Lender to the modifications and amendments set forth in this Amendment: (a) Lender shall have received an original of this Amendment, in form and substance satisfactory to Lender and its counsel, duly authorized, executed and delivered by Borrowers and Guarantors; and (b) each of Borrowers and Guarantors shall deliver, or cause to be delivered, to Lender a true and correct copy of any consent, waiver or approval to or of this Amendment, which any Borrower or Guarantor is required to obtain from any other Person, and such consent, approval or waiver shall be in a form reasonably acceptable to Lender. 13. Effect of this Amendment. This Amendment constitutes the entire agreement of the parties with respect to the subject matter hereof, and supersedes all prior oral or written communications, memoranda, proposals, negotiations, discussions, term sheets and commitments with respect to the subject matter hereof. Except as expressly provided herein, no other changes or modifications to the Loan Agreement and no changes or modifications to the Subordination Agreement dated November 14, 1995 between IMR and Lender, or any of the other Financing Agreements, or waivers of or consents under any provisions of any of the foregoing, are intended or implied, and in all other respects the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the effective date hereof. To the extent that any provision of the Loan Agreement or any of the other Financing Agreements conflicts with any provision of this Amendment, the provision of this Amendment shall control. -6- 14. Further Assurances. Borrowers and Guarantors shall execute and deliver such additional documents and take such additional action as may be reasonably requested by Lender to effectuate the provisions and purposes of this Amendment. 15. Governing Law. The rights and obligations hereunder of each of the parties hereto shall be governed by and interpreted and determined in accordance with the internal laws of the State of New York (without giving effect to principles of conflicts of laws). 16. Binding Effect. This Amendment shall be binding upon and inure to the benefit of each of the parties hereto and their respective successors and assigns. 17. Counterparts. This Amendment may be executed in any number of counterparts, but all of such counterparts shall together constitute but one and the same agreement. In making proof of this Amendment, it shall not be necessary to produce or account for more than one counterpart thereof signed by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed on the day and year first written. CONGRESS FINANCIAL CORPORATION By:_________________________ Title:______________________ HANOVER DIRECT PENNSYLVANIA, INC. By:_________________________ Title:______________________ BRAWN OF CALIFORNIA, INC. By:_________________________ Title:______________________ [SIGNATURES CONTINUE ON NEXT PAGE] -7- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] GUMP'S BY MAIL, INC. By:_________________________ Title:______________________ GUMP'S CORP. By:_________________________ Title:______________________ THE COMPANY STORE, INC. By:_________________________ Title:______________________ TWEEDS, INC. By:_________________________ Title:______________________ LWI HOLDINGS, INC. By:_________________________ Title:______________________ AEGIS CATALOG CORPORATION By:_________________________ Title:______________________ HANOVER DIRECT VIRGINIA INC. By:_________________________ Title:______________________ [SIGNATURES CONTINUE ON NEXT PAGE] -8- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER REALTY, INC. By:_________________________ Title:______________________ THE AUSTAD COMPANY By:_________________________ Title:______________________ By their signatures below, the undersigned Guarantors acknowledge and agree to be bound by the applicable provisions of this Amendment: HANOVER DIRECT, INC. By:____________________________ Title:_________________________ AEGIS RETAIL CORPORATION By:____________________________ Title:_________________________ AEGIS SAFETY HOLDINGS, INC. By:____________________________ Title:_________________________ [SIGNATURES CONTINUE ON NEXT PAGE] -9- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] AEGIS VENTURES, INC. By:____________________________ Title:_________________________ AMERICAN DOWN & TEXTILE COMPANY By:____________________________ Title:_________________________ BRAWN WHOLESALE CORP. By:____________________________ Title:_________________________ THE COMPANY FACTORY, INC. By:____________________________ Title:_________________________ THE COMPANY OFFICE, INC. By:____________________________ Title:_________________________ COMPANY STORE HOLDINGS, INC. By:____________________________ Title:_________________________ [SIGNATURES CONTINUE ON NEXT PAGE] -10- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] D.M. ADVERTISING, INC. By:____________________________ Title:_________________________ GUMP'S CATALOG, INC. By:____________________________ Title:_________________________ GUMP'S HOLDINGS, INC. By:____________________________ Title:_________________________ HANOVER CASUALS, INC. By:____________________________ Title:_________________________ HANOVER CATALOG HOLDINGS, INC. By:____________________________ Title:_________________________ HANOVER FINANCE CORPORATION By:____________________________ Title:_________________________ [SIGNATURES CONTINUE ON NEXT PAGE] -11- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER LIST MANAGEMENT, INC. By:____________________________ Title:_________________________ HANOVER VENTURES, INC. By:____________________________ Title:_________________________ LEICHTUNG OF MICHIGAN, INC. By:____________________________ Title:_________________________ LWI RETAIL, INC. By:____________________________ Title:_________________________ SCANDIA DOWN CORPORATION By:____________________________ Title:_________________________ TWEEDS OF VERMONT, INC. By:____________________________ Title:_________________________ [SIGNATURES CONTINUE ON NEXT PAGE] -12- [SIGNATURES CONTINUED FROM PREVIOUS PAGE] YORK FULFILLMENT COMPANY, INC. By:____________________________ Title:_________________________ AUSTAD HOLDINGS, INC. By:____________________________ Title:_________________________ -13- EX-10 4 EXHIBIT 10(C) Exhibit 10(c) THIRD SUPPLEMENTAL INDENTURE THIRD SUPPLEMENTAL INDENTURE, dated as of April 16, 1996 (the "Third Supplemental Indenture"), to the Indenture, dated as of August 17, 1993, as supplemented by a First Supplemental Indenture, dated as of March 25, 1995, and a Second Supplemental Indenture, dated as of November 14, 1995 (as so supplemented, the "Indenture"), among THE HANOVER COMPANIES, a Nevada corporation (the "Company"), THE HORN & HARDART COMPANY, a Nevada corporation (the "Guarantor"), the subsidiaries of the Company which have executed the Indenture (the "Guarantor Subsidiaries"), and FIRST TRUST NATIONAL ASSOCIATION, a national association, as Trustee (the "Trustee"). WHEREAS, the Company, the Guarantor and the Trustee heretofore entered into the Indenture; WHEREAS, the Company and the Guarantor were merged with and into Hanover Direct, Inc., a Delaware corporation ("HDI"), pursuant to the provisions of the Agreements and Plans of Merger, dated as of April 15, 1993, between each of the Company and the Guarantor and HDI and, when the mergers became effective, HDI became responsible for the obligations of, and succeeded to and was substituted for, the Company and the Guarantor, respectively, pursuant to Section 5.2 of the Indenture; WHEREAS, pursuant to the Indenture, $14,000,000 aggregate principal amount of HDI's 9.25% Senior Subordinated Notes due August 1, 1998 (the "Securities") remain outstanding; WHEREAS, Sun America Life Insurance Company ("Sun Life") was, until November 14, 1995, the sole Holder of all the outstanding Securities; WHEREAS, as of November 14, 1995, Intercontinental Mining & Resources Incorporated ("IMR") purchased all of the outstanding Securities from Sun Life; WHEREAS, Section 9.2 of the Indenture provides that HDI, the Guarantor Subsidiaries and the Trustee may amend the Indenture with the written consent of the Holders of at least a majority in principal amount of the then outstanding Securities; and WHEREAS, HDI and the Guarantor Subsidiaries desire to amend the Indenture as set forth herein and IMR has provided its written consent to the substance of such amendments. NOW THEREFORE, each party agrees as follows: ARTICLE I AMENDMENTS 1.1 Maintenance of Consolidated Net Worth. Notwithstanding Section 4.12 of the Indenture, as of the end of each fiscal month occurring during the period commencing on the date hereof and ending on the last day of the Temporary Loan Period, the Company shall only be required to maintain Consolidated Net Worth, calculated on a consolidated basis for the Company and its Subsidiaries, of at least Seventy One Million Two Hundred Fifty Thousand Dollars ($71,250,000). As of the end of the Temporary Loan Period, the Company shall maintain Consolidated Net Worth as provided in Section 4.12 of the Indenture. 1.2 Working Capital Adequacy. Notwithstanding Section 4.33 of the Indenture, as of the end of each fiscal month occurring during the period commencing on the date hereof and ending on the last day of the Temporary Loan Period, the Company shall only be required to maintain Working Capital, calculated on a consolidated basis for the Company and its Subsidiaries, of at least Nineteen Million Nine Hundred Fifty Thousand Dollars ($19,950,000). As of the end of the Temporary Loan Period, the Company shall maintain Working Capital Adequacy as provided in Section 4.33 of the Indenture. 1.3 Definitions. As used herein, the following terms shall have the respective meanings set forth below, and Section 1.1 of the Indenture shall be deemed and is hereby amended to include, in addition and not in limitation, each of the following: "Hanover Rights Offering" means the proposed offering by the Company of rights to purchase shares of Common Stock of the Company, for an aggregate gross issuance price of approximately $40,000,000, as described in the press release, dated March 7, 1996, issued by the Company, a copy of which is annexed hereto as Exhibit A, and the consummation of the transactions involving the exercise of such rights and the issuance of the Company's Common Stock in respect of such exercise, including the standby purchase by NAR. "Temporary Loan Period" means the period commencing on the date hereof and ending on the earlier of (A) June 15, 1996 and (B) the closing of the issuance and sale of shares of Common Stock pursuant to the Hanover Rights Offering. -2- ARTICLE II MISCELLANEOUS 2.1 Except as expressly supplemented by this Third Supplemental Indenture, the Indenture is in all respects hereby ratified and confirmed and shall remain in full force and effect. 2.2 This Third Supplemental Indenture is executed and shall constitute an indenture supplemental to the Indenture and shall be construed in connection with and as part of the Indenture. This Third Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York. 2.3 The recitals contained herein shall be taken as the statements of HDI and the Guarantor Subsidiaries, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Third Supplemental Indenture. 2.4 This Third Supplemental Indenture may be executed in any number of counterparts each of which shall be an original, but all such counterparts shall together constitute but one and the same instrument. 2.5 Capitalized terms used herein but not otherwise defined shall have the meanings ascribed to them in the Indenture. 2.6 This Third Supplemental Indenture, together with the Indenture, and any other instruments or documents delivered or to be delivered in connection herewith or therewith represent the entire agreement and understanding concerning the subject matter hereof among the parties hereto, and supersede all prior proposals, agreements, understandings, negotiations and discussions, representations, warranties, commitments, offers and contracts concerning the subject matter hereof, whether oral or written. 2.7 Upon the execution and delivery of this Third Supplemental Indenture, no Event of Default (and no event that, after notice or lapse of time, or both, would become an Event of Default) shall be created or have occurred and be continuing that is not otherwise waived pursuant to any waiver executed by the Holders. -3- IN WITNESS WHEREOF, the parties hereto have caused this Third Supplemental Indenture to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. HANOVER DIRECT, INC. By: /s/ WAYNE GARTEN ------------------------ Title: [CORPORATE SEAL] ATTEST: /s/ MICHAEL P. SHERMAN - ----------------------------- HANOVER DIRECT PENNSYLVANIA, INC. BRAWN OF CALIFORNIA, INC. HANOVER DIRECT NEW JERSEY, INC. GUMP'S BY MAIL, INC. GUMP'S HOLDINGS, INC. HANOVER LIST MANAGEMENT INC. HANOVER SYNDICATION CORP. YORK FULFILLMENT COMPANY, INC. COMPANY STORE HOLDINGS, INC. TWEEDS, INC. HANOVER CASUALS, INC. HANOVER DIRECT VIRGINIA INC. HANOVER HOLDINGS INC. HANOVER VENTURES, INC. LWI HOLDINGS, INC. HANOVER REALTY, INC. HANOVER CATALOG HOLDINGS, INC. By: /s/ EDWARD J. O'BRIEN ----------------------- Title: [CORPORATE SEAL] ATTEST: /s/ MICHAEL P. SHERMAN - ----------------------------- -4- FIRST TRUST NATIONAL ASSOCIATION, as Trustee By: /s/ RICK PROKOFCH ------------------------ Title: TRUST OFFICER [CORPORATE SEAL] ATTEST: - ----------------------------- -5- EX-27 5 EXHIBIT 27
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER DIRECT, INC AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED MARCH 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY, EXCEPT FOR GROSS ACCOUNTS RECEIVABLE AND THE ALLOWANCE FOR DOUBTFUL ACCOUNTS, BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-28-1996 MAR-30-1996 2,750 0 34,216 (2,971) 87,479 169,564 84,042 (27,528) 288,397 128,209 79,180 6,412 0 62,504 8,945 288,397 165,527 165,527 108,438 173,260 0 0 1,663 (9,227) 250 (9,477) 0 0 0 (9,477) (0.10) (0.10)
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