-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, RYeiw8Dbxjq9hLfWufXlu9ZhTxTOGE3TL99831oYHHhZ2pb2PzND4MxuXu1dUt5r EZLoGoBxP64vM3hOaEfACw== 0000950123-94-000483.txt : 19940314 0000950123-94-000483.hdr.sgml : 19940314 ACCESSION NUMBER: 0000950123-94-000483 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19940101 FILED AS OF DATE: 19940311 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANOVER DIRECT INC /DE// CENTRAL INDEX KEY: 0000320333 STANDARD INDUSTRIAL CLASSIFICATION: 5961 IRS NUMBER: 138053260 STATE OF INCORPORATION: NV FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-08056 FILM NUMBER: 94515525 BUSINESS ADDRESS: STREET 1: 1500 HARBOR BLVD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 BUSINESS PHONE: 2018653800 FORMER COMPANY: FORMER CONFORMED NAME: HORN & HARDART CO /NV/ DATE OF NAME CHANGE: 19920703 10-K 1 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended January 1, 1994 Commission file number 1-12082 HANOVER DIRECT, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-0853260 - ---------------------------------- ------------------------------------ (State of incorporation) (I.R.S. Employer Identification No.) 1500 HARBOR BOULEVARD, WEEHAWKEN, NEW JERSEY 07087 - -------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (201) 863-7300 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered - -------------------------------- ----------------------- Common Stock, $.66 2/3 Par Value American Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None ---- Indicate by check mark whether the 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 _____ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. _____ As of March 9, 1993, the aggregate market value of the voting stock held by non-affiliates of the registrant was $200.2 million (based on the closing price of the Common Stock on the American Stock Exchange on March 9, 1994). As of March 9, 1994, the registrant had 82,933,177 shares of Common Stock and 234,900 shares of Series A Preferred Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Proxy statement for the 1994 Annual Meeting of Shareholders is incorporated by reference into Part III of this Annual Report on Form 10-K. 2 P A R T I ITEM 1. BUSINESS GENERAL Hanover Direct, Inc. (the "Company") is a leading direct specialty retailer that publishes a portfolio of 14 branded specialty catalogs offering home furnishings, general merchandise and apparel. The Company's catalogs include DOMESTICATIONS, the nation's leading specialty home textile catalog, which has grown rapidly with revenues increasing from approximately $30 million in 1987 to approximately $311 million in 1993. The Company's portfolio of catalogs also includes COLONIAL GARDEN KITCHENS, a leading specialty catalog featuring worksaving and lifestyle enhancing items for the kitchen and home. During 1993, the Company mailed approximately 322 million catalogs and had total revenues of approximately $643 million. The Company maintains a proprietary customer list, containing approximately 19 million names of customers who have made purchases from at least one of the Company's catalogs within the past 36 months. Approximately seven million of the names on the list represent customers who have made purchases from at least one of the Company's catalogs within the last 12 months. The Company is incorporated in Delaware with its principal executive office at 1500 Harbor Boulevard, Weehawken, New Jersey 07087. The Company's telephone number is (201) 863-7300. HISTORY AND ORGANIZATION History. The Company's direct marketing subsidiary, founded in 1934, initially operated as a chain of specialty retail women's fashion stores in Pennsylvania and nearby states under the name Lana Lobell. In 1950, it published its first catalog offering women's fashion by mail and, by the end of the decade, a majority of the subsidiary's revenues was derived from catalog sales. In 1962, the subsidiary first published HANOVER HOUSE, a catalog featuring gifts, seasonal, household and novelty items. The Company's direct marketing subsidiary was acquired in 1972 by The Horn & Hardart Company ("H&H"), a restaurant company founded in 1911. The Company's direct marketing subsidiary continued its growth through internal development of new and existing catalogs utilizing its proprietary customer list as well as through acquisitions of other catalog companies. Restructuring. The Company incurred a substantial amount of debt in connection with the growth of its restaurant business in the 1970s and 1980s. As the Company began the disposition of its restaurant operations in 1989, management believed that the underlying asset values would at least enable it to repay the debts secured thereby. However, the Company's withdrawal from the restaurant business coincided with a severe decline in real estate values in the northeastern United States and elsewhere in the country. Accordingly, 1 3 the Company failed to generate sufficient cash proceeds to repay all of the associated debt. As a result, a high level of debt remained and placed an excessive burden on the cash flows of the direct marketing business, the Company's only source of internally generated cash. By early 1991, vendors and factors were restricting the availability of trade credit on normal terms, hampering the Company's ability to purchase merchandise. Because of strong demand for the merchandise in the Company's catalogs and its inability to obtain adequate trade credit with which to purchase merchandise, the Company's backorder level increased substantially and it incurred operating losses. In response, the Company began to take additional actions and explore financial alternatives available to it to solve its cash flow problems, including the sale of an equity interest in the Company. In the fall of 1991, NAR Group Limited, a British Virgin Islands corporation (together with its affiliates, "NAR"), effectively gained control of the Company. NAR is a private investment holding company that is a joint venture between the family of Alan G. Quasha, a Director and the Chairman of the Board of the Company, and Compagnie Financiere Richemont A.G., a Swiss public company engaged in tobacco, luxury goods and other businesses. NAR acquired a 48.9% interest in the Company through an equity investment of $40 million and the extension of a line of credit of up to $30 million (later increased to $50 million) and implemented a restructuring program consisting of operational changes, debt reduction and disposition of substantially all of the Company's remaining non-direct marketing assets. By the end of 1992, through the sale of assets and a series of transactions, including a rights offering, a sale of preferred stock and exchange offers, the Company reduced its debt and lease obligations (excluding working capital debt) by $182.8 million from September 1991. As a result of these transactions, NAR increased its interest in the Company to approximately 56% through an additional equity investment of approximately $38.1 million. In September 1993, the Company changed its name to Hanover Direct, Inc. and eliminated its two-tier holding company structure. This reorganization was accounted for similarly to a pooling-of-interests and, accordingly, the Company's financial statements include the results of H&H and The Hanover Companies ("THC") for all applicable periods presented. RECENT ACQUISITIONS AND VENTURES During 1993, the Company made the following acquisitions: Gump's. In May 1993, the Company acquired substantially all of the assets of Gump's Inc., the well known San Francisco retailer and a leading upscale catalog marketer of exclusive gifts, for a total purchase price of $13.2 million, consisting of $6.9 million in cash and $6.3 million of Common Stock. The Company is relocating its retail store to a new location in downtown San Francisco, which is scheduled to open in the fall of 1994. The Company Store. In August 1993, the Company acquired in Chapter 11 bankruptcy proceedings substantially all of the assets of Company Store Holdings, Inc., an upscale direct marketer of down comforters and other down and related products for the home, sold under THE COMPANY STORE and SCANDIA DOWN names, for a total purchase price of $7 million, consisting of the issuance of $4.6 million of notes and $2.4 million of Common Stock. 2 4 Tweeds. In September 1993, the Company purchased all of the outstanding stock of Tweeds, the European inspired women's fashion catalog, for a total purchase price of $8.8 million, consisting of the assumption of $5.1 million of liabilities, $.1 million in cash and $3.6 million of Common Stock. In addition, the Company has recently entered into the following ventures: Sears. In January 1994, the Company entered into a licensing agreement (the "Sears Agreement") with the direct marketing subsidiary of Sears Roebuck and Co. ("Sears"), to produce specialty catalogs for the 23 million customers of the recently discontinued Sears catalog. The specialty catalogs include: Show Place, based on the DOMESTICATIONS catalog, Great Kitchens, based on the COLONIAL GARDEN KITCHENS catalog, and Beautiful Style, based on the SILHOUETTES catalog. The Sears Agreement has an initial three-year term and continues thereafter unless terminated by either party. Profits and losses from the venture are to be shared between the parties on an equal basis. The Company also issued to Sears a performance warrant to purchase 3.5 million shares of Common Stock in 1999 if the licensed business with Sears has revenues of at least $250 million and earnings before interest and taxes of at least $30 million in 1998. Alternately, Sears will be entitled to purchase 7 million shares of Common Stock in 1999 if the licensed business with Sears has revenues of at least $500 million and earnings before interest and taxes of at least $60 million in 1998. If neither of these goals is achieved, the performance warrant will expire unexercised in 1999. The warrant exercise price is $10.57 per share. The Company is obligated to meet various operational performance standards and, if the Company is unable to meet these standards, Sears would be entitled to terminate the agreement. The Company is also entitled to terminate the agreement if Sears fails to comply with any material provision thereof. Show Place, Great Kitchens and Beautiful Style are trademarks of Sears. The Safety Zone. In September 1993, the Company acquired 20% of the outstanding common stock of Aegis Safety Holdings, Inc. ("Aegis"), a direct marketer of safety and anti-hazard products through The Safety Zone catalog. The consideration for the acquisition was the provision by the Company of certain catalog fulfillment and production services to Aegis at the Company's cost until August 1998, subject to certain early termination provisions. The Company also acquired an option to increase its ownership to 50% of Aegis' common stock until the end of 1996. Aegis has an option to require the Company to acquire all of Aegis' then outstanding stock after December 31, 1998 if the Company has exercised its option and certain other conditions have been satisfied. The Company has agreed to extend a secured working capital line of up to $1 million to Aegis. Aegis had approximately $9 million in net sales for the eleven months ended January 1, 1994. Boston Publishing Company. In February 1994, the Company acquired a 20% ownership interest in Boston Publishing Company, Inc. ("BPC"), the publisher of The Museum Collection, a catalog featuring reproductions, replicas and adaptations of items contained in museum collections, and Finishing Touches, a catalog featuring items for the home, in consideration for providing $3.0 million of secured working capital financing, a $.75 million short-term loan and a $.5 million convertible term loan. As part of the acquisition the Company will provide BPC with access to the Company's proprietary customer list and catalog production assistance. BPC had approximately $12 million in revenues in 1993. 3 5 THE COMPANY'S CATALOGS Each of the Company's specialty catalogs targets distinct market segments and develops and executes its own merchandising strategy based on a focused assortment of merchandise that is designed to meet the needs and preferences of its target customers. Through market research and ongoing testing of new products and concepts, the Company determines, on a catalog by catalog basis, the appropriate price points, service levels, mailing plans and presentation of its products. The Company has placed an increasing emphasis on the use of exclusive or private label products in a number of its catalogs, including DOMESTICATIONS, TWEEDS and THE COMPANY STORE, to further enhance the brand identity of the catalog. The Company's specialty catalogs typically range in size from 44 to 100 pages with four to six new editions per year depending on the seasonality and fashion content of the products offered. Each edition may be mailed several times each year with slight variations in format and content. Depending on the catalog's product focus, approximately 30% to 70% of the merchandise assortment in each edition is seasonal or new items. Catalogs featuring women's fashions generally have the highest new product introduction rate. Each catalog employs the services of an outside creative agency or has its own creative staff which is responsible for the design, layout, copy, feel and theme of the book. Generally, the initial sourcing of new merchandise for a catalog begins two to six months before the catalog is mailed. During 1993, the Company streamlined its catalog operations into two main groups, Apparel and Non-Apparel. Revenues for 1993 and the percent of total revenues for 1993 for each of the Company's catalogs are set forth below:
PERCENT OF REVENUES (a) TOTAL REVENUES ------------ -------------- (IN THOUSANDS) NON-APPAREL GROUP DOMESTICATIONS $ 310,573 48.3% HANOVER HOUSE 41,869 6.5 COLONIAL GARDEN KITCHENS 39,604 6.2 TAPESTRY 31,584 4.9 GUMP'S (b) (c) 22,653 3.5 THE COMPANY STORE (b) 15,244 2.4 MATURE WISDOM 13,420 2.1 Other (d) 2,478 .4 Discontinued Catalogs 6,451 1.0 --------- ---- Total Non-Apparel $ 483,876 75.3% --------- ---- APPAREL GROUP INTERNATIONAL MALE $44,759 7.0% SILHOUETTES 25,268 3.9 SIMPLY TOPS 23,988 3.7 ESSENCE BY MAIL 16,475 2.6 UNDERGEAR 12,825 2.0 TWEEDS (b) 9,280 1.5 Sale catalogs and other(e) 12,773 2.0 Discontinued Catalogs 13,267 2.0 --------- ---- Total Apparel $ 158,635 24.7% --------- ---- Total Company (f) $ 642,511 100% ========= ====
4 6 (a) Revenues are net of returns. (b) Revenues were recorded for these catalogs from the dates of their respective acquisitions in 1993. (c) Represents revenues from both the GUMP'S catalog and retail store. (d) Represents revenues from the outlet store and surplus inventory liquidation. (e) Represents revenues from sale catalogs, the outlet stores and surplus inventory liquidation. (f) Excludes Safety Zone which is accounted for on the equity method. Non-Apparel Group. The catalogs comprising the Non-Apparel Group are as follows: DOMESTICATIONS(R): DOMESTICATIONS is the nation's leading specialty home textiles catalog and the preferred fashion decorating sourcebook for today's value-oriented and style-conscious consumer. DOMESTICATIONS features sheets, towels, comforters, tablecloths and other items for the home. The catalog has enjoyed significant growth and success, experiencing a 48% compound annual growth rate during the period from 1987 to 1993. The layout and presentation of DOMESTICATIONS has a decorator look offering coordinated decorating ideas for the home. Over 60% of the items offered in the catalog are exclusive or private label, designed by its in-house staff. HANOVER HOUSE(R): HANOVER HOUSE features gifts, seasonal, household and novelty items. HANOVER HOUSE is currently being repositioned to upgrade its presentation and product mix. COLONIAL GARDEN KITCHENS(R): COLONIAL GARDEN KITCHENS is a leading specialty catalog, featuring work saving and lifestyle enhancing items for the kitchen and home. The Company is currently testing a new upscale kitchen and home product catalog called KITCHEN & HOME. TAPESTRY(R): TAPESTRY is a value-oriented home accessories catalog featuring flatware, dinnerware, furniture, rugs and other home decorating items. GUMP'S(R): GUMP'S is the well known San Francisco retailer and a leading upscale catalog marketer of exclusive gifts. THE COMPANY STORE(R): THE COMPANY STORE is an upscale direct marketer of down comforters and other down and related products for the home. MATURE WISDOM(R): MATURE WISDOM is one of the leading general merchandise catalogs catering to the needs of older customers featuring fashions, health care products and other items for greater ease of living. 5 7 THE SAFETY ZONE: The Safety Zone is a direct marketer of safety and anti-hazard products in which the Company has a 20% interest. Apparel Group. The catalogs comprising the Apparel Group are as follows: INTERNATIONAL MALE(R): INTERNATIONAL MALE is an authority for unique men's fashion with an international flair. UNDERGEAR(R): UNDERGEAR is a leader in activewear, workout wear and fashion underwear for men. SILHOUETTES(R): SILHOUETTES is a women's fashion catalog featuring special occasion and career fashions in sizes 14 to 26. SIMPLY TOPS(R): SIMPLY TOPS is a source for unique apparel, supplying moderate-priced clothing to women interested in embellished clothing which makes a statement. ESSENCE BY MAIL(R): ESSENCE BY MAIL is the original catalog featuring women's fashions and home decorating items reflecting African-American culture and is a 50% joint venture with Essence Communications Inc., publisher of Essence magazine. TWEEDS(R): TWEEDS is a European inspired women's fashion catalog featuring relaxed fashions uniquely designed by its in-house staff. MARKETING AND DATABASE MANAGEMENT The Company maintains one of the largest proprietary customer lists in the industry containing approximately 19 million names of customers who have purchased from one of the Company's catalogs within the past 36 months. The list contains name, gender, residence and historical transaction data (including catalog(s) purchased from, product classifications, recency of purchase, average order size and payment method). This database is selectively enhanced with demographic, socioeconomic, lifestyle and purchase behavior overlays from other sources. The Company utilizes proprietary modelling and sophisticated segmentation analysis, on a catalog by catalog basis, to devise catalog marketing and circulation strategies which are intended to maximize the contribution by customer by catalog. This analysis is the basis for the Company's determination of which of the Company's 14 catalogs (and how frequently) will be mailed to a particular customer as well as the promotional incentive content of the catalog(s) such customer receives. 6 8 In addition to mailing to customers who exist on its database, the Company has an ongoing prospect acquisition program designed to attract new customers on a cost effective basis. The primary source of new customers for the Company's catalogs is lists that have been rented from other mailers and compilers. Prior to mailing to these non-proprietary lists, the lists are edited using statistical segmentation tools to enhance their probable performance. Other sources of new customers include space advertisements, promotional inserts in outbound merchandise packages and friend's name cards inserted in mailed catalogs. During 1993, the Company mailed approximately 322 million catalogs. Of the approximately 19 million names on the Company's proprietary customer list, approximately seven million customers, or approximately 37%, have made at least one purchase from one of the Company's catalogs within the preceding 12 months. TELEMARKETING AND CUSTOMER SERVICE The Company designs its service standards to exceed its customers' expectations and supports this with an unconditional merchandise guarantee. Under the Company's return policy, a customer may return merchandise for a refund, exchange or replacement if not satisfied for any reason. The Company's return rate for 1993 was approximately 13% of gross shipments. In 1993, the Company received approximately 64% of its orders through its toll-free telephone service which offers customer access seven days per week, 24 hours per day. Telemarketing facilities are located in San Diego, California, Hanover, Pennsylvania, DeSoto, Texas, Roanoke, Virginia and La Crosse, Wisconsin. The telemarketing facilities utilize state-of-the-art telephone switching equipment which enables the Company to route calls between telemarketing centers and enhance prompt customer service. During 1993, the Company's telemarketing centers processed approximately 11.7 million calls and received approximately 5.6 million orders. The remaining calls included requests for copies of catalogs, order status inquiries and other general inquiries. The Company trains its telemarketing service representatives to be courteous, efficient and knowledgeable about the Company's products. Each telemarketing service representative initially receives 40 hours of training in selling products, services, systems and communication skills through simulated as well as actual phone calls. A substantial portion of the evaluation of telemarketing service representatives' performance is based on meeting customer service standards. While primarily trained with product knowledge to serve customers of one or more specific catalogs, telemarketing service representatives also receive cross-training which enables them to take overflow calls from other catalogs. The Company utilizes customer surveys as an important measure of performance and customer satisfaction. The Company's computerized database provides its telemarketing service representatives with information concerning a customer's previous orders, permitting the service representative to establish a personalized dialogue with the customer. Telemarketing service representatives are provided selling information which they are trained to use to describe promotional items. 7 9 DISTRIBUTION The Company maintains distribution centers in Hanover, Pennsylvania, DeSoto, Texas, Roanoke, Virginia and LaCrosse, Wisconsin. The Company's long range plan is to maximize efficiencies in merchandise handling and distribution by consolidating the warehousing and distribution of like items in specific fulfillment centers. The Company plans to consolidate the Apparel Group catalogs into the Tweeds Roanoke facility and to construct in 1994 a 500,000 square foot state-of-the-art facility on a separate site in Roanoke which, upon its completion, will handle all of DOMESTICATIONS fulfillment needs. The Company's facilities processed approximately 13 million packages in 1993. The Company obtains rate discounts from the United States Postal Service by automatically weighing each parcel and sorting and trucking packages to a number of United States Postal Service drop points throughout the country. The Company's size enables it to efficiently handle packages in this manner. From time to time, the Company uses United Parcel Service, Federal Express and other expedited delivery services. The Company, on average, shipped approximately 48,000 packages per day in 1993. PURCHASING The Company's large sales volume permits it to achieve a variety of purchasing efficiencies, including the ability to obtain prices and terms which are more favorable than those available to smaller companies. Major goods and services used by the Company are purchased or leased from selected suppliers by its central buying staff. These goods and services include: paper, catalog printing and printing related services such as order forms and color separations, communication systems including telephone time and switching devices, packaging materials, expedited delivery services, computers and associated network software and hardware. The Company's objective is to achieve favorable "total costs" reflecting a long-term mutual commitment by the Company and each supplier for competitive rates and terms as well as the quality, future maintenance, replacement and modification needs of the Company. The Company typically enters into annual agreements for paper and printing with a limited number of suppliers. These agreements permit periodic price increases or decreases based on prevailing market conditions, changes in supplier costs and continuous productivity improvements. The Company's telephone systems are typically contracted for on a three to four year basis. During 1993, the Company purchased approximately 55 thousand tons of paper and approximately 60 million minutes of telephone time. The Company believes it has developed and maintains strong relationships with suppliers for key goods and services. MANAGEMENT INFORMATION SYSTEMS The Company is currently in the process of upgrading its management information systems by implementing new integrated software and migrating from a centralized mainframe to mid-range mini-computers. The migration of the Company's business applications is the first phase of the Company's overall systems plan which defines the mid- and long-term systems and computing strategy for the Company. As part of this plan, the Company has purchased and will be installing new integrated software for use in managing all phases of the Company's operations. The new software is an upgraded 8 10 version of existing software installed in over 60 mail order companies which has been designed to meet the Company's requirements as a high volume publisher of multiple catalogs. The Company plans to bring the new systems on-line for several catalogs in 1994 with expected completion in 1995. Delivery, installation and implementation are expected to commence shortly. The Company currently estimates that the total cost to install and implement the new systems, including the cost of dedicated internal personnel, will be approximately $13 to $15 million. The new software system is an on-line, real-time system which includes order processing, fulfillment, inventory management, list maintenance and reporting. The implementation of the software will provide the Company with a flexible system that offers highly sophisticated data manipulation, a high degree of marketing-oriented and fulfillment functionality and extensive reporting capabilities. The new management information systems are designed to permit the Company to achieve substantial improvements in the way its financial, merchandising and inventory functions are performed. The new system was selected to support the Company's decentralized operating structure because it can be customized for and by each catalog unit. CREDIT MANAGEMENT The Company's customers are able to purchase merchandise using checks or money orders, the Company's credit cards or third party credit cards. Several of the Company's catalogs, including DOMESTICATIONS, INTERNATIONAL MALE, and GUMP'S, offer their own credit cards. Approximately 73% of 1993 sales were paid using third party credit cards and 8% were paid with the Company's credit cards. In December 1992, the Company entered into a three year $75 million credit facility with General Electric Credit Corporation ("GECC") which provides for the sale and servicing of accounts receivable originating from the Company's revolving credit cards. The Company is obligated to repurchase uncollectible accounts and is required to maintain a specified percentage of all outstanding receivables sold under the program as a deposit with GECC to service its obligations under the agreement. The Company is required to pay certain servicing fees to GECC and the Company earns the finance charge income that GECC charges to the accounts. GECC's servicing responsibilities include credit processing, collections, billing/payment processing, reporting and credit card issuance. INVENTORY MANAGEMENT The Company's inventory management strategy is designed to maintain inventory levels that provide optimum in-stock positions while maximizing inventory turnover rates and minimizing the amount of unsold merchandise at the end of each season. The Company manages inventory levels by monitoring sales and fashion trends and making purchasing adjustments as necessary and by promotional sales. Additionally, the Company sells excess inventory in its special sale catalogs, its outlet stores and to jobbers. The Company acquires products for resale in its catalogs from numerous domestic and foreign vendors. No single source supplied more than 8% of the Company's products in 1993. The Company's vendors are selected based on their ability to reliably meet the Company's production and quality requirements, as well as their financial strength and willingness to meet the Company's needs on an ongoing basis. 9 11 EMPLOYEES The Company currently employs approximately 2,280 persons on a full time basis and approximately 530 persons on a part time basis. Approximately 120 employees of The Company Store manufacturing facility are members of the International Ladies Garment Workers Union. The Company believes its relations with its employees are good. SEASONALITY Although the Company experiences quarterly variations in sales, such variations are due primarily to fluctuations in circulation levels rather than seasonality and are further ameliorated by the Company's diversified portfolio of catalogs. The Company traditionally mails more catalogs in the second half of the year. COMPETITION The mail order catalog business is highly competitive. The Company's catalogs compete with other mail order catalogs and retail stores, including department stores, specialty stores and discount stores. Competitors also exist in each of the Company's catalog specialty areas, including Spiegel and Chadwick's of Boston in women's fashion; Spiegel, Touch of Class, Linen Source, Lands' End Coming Home and Horchow in home furnishings; Lillian Vernon, Taylor Gift, Williams Sonoma, Chef's Corner, Harriet Carter and Dr. Leonards in general merchandise; and Bachrach's, Collections, Road Runner Sports and J. Crew in men's fashions. The Company also considers general catalog companies such as J.C. Penney and retail stores as part of its competition. A number of the Company's competitors have substantially greater financial, distribution and marketing resources than the Company. The recent substantial sales growth in the direct marketing industry has encouraged the entry of many new competitors and an increase in competition from established companies. The Company believes that the principal bases upon which it competes are quality, value, service, product offerings, catalog design, convenience, efficiency and safety. TRADEMARKS Each of the Company's catalogs has its own federally registered trademark. DOMESTICATIONS, TAPESTRY, HANOVER HOUSE, COLONIAL GARDEN KITCHENS, MATURE WISDOM, INTERNATIONAL MALE, UNDERGEAR, SILHOUETTES, SIMPLY TOPS, GUMP'S, TWEEDS, THE COMPANY STORE, FASHION FAVORITES, FASHION GALAXY and OUTTAKES are registered trademarks of the Company. "Essence" is a trademark used by the Company under license by Essence Communications, Inc. The Company also owns numerous trademarks, copyrights and service marks on its logos, products and catalog offerings. The Company has also protected various trademarks internationally. The Company vigorously protects such marks and believes there is substantial goodwill associated with them. GOVERNMENT REGULATION The Company is subject to Federal Trade Commission regulations governing its advertising and trade practices, Consumer Product Safety Commission regulations governing the safety of the products it sells in its catalogs and other regulations relating to the sale of merchandise to its customers. The Company is also subject to the Department of Treasury-Customs regulations 10 12 with respect to any goods it imports. To date, such governmental regulations have not had a material adverse effect on the Company's business. The imposition of a sales and use tax collection obligation on out-of-state catalog companies in states to which they ship products is the subject of a case recently decided by the United States Supreme Court. While the Court reaffirmed an earlier decision which allowed direct marketers to make sales into states where they do not have a physical presence without collecting sales taxes with respect to such sales, the Court further noted that Congress has the power to change this law. The Company believes that it collects sales tax in all jurisdictions where it is currently required to do so. ITEM 2. PROPERTIES The Company's corporate headquarters are located in a modern 84,700-square-foot facility in Weehawken, New Jersey. The facility houses merchandising and marketing personnel, an art department including photographic studios, catalog production personnel and corporate and administrative offices. The Weehawken facility is leased for a 15-year term expiring in 2005. The Company also occupies a leased office building in Hanover, Pennsylvania and five warehouse/fulfillment locations in the Hanover area providing a total of approximately 1,200,000 square feet of space, including its principal fulfillment center consisting of a twenty acre leasehold with a 265,000 square foot warehouse and other improvements. The other four warehouse/fulfillment locations are leased pursuant to short-term leases. The Company intends to consolidate all or most of the facilities with short-term leases into its new fulfillment center that will be constructed for DOMESTICATIONS in Roanoke, Virginia. Administrative offices in Hanover, Pennsylvania are located in a two- story building of approximately 123,000 square feet, with a lease expiring in 1994, which contains renewal options for three five-year periods. Brawn of California, Inc., occupies 30,000 square feet of new office space in San Diego, California pursuant to a fifteen-year lease that expires in 2004. Gump's occupies 4,700 square feet of office space in addition to 49,800 square feet of space for its retail store in San Francisco, California. In addition, Gump's occupies a leased warehouse/fulfillment center in DeSoto, Texas of approximately 43,000 square feet. This lease expires in 1995. The Company Store occupies 185,000 square feet for its warehouse/fulfillment center pursuant to a short-term lease. Additionally, a 150,000 square ft. manufacturing and assembly facility and 58,000 square ft. telemarketing and customer service facility in La Crosse are owned. In January 1994, the Company purchased for $1.1 million a 50% interest in Blue Ridge Associates (the "Partnership"), a partnership which owns the Tweeds Roanoke, Virginia fulfillment center. In addition, the Partnership and the Company entered into a 15 year lease covering the facility. Under the terms of the lease agreement and subject to certain conditions specified therein, the Partnership, as lessor, agreed to expand the facility by not less than 100,000 square feet in accordance with plans and specifications reasonably acceptable to the parties. The expanded facility will be leased to the Company on the same terms as the existing facility, subject to an adjustment in the amount of rent payments and the expiration date. 11 13 The following chart lists each of the Company's principal properties:
OWNED OR APPROXIMATE CATALOG LOCATION LEASED SQUARE FOOTAGE USE (a) -------- ------ -------------- -------- Warehouse and Fulfillment Centers: Emigsville, PA Leased 144,000 Hanover, PA Owned 265,000 Hanover, PA Leased 433,300 Landsville, PA Leased 23,000 York, PA Leased 319,000 DeSoto, TX Leased 43,000 GUMP'S(b) Roanoke, VA Leased 175,000 TWEEDS(c) LaCrosse, WI Leased 185,000 THE COMPANY STORE Corporate and Administrative Offices: San Diego, CA Leased 30,000 Men's Apparel(f) San Francisco, CA Leased 4,700 GUMP'S Edgewater, NJ Leased 65,000 TWEEDS Weehawken, NJ Leased 84,700 Corporate Headquarters Telemarketing and Customer Service: Hanover, PA Leased 123,300 LaCrosse, WI Owned 58,000(d) Retail Stores: Beverly Hills, CA Leased 1,200 SCANDIA DOWN Costa Mesa, CA Leased 1,200 SCANDIA DOWN San Diego, CA Leased 3,800 INTERNATIONAL MALE San Francisco, CA Leased 49,800 GUMP'S(e) West Hollywood, CA Leased 3,600 INTERNATIONAL MALE Hanover, PA Leased 12,500 Outlet Store La Crosse, WI Leased 13,000 THE COMPANY STORE Oshkosh, WI Leased 2,000 THE COMPANY STORE Kenosha, WI Leased 5,500 THE COMPANY STORE Madison, WI Leased 5,500 THE COMPANY STORE Manufacturing and Assembly: LaCrosse, WI Owned 150,000 THE COMPANY STORE
(a) Unless otherwise noted, the facility services multiple catalogs. (b) Also a telemarketing center for GUMP'S. (c) Also a telemarketing center for TWEEDS. (d) Also used for executive offices for THE COMPANY STORE. (e) Also used for GUMP'S executive offices. To be replaced by a new store in the fall of 1994. (f) Also a telemarketing center for Men's Apparel. 12 14 The Company also leases 18 properties, all of which are subleased. All of such properties are part of the Company's discontinued restaurant operations. ITEM 3. LEGAL PROCEEDINGS The Company is involved in various routine lawsuits of a nature which is deemed customary and incidental to its businesses. In the opinion of management, the ultimate disposition of such actions will not have a material adverse effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None 13 15 P A R T II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Common Stock is traded on the American Stock Exchange (Symbol: HNV). The following table sets forth, for the periods shown, the high and low sale prices of the Common Stock reported on the American Stock Exchange Composite Tape.
HIGH LOW -------- ------- 1992 First Quarter $ 3 $ 1 1/2 Second Quarter 2 1/8 1 5/8 Third Quarter 2 1/4 1 3/8 Fourth Quarter 2 7/8 1 5/8 1993 First Quarter $ 4 $ 2 1/16 Second Quarter 4 1/2 2 3/4 Third Quarter 5 1/2 4 1/6 Fourth Quarter 7 5/8 4 1/2
The Company is restricted from paying dividends on its Common Stock or from acquiring any of its capital stock by certain debt covenants contained in agreements to which the Company is a party. Cash dividends have not been paid on the Common Stock since 1967. As of March 9, 1994, there were approximately 4,359 holders of record of Common Stock. 14 16 ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial data for each of the years indicated:
1989 1990 1991 1992 1993 -------- -------- -------- -------- -------- INCOME STATEMENT DATA: (in thousands, except share and per share data) REVENUES $ 382,637 $ 555,770 $ 623,650 $ 586,562 $ 642,511 Operating (loss) income 9,703 10,190 (26,078) 14,402 19,076 Interest expense, net... 11,084 11,426 18,341 13,135 2,757 Other income (expense).. 1,868 - (6,437) - 888 Income (loss) from continuing operations.. 187 (2,136) (51,081) 1,048 17,337 (Loss) from discontinued operations............. (9,146) (115,921) (21,119) - - ---------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary items and cumulative effect of accounting change for income taxes........... (8,959) (118,057) (72,200) 1,048 17,337 Extraordinary items..... - 2,146 6,915 9,201 - Cumulative effect of accounting change for income taxes........... - - - 10,000 - ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS)....... (8,959) (115,911) (65,285) 20,249 17,337 Preferred stock dividends - - (466) (3,197) (4,093) ---------- ---------- ---------- ---------- ---------- Net income (loss) applicable to common shareholders........... $ (8,959) $ (115,911) $ (65,751) $ 17,052 $ 13,244 ========== ========== ========== ========== ========== Per Share: Income (loss) from continuing operations.. $ .01 $ (.15) $ (3.16) $ (.06) $ .17 (Loss) from discontinued operations (.64) (8.24) (1.30) - - ---------- ---------- ---------- ---------- ---------- Income (loss) before extraordinary items.... (.63) (8.39) (4.46) (.06) .17 Extraordinary items..... - .15 .43 .24 - Cumulative effect of accounting change for income taxes........... - - - .26 - ---------- ---------- ---------- ---------- ---------- Net (loss) income ...... $ (.63) $ (8.24) $ (4.03) $ .44 $ .17 ========== ========== ========== ========== ========== Weighted average number of shares outstanding: Primary... ............. 14,145,416 14,068,460 16,287,723 38,467,015 75,625,330 ========== ========== ========== ========== ========== Fully diluted........... 14,145,416 14,068,460 16,287,723 38,467,015 77,064,131 ========== ========== ========== ========== ========== BALANCE SHEET DATA (END OF PERIOD): Working capital (deficit).............. $ 42,176 $ 8,913 $ (37,636) $ 31,566 $ 25,476 Total assets............ 324,148 234,761 162,800 134,352 188,838 Total debt.............. 179,251 155,649 127,918 43,362 36,160 Preferred stock of subsidiary............. - - 35,247 32,842 - Shareholders' (deficit) equity................. 53,813 (61,484) (113,632) (19,758) 45,868
There were no cash dividends declared on Common Stock in any of the periods. See Notes to Consolidated Financial Statements. 15 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth, for the fiscal years indicated, the percentage relationship to revenues of certain items in the Company's Consolidated Statement of (Loss) Income:
Fiscal Year -------------------------------------- 1991 1992 1993 -------- -------- -------- Revenues 100.0% 100.0% 100.0% Cost of sales and operating expenses.... 65.6 65.1 63.6 Selling expenses........................ 28.0 23.6 24.6 General and administrative expenses..... 9.2 8.9 8.9 Income (loss) from operations............ (4.2) 2.5 3.0 Interest expense, net................... 2.9 2.2 .4 Income (loss) from continuing operations before income taxes..................... (8.2) .2 2.7 Income tax provision (credit)........... - - - Income (loss) from continuing operations (8.2)% .2% 2.7% ===== ===== =====
RESULTS OF OPERATIONS 1993 COMPARED WITH 1992 Net Income. The Company reported net income of $17.3 million or $.17 per share for the year ended January 1, 1994, compared to net income of $1.0 million (before extraordinary items and cumulative effect of accounting change) or a loss of $.06 per share in 1992. Net income for 1992 after extraordinary items and cumulative effect of accounting change was $20.2 million or $.44 per share. Per share amounts are expressed after deducting preferred dividends of $3.2 million in 1992 and $4.1 million in 1993. Revenues. Revenues increased 9.5% from $587 million in 1992 to $643 million in 1993. The higher revenues were due to a 10% increase in revenues relating to continuing catalogs, which include the initial test marketing of the Sears venture which began in mid-1993 and resulted in the Sears Agreement in January 1994. Additionally, approximately $47 million of the increase was generated by the acquisition of GUMP'S, THE COMPANY STORE AND TWEEDS in the second half of 1993. Revenues from discontinued catalogs were $63 million and $19.5 million in 1992 and 1993, respectively. Non-Apparel revenues increased 23% from $395 million in 1992 to $484 million in 1993. This increase is a result of $38 million of revenues generated by GUMP'S and THE COMPANY STORE which were acquired in the third quarter of 1993 and a 14% increase in revenues related to continuing catalogs. Substantially all of the increase in revenues from continuing catalogs is related to DOMESTICATIONS, COLONIAL GARDEN KITCHENS and TAPESTRY, of which approximately 40% is attributable to the Sears venture. Revenues from discontinued catalogs (assuming such catalogs were discontinued at the beginning of 1992) were $10 million and $6.5 million in 1992 and 1993, respectively. Apparel revenues declined 17% from $192 million in 1992 to $159 million in 1993. Revenues from discontinued catalogs were $53 million and $13 million in 1992 and 1993, respectively, while continuing catalog revenues declined by 2% from 1992. Additionally, the acquisition of TWEEDS in the 16 18 fourth quarter of 1993 contributed $9 million to revenues. As discussed below, the Company is continuing to restructure its Apparel catalogs. The Company mailed approximately 322 million catalogs in 1993, a 13% increase over 1992, with variations in mailing strategies and volumes amongst the catalogs. Additionally, the Company was able to increase its average order size by 9%. Revenues also improved as the Company reduced its order cancellation and return rates compared to 1992, principally as a result of improving its in-stock inventory position. Operating Costs and Expenses. Cost of sales and operating expenses as a percentage of revenues decreased from 65.1% in 1992 to 63.6% in 1993. The improvement was attributable to an increase in product margin due to changes in the sales mix as well as lower inventory markdowns in 1993 and lower shipping costs due to more efficient shipping methods. Shipping costs were also positively impacted by fewer split-shipments due to the improved in-stock inventory position. Selling expenses increased from 23.6% of revenues in 1992 to 24.6% of revenues in 1993 and represented an increase of $19.3 million. This increase was due to lower response rates, related principally to an aggressive customer acquisition campaign primarily in DOMESTICATIONS (which increased the size of its 12 month customer list by 14%) and from the addition of the selling expenses for the GUMP'S retail store. Selling expenses include catalog creation and mailing costs and rentals of mailing lists from third parties, as well as retail selling expenses. General and administrative expenses represented 8.9% of revenues in 1992 and 1993. Such expenses increased $5.3 million, or 10.2%, from 1992 to 1993, including $5.8 million of expenses for the three companies acquired in 1993. General and administrative expenses were reduced by lower bad debt expense and lower credit card commissions, offset by increases in merchandise and marketing personnel. Income (Loss) from Operations. Income from operations increased from $14.4 million in 1992, or 2.5% of revenues, to $19.1 million in 1993, or 3.0% of revenues. Income from operations excluding the discontinued catalogs was $24.6 million in 1992 (comprised of $21.9 million and $2.7 million for Non-Apparel and Apparel, respectively) compared to $26.7 million in 1993 (comprised of $25.8 million and $.9 million for Non-Apparel and Apparel, respectively). Of this, the three companies acquired in 1993 generated income from operations of $3 million. Losses from discontinued catalogs were $9.0 million in 1992 compared to $4.3 million in 1993. The restructuring of the Apparel catalogs continued in 1993 as the catalog mix was changed further, with two catalogs being discontinued and the acquisition of Tweeds. In order to improve operating results, each Apparel catalog is being more sharply focused on its target audience and overhead and circulation levels for certain catalogs have been reduced. Interest and Other Income (Expense). Interest expense decreased approximately $8.5 million from $13.4 million in 1992 to $4.9 million in 1993, due to the Company's financial restructuring which began in the fourth quarter of 1991 and included a debt reduction of $67 million from the beginning of 1992 to the end of 1993. Interest income was $2.2 million in 1993, an increase of $1.9 million from 1992, due primarily to the interest portion of a Federal income tax refund received in fiscal 1993. 17 19 Other income of $.9 million in 1993 represents a settlement of a claim in bankruptcy from a brokerage firm with which the Company had previously had a contract. Income Taxes. In 1992 the Company adopted Statement of Financial Accounting Standards No. 109 - Accounting for Income Taxes ("SFAS 109"). In accordance with this statement, the Company recognized a deferred tax asset of $10 million reflecting the cumulative effect of this accounting change for the estimated future benefit expected to be realized from the utilization of net operating loss carryforwards ("NOLs") and deductible temporary differences. The deferred tax asset consisted of a $63 million gross deferred tax asset less a $53 million valuation allowance that was established to reflect the annual limitation on the utilization of certain of the NOLs and an assumed limitation on the utilization of the remaining deferred tax asset. Realization of the future tax benefits is dependent on the Company's ability to generate taxable income within the carryforward period. Future levels of operating income and taxable income are dependent, in part, upon general economic conditions, competitive pressures on sales and margins, and other factors beyond the Company's control. In 1992 management determined that, based on the successful completion of the financial restructuring, future operating income of the Company would be sufficient to utilize $30 million of deductible timing differences and NOLs prior to their expiration. (See Results of Operations for 1992 Compared with 1991 for additional details). At January 1, 1994, the Company had $147 million of NOLs and has maintained the $30 million amount of expected future operating income that will more likely than not utilize the NOLs prior to their expiration. Management believes that, although the 1993 operating results might justify a higher amount, in view of its history of operating losses, the $30 million represents a reasonable conservative estimate of the future utilization of the NOLs and the Company will continue to evaluate the likelihood of future profit and the necessity of future adjustments to the deferred tax asset valuation allowance. The Federal income tax provision was $5.9 million in 1993 which was offset by the utilization of certain NOLs. In addition, the Revenue Reconciliation Act of 1993 raised the 1993 corporate income tax rate from 34% to 35%, and, as a result, the Company recognized an additional deferred tax benefit of $.6 million in 1993. In addition, the Company recorded a state tax provision of $.2 million in 1992 and $.5 million in 1993. Shareholders' Equity. The number of shares of Common Stock outstanding increased by 13,396,345 in 1993 due to: i) 1,150,733 shares issued in connection with the Company's equity and incentive plans, ii) 2,615,928 shares issued in connection with the acquisitions of GUMP'S, THE COMPANY STORE AND TWEEDS, iii) 2,278,128 shares issued upon the conversion of the 7.5% Preferred Stock, iv) 18,937,169 shares issued in connection with the exchange of the Class B Preferred Stock and Class B Common Stock (of which 12,270,503 shares were exchanged) and v) 684,890 shares issued as dividends on the Class B Preferred Stock. At January 1, 1994, there were 82,933,177 shares of Common Stock outstanding compared to 69,536,832 shares outstanding at December 26, 1992. The dividends of $3.2 million in 1992 and $4.1 million in 1993 represent dividend requirements on the two preferred stocks. These preferred stocks were converted into Common Stock in 1993, which resulted in the elimination of future dividends. 18 20 1992 COMPARED WITH 1991 Net Income. The Company generated net income of $17.1 million, or $.44 per share, in 1992 compared to a net loss of $65.8 million, or $4.03 per share in 1991. Included in the 1992 net income are $9.2 million of extraordinary gains resulting from the exchange offers (compared to extraordinary gains of $6.9 million in 1991) and $10 million due to the cumulative effect of the change in the method of accounting for income taxes. The year ended December 28, 1991 included provisions for losses on disposal of discontinued operations of $21.1 million and restructuring and other non-recurring charges of $15.3 million. Income (Loss) From Operations. Income from continuing operations improved $52.1 million from a loss of $51.1 million in 1991 to income of $1 million in 1992. This improvement reflects the impact of the financial restructuring and operational changes that began in the fourth quarter of 1991 with NAR's investment in the Company. The financial restructuring has allowed the Company to eliminate $142.8 million in debt and $40 million of lease obligations and dispose of its discontinued restaurant operations. Without this cash drain, the Company's liquidity has significantly improved. The operational changes included the decentralization of the Company which resulted in a strategic review throughout the organization of all catalogs, costs and service levels. As a result, seven catalogs (six Apparel and one Non-Apparel) were discontinued in late 1991 and early 1992. In 1991 and 1992, these catalogs had a combined loss from operations of $16.2 and $6.7 million, respectively, on revenues of $97 million and $25 million, respectively. The elimination of these catalogs enabled the Company to redirect its resources into its core catalogs, thereby improving its inventory position for the remaining catalogs and allowing for investment in infrastructure improvements. Revenues from continuing catalogs increased approximately $35 million or 7% from 1991 to 1992. The Company's improved liquidity, as well as the elimination of the uncertainty as to whether the Company would be able to satisfy its debt obligations, enabled it to normalize its relationships with vendors. This resulted in higher inventory receipts on a timely basis which significantly reduced backorder levels and the associated costs. In addition, net interest expense was reduced in fiscal 1992 by $5.2 million ($9 million on an annualized basis) as a result of the debt and equity transactions. These reasons, as well as the elimination of the $15.3 million of non-recurring restructuring, transaction and other costs resulted in the significant turnaround in the Company's operating results. Revenues. Revenues decreased $37 million, or 5.9%, compared to 1991 as the Company focused on its profitable catalogs and discontinued seven poorer performing catalogs in late 1991 and early 1992. Revenues from continuing catalogs increased 7% from $527 million in 1991 to $562 million in 1992. The Company mailed approximately 375 million catalogs in 1991 compared to approximately 285 million in 1992, a 24% decrease, but was able to increase its average order size and response rates. Revenues were also improved as the Company reduced its order cancellation and return rates by two percentage points compared to 1991, principally as a result of the normalization of the backorder levels which peaked at approximately $58 million in 1991 to a low of $11 million at the end of 1992. 19 21 Non-Apparel revenues increased 3% from $383 million in 1991 to $395 million in 1992. Revenues from continuing catalogs increased 7% to $394 million in 1992. Revenues from discontinued catalogs were $15.6 million and $.7 million in 1991 and 1992, respectively. Apparel revenues declined 20% from $240 million in 1991 to $192 million in 1992, although revenues from continuing catalogs increased 6% to $168 million. Revenues of the discontinued catalogs were $82 million and $24 million in 1991 and 1992, respectively. Operating Costs and Expenses. Cost of sales and operating expenses as a percentage of revenues decreased from 65.6% in 1991 to 65.1% in 1992, although gross margin decreased $9.7 million from 1991 to 1992. The improvement in margin percentage was attributable to reducing shipping costs by one percent of revenues as there were less split-shipments and other operational inefficiencies associated with the 1991 backorder situation. Partially offsetting these improvements was a change in the sales mix from higher margin fashion merchandise to lower margin home textile merchandise. Selling expenses decreased $35.9 million in 1992, of which $23 million was due to lower circulation resulting from discontinuing certain catalogs. Selling expenses decreased as a percentage of revenues from 28.0% in 1991 to 23.6% in 1992 due to improved customer order response rates and lower paper costs. General and administrative expenses decreased $5.4 million, or 9.4%, from 1991 to 1992. Such expenses decreased as a percentage of sales, from 9.2% in 1991 to 8.9% in 1992. The decrease in expense was due to lower bad debt expense ($1.3 million), lower credit card commissions ($2 million) and reduced space advertising activity ($2 million). These decreases were partially offset by increases in consulting and internal development costs for management information systems and to support the decentralized organization ($2.2 million). Interest and Other Income (Expense). Interest expense was $13.4 million in 1992, a decrease of $7.1 million over 1991, as a result of debt reduction due to the rights offering relating to the H&H Common Stock (the "Rights Offering") and two separate exchange offers for the Company's 14% senior subordinated debentures due 1997 (the "14% Debentures") and the Company's 7 1/2% convertible subordinated debentures due 2007 (the "7 1/2% Debentures" and the two exchange offers being referred to herein as the "Exchange Offers"). Future interest expense will be reduced on an annualized basis by $9 million, as a result of this debt reduction. The closing of the transactions in 1991 had the effect of reducing interest expense due to the retirement of $15.1 million of 7 1/2% Debentures, the repayment of $5 million of principal amount of 8% Subordinated Notes due 1994 (the "8% Notes"), as well as a reduction of the interest rate from 11% to 8% thereon. Interest income was $.2 million in 1992, a decrease of $1.9 million from 1991. The decrease is due to the Company's overall liquidity position in which funds were not available to invest in interest bearing instruments. Extraordinary Items. In 1991, the Company recognized a $6.9 million extraordinary gain with respect to the retirement of $15.1 million of its 7 1/2% Debentures. The Company recorded extraordinary gains of $9.2 million in 1992 from the exchange of $11.9 million of 7 1/2% Debentures and $23.4 million of 14% Debentures into equity. 20 22 Income Taxes. At December 26, 1992, the Company had tax NOLs totalling $142 million, which expire through 2007. Certain transactions the Company entered into during 1991 resulted in an ownership change with respect to the Company and, thus, in the imposition of an annual limitation of approximately $4 million on the amount of future taxable income of the Company which may be offset by the Company's pre-change NOLs. The Company's available NOLs for tax purposes consists of $98 million of pre-change NOLs (subject to this limitation) and $44 million of post-change NOLs (not subject to this limitation). SFAS 109 requires that the tax benefit of such NOLs be recorded as an asset to the extent that management assesses the utilization of such NOLs to be "more likely than not". The deferred tax asset of $10 million recognized in 1992 consists of a $63 million gross deferred tax asset (principally, the expected tax benefit of the NOLs discussed above) less a $53 million valuation allowance. The Company believes, based upon successful completion of the financial restructuring, the disposal of unprofitable discontinued operations, the Company's history of prior operating earnings in its direct marketing business and its expectations for the future, that the operating income of the Company will be sufficient to utilize a substantial portion of the NOLs prior to their expiration. Since the realization of the future tax benefits is dependent on the Company's ability to generate taxable income within the carryforward period (through 2007), the Company believes it would be imprudent to record the entire benefit, based on income projections through 2007, due to the Company's recent operating losses. The Company does believe that an appropriate measure of its current earnings level is to adjust its 1992 income before extraordinary gains of $1 million by $9 million, which represents the annual interest expense on the debt that has been retired. Using this $10 million income as a base and three years as a reasonable time frame, income would not have to grow from its current level in order to generate the $30 million necessary to utilize NOLs sufficient to realize the $10 million benefit that was recorded in 1992. Shareholders' Equity. Net income for the year ended December 26, 1992 was $17.1 million, or $0.44 per share, as compared to a net loss of $65.8 million, or $4.03 per share in 1991. Net income from continuing operations in 1992 was $1 million, or a loss of $.06 per share after deducting preferred dividends of $3.2 million, compared to a net loss of $51.1 million, or $3.16 per share in 1991. Extraordinary items in 1992 were $9.2 million or $.24 per share, compared to $6.9 million or $.43 per share in 1991. The cumulative effect of accounting change for income taxes in 1992 was $10 million, or $.26 per share as compared to no cumulative adjustment in 1991. For the year ended December 26, 1992 there was no income or loss from discontinued operations compared to a loss of $21.1 million, or $1.30 per share in 1991. The number of shares of Common Stock outstanding increased in 1992 principally due to the Rights Offering in which 14,396,798 shares were issued, the Exchange Offers in which 7,548,465 shares were issued and the exchange of the preferred stock by NAR for 20 million shares of H&H Common Stock. At December 26, 1992 there was a total of 69,535,089 shares of H&H Class B Common and H&H Common Stock outstanding compared to 28,537,471 at December 28, 1991. 21 23 The dividends of $3.2 million in 1992 represent dividend requirements on the two preferred stocks that were issued in October 1991 and September 1992. In 1991, the dividend accretion was $.5 million, representing the two months during which the 8% preferred stock was outstanding in 1991. LIQUIDITY AND CAPITAL RESOURCES The Company had $2.6 million in cash and cash equivalents at each of December 26, 1992 and January 1, 1994. Working capital and the current ratio were $25.5 million and 1.24 to 1 at January 1, 1994 versus $31.6 million and 1.42 to 1 at December 26, 1992. The Company had substantially paid down its long-term revolving credit facility at January 1, 1994, compared to a balance of $21.2 million outstanding at December 26, 1992. The Company generated $28.0 million in cash from operations in 1993. Cash was used primarily to support increases of i) $12.1 million of inventory as part of the Company's strategy to increase its in-stock position at the time customer orders are received; ii) $5.3 million in prepaid catalog costs to support the spring mailing activity and iii) $4.2 million in capital expenditures, primarily for its new management information system, while $21.0 million was used for the paydown of the Company's revolving credit facility. These uses of cash were primarily financed by a $24.5 million increase in accounts payable and operating profits. With the significant improvement in the Company's financial condition in 1993, it has been successful in restoring normal trade terms with its vendors, which has resulted in greater leverage of its accounts payable. The Company experiences seasonality in its working capital requirements and fluctuations in the revolving credit facility will occur, usually within the first and fourth quarters of the year. With the Company's financial restructuring completed and the corresponding improvement in its financial condition, the Company focused in 1993 on refinancing its remaining indebtedness, simplifying its capital structure and embarking on a program of investing in infrastructure improvements to support its growth objectives. Refinancing of Indebtedness. In May 1993, the Company refinanced its revolving credit facility that had been previously provided by a subsidiary of NAR with a new three-year $40 million facility with an independent financial institution. In October 1993, the Company increased the maximum credit available to $52.5 million to include GUMP'S, THE COMPANY STORE AND TWEEDS as borrowers under the facility. A subsidiary of NAR has provided a secured limited guarantee of $10 million which allows the Company to borrow in excess of its availability based on a formula, up to the facility's limit. This limited guarantee was reduced by approximately $5.1 million during the fourth quarter of 1993, and the guarantee will be eliminated in March 1994 based on the Company's 1993 operating results. At January 1, 1994, the Company's borrowing base formula would have enabled the Company to borrow approximately $40 million, compared to the $.2 million that was outstanding. In August 1993, the Company issued $20 million of 9.25% Senior Subordinated Notes ("the 9.25% Notes") in a private placement with an insurance company. The Company retired its outstanding $12.4 million of 8% Notes that were due in October 1994 and $.8 million of its 14% Notes using the proceeds of the 9.25% Notes, with the remainder to be used for the purchase of additional fulfillment and warehouse capacity. The Company is 22 24 required to redeem $6 million of the 9.25% Notes without penalty by February 15, 1994 (subsequently amended to May 1, 1994) if the Company has not established or acquired a new distribution facility by such date. In 1993, the Company acquired three companies for $.1 million of its own cash, $4.6 million of debt and $12.3 million of Common Stock. In addition, the Company has agreed to provide an aggregate of up to $4 million of secured working capital financing, a $.75 million short-term loan and a $.5 million convertible note to two entities in which it has acquired an equity interest. Simplification of Capital Structure. In September 1993, through a series of mergers involving H&H and THC, the Company changed its name to Hanover Direct, Inc. and eliminated its two-tier holding company structure. On December 13, 1993, the Company converted its 7.5% Preferred Stock into 2,278,128 shares of Common Stock. The holders of the 7.5% Preferred Stock were paid all accrued and unpaid dividends in cash amounting to $197,000. On January 1, 1994, 12,270,503 shares of Class B Common Stock and 40,000 shares of Class B Preferred Stock were exchanged into 18,937,169 shares of Common Stock. All accrued and unpaid dividends amounting $886,000 were paid in cash in February 1994. As a result of these transactions, the Company has eliminated approximately $4 million of future annual preferred stock dividend requirements. On December 10, 1993, the Company issued 234,900 shares of its 6.0% Series A Preferred Stock (6.0% Preferred Stock) for an installment note in the amount of $2.4 million that it had assumed in its acquisition of Tweeds. As a result of these transactions, the Company's capital structure consists of 82,933,177 shares of Common Stock and 234,900 shares of 6.0% Preferred Stock at January 1, 1994. Infrastructure Investments. To improve its infrastructure to support its growth objectives, the Company intends to construct a new 500,000 square foot fulfillment center costing approximately $18 million in Roanoke, Virginia to support the DOMESTICATIONS business and has acquired a 50% interest in a partnership which owns the 175,000 square foot TWEEDS fulfillment center, into which the Company plans to consolidate its Apparel group. Additionally, the Company is currently in the process of upgrading its management information systems by implementing new integrated software which it expects to be fully operational in 1995 and is migrating from a centralized mainframe to mid-range mini-computers at a total estimated cost of approximately $13 to $15 million. As of January 1, 1994, the Company has incurred costs of approximately $5.3 million as part of this plan, including capital leases aggregating $2.4 million to be paid over four years. Public Offering of Shares. On February 18, 1994, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission registering 10 million shares of its Common Stock, including 4,154,604 shares on behalf of two selling shareholders. The net proceeds from the offering with respect to the Company's shares will be used for general corporate purposes, including the expansion of the Company's business. 23 25 The Company plans to fund the remaining infrastructure costs through cash generated from operations, the proceeds of the Common Stock offering and, possibly, obtaining mortgage financing. The Company believes that it has adequate sources of financing to service its capital requirements. Effects of Inflation. The Company normally experiences increased cost of sales and operating expenses as a result of the general rate of inflation in the economy. Operating margins are generally maintained through selective price increases where market conditions permit. The Company's inventory is mail-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. 24 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Hanover Direct, Inc.: We have audited the accompanying consolidated balance sheets of Hanover Direct, Inc. (a Delaware corporation) (successor to The Horn & Hardart Company, see Note 1 to the Consolidated Financial Statements) and subsidiaries as of December 26, 1992 and January 1, 1994, and the related consolidated statements of income (loss), shareholders' (deficit) equity and cash flows for each of the three fiscal years in the period ended January 1, 1994. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules referred to below based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hanover Direct, Inc. and subsidiaries as of December 26, 1992 and January 1, 1994, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 1, 1994 in conformity with generally accepted accounting principles. As discussed in Notes 1 and 10 to the Consolidated Financial Statements, effective December 29, 1991 the Company changed its method of accounting for income taxes. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index to financial statement schedules are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN & CO. New York, New York February 28, 1994 25 27 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 26, 1992 and January 1, 1994
DECEMBER 26, JANUARY 1, 1992 1994 ----------- --------- (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents $ 2,553 $ 2,583 Accounts receivable, net of allowance for doubtful accounts of $2,892 in 1992 and $2,509 in 1993 22,840 19,043 Inventories 58,270 80,429 Deferred tax asset, net 2,800 2,975 Prepaid catalog costs 18,277 25,571 Other current assets 2,058 2,374 -------- -------- Total Current Assets 106,798 132,975 -------- -------- Property and Equipment, at cost Land 205 1,171 Buildings and building improvements 4,462 7,862 Leasehold improvements 5,696 6,242 Furniture, fixtures and equipment 16,309 22,551 Construction in progress - 5,434 -------- -------- 26,672 43,260 Accumulated depreciation and amortization (15,761) (18,341) -------- -------- Net Property and Equipment 10,911 24,919 -------- -------- Excess of Cost Over Net Assets of Acquired Businesses, net 8,710 18,463 Deferred Tax Asset, net 7,200 7,656 Other Assets, net 733 4,825 -------- -------- Total Assets $134,352 $188,838 ======== ========
See Notes to Consolidated Financial Statements. 26 28
HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) As of December 26, 1992 and January 1, 1994 DECEMBER 26, JANUARY 1, 1992 1994 ------------ ---------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY Current Liabilities: Current portion of long-term debt and capital lease obligations $ 73 $ 2,024 Accounts payable 49,741 78,905 Dividends payable - 886 Accrued liabilities 21,363 20,653 Customer prepayments and credits 4,055 5,031 --------- -------- Total Current Liabilities 75,232 107,499 --------- -------- Noncurrent Liabilities: Long-term debt 43,184 32,313 Capital lease obligations 105 1,823 Other 2,747 1,335 --------- -------- Total Noncurrent Liabilities 46,036 35,471 --------- -------- Total Liabilities 121,268 142,970 --------- -------- Commitments and Contingencies Preferred Stock: 7.5% cumulative, convertible, $.01 par value, authorized 861,900 shares; issued 529,114 shares in 1992 6,526 - Class B 8% cumulative, convertible, $.01 par value, authorized and issued 40,000 shares in 1992 26,316 - --------- -------- Total Preferred Stock 32,842 - --------- -------- Shareholders' (Deficit) Equity: 6% Preferred Stock, convertible, $10 stated value, authorized 5,000,000 shares; issued 234,900 shares in 1993 - 2,378 Class B Common Stock, $.01 par value, authorized and issued 12,270,503 shares in 1992 123 - Common Stock, $.66 2/3 par value, authorized 150,000,000 shares; issued 58,154,584 shares in 1992 and 83,136,542 shares in 1993 38,774 55,423 Capital in excess of par value 178,149 209,834 Accumulated deficit (229,049) (215,805) --------- -------- (12,003) 51,830 Less: Treasury stock, at cost (2,169,713 shares in 1992 and 1,120,032 shares in 1993) (7,170) (3,130) Notes receivable from sale of Common Stock - (1,774) Deferred compensation (585) (1,058) --------- -------- Shareholders' (Deficit) Equity (19,758) 45,868 --------- -------- Total Liabilities and Shareholders' (Deficit) Equity $ 134,352 $188,838 ========= ========
See Notes to Consolidated Financial Statements. 27 29 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) For The Years Ended December 28, 1991, December 26, 1992 and January 1, 1994
1991 1992 1993 -------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) REVENUES $623,650 $586,562 $642,511 -------- -------- -------- Operating costs and expenses: Cost of sales and operating expenses 409,098 381,716 408,387 Selling expenses 174,401 138,494 157,811 General and administrative expenses 57,329 51,950 57,237 Restructuring expenses 8,900 - - -------- -------- -------- 649,728 572,160 623,435 -------- -------- ------- INCOME (LOSS) FROM OPERATIONS (26,078) 14,402 19,076 Interest expense (20,525) (13,379) (4,925) Interest income 2,184 244 2,168 Other income (expense) (6,437) - 888 -------- -------- -------- Income (loss) from continuing operations before income taxes (50,856) 1,267 17,207 Income tax provision (benefit) 225 219 (130) -------- -------- -------- INCOME (LOSS) FROM CONTINUING OPERATIONS (51,081) 1,048 17,337 Provision for loss on disposal of discontinued operations (21,119) - - -------- -------- -------- Income (loss) before extraordinary items and cumulative effect of accounting change (72,200) 1,048 17,337 Extraordinary items 6,915 9,201 - Cumulative effect of accounting change for income taxes - 10,000 - -------- -------- -------- NET INCOME (LOSS) (65,285) 20,249 17,337 Preferred stock dividends (466) (3,197) (4,093) -------- -------- -------- Net income (loss) applicable to Common Shareholders $(65,751) $ 17,052 $ 13,244 ======== ======== ======== Net income (loss) per share: Income (loss) from continuing operations $ (3.16) $ (0.06) $ 0.17 (Loss) from discontinued operations (1.30) - - -------- -------- -------- Income (loss) before extraordinary items and cumulative effect of accounting change (4.46) (0.06) 0.17 Extraordinary items 0.43 0.24 - Cumulative effect of accounting change for income taxes - 0.26 - -------- -------- -------- Net income (loss) per share $ (4.03) $ 0.44 $ 0.17 ======== ======== ========
See Notes to Consolidated Financial Statements. 28 30 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY FOR THE YEARS ENDED DECEMBER 28, 1991, DECEMBER 26, 1992, AND JANUARY 1, 1994 (in thousands, except share amounts)
Preferred Stock Preferred Stock Class B 8% Cumulative 7.5% Cumulative Shares Amount Shares Amount ----------------------------------------------------- Balance at December 29, 1990 0 $0 0 $0 Net loss for the year Issuance of warrants Executive employment contracts Shares to 401k savings plan Payment on notes receivable Issuance of Class B Common Stock Amortization of deferred compensation Termination of Employee Stock Ownership Plan ----------------------------------------------------- Balance at December 28, 1991 0 $0 0 $0 Net income for the year Issuance of Common Stock to and redemption of Class B Common Stock by NAR Issuance of Class B Common Stock Amortization of deferred compensation Issuance of Common Stock in connection with Rights Offering 14% Exchange Offer 7 1/2% Exchange Offer Stock Dividend to NAR Issuance of Common Stock Transfer of ESOP shares to treasury ----------------------------------------------------- Balance at December 26, 1992 0 $0 0 $0 Net income Mergers of H&H & THC into Hanover Direct, Inc. 40,000 25,516 569,532 7,158 Exchange of Class B 8% Preferred and Common Stock (40,000) (25,516) Conversion of 7.5% Preferred Stock (569,532) (7,158) Issuance of Preferred Stock Stock dividends Amortization of deferred compensation Issuance of Common Stock ----------------------------------------------------- Balance at January 1, 1994 0 $0 0 $0 =====================================================
Preferred Stock Class B Common Stock Series A, 6.0% $.01 par value Shares Amount Shares Amout ---------------------------------------------------- Balance at December 29, 1990 0 $0 0 $0 Net loss for the year Issuance of warrants Executive employment contracts Shares to 401k savings plan Payment on notes receivable Issuance of Class B Common Stock 13,333,334 133 Amortization of deferred compensation Termination of Employee Stock Ownership Plan ---------------------------------------------------- Balance at December 28, 1991 0 $0 13,333,334 $133 Net income for the year Issuance of Common Stock to and redemption of Class B Common Stock by NAR (13,333,334) (133) Issuance of Class B Common Stock 12,270,503 123 Amortization of deferred compensation Issuance of Common Stock in connection with Rights Offering 14% Exchange Offer 7 1/2% Exchange Offer Stock Dividend to NAR Issuance of Common Stock Transfer of ESOP shares to treasury ---------------------------------------------------- Balance at December 26, 1992 0 $0 12,270,503 $123 Net income Mergers of H&H & THC into Hanover Direct, Inc. Exchange of Class B 8% Preferred and Common Stock (12,270,503) (123) Conversion of 7.5% Preferred Stock Issuance of Preferred Stock 234,900 2,342 Stock dividends 36 Amortization of deferred compensation Issuance of Common Stock -------------------------------------------------- Balance at January 1, 1994 234,900 $2,378 0 $0 ==================================================
Capital Common Stock in Excess $.66 2/3 par value of par Accum. Treasury Stock Share Amount Value (Deficit) Shares Amount ----------------------------------------------------------------------------------- Balance at December 29, 1990 14,812,863 $9,874 $124,228 ($180,350) (900,943) ($7,865) Net loss for the year (65,751) Issuance of warrants 3,286 Executive employment contracts 1,281,458 854 6,287 (1,281,458) (3,845) Shares to 401k savings plan (56) 12,502 109 Payment on notes receivable Issuance of Class B Common Stock 1,867 Amortization of deferred compensation Termination of Employee Stock Ownership Plan ----------------------------------------------------------------------------------- Balance at December 28, 1991 16,094,321 $10,728 $135,612 ($246,101) (2,169,899) ($11,601) Net income for the year 17,052 Issuance of Common Stock to and redemption of Class B Common Stock by NAR 20,000,000 13,334 24,146 Issuance of Class B Common Stock 410 Amortization of deferred compensation Issuance of Common Stock in connection with Rights Offering 14,396,798 9,603 11,086 14% Exchange Offer 4,099,625 2,733 5,123 7 1/2% Exchange Offer 3,448,840 2,299 5,773 45,006 393 Stock Dividend to NAR (3,764) 601,233 5,249 Issuance of Common Stock 115,000 77 (237) Transfer of ESOP shares to treasury (646,053) (1,211) ----------------------------------------------------------------------------------- Balance at December 26, 1992 58,154,584 $38,774 $178,149 ($229,049) (2,169,713) ($7,170) Net income 13,244 Mergers of H&H & THC into Hanover Direct, Inc. Exchange of Class B 8% Preferred and Common Stock 18,937,169 12,625 13,014 Conversion of 7.5% Preferred Stock 2,278,128 1,519 5,639 Issuance of Preferred Stock Stock dividends (438) 684,890 2,946 Amortization of deferred compensation Issuance of Common Stock 3,766,661 2,505 13,470 364,791 1,094 ---------------------------------------------------------------------------------- Balance at January 1, 1994 83,136,542 $55,423 $209,834 ($215,805) (1,120,032) ($3,130) ==================================================================================
Notes Receivable From Sale of Common Deferred Stock Comp. Total --------------------------------- Balance at December 29, 1990 ($270) ($7,101) ($61,484) Net loss for the year (65,751) Issuance of warrants 3,286 Executive employment contracts (1,297) 1,999 Shares to 401k savings plan 53 Payment on notes receivable 270 270 Issuance of Class B Common Stock 2,000 Amortization of deferred compensation 1,145 1,145 Termination of Employee Stock Ownership Plan 4,850 4,850 ---------------------------------- Balance at December 28, 1991 $0 ($2,403) ($113,632) Net income for the year 17,052 Issuance of Common Stock to and redemption of Class B Common Stock by NAR 37,347 Issuance of Class B Common Stock 533 Amortization of deferred compensation 607 607 Issuance of Common Stock in connection with Rights Offering 20,689 14% Exchange Offer 7,856 7 1/2% Exchange Offer 8,465 Stock Dividend to NAR 1,485 Issuance of Common Stock (160) Transfer of ESOP shares to treasury 1,211 0 ---------------------------------- Balance at December 26, 1992 $0 ($585) ($19,758) Net income 13,244 Mergers of H&H & THC into Hanover Direct, Inc. 32,674 Exchange of Class B 8% Preferred and Common Stock 0 Conversion of 7.5% Preferred Stock 0 Issuance of Preferred Stock 2,342 Stock dividends 2,544 Amortization of deferred compensation 599 599 Issuance of Common Stock (1,774) (1,072) 14,223 ---------------------------------- Balance at January 1, 1994 ($1,774) (1,058) $45,868 ==================================
See Notes to Consolidated Financial Statements 29 31 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For The Years ended December 28, 1991, December 26, 1992 and January 1, 1994
1991 1992 1993 -------- -------- -------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) ($65,285) $20,249 $17,337 Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization ......... 11,568 5,188 4,122 Noncash portion of loss provision...... 19,516 - - Noncash portion of extraordinary gains. (6,915) (9,201) - Noncash portion of cumulative effect of an accounting change.............. - (10,000) - Noncash portion of ESOP termination.... 4,734 - - Noncash portion of contract settlement. 2,652 - - Deferred taxes......................... - - (631) Other, net............................. 216 368 (33) Changes in assets and liabilities, net of effects of acquired businesses and dispositions of assets: Payment for repurchase of mail order customer receivables.............. - (35,301) - Net proceeds from sale of mail order customer receivables.................. 11,332 37,008 - Accounts receivable, net............... (4,427) 13,321 8,907 Inventories............................ 10,662 (9,854) (12,081) Prepaid catalog costs.................. 12,606 9,470 (5,305) Other current assets................... 3,254 (671) 282 Accounts payable....................... (23,937) (17,292) 24,530 Accrued liabilities.................... (9,811) (12,821) (10,650) Dividend payable....................... - - 886 Customer prepayments and credits....... - (3,508) 684 ------- ------- ------- Net cash provided (used) by operating activities............................... (33,835) (13,044) 28,048 ------- ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in restricted cash.............. 557 5,765 - Acquisitions of property and equipment... (1,320) (1,431) (4,239) Purchase of businesses................... - - (100) Net proceeds from sales of property...... 3,025 17,256 - Other, net............................... (647) - (313) ------- ------- ------- Net cash provided (used) by investing activities................................ 1,615 21,590 (4,652) ------- ------- -------
See Notes to Consolidated Financial Statements. 30 32 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For The Years Ended December 28, 1991, December 26, 1992 and January 1, 1994
1991 1992 1993 -------- --------- --------- (IN THOUSANDS) CASH FLOWS FROM FINANCING ACTIVITIES: Net payments under revolving credit facility . . . . . . . . . . . . . . . . . $ - $ - $ (20,965) Proceeds from issuance of debt . . . . . . . 21,602 9,583 20,000 Net proceeds from issuance of Preferred Stock and Class B Common Stock . 29,281 27,533 - Payments of long-term debt and capital lease obligations . . . . . . . . . . . . (18,060) (68,720) (19,856) Proceeds from Rights Offering . . . . . . . - 19,748 - Cash dividends paid . . . . . . . . . . . . - - (890) Payment of debenture issuance costs . . . . (2,665) (825) - Payment of debt issuance costs . . . . . . . - - (1,560) Loan to ESOP. . . . . . . . . . . . . . . . . (1,050) - - Proceeds from issuance of Common Stock . . . - - 912 Other, net . . . . . . . . . . . . . . . . . (1,593) - (1,007) -------- ----------- ---------- Net cash provided (used) by financing activities . . . . . . . . . . . . . . . . . . 27,515 (12,681) (23,366) -------- ----------- ---------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . (4,705) (4,135) 30 Cash and cash equivalents at the beginning of the year . . . . . . . . . . . . . . . . . 11,393 6,688 2,553 -------- ----------- ---------- Cash and cash equivalents at end of the year . . . . . . . . . . . . . . . . . . . . . $ 6,688 $ 2,553 $ 2,583 ======== =========== ========== SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid . . . . . . . . . . . . . . . $ 21,325 $ 12,547 $ 4,883 Income taxes paid . . . . . . . . . . . . . 755 226 71 Issuance of warrants . . . . . . . . . . . . 3,286 - -
See Notes to Consolidated Financial Statements. 31 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 28, 1991, DECEMBER 26, 1992 AND JANUARY 1, 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Merger - Hanover Direct, Inc. ("HDI") was formed in connection with the September 8, 1993 merger (the "Merger") involving HDI, The Horn & Hardart Company ("H&H") and The Hanover Companies ("THC"), a wholly-owned subsidiary of H&H. The Merger consisted of the merger of H&H into HDI, followed by the merger of THC into HDI. The purpose of the Merger was to create a single corporation to replace the then-existing two-tier structure whereby H&H and THC were both subject to the filing requirements of Section 13 of the Securities Exchange Act of 1934, as amended. The financial statements of THC had previously been included in the consolidated financial statements of H&H. The Merger was consummated by (i) the exchange to holders of shares of H&H Common Stock shares of HDI Common Stock, (ii) the exchange to holders of shares of THC 7.5% Preferred Stock shares of HDI's 7.5% Preferred Stock, and (iii) the exchange to holders of shares of THC Class B Preferred Stock, shares of HDI's Class B Preferred Stock, each such distribution being on a one-for- one-basis. The Merger was accounted for similarly to a pooling-of-interests and, accordingly, HDI's Consolidated Financial Statements include the results of H&H and THC for all applicable periods presented. Principles of Consolidation - The Consolidated Financial Statements include the accounts of HDI and all subsidiaries (the "Company"). Intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation. Fiscal Year - The Company operates on a 52/53 week fiscal year. The years ended December 28, 1991 and December 26, 1992 were 52 week years. The year ended January 1, 1994 was a 53 week year. Inventories - Inventories consist principally of merchandise held for resale and are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Prepaid Catalog Costs - Costs related to mail order catalogs and promotional material are amortized over their estimated productive lives, based on projected net shipments, not exceeding six months. Depreciation and Amortization - Depreciation and amortization of property and equipment are provided on the straight-line method at rates based on the lesser of the estimated useful lives of the assets or terms of leases as follows: buildings and building improvements, 30 years; furniture, fixtures and equipment, 3-10 years; and leasehold improvements, over the terms of the related leases. Expenditures for maintenance and repairs are charged to operations as incurred; major improvements are capitalized. Construction in Progress - Construction in progress includes the costs to upgrade the Company's management information systems. These costs will be depreciated and amortized over five years or the life of any leases, whichever is shorter, and depreciation will commence when the assets are placed in service. The Company capitalized $5.3 million of such costs as of January 1, 1994. 32 34 Excess of Cost Over Net Assets of Acquired Businesses - Excess of cost over the net assets of acquired businesses is being amortized on a straight-line basis over periods up to forty years. Accumulated amortization was $3,458,000 and $3,878,000 at December 26, 1992 and January 1, 1994, respectively. Mailing Lists - The costs of acquired mailing lists are amortized over a five year period. Mailing lists, included in Other Assets, amounted to $89,000 and $2,274,000 at December 26, 1992 and January 1, 1994, respectively, and are carried net of accumulated amortization of $6,020,000 and $6,295,000, respectively. Change in Accounting for Income Taxes - Effective December 29, 1991 (beginning of fiscal year 1992), the Company adopted Statement of Financial Accounting Standards No. 109 - Accounting for Income Taxes ("SFAS 109"). This standard requires, among other things, recognition of future tax benefits, measured by enacted rates, attributable to deductible temporary differences between financial statement and income tax bases of assets and liabilities and to tax net operating loss carryforwards, to the extent that realization of such benefits is "more likely than not". Cash and Cash Equivalents - For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid temporary investments with an original maturity of less than ninety days as cash equivalents. Net Income (Loss) Per Share - Net income (loss) per share was computed using the weighted average number of common shares outstanding. The weighted average number of shares used in the calculation for both primary and fully diluted net income (loss) per share in 1991 and 1992 were 16,287,723 and 38,467,015 shares, respectively. For 1993 the weighted average number of shares for primary and fully diluted net income (loss) per share were 75,625,330 and 77,064,131 shares, respectively. Common share equivalents for purposes of net income (loss) per share are stock options and warrants. Supplemental Earnings Per Share - Assuming that the rights offering and exchange offers discussed in Notes 2 and 7 had been consummated at the beginning of fiscal year 1992, the weighted average number of shares outstanding would have been 68,795,471, and earnings per share for 1992 would have been as follows: Income from continuing operations $.09 Net income $.37 The supplemental earnings per share was calculated assuming that the Company eliminated $9 million of interest on the debt that was retired and the Company incurred additional dividends on $.8 million on the preferred stock. Assuming that the conversions of the 7.5% Preferred Stock and the exchange of the Class B 8% Preferred Stock and the Class B Common Stock had been consummated at the beginning of fiscal year 1993, the weighted average number of shares outstanding for primary and fully diluted earnings per share would have been 84,408,807 and 85,847,608 and earnings per share would have been $.21 and $.20, respectively. This supplemental earnings per share calculation assumes that the Company eliminated $4.1 million of preferred stock dividends. 33 35 Supplemental Disclosure of Noncash Activities
1992 1993 --------- -------- (IN THOUSANDS) Exchange of THC 8% Cumulative Preferred Stock and issuance of 20,000,000 shares of Common Stock . . . . . . . . . . . $ 35,847 $ - ========= ======== Exchange of 14% Senior Subordinated Debentures for Common Stock and THC 7.5% Preferred Stock . . . . . . . . . . . $ 18,575 $ - ========= ======== Exchange of 7 1/2% Convertible Subordinated Debentures for Common Stock and THC 7.5% Preferred Stock . . . . . . . . . . . $ 11,900 $ - ========= ======== Dividend on 7.5% Preferred Stock paid - in-kind . . . . . . . . . . . . . . . $ - $ 610 ========= ======== Dividend on Class B 8% Preferred Stock paid in Common Stock . . . . . . . . . $ - $ 2,508 ========= ======== Exchange of 8.0% Class B Preferred Stock for Common Stock . . . . . . . . . . . $ - $ 25,516 ========= ======== Exchange of Class B Common Stock for Common Stock . . . . . . . . . . . . . $ - $ 123 ========= ======== Exchange of 7.5% Convertible Preferred Stock for Common Stock . . . . . . . . $ - $ 7,158 ========= ======== Issuance of 6% Preferred Stock . . . . . $ - $ 2,342 ========= ======== Capital Lease Obligations . . . . . . . . $ - $ 2,541 ========= ======== Issuance of Common Stock for notes receivable . . . . . . . . . . . . . . $ - $ 1,915 ========= ======== Acquisition of businesses: Fair value of assets acquired . . . $ 38,578 Fair value of liabilities assumed . . (26,180) Common stock issued . . . . . . . . (12,298) -------- Net cash paid . . . . . . . . . . . $ 100 ========
There were no significant noncash activities in 1991. 2. TRANSACTIONS WITH NAR GROUP LIMITED On October 25, 1991 the Company's shareholders approved several transactions among the Company, THC and NAR Group Limited ("NAR") pursuant to which NAR acquired 13,333,334 shares of Class B Common Stock of the Company and 40,000 shares of 8% Cumulative Preferred Stock of THC (the "Hanover Preferred Stock"), for an aggregate purchase price of $40 million. The purchase price was paid by the surrender by NAR of $15.1 million principal amount of the Company's 7-1/2% Convertible Subordinated Debentures due March 1, 2007 (valued under the Purchase Agreement at $7.5 million) plus $31.3 million in cash (representing the difference between $32.5 million and the sum of (i) accrued interest on the debentures and (ii) $1 million of reimbursable expenses payable to NAR under the stock purchase agreement). NAR also received warrants to purchase 1,210,901 shares of the Company's Common Stock at exercise prices ranging from $4.00 to $5.25 per share and expiring in five years. The exercise prices were subsequently adjusted to prices ranging from $2.19 to $2.42 per share in accordance with the anti-dilution provisions of the warrant agreements. 34 36 The Company entered into this transaction in July 1991, expecting that this transaction would close by September 30, 1991 so it could apply the proceeds to repay an interim borrowing which matured on the same date. Unforeseeable delays prevented the Company from obtaining required consents from certain creditors which were conditions to closing the transactions. As a result of these delays, the Company was required to satisfy the maturing interim borrowing out of working capital. Using working capital to satisfy these borrowings caused increased strain on the Company's already poor cash flow which further strained its relationship with its vendors. The Company closed the above transactions on October 25, 1991 and received an equity infusion of approximately $40 million. A working capital line of credit of approximately $30 million had previously been made available to the Company by a subsidiary of NAR. Although the Company believed that the resulting capital provided to it would be sufficient to return the Company to profitability and enable the Company to pay off $46.1 million of debt that was due in October 1992, it became apparent thereafter, that due to the Company's high debt service requirements and other operational difficulties, it still did not possess the sufficient liquidity to obtain the necessary merchandise on a timely basis. The Company, therefore, required additional capital to permit it to maintain satisfactory credit relations with its vendors and other trade creditors, as well as to satisfy the debt that was due in October 1992. The stock purchase agreement had granted NAR an option to cause the Company to conduct a rights offering in the event that the Company did not achieve certain earnings in the fourth quarter of 1991. In the event that NAR exercised that option it would have been committed to purchase any shares of Common Stock not subscribed for in such Rights Offering by the Company's other shareholders. Thus, it appeared to the Company that the most likely source of additional capital was NAR. Because the Company had a significant loss in the fourth quarter of 1991, in December 1991 NAR indicated to the Company that it would not exercise its option to cause the Company to conduct a Rights Offering but indicated that it would be willing to make an additional equity investment in the Company on terms other than those contemplated by the agreement. In July 1992, the Company and NAR entered into a Definitive Agreement, the terms of which were subsequently approved by the Company's shareholders on September 23, 1992, at which time the following transactions were consummated: - - NAR exchanged its 40,000 shares of the Hanover Preferred Stock and 13,333,334 shares of the Class B Common Stock for 20 million shares of Common Stock of the Company. - - NAR purchased 12,270,503 shares of the Company's Class B Common Stock and 40,000 shares of a newly-created Class B 8% Cumulative Preferred Stock (the "Class B Preferred Stock"), for an aggregate purchase price of $28.4 million. Pursuant to the terms of the Preferred Stock, the Company had the right to require the exchange of the Hanover Preferred Stock and the Class B Common Stock into 18,937,169 shares of Common Stock at any time after the date on which the per-share closing price had been greater than $6.00 for 20 consecutive trading days. 35 37 - - The Company conducted a rights offering (the "Rights Offering") in which the Company's shareholders (other than NAR) subscribed to 7,636,905 shares of Common Stock at $1.50 per share for an aggregate of $11.5 million. NAR purchased the remaining 6,759,893 shares not subscribed for $1.50 per share for an aggregate of approximately $10 million. NAR received a standby commitment fee of $177,000 and an underwriting fee of $405,000 representing 4% of the offering price of all shares it purchased that were not purchased by other shareholders in the Rights Offering. On January 1, 1994, the Company exercised its right to require the exchange of 40,000 shares of the Class B Preferred Stock and 12,270,503 shares of the Class B Common Stock into 18,937,169 shares of Common Stock. 3. ACQUISITIONS Gump's In July 1993, the Company acquired substantially all of the mail order and retail assets of Gump's, Inc. ("Gump's"). Gump's is an upscale catalog marketer of exclusive gifts and the legendary San Francisco retailer. The consideration given for the assets acquired was $13.2 million and consisted of $6.9 million in cash and 1,327,330 shares of Common Stock valued at $4.78 per share or $6.3 million. The $6.9 million of cash used for the purchase of the assets was comprised of (i) proceeds of the sale of Gump's accounts receivable aggregating $2.8 million; (ii) $2.6 million of Gump's cash acquired by the Company as part of the assets acquired; and (iii) $1.5 million of additional credit under the Company's revolving credit facility, as amended. In connection with the above transaction, the Company amended its agreement with General Electric Capital Corp. ("GECC") for the sale and servicing of accounts receivable to include the Gump's accounts receivable under its $75 million facility. The Company also amended its revolving credit facility to increase the maximum credit available by $5 million for Gump's and to include two wholly-owned subsidiaries of the Company as borrowers under the revolving credit facility. The Company Store In August 1993, the Company acquired certain assets of Company Store Holdings, Inc. ("CSH"), The Company Store, Inc., Scandia Down Corporation and Southern California Comfort Corporations (collectively, "The Company Store"). The Company Store is a direct marketer of down comforters, other down products and home furnishings. The consideration given for the assets acquired was $7 million and consisted of (i) 516,824 shares of the Company's Common Stock, valued at $4.64 per share, or $2.4 million, and (ii) two promissory notes in the aggregate principal amount of $1.1 million issued by a subsidiary of the Company, with interest thereon at six percent (6%) per annum due on October 31, 1994 and $3.5 million principal amount of secured notes issued by certain subsidiaries of the Company with interest thereon at six percent (6%) per annum, with principal and interest payments payable monthly on a fifteen year amortization, with the remaining balance due and payable on August 31, 1998. 36 38 In October 1993, the Company amended its revolving credit facility to increase the maximum credit available by $5 million for The Company Store and to include The Company Store as a borrower under the facility. Tweeds In September 1993, the Company acquired all of the outstanding shares of Tweeds, Inc. Tweeds is a well-known European- inspired women's fashion catalog. The purchase price was $8.8 million and consisted of: (i) $.1 million in cash; (ii) 771,774 shares of the Company's Common Stock, valued at $4.60 per share, or $3.6 million and (iii) the assumption of $5.1 million of liabilities. In October 1993, the Company amended its revolving credit facility to increase its maximum credit available by $2.5 million for Tweeds and to include Tweeds as a borrower under the facility. Accounting for Acquisitions The acquisitions of Gump's, The Company Store and Tweeds have been accounted for using the purchase method of accounting with an estimated excess of cost over net assets of acquired businesses of approximately $10.2 million recorded, based upon the fair values of the assets acquired and liabilities assumed. In addition, the Company recorded $2.5 million representing the fair value of acquired mailing lists. The operating results of the acquired companies are included in consolidated net income from their respective dates of acquisition. The following represents the unaudited pro forma results of operations for the years ended December 26, 1992 and January 1, 1994 as if these three acquisitions had occurred at the beginning of fiscal years 1992 and 1993:
(In thousands except per share amounts) (Unaudited) 1992 1993 --------- ---------- Revenues $ 733,454 $ 723,749 ========= ========== Income (loss) before extraordinary items and cumulative effect of accounting change for income taxes $ (3,720) $ 10,160 ========= ========== Net income applicable to Common Shareholders $ 12,284 $ 6,067 ========= ========== Per Share: Income (loss) per share before extraordinary items and cumulative effect of accounting change for income taxes $ (.17) $ .08 Extraordinary items .23 - Cumulative effect of accounting change for income taxes .24 - --------- ---------- Net income $ .30 $ .08 ========= ==========
37 39 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. The Safety Zone In September 1993, the Company acquired 20% of the outstanding common stock of Aegis Safety Holdings, Inc. ("Aegis"), a direct marketer of safety and anti=hazard products through The Safety Zone catalog. The consideration for the investment was the provision by the Company of certain catalog fulfillment and financial services to Aegis at the Company's cost until August 1998, subject to certain early termination provisions. The Company also acquired an option to purchase an additional 460,714 shares at $7.00 per share, subject to anti=dilution provisions which would increase its ownership to 50% of Aegis common stock. This option expires at the end of 1996. Aegis has an option to require the Company to acquire all of Aegis' then outstanding stock after December 31, 1998 if the Company has exercised its option and certain other conditions have been satisfied. The Company has agreed to extend a secured working capital line of up to $1 million to Aegis in 1994. Aegis had approximately $9 million in net sales for the eleven months ended January 1, 1994. Boston Publishing Company In February 1994, the Company entered into an agreement with Boston Publishing Company, Inc. ("BPC") whereby the Company acquired a 20% equity interest in BPC and agreed to provide certain catalog related services to the Boston based publisher. The Company will also provide BPC with a secured three=year revolving credit facility of up to $3 million, a secured $.75 million short=term loan, and a $.5 million five year convertible note. The note is convertible into equity representing approximately 4% of BPC. The Company also acquired an option to acquire an additional 1,536,345 shares at $2.08 per share subject to anti=dilution provisions which would increase its ownership to 50% in BPC. The BPC shareholders will have the right to require the Company to purchase their shares in fiscal year 1997 under certain circumstances. BPC publishes the Museum Collections catalog featuring unique, well=valued museum replicas, reproductions and adaptations; and the Finishing Touches catalog, featuring decorative merchandise for the home. BPC had approximately $12 million (unaudited) in revenues in 1993. The investments in Aegis and BPC are accounted for by the equity method of accounting. 4. SEARS LICENSING AGREEMENT In January 1994, the Company entered into a licensing agreement (the "Sears Agreement") with the direct marketing subsidiary of Sears Roebuck and Co. ("Sears"), to produce specialty catalogs for customers of the recently discontinued Sears catalog. The specialty catalogs include: Show Place, based on the DOMESTICATIONS catalog, Great Kitchens, based on the COLONIAL GARDEN KITCHENS catalog, and Beautiful Style, based on the SILHOUETTES catalog. The Sears Agreement has an initial three-year term and continues thereafter unless terminated by either party. Profits and losses from the venture are to be shared between the parties on an equal basis. 38 40 The Company also issued to Sears a performance warrant to purchase 3.5 million shares of Common Stock in 1999 if the licensed business with Sears has revenues of at least $250 million and earnings before interest and taxes of at least $30 million in 1998. Alternately, Sears will be entitled to purchase 7 million shares of Common Stock in 1999 if the licensed business with Sears has revenues of at least $500 million and earnings before interest and taxes of at least $60 million in 1998. If neither of these goals are achieved, the performance warrant will expire unexercised in 1999. The Company will be required to value the performance warrant at such time as it is deemed to have become measurable for accounting purposes because the required events have become probable or have occurred (which may be prior to the date the warrant is exercisable under the Sears Agreement) (the "Measurement Date"). The value would be the difference, if any, between the closing market price of the Common Stock at the Measurement Date and the exercise price of the performance warrant, multiplied by the applicable number of shares. The value would be amortized from the Measurement Date through 1998 and would be subject to change each reporting period based on the closing market price of the Common Stock as of such reporting date. The warrant exercise price is $10.57 per share. The Company is obligated to meet various operational performance standards and if the Company is unable to meet these standards, Sears would be entitled to terminate the agreement. The Company is also entitled to terminate the agreement in certain circumstances, including if Sears fails to comply with any material provision of the Sears Agreement. 5. ACCOUNTS RECEIVABLE, NET On December 22, 1992, the Company repurchased all receivables then owned by certain trusts ($52.7 million), and concurrently entered into an agreement with an unrelated third party which provides for the sale and servicing of accounts receivable originating from the Company's revolving credit card. The Company remains obligated to repurchase uncollectible accounts pursuant to the recourse provisions of the agreement and is required to maintain a specified percentage of all outstanding receivables sold under the program as a deposit with the third party to secure its obligations under the agreement. The Company is required to pay certain servicing fees to the third party and the Company earns the finance charge income that is charged to the accounts. The uncollected balances of accounts receivable sold under this program were $51.3 million, of which $15.3 million represents deposits under the agreement and $2.7 million are accounts not purchased under the agreement which are included in Accounts receivable at December 26, 1992. At January 1, 1994, the uncollected balances of accounts receivable under this program were $47.0 million, of which $13.0 million represents deposits under the agreement. The total reserve balance maintained for the repurchase of uncollectible accounts was $5.5 million and $3.1 million at December 26, 1992 and January 1, 1994, respectively, of which $3.5 million and $1.7 million, respectively, are included in Accrued liabilities and the remaining balance is included in the allowance for doubtful accounts. Receivables sold under this agreement are considered financial instruments with off=balance sheet risk as defined in Statement of Financial Accounting Standards No. 105. 39 41 Because the Company's sales are primarily made to individual customers located throughout the United States, the Company believes there are no concentrations of credit risks. 6. ACCRUED LIABILITIES Accrued liabilities consists of the following (in thousands):
DECEMBER 26, JANUARY 1, 1992 1994 ------------ ---------- Compensation.............................. $ 3,298 $ 3,642 Interest.................................. 1,033 746 Insurance................................. 1,434 736 Reserve for future sales returns.......... 3,901 4,911 Reserve for repurchase of accounts receivable sold with recourse............ 3,500 1,735 Net liabilities of discontinued operations............................... 4,944 977 Other..................................... 3,253 7,906 ---------- --------- $ 21,363 $ 20,653 ========== =========
7. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
DECEMBER 26, JANUARY 1, 1992 1994 ------------ ----------- Revolving Credit Facility................. $ 21,195 $ 230 Industrial Revenue Bonds with variable interest rates averaging 4.3% in 1992 and 3.7% in 1993 due 2003................................. 8,000 8,000 6% Notes Payable due 1994................. - 1,100 6% Mortgage Notes Payable due 1998........ - 3,452 9.25% Senior Subordinated Notes due 1998.. - 20,000 7 1/2% Convertible Subordinated Debentures due 2007................................. 751 751 14% Senior Subordinated Debentures........ 825 - 8% Subordinated Notes..................... 12,360 - Other..................................... 76 56 ---------- ---------- 43,207 33,589 Less current portion...................... 23 1,276 ---------- ---------- Noncurrent portion........................ $ 43,184 $ 32,313 ========== ==========
Revolving Credit Facility On May 5, 1993, the Company consummated a three-year, $40 million credit facility with a financial institution, replacing the previous facility with Quadrant Capital Corporation ("QCC"), a subsidiary of NAR, that had been entered into in 1991. The new facility (the "Revolving Credit Facility") provides for cash borrowings and letters of credit based on eligible inventory, with a $10 million sublimit for letters of credit. The interest rate on the funds borrowed under the Revolving Credit Facility is the prime rate of Philadelphia National Bank plus two percent per annum. Subsequent to May 5, 1993, the Company amended the Revolving Credit Facility to include Gump's, The Company Store and Tweeds, as borrowers under the agreement and 40 42 the limit was increased to $52.5 million. The facility is guaranteed by the Company and is secured by inventory and other assets of its principal operating subsidiaries. In addition, a subsidiary of NAR provided a secured limited guarantee of $10 million which allowed the Company to borrow funds in excess of its availability, based on a formula, up to the facility's limit. The guarantee is reduced based upon availability under the agreement and the Company's cash flow, as defined, and accordingly, was reduced by $5.1 million in the fourth quarter of 1993 and will be eliminated in March 1994. The loan agreement contains working capital and net worth covenants, debt incurrence restrictions, dividend restrictions, and prepayment penalties. The face amount of unexpired documentary letters of credit at December 26, 1992 and January 1, 1994 were $1.7 million and $5.7 million, respectively. In addition, the Company had issued $5.7 million of standby letters of credit at December 26, 1992. Industrial Revenue Bonds due 2003 The Industrial Revenue Bonds are due on December 1, 2003 and are secured by the related assets purchased from the proceeds of the bonds and by an irrevocable letter of credit in the amount of $8.6 million. The obligations are guaranteed by the Company. 6% Notes Payable due 1994 In connection with the purchase of The Company Store, a subsidiary of the Company entered into two secured promissory notes in the aggregate amount of $1.1 million. The promissory notes bear interest at 6% per annum and are due October 31, 1994. The promissory notes are secured by equipment of The Company Store. 6% Mortgage Notes Payable due 1998 In connection with the purchase of The Company Store, certain subsidiaries of the Company entered into two secured notes in the aggregate amount of $3.5 million with interest at 6% per annum with principal and interest payments payable monthly on a fifteen year amortization with the remaining balance due on August 31, 1998. The mortgage notes payable are non-recourse notes and are not guaranteed by the Company. The mortgage notes payable are secured by the manufacturing and office facilities of The Company Store. 9.25% Senior Subordinated Notes due 1998 On August 17, 1993, the Company issued $20 million of 9.25% Senior Subordinated Notes due 1998 ("9.25% Notes") in a private placement with an insurance company. The Company utilized the funds to retire approximately $14 million of other subordinated debt. Under the terms of the 9.25% Notes, the Company must redeem $6 million without penalty by February 15, 1994, (subsequently amended to May 1, 1994) if the Company has not established or acquired a new distribution facility by such date. The 9.25% Notes mature on August 1, 1998 and require quarterly interest payments. The 9.25% Notes require that the Company maintain certain minimum net worth, working capital, debt to earnings and fixed charge coverage ratios. Under the terms of the related Registration Rights Agreement, the 41 43 Company is required to file a "shelf" registration statement under the Securities Act of 1933, by February 13, 1994 (subsequently extended until March 15, 1994) and use its best effort to cause the registration to be declared effective by June 13, 1994. 7 1/2% Convertible Subordinated Debentures due 2007 On September 23, 1992, the Company consummated an exchange offer with holders of these debentures, pursuant to which the Company issued 40,500 shares of its Common Stock and 13,500 shares of 7.5% Preferred Stock (hereinafter defined) in exchange for $540,000 of the debentures that were tendered. This resulted in an extraordinary gain of $.3 million in 1992. On November 9, 1992, the Company, with the consent of a majority of holders of these debentures, amended the indenture to allow, for the 30 day period ending on December 4, 1992, holders of the debentures to be able to convert their debentures into Common Stock at a conversion price of $3.33 per share instead of $10.31 per share. As a result, the Company converted approximately $11.4 million of these debentures into 3,408,340 shares of Common Stock and recorded an extraordinary gain of approximately $1.6 million based on the fair market value of the shares issued. 14% Senior Subordinated Debentures In 1992, the Company defaulted with respect to the payment of interest on these debentures. The Company and holders of 75% of the 14% Debentures entered into an exchange agreement (the "14% Exchange Offer") by which such holders would exchange their debentures for a combination of cash and 7.5% Preferred Stock (hereinafter defined) and Common Stock of the Company. On September 23, 1992, the Company consummated the 14% Exchange Offer resulting in the exchange of $23.5 million (of the $24.3 million) of 14% Debentures outstanding for $4.85 million in cash and 4,099,625 shares of its Common Stock and 403,088 shares of 7.5% Cumulative Convertible Preferred Stock ("7.5% Preferred Stock"). A subsidiary of QCC owned and exchanged approximately $1.7 million or 7% of these debentures. The Company recorded an extraordinary gain in 1992 of approximately $6.2 million as a result of the 14% Exchange Offer. The gain was calculated based on the cash and the fair market value of the securities issued in exchange for the debt retired, net of approximately $1.3 million in transaction costs. The gain also includes interest that was forgiven as part of the 14% Exchange Offer amounting to approximately $3.7 million. The defaulted interest was paid to the remaining bondholders on November 4, 1992 and the Company was no longer in default. On August 17, 1993, the Company paid off the remaining $825,000 of 14% debentures with proceeds from the 9.25% Notes. 8% Subordinated Notes The 8% Subordinated Notes were due on October 15, 1994. They had originally been due in October, 1991, and carried an interest rate of 11%. In connection with the restructuring of the Company's debt obligations in 1991, these notes were partially paid down by $5.0 million, and extended to 1994 with the interest rate lowered to 8%. The Company was required to pay an amount equal to 3% per year if, at final maturity or earlier redemption, NAR's compound annual rate of return on the Company's Common Stock, together 42 44 with any dividends on the Class B Preferred, had exceeded 20% after adjustment to eliminate general market changes as reflected in movements of the Dow Jones Industrial Average. The Company redeemed all of the outstanding notes at the face amount plus accrued interest on August 17, 1993, with the proceeds of the 9.25% Notes. General At January 1, 1994, the aggregate annual principal payments required on all long-term debt were as follows (in thousands): 1994 - $1,276, 1995 - $161, 1996 - $437, 1997 - $181, 1998 - $22,783 and thereafter $8,751. 8. CAPITAL STOCK On September 8, 1993 HDI was formed through a series of mergers involving H&H and THC. The Merger was consummated by (i) the exchange to holders of shares of H&H Common Stock shares of the HDI's Common Stock, (ii) the exchange to holders of shares of THC 7.5% Preferred Stock shares of 7.5% Preferred Stock, and (iii) the exchange to holders of shares of THC Class B Preferred Stock shares of the HDI's Class B Preferred Stock, each such distribution being on a one-for-one-basis. On December 13, 1993, the Company converted all of the 7.5% Preferred Stock into 2,278,128 shares of Common Stock. The holders of the 7.5% Preferred Stock were paid all outstanding dividends in cash amounting to $197,000. These shares had been issued in connection with the 1992 7 1/2% Exchange Offer. Each share was convertible into four shares of Common Stock at the time on which the per-share closing price of the Common Stock on the American Stock Exchange exceeded $6.00 for 20 trading days in a consecutive 30 day trading period, which occurred on November 11, 1993. On January 1, 1994, 12,270,503 shares of Class B Common Stock and 40,000 shares of Class B Preferred Stock were exchanged into 18,937,169 shares of Common Stock. Dividends on the Class B Preferred Stock aggregated $3.3 million in fiscal 1993 and were paid through the issuance of 684,890 shares of Common Stock and $693,000 in cash. The Common Stock issued in connection with these dividends was valued at the average per-share closing price of the Common Stock during the 20 consecutive trading days immediately preceding the date on which the dividends were paid. On January 1, 1994, the Company had accrued dividends payable of $886,000 on the Class B Preferred Stock which were paid in cash on February 22, 1994. 6% Series A Convertible Preferred Stock On December 10, 1993, in connection with the Company's acquisition of Tweeds, the Company entered into an exchange agreement with a major vendor of Tweeds. Under the exchange agreement, the Company issued 234,900 shares of its 6% Series A Preferred Stock (6% Preferred Stock) for an installment note, dated March 29, 1993, as amended, in the amount of approximately $2.4 million issued by Tweeds. Dividends on the 6% Preferred Stock began accruing on September 30, 1993. The 6% Preferred Stock shall be converted into Common Stock of the Company over a three year period on September 30, 1994, 1995, and 1996. The 43 45 conversion price shall be an amount equal to the average of the per share closing prices for the five trading days proceeding the conversion dates. The 6% Preferred Stock has a stated value of $10 per share and has a liquidation preference of an amount equal to the stated value of each share of the 6% Preferred Stock plus accrued dividends or $2,385,000 at January 1, 1994. The Company has the right to redeem the 6% Preferred Stock at its initial stated value plus accrued dividends, payable in cash. Warrants The warrants outstanding at January 1, 1994, are as follows:
WARRANTS EXERCISE EXPIRATION ISSUED PRICE DATE -------- -------- ---------- 3,151,945 $ 2.42 05/08/96 349,601 2.19 05/10/96 3,157,884 2.91 07/08/96 334,550 2.19 07/10/96 ---------- 6,993,980 ==========
Of the above warrants issued, 5,033,735 warrants are held by NAR and affiliates. In addition, as previously discussed, the Company issued to Sears a performance warrant to purchase up to 7 million shares of Common Stock in 1999. This performance warrant is not reflected in the above table. At January 1, 1994, there were 82,933,177 shares of Common Stock and 234,900 shares of 6% Series A Preferred Stock outstanding. Additionally, an aggregate of 18,367,717 shares of Common Stock were reserved for (i) the exercise of outstanding options (535,250), (ii) the exercise of outstanding warrants (13,993,980) including the Sears performance warrant discussed above, (iii) the Executive Equity Incentive Plan (1,736,170), (iv) the Restricted Stock Award Plan (314,200), and (v) the All Employee Equity Investment Plan (1,788,117). Other Transactions In July 1993, the Company filed a Form S-3 with the Securities and Exchange Commission registering 3,750,000 shares of the Company's Common Stock for the purpose of the Gump's acquisition and future business combination transactions. As of January 1, 1994, 2,615,928 shares have been issued in connection with the Gump's, The Company Store and Tweeds acquisitions. On February 16, 1994, the Company entered into an agreement with Sun Life Insurance Company of America ("Sun Life") whereby Sun Life will exercise its 1,960,245 warrants in a cashless or net-issue exchange with the Company and the Company will issue 1,309,207 shares of Common Stock. The number of shares of the Company's Common Stock to be received by Sun Life upon the "cashless" exercise of its warrants was determined based upon the average closing price of the Common Stock on the American Stock Exchange for the ten day trading period ended on February 15, 1994, which is $7.163 per share. 44 46 Dividend Restrictions The Company is restricted from paying dividends on its Common Stock or from acquiring any of its capital stock by certain debt covenants contained in agreements to which the Company is a party. 9. EMPLOYEE BENEFIT PLANS Stock Option Plan Pursuant to the Company's Stock Option Plan (the "Plan"), an aggregate of 2,830,519 shares were approved by shareholders for issuance to employees and consultants of the Company. The option price and the periods over which an option is exercisable are specified by the Compensation Committee of the Board of Directors. Options expire five years from the date of grant and principally vest over three to four years. Payment for shares purchased upon the exercise of an option shall be in cash or stock of the Company. If paid in cash, a partial payment may be made with the remainder in installments evidenced by promissory notes at the discretion of the Compensation Committee. Changes in options outstanding and options available for grant, expressed in number of shares, are as follows:
1991 1992 1993 ---------- ----------- ---------- Options outstanding, beginning of period 1,231,623 945,965 603,765 Expired (28,433) (164,200) (214,165) Cancelled (257,225) (178,000) (24,350) --------- --------- --------- Options outstanding, end of period 945,965 603,765 365,250 ========= ========= ========= Options exercisable, end of period 571,833 502,675 365,250 ========= ========= ========= Available for grant of options, end of period 1,012,118 1,345,318 1,583,833 ========= ========= =========
The option prices range from $2.75 per share to $9.625 per share, with amounts as follows: $2.75 - 200,000 shares, $5.00 - 144,550 shares, $7.00 - -6,200 shares, $8.00 - 7,000 shares and $9.625 - 7,500 shares. Prior to 1992, three directors were granted non-qualified options outside of the Plan to purchase a total of 50,000 shares. Of these options 45,000 shares expire in 1994 and 5,000 shares expire in 1995. The option price ranges from $5.00 per share to $7.25 per share. The table above does not include these option grants. On September 23, 1992, six directors were granted options to purchase 20,000 shares each, at market price, which at that time was $1.75 per share. These option grants were approved at the 1993 annual meeting of shareholders and expire in 1997. The table above does not include these option grants. Hanover Direct, Inc. Savings Plan The 401(K) Savings Plan (the "Plan") allows eligible employees to contribute a percentage of their base compensation to the Plan. The Company makes matching contributions of one-third of the employees' pre-tax 45 47 contributions. Participants may invest contributions in various investment funds, in addition to a guaranteed investment fund or in the Company's Common Stock. The Company's contributions charged to expense for 1991, 1992 and 1993 were $241,000, $265,000 and $431,000, respectively. Supplemental Retirement Plan The Supplemental Retirement Plan (the "Plan") allows eligible employees to make contributions to a trust where, prior to October 1993, they were invested for each participant in life insurance having a cash surrender value and carrying a term benefit payable to the beneficiary selected by the participant. The Company makes matching contributions. In October 1993, the Company amended and restated the Plan. Participant contributions are invested by the trust for each participant in a tax free money market fund. Company contributions in 1991, 1992 and 1993 amounted to $130,000, $179,000 and $130,000, respectively. The Plan permits eligible employees to contribute up to 4% of their salary. The Company matches all participant contributions, up to the 4% threshold. The Plan is not tax-qualified under the applicable provisions of the Internal Revenue Code of 1986, as amended. Incentive Compensation Plan Bonus arrangements with certain executives and key employees generally provide for additional compensation based upon the attainment of certain profit levels, as well as other performance measures. These bonuses approximated $1.6 million and $.4 million in 1992 and 1993, respectively. There were no bonuses paid in 1991. Under the bonus plan, 25% of the bonus is paid in restricted stock that participants vest in over a three year period. In fiscal 1993, 89,220 shares were issued in connection with the Incentive Compensation Plan. Executive Equity Incentive Plan On December 17, 1992, the Board of Directors adopted the 1993 Executive Equity Incentive Plan (the "Incentive Plan"). Such plan was approved by Shareholders at the 1993 Annual Meeting. Pursuant to the Incentive Plan, options to purchase shares of the Company's Common Stock will be granted from time to time by the Compensation Committee of the Board of Directors to selected executives of the Company or its affiliates. For each such option granted, the selected executive will receive the right to purchase on a specified date (the "Tandem Investment Date") a number of shares of the Company's Common Stock ("Tandem Shares") equal to one-half the maximum number of shares of the Company's Common Stock covered by such option. An aggregate of 2,400,000 shares of the Company's Common Stock have been reserved for issuance under the Incentive Plan. Company financing is available under the Incentive Plan to pay for the purchase price of the Tandem Shares. The purchase price per share of the Company's Common Stock upon exercise of a stock option was $2.50 ("Option Price") for all options granted before the ratification of the Incentive Plan by the Shareholders, and the fair market value of a share of the Company's Common Stock on the date of grant of such option for all other options. Options granted under the Incentive Plan become exercisable three years after the date of grant and expire six years 46 48 from the date of grant. The purchase price shall be paid in full at the time of purchase in cash, or shares of the Company's Common Stock valued at their fair market value or in combination thereof. The difference between the Option Price and the fair market value of the Common Stock on the Tandem Investment Date aggregated $601,000 and is being amortized over the three year period that the options become exercisable. The amortization for fiscal 1993 was $170,000. In 1993, 663,830 shares were purchased at prices ranging from $3.125 to $4.50 for a total consideration of $2,133,156. The employees paid $710,000 and the Company accepted notes in the amount of $1,423,000 which are due in 1999. The notes bear interest at 3.96% to 5.54%, and 1,327,660 options were granted to such employees at prices ranging from $2.50 to $4.50. Restricted Stock Award Plan On December 17, 1992, the Board of Directors adopted the 1993 Restricted Stock Award Plan (the "Restricted Stock Plan"). Each full-time or permanent part-time employee of the Company or its affiliates selected by the Compensation Committee who holds a key position that the Compensation Committee shall have designated for eligibility in the Restricted Stock Plan, has attained the age of 18, has performed at least 12 months of continuous service with the Company or an affiliate of the Company, and is not covered by a collective bargaining agreement may participate in the Restricted Stock Plan. Pursuant to the Restricted Stock Plan, the Compensation Committee from time to time may award shares of the Company's Common Stock ("Award Shares") to such participants. The Award Shares received by such participants are not transferable (other than by will or the laws of descent and distribution) until the vesting date or when such participant attains the age of 65, dies, or becomes permanently disabled, and are subject to forfeiture in the event the participant ceases to be an employee prior to that date. An aggregate of 500,000 shares of the Company's Common Stock have been reserved for issuance under the Restricted Stock Plan. During 1993, 185,800 shares were awarded to participants aggregating $650,000. Such amount is being amortized over a three year vesting period. Amortization in 1993 was $188,000. All Employee Equity Investment Plan On December 17, 1992, the Board of Directors adopted the 1993 All Employee Equity Investment Plan (the "Investment Plan"), subject to the approval of Shareholders at the 1993 Annual Meeting. Each full-time or permanent part-time employee of the Company or its affiliates who has attained the age of 18, has met certain standards of continuous service with the Company or an affiliate of the Company and is not covered by a collective bargaining agreement may participate in the Investment Plan. An eligible employee shall be granted a right to purchase a specific number of shares of the Company's Common Stock by the Compensation Committee, based on the eligible employee's salary level. The purchase price of the Company's Common Stock in the Investment Plan shall be the average market value of a share of the Company's Common Stock during the 20 days prior to the first day of the subscription period, less a 40% discount. The Shares received by such participants are not transferable (other than by will or the laws of descent and distribution) until the vesting date or when such participant attains the age of 65, dies, or becomes permanently disabled, and are subject to forfeiture in the event the participant ceases to be an employee prior to that date. An aggregate of 2,000,000 shares of the 47 49 Company's Common Stock have been reserved for issuance under the Investment Plan. During fiscal 1993, 211,883 shares were purchased by employees at an average discounted price of $2.32. The difference between the market price and discounted price aggregated $422,000 and is being amortized over a three year vesting period. Amortization in 1993 was $46,000. Employee Stock Ownership Plan The Employee Stock Ownership Plan (the "ESOP") was terminated December 28, 1991. Because the value of the unallocated shares was not sufficient upon termination to fully satisfy the ESOP's indebtedness to the Company, a charge of $4.7 million was recognized in 1991 and is reflected in Other income (expense). Shares allocated to participants at December 28, 1991 were approximately 288,000. These shares became vested upon termination of the ESOP. In November 1992, after receiving approval of the termination from the Internal Revenue Service, the Company transferred 646,053 non-vested shares into its Treasury. The vested shares were distributed in 1993. 10. INCOME TAXES Effective December 29, 1991, the Company adopted Statement of Financial Accounting Standards No. 109 - Accounting for Income Taxes (SFAS 109). In accordance with this statement, for the year ended December 26, 1992, the Company recognized a deferred tax asset of $10 million, reflecting the cumulative effect of the accounting change for the benefit expected to be realized from the utilization of net operating loss carryforwards ("NOLs") and deductible temporary differences. For the year ended January 1, 1994, the Company recognized an additional deferred tax asset of $.6 million, reflecting the effect of the increase in the Federal corporate income tax rate (from 34% to 35%) on the benefit expected to be realized from the utilization of NOLs carryforwards and deductible temporary differences. At January 1, 1994, the Company had tax NOLs totalling $147 million, which expire as follows: In the year 2000 - $1 million, 2001 - $21 million, 2003 - $15 million, 2004 - $14 million, 2005 - $21 million, 2006 - $47 million, 2007 - $28 million. The Company also has $.9 million of charitable contribution carryforwards that expire in 1994 through 1997 and $1.7 million of general business tax credit carryforwards that expire in 1998 through 2003. Under Section 382 of the Internal Revenue Code of 1986, certain transactions the Company entered into during 1991 resulted in an ownership change with respect to the Company and, thus, in the imposition of an annual limitation ("the Section 382 limitation") of approximately $4 million on the amount of taxable income of the Company which may be offset by the Company's pre-change NOL, charitable contribution and business tax credit carryforwards. The Company's available NOLs for tax purposes consists of $97 million of pre-change NOL (subject to the Section 382 limitation) and $50 million of post-change NOL (not subject to the Section 382 limitation). The Company's charitable contribution carryforwards and business tax credit carryforwards are pre-change items subject to the Section 382 limitation. The unused portion of the $4 million annual Section 382 limitation for any year may be carried forward to succeeding years to increase the annual limitation for those succeeding years. In addition, the Company's entire $97 million of pre-change NOL may be used to offset future taxable income 48 50 realized within five years of the date of change of ownership from built-in gains (generally, taxable income from the sale of appreciated assets held by the Company at the date of change in ownership) without reference to the Section 382 limitation. A reconciliation of the Company's net income for financial statement purposes to taxable income (loss) for the years ended December 26, 1992 and January 1, 1994 is as follows (in thousands):
1992 1993 ---------- ---------- Net income............................. $ 20,249 $ 17,337 Income tax provision (benefit)........ 219 (130) ---------- --------- Income before income taxes............. 20,468 17,207 ---------- --------- Differences between income before taxes for financial statement purposes and taxable income: Cumulative effect of accounting change for income taxes............... (10,000) - State income taxes.................... (219) (501) Utilization of carryovers............. - (2,543) Permanent differences................. 3,687 28 Net change in temporary differences........................... (41,678) (14,191) ---------- --------- (48,210) (17,207) ---------- --------- Taxable income (loss).................. ($ 27,742) $ - ========== =========
Changes during 1992 and 1993 in temporary differences principally relate to restaurant closing expenses and losses on asset disposals accrued in 1990 and 1991, which are deductible for income tax purposes in the year in which the assets are actually disposed and expenses are paid. The components of the net deferred tax asset at January 1, 1994 are as follows (in millions):
Non- Current current Total ------- ------- ----- Federal tax NOL, charitable contribution and business tax credit carryforwards...... $ - $55.2 $55.2 Allowance for doubtful accounts............. .8 - .8 Accrued liabilities......................... 3.6 - 3.6 Tax basis in net assets of discontinued operations in excess of financial statement amount........................... .3 - .3 Other....................................... .4 - .4 ----- ----- ----- Deferred Tax Asset.......................... 5.1 55.2 60.3 Valuation allowance....................... (2.1) (47.6) (49.7) ----- ----- ----- Deferred Tax Asset, net..................... $ 3.0 $ 7.6 $10.6 ===== ===== =====
The Company has established a valuation allowance for a portion of the deferred tax asset, due to the Section 382 limitation and limiting the utilization of the remaining deferred tax asset. SFAS 109 requires that the future tax benefit of such NOLs be recorded as an asset to the extent that management assesses the utilization of such NOLs to be "more likely than not". In 1992 management determined, based upon the conversion of interest-bearing debentures to equity, the issuance of additional Common Stock, the disposal of unprofitable discontinued restaurant 49 51 operations, the Company's history of prior operating earnings in the direct marketing business and its expectations for the future, that the operating income of the Company will, more likely than not, be sufficient to utilize $30 million of deductible temporary differences and NOLs prior to their expiration. In making such determination, the Company adjusted 1992 income by eliminating interest expense related to retired debt and assumed that such adjusted 1992 income level could be obtained in each of the next three years. Realization of the future tax benefits is dependent on the Company's ability to generate taxable income within the carryforward period and the periods in which net temporary differences reverse. Future levels of operating income and taxable income are dependent upon general economic conditions, competitive pressures on sales and margins, postal and other delivery rates, and other factors beyond the Company's control. Accordingly, no assurance can be given that sufficient taxable income will be generated for utilization of the NOLs and reversals of temporary differences. At January 1, 1994, the Company has maintained the $30 million amount of expected future operating income that will "more likely than not" utilize the deductible temporary differences and NOLs prior to their expiration. Management believes that although the 1993 operating results might justify a higher amount, in view of its history of operating losses, the $30 million represents a reasonable conservative estimate of the future utilization of the NOLs and will continue to evaluate the likelihood of future profit and the necessity of future adjustments to the deferred tax asset valuation allowance. The Company's tax returns for years subsequent to 1984 have not been examined by the Internal Revenue Service ("IRS"). Availability of the NOLs might be challenged by the IRS upon examination of such returns which could affect the availability of NOLs incurred prior or subsequent to the change in ownership or both. The Company believes, however, that IRS challenges that would limit the utilization of NOLs will not have a material adverse effect on the Company's financial position. The Federal income tax provision was $5.9 million in 1993 which was offset by the utilization of certain NOLs. In addition, a $.6 million deferred tax benefit in 1993 was recorded as a result of the increase in the Federal corporate income tax rates from 34% to 35%. The Company's Federal income tax provision consists of zero in 1991 and 1992. The Company's provision for state income taxes consists of $.2 million in 1991, $.2 million in 1992 and $.5 million in 1993. 50 52 Total tax expense for each of the three fiscal years presented differ from the amount computed by applying the statutory tax rate of 35% (34% in 1992 and 1991) due to the following:
1991 1992 1993 PERCENT PERCENT PERCENT OF PRE-TAX OF PRE-TAX OF PRE-TAX LOSS INCOME INCOME ---------- ---------- ---------- Tax (benefit) at statutory rate............................ (34.0%) 34.0% 35.0% Cumulative effect of accounting change for income taxes......... - (16.6) - State and local taxes............ 0.3 1.1 1.9 Effect of federal rate change on deferred tax asset.............. - - (3.7) Stock issuance expenses.......... - 5.5 - Net reversal of temporary differences..................... - (69.2) (28.9) Loss for which no tax benefit could be recognized............. 30.8 - - Utilization of contribution and NOL carryover................... - - (5.4) Tax NOL for which no benefit could be recognized............. - 46.1 - Other............................ 3.2 0.2 0.3 ------- ------- -------- 0.3% 1.1% (0.8%) ======= ======= ========
11. LEASES Certain leases to which the Company is a party provide for payment of real estate taxes and other expenses. Most leases are operating leases and include various renewal options with specified minimum rentals. Rental expense for operating leases related to continuing operations were as follows (in thousands):
1991 1992 1993 -------- -------- ------- Minimum rentals $ 6,807 $ 8,910 $ 9,458 ======== ======== ========
Future minimum lease payments under noncancellable operating and capital leases relating to continuing operations, that have initial or remaining terms in excess of one year, together with the present value of the net minimum lease payments as of January 1, 1994, are as follows (in thousands):
OPERATING CAPITAL YEAR ENDING LEASES LEASES ------------- ------------ ----------- 1994......................... $ 7,257 $ 873 1995......................... 4,527 732 1996......................... 3,425 694 1997......................... 2,703 454 1998......................... 2,627 - Thereafter................... 17,706 - ------- -------- Total minimum lease payments.................... $38,245 2,753 ======= Less amount representing interest (a)............... 182 -------- Present value of minimum lease payments (b).......... $ 2,571 ========
51 53 (a) Amount necessary to reduce net minimum lease payments to present value calculated at the Company's incremental borrowing rate at the inception of the leases. (b) Reflected in the balance sheet as current and noncurrent capital lease obligations of $50,000 and $105,000 in 1992 and $748,000 and $1,823,000 in 1993, respectively. 12. DISCONTINUED RESTAURANT OPERATIONS In 1992, the Company sold substantially all of the properties remaining from its discontinued restaurant operations. The Company realized net proceeds from such sales of approximately $17.3 million of which approximately $14.9 million was used to reduce outstanding indebtedness. In addition, in exchange for notes, cash and stock valued at $3.9 million, the Company was relieved of $20.4 million in future rent obligations. Revenues applicable to discontinued operations were $10 million in 1991. Interest expense allocated to discontinued operations was $1.6 million and $1.9 million for the years 1991 and 1992, respectively. There was no interest expense allocated to discontinued operations for the year ended January 1, 1994. At December 26, 1992 and January 1, 1994, reserves for discontinued restaurant operations approximated $3.5 million and $2.6 million, respectively. Charges against these reserves were $7.7 million and $0.9 million for the years ended December 26, 1992 and January 1, 1994, respectively. The future minimum lease payments under noncancellable leases as of January 1, 1994, are as follows: 1994 - $1.7 million; 1995 - $1.7 million; 1996 - $1.5 million; 1997 - $1.5 million; 1998 - $1.4 million and thereafter $14.8 million. The above amounts exclude annual sublease income of $1.8 million from subleases which have the same expiration as the underlying leases. 13. RESTRUCTURING CHARGES AND TRANSACTION COSTS In 1991, in connection with the restructuring activities, the Company recorded charges of approximately $5.8 million. These charges were primarily related to severance costs ($.6 million), the costs associated with the restructuring of certain catalogs, including inventory costs ($2.6 million), and other restructuring costs ($2.6 million). The operating results of 1991 also include charges of approximately $4.8 million which were directly related to the stock purchase agreement transaction. These charges include approximately $1.7 million of transaction fees which have been classified as Other income (expense) and increased compensation costs directly related to the change in control provisions included in certain executive employment contracts. In addition, the Company incurred a charge of $3.1 million in connection with the settlement of the employment contract of the former Chairman and CEO of the Company. 14. MANAGEMENT COMPENSATION AGREEMENTS In connection with consummating the transactions in the stock purchase agreement and as a condition thereto, the Company entered into an employment agreement (the "Employment Agreement") with Jack E. Rosenfeld, the President 52 54 and Chief Executive Officer of the Company. The Employment Agreement provides for (1) a five-year term commencing on October 25, 1991, at a base salary of $500,000 per year; (2) a payment to a trust on behalf of Mr. Rosenfeld of 916,667 shares of Common Stock in lieu of a cash payment of $1,564,000 to which he would have been entitled in connection with a change in control, 250,000 of such shares to vest in equal annual installments over three years with the vested shares distributable to Mr. Rosenfeld at the end of the employment term or the earlier termination of his employment; (3) the grant of an option to Mr. Rosenfeld, which has expired, to purchase shares of Common Stock in the event the Company achieved certain earnings in the fourth quarter of 1991; and (4) the grant of registration rights under the Securities Act of 1933, as amended, for shares of Common Stock owned by Mr. Rosenfeld. On October 25, 1991, NAR entered into an agreement with Mr. Rosenfeld pursuant to which he may purchase from NAR prior to October 25, 1996, 1,213,605 shares of Common Stock at a price per share of $2.00 (subject to adjustment) plus 10% per year through the exercise period. This agreement was amended on September 23, 1992 to provide that NAR would grant to Mr. Rosenfeld in March 1993 the right to purchase an additional 1,213,605 shares of Common Stock ("Rights Shares") at a price per share of $1.50 (subject to adjustment) plus 10% per year from September 1992 through the exercise period. In connection with the stock purchase agreement, the Company entered into employment agreements with each of Messrs. Michael P. Sherman, Wayne P. Garten and Edward J. O'Brien, executive officers of the Company. These agreements were substantially the same as such officers' existing employment agreements, except that they provided for cash payments to Messrs. Sherman, Garten and O'Brien of $281,714, $221,621 and $90,000, respectively, and contribution to a trust on behalf of such officers of 156,979 shares, 147,812 shares and 60,000 shares of Common Stock of the Company, respectively, in connection with the change in control effected by the NAR transaction and in lieu of their right to receive a cash change in control payment. Pursuant to the terms of the trust, such Common Stock was distributed to each such officer during fiscal 1993. Messrs. Sherman, Garten and O'Brien were granted certain registration rights under the Securities Act of 1933, as amended, with respect to the shares of Common Stock granted to each of them. 15. RELATED PARTY TRANSACTIONS Approximately $85,000 was paid for the rental of property pursuant to an operating lease to a partnership in which the wife of the Chief Executive Officer and President of the Company, Jack E. Rosenfeld, is a partner. Jack E. Rosenfeld is also a director of the Company. On September 23, 1992, a transaction was approved by the Company's shareholders pursuant to which NAR acquired 62% of the Company's Common Stock. See Note 2 for a description of the transaction. At January 1, 1994, NAR owned 57% of the Company's outstanding Common Stock. Since January 1993, pursuant to a consulting arrangement, QCC renders management consulting, business advisory and investment banking services to the Company for an annual fee of $750,000. 16. COMMITMENTS AND CONTINGENCIES The Company is obligated under various employment contracts with key executives extending through 1995. The aggregate payments due under such contracts is $2.0 million. 53 55 In connection with certain disposal transactions, the Company remains contingently liable with respect to lease obligations for 10 restaurant properties, should the buyers fail to perform under the agreements. The future minimum lease payments as of January 1, 1994, are as follows (in thousands): 1994 - $459; 1995 - $445; 1996 - $366; 1997 - $278; 1998 - $192 and thereafter $737. In January 1994, the Company purchased for $1.1 million a 50% interest in Blue Ridge Associates (the "Partnership), a partnership which owns the Tweeds Roanoke, Virginia fulfillment center. In connection with the Partnership, a subsidiary of the Company is contingently liable with respect to the obligations of the Partnership. The Partnership has a mortgage on the Roanoke fulfillment center in the amount of $6.6 million. In May 1992 the United States Supreme Court reaffirmed an earlier decision which allowed direct marketing companies to make sales into states where they do not have a physical presence without collecting sales taxes with respect to those sales. The Court, however, noted that Congress has the power to change this law. Forty-six states plus the District of Columbia have sales or use taxes or authorize local governmental units to impose sales or use taxes. The Company sells merchandise in all fifty states plus the District of Columbia. Various states are increasing their efforts by various means, including lobbying Congress, to impose on direct marketers the burden of collecting sales and use taxes on the sale of products shipped to state residents. The imposition of a sales and use tax collection obligation on the Company in states to which it ships products would result in additional administrative expense to the Company and higher costs to its customers for the same merchandise currently being purchased by them. This may have a negative effect on customer response rates and revenue levels, thereby negatively affecting the Company's sales and profitability. Under the law as it presently exists, the Company believes that it collects sales tax in all jurisdictions that it is required to do so. The Company is involved in other various routine lawsuits of a nature which are deemed customary and incidental to its business. In the opinion of management, the ultimate disposition of such actions will not have a material adverse effect on the Company's financial position or results of operations. 17. SUBSEQUENT EVENT On February 18, 1994, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission registering 10 million shares of its Common Stock, including 4,154,604 shares on behalf of two selling shareholders. The net proceeds from the offering with respect to the Company's shares will be used for general corporate purposes, including the expansion of the Company's business. The registration statement has not yet become effective. 54 56 18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (in thousands, except per share amounts) 1992 - -------- Revenues $128,787 $142,861 $144,769 $170,145 Gross profit 42,698 51,337 48,924 61,887 Income from operations 2,133 3,123 2,291 6,855 Income (loss) from continuing operations (1,823) (899) (1,246) 5,016 Extraordinary items - 1,209 6,501 1,491 Cumulative effect of accounting change for income taxes 10,000 - - - -------- ------- ------- ------- NET INCOME 8,177 310 5,255 6,507 Preferred stock dividends (700) (700) (800) (997) -------- ------- ------- ------- Net income (loss) applicable to Common Shareholders $ 7,477 $ (390) $ 4,455 $ 5,510 ======== ======= ======= ======== Net income (loss) per share: Income (loss) from continuing operations $ (.09) $ (.05) $ (.07) $ .06 Extraordinary items - .04 .22 .02 Cumulative effect of accounting change for income taxes .35 - - - -------- ------- ------- ------- Net income (loss) $ .26 $ (.01) $ .15 $ .08 ======== ======= ======= ========
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (in thousands, except per share amounts) 1993 - -------- Revenues $121,565 $144,319 $147,890 $228,737 Gross profit 43,585 52,578 51,233 86,728 Income from operations 2,937 3,963 3,056 9,120 NET INCOME 2,477 4,356 2,492 8,012 Preferred stock dividends (1,000) (1,005) (1,006) (1,082) -------- -------- -------- -------- Net income applicable to Common Shareholders $ 1,477 $ 3,351 $ 1,486 $ 6,930 ======== ======== ======== ======== Net income per share $ .02 $ .05 $ .02 $ .09 ======== ======== ======== ========
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None 55 57 P A R T III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (a) Identification of Directors. The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed by the Company pursuant to Regulation 14A. (b) Identification of Executive Officers.(a)
TITLE AND OTHER OFFICE HELD NAME AGE INFORMATION SINCE - ---- --- --------------- ----------- JACK E. ROSENFELD 55 Chief Executive Officer, 1990 President and Director. Mr. Rosenfeld served as Executive Vice President of the Company from June 1988 until October 1990 He was elected to the Board of Directors in 1974. MICHAEL P. SHERMAN 41 Executive Vice President 1990 Corporate Affairs, General Counsel and Secretary. He joined the Company in 1983 and was elected Vice President-Assistant Secretary in the same year. From 1986 to 1990, Mr. Sherman held the position of Senior Vice President, General Counsel and Secretary. WAYNE P. GARTEN 41 Executive Vice President, 1990 Chief Financial Officer since 1990. From 1989 to 1990, Mr. Garten previously held the position of Senior Vice President, Chief Financial Officer. He joined the Company in 1983 and was elected Vice President in 1984. He was elected Vice President-Finance in 1989. EDWARD J. O'BRIEN 50 Senior Vice President and 1991 Treasurer. Mr. O'Brien joined the Company in 1986 and was elected Vice President in 1988.
56 58
TITLE AND OTHER OFFICE HELD NAME AGE INFORMATION SINCE - ---- --------------- ----------- DAVID E. ULLMAN 36 Vice President, 1992 Controller. Prior to joining the Company, Mr. Ullman was with Arthur Andersen & Co. for ten years, most recently as a manager in the Audit and Business Advisory Group.
(a) All references to dates and positions held by such executive officers refer to the Company's predecessor, H&H. H&H merged with and into the Company in September 1993, with the Company surviving. Pursuant to the Company's By-Laws, its officers are chosen annually by the Board of Directors and hold office until their respective successors are chosen and qualified. ITEM 11. EXECUTIVE COMPENSATION. The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed by the Company pursuant to Regulation 14A. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed by the Company pursuant to Regulation 14A. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this item is incorporated by reference from the Company's definitive proxy statement to be filed by the Company pursuant to Regulation 14A. 57 59 P A R T IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as part of this report.
PAGE NO. -------- 1. Index to Consolidated Financial Statements Report of Independent Public Accountants 25 Hanover Direct, Inc. and Subsidiaries Financial Statements: Consolidated Balance Sheets as of December 26, 1992 26 and January 1, 1994 Consolidated Statements of Income/(Loss) for the three 28 years ended January 1, 1994 Consolidated Statements of Shareholders' (Deficit) 29 Equity for the three years ended January 1, 1994 Consolidated Statements of Cash Flows for the three 30 years ended January 1, 1994 Notes to Consolidated Financial Statements 32 Supplementary Data: Selected quarterly financial information (unaudited) for the two fiscal years ended January 1, 1994 2. Index to Financial Statement Schedules Schedule II 61 Schedule VIII 63 Schedules other than those listed above are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto. 3. Exhibits 64 The exhibits required by Item 601 of Regulation S-K filed as part of, or incorporated by reference in, this report are listed in the accompanying Exhibit Index.
58 60 (b) Reports on Form 8-K Current Report on Form 8-K dated July 12, 1993 of H & H Current Report on Form 8-K dated August 25, 1993 of H & H Current Report on Form 8-K dated September 30, 1993 Current Report on Form 8-K dated January 1, 1994 (c) Exhibits required by Item 601 of Regulation S-K. See Exhibit Index. 59 61 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. HANOVER DIRECT, INC. (registrant) Date: March 9, 1994 By: s/Jack E. Rosenfeld --------------------------- Jack E. Rosenfeld, Director, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated. Principal Financial Officer: s/Wayne P. Garten - ----------------------------- Wayne P. Garten Executive Vice President and Chief Financial Officer Board of Directors: s/Ralph Destino s/Edmund R. Manwell - ----------------------------- ----------------------------- Ralph Destino, Director Edmund R. Manwell, Director s/J. David Hakman s/Alan G. Quasha - ----------------------------- ----------------------------- J. David Hakman, Director Alan G. Quasha, Director s/S. Lee Kling s/Geraldine Stutz - ----------------------------- ----------------------------- S. Lee Kling, Director Geraldine Stutz, Director s/Theodore H. Kruttschnitt s/Jeffrey Laikind - ----------------------------- ----------------------------- Theodore H. Kruttschnitt Jeffrey Laikind, Director Director s/Elizabeth Valk Long s/Robert F. Wright - ----------------------------- ----------------------------- Elizabeth Valk Long, Director Robert F. Wright, Director Date: March 9, 1994 60 62 SCHEDULE II HANOVER DIRECT, INC. AMOUNTS RECEIVABLE FROM RELATED PARTIES, UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES YEAR ENDED JANUARY 1, 1994
Column A Column B Column C Column D Column E - ---------------------------- -------------- --------------- -------------------- ----------------------- Deductions Balance at end Balance at -------------------- of period beginning Amounts Amounts ----------------------- Name of debtor of period Additions Collected written off Current Non Current - ------------------------- -------------- --------------- ----------- ------------ --------- ----------- Spence Halper, E.V.P.(a) Year Ended January 1, 1994 $ - $100,000 $- $ - $ - $100,000 Wayne P. Garten, E.V.P.(b) Year Ended January 1, 1994 $ - $235,802 $135,802 $ - $ - $100,000 Edward J. O'Brien, Sr.V.P.(c) Year Ended January 1, 1994 $ - $113,837 $63,837 $ - $ - $50,000 Charles Pellenberg, E.V.P.(a) Year Ended January 1, 1994 $ - $125,000 $ - $ - $ - $125,000 Jack Rosenfeld, C.E.O.(a) Year Ended January 1, 1994 $ - $187,500 $ - $ - $ - $187,500 Michael P. Sherman, E.V.P.(d) Year Ended January 1, 1994 $ - $229,802 $129,802 $ - $ - $100,000
61 63 SCHEDULE II HANOVER DIRECT, INC. AMOUNTS RECEIVABLES FROM RELATED PARTIES, UNDERWRITERS, PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES YEAR ENDED JANUARY 1, 1994 (a) Notes receivable issued in connection with Executive Equity Incentive Plan. The Notes bear interest at 5.54% and are due March 1999. (b) Notes receivable represents $100,000 for the Executive Equity Incentive Plan bearing interest at 5.54% due March 1999. The $135,802 represents a personal loan with interest at 8% and such loan was repaid in fiscal 1993. (c) Notes receivable represents $50,000 for the Executive Equity Incentive Plan bearing interest at 5.54% due March 1999. The remaining $63,837 represents a personal loan with interest at 8% and such loan was repaid in fiscal 1993. (d) Notes receivable represents $100,000 for the Executive Equity Incentive Plan bearing interest at 5.54% due March 1999. The remaining $129,802 represents a personal loan with interest at 8% and such loan was repaid in fiscal 1993. 62 64 SCHEDULE VIII HANOVER DIRECT, INC. VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JANUARY 1, 1994, DECEMBER 26, 1992 AND DECEMBER 28, 1991
Column A Column B Column C Column D Column E - -------------------------- ------------ ---------------------------------- ------------- ------------- Additions ----------------------------------- Balance at Charged to beginning Charged to costs other accounts Deductions - Balance at Description of period and expenses describe describe end of period - -------------------------- --------------- ---------------- --------------- -------------- -------------- 1993: - ------------------------- Allowance for doubtful accounts receivable $6,386,000 $3,676,000 (5) $134,000 (1) $5,952,000 $4,244,000 Reserves for discontinued operations 3,464,000 (2) 906,000 2,558,000 Deferred tax asset valuation allowance 53,000,000 (6) 2,600,000 (4) 5,900,000 49,700,000 1992: - --------------------------- Allowance for doubtful accounts receivable 7,040,000 6,024,000 (1) 6,678,000 6,386,000 Reserves for discontinued operations 11,185,000 (2) 7,721,000 3,464,000 Deferred tax asset valuation allowance (3)53,000,000 53,000,000 1991: - --------------------------- Allowance for doubtful accounts receivable 4,994,000 6,756,000 (1) 4,710,000 7,040,000 Reserves for discontinued operations 17,270,000 5,229,000 (2) 11,314,000 11,185,000
(1) Accounts written-off. (2) Utilization of reserves. (3) The Company adopted SFAS 109 effective December 29, 1991 (4) Utilization of valuation allowance. (5) Represents acquired allowance for doubtful accounts receivable. (6) Represents increase in available net operating losses and effect of increase in coporate income tax rates from 34% to 35%. 63 65 EXHIBIT INDEX EXHIBIT NUMBER PER ITEM 601 OF DESCRIPTION OF DOCUMENT AND INCOR- REGULATION S-K PORATION REFERENCE WHERE APPLICABLE 2.1 Plan of Agreement and Merger dated as of April 15, 1993 between The Horn & Hardart Company and Hanover Direct, Inc. Incorporated by reference to the Company's* Registration Statement on Form S-4 filed on April 16, 1993, Registration No. 33-6152. 2.2 Plan of Agreement and Merger dated as of April 15, 1993 between The Hanover Companies and Hanover Direct, Inc. Incorporated by reference to the Company's* Registration Statement on Form S-4 filed on April 16, 1993, Registration No. 33-6152. 2.3 Asset Purchase Agreement dated as of May 21, 1993 among the Company*, GSF Acquisition Corp. ("GSF") and Gump's, Inc. Incorporated by reference to the Company's* Current Report on Form 8-K dated July 12, 1993. 2.4 Asset Purchase Agreement dated as of May 21, 1993 among the Company*, Gump's By Mail, Inc. ("GBM") and Gump's, Inc. Incorporated by reference to the Company's* Current Report on Form 8-K dated July 12, 1993. 2.5 Order Confirming Sale of the Assets of The Company Store to the Company, entered by the United States Bankruptcy Court for the Western District of Wisconsin on August 20, 1993 in Bankruptcy No. 92-21810-11. Incorporated by reference to the Company's* Current Report on Form 8-K dated August 25, 1993. 2.6 Stock Purchase Agreement dated as of September 7, 1993 among Warburg, Pincus Capital Partners, L.P., WPM, Inc., Sprout Capital V, Sprout Technology Fund, DLJ Venture Capital Fund, DLJ Venture Capital Fund II, L.P., Sprout Growth, Ltd., Sprout Growth, L.P., Primus Capital Fund II, L.P., PAS Associates, Tweeds, Inc., the Company* and TW Acquisitions, Inc. Incorporated by reference to the Company's Current Report on Form 8-K dated September 30, 1993. 64 66 3.1 Certificate of Incorporation. FILED HEREWITH. 3.2 Certificate of Amendment of the Company's Certificate of Incorporation together with Certificate of Designation of Series A Convertible Additional Preferred Stock. FILED HEREWITH. 3.3 Bylaws. Incorporated by reference to the Company's Registration Statement on Form S-4 filed on April 16, 1993, Registration No. 33-6152. 4.1 Indenture between the Company and First Trust National Association, as Trustee, dated as of August 17, 1993. FILED HEREWITH. 4.2 Registration Rights Agreement dated as of August 17, 1993 by and between the Company* and Sun Life Insurance Company of America. FILED HEREWITH. 4.3 Warrant Agreement dated as of October 25, 1991 between the Company* and NAR. Incorporated by reference to the Company's* Current Report on Form 8-K dated October 25, 1991. 4.4 Registration Rights Agreement dated as of July 8,1991 among the Company*, NAR and Intercontinental Mining & Resources Limited ("IMR"). Incorporated by reference to the Company's* Current Report on Form 8-K Dated July 10, 1991. 4.5 Shareholders' Agreement dated October 25, 1991 between the Company* and NAR. Incorporated by reference to the Company's Current Report on Form 8-K dated October 25, 1991. 4.6 Definitive Agreement dated July 20, 1992 between the Company* and NAR. Incorporated by reference to the Company's* Registration Statement on Form S-4 filed on July 28, 1992, Registration Statement No. 33-50102. 65 67 4.7 Form of Warrant Agreement dated as of January 1, 1994 between the Company and Sears Shop At Home Services, Inc. ("Sears"). Incorporated by reference to the Company's Current Report on Form 8-K dated January 1, 1994. 10.1 1978 Stock Option Plan, as amended. Incorporated by reference to the Company's* Annual Report on Form 10-K for the fiscal year ended December 28, 1991. 10.2 Stock Purchase Agreement dated as of July 8, 1991 among the Company* and North American Resources ("NAR"). Incorporated by reference to the Company's* Current Report on Form 8-K dated July 10, 1991. 10.3 Amendment to the Stock Purchase Agreement dated as of October 14, 1991 between the Company* and NAR. Incorporated by reference to the Company's Current Report on Form 8-K dated October 25, 1991. 10.4 Agreement dated as of December 21, 1992 among the Company*, Hanover Direct Pennsylvania, Inc. ("HDPI"), Brawn of other than as noted California, Inc. ("Brawn") and General Electric Capital Corporation ("GECC"). Incorporated by reference to the Company's* Annual Report on Form 10-K for the fiscal year ended December 26, 1992. 10.5 Amendment to the Account Purchase Agreement dated as of July 12, 1993 among the Company*, HDPI, Brawn and GECC. Incorporated by reference to the Company's* Current Report on Form 8-K dated July 12, 1993. 10.6 Loan and Security Agreement dated as of May 5, 1993 among Congress Financial Corporation ("Congress"), HDPI and Brawn. Incorporated by reference to the Companies Registration Statement on Form S-4 filed on April 16, 1993, Registration No. 33-6152. 10.7 Amended and Restated Loan and Security Agreement dated as of July 9, 1993 among HDPI, Brawn, GBM, GSF and Congress. Incorporated by reference to the Company's* Current Report on Form 8-K dated July 12, 1993. 66 68 10.8 Second Amended and Restated Loan and Security Agreement dated as of October 27, 1993 among Congress, HDPI, Brawn, GBM, Gump's Corp., TCSA, Inc., SDSA, Inc. and Tweeds. FILED HEREWITH. 10.9 Form of Stock Option Agreement between the Company* and certain Directors of the Company, as amended. Incorporated by reference to the Company's* Annual Report on Form 10-K for the fiscal year ended December 28, 1991. 10.10 Form of Stock Option Agreement between the Company* and certain Directors of the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1991. 10.11 Executive Employment Agreement dated as of October 25, 1991 among the Company*, HDPI and Jack E. Rosenfeld. Incorporated by reference to the Company's Current Report on Form 8-K dated October 25, 1991. 10.12 Stock Option Agreement dated as of January 1, 1992 between the Company* and Jack E. Rosenfeld, as amended. Incorporated by reference to the Company's* Annual Report on Form 10-K for the fiscal year ended December 26, 1992. 10.13 Registration Rights Agreement dated as of October 25, 1991 between the Company* and Jack E. Rosenfeld. Incorporated by reference to the Company's* Current Report on Form 8-K dated October 25, 1991. 10.14 Employment Agreement dated as of October 14, 1991 between the Company* and Michael P. Sherman. Incorporated by reference to the Company's Report on Form 8-K dated October 28, 1991. 10.15 Amendment No. 1 to the Employment Agreement dated as of June 18, 1993 between the Company and Michael P. Sherman. FILED HEREWITH. 67 69 10.16 Registration Rights Agreement dated as of October 14, 1991 between the Company* and Michael P.Sherman. Incorporated by reference to the Company's* Current Report on Form 8-K dated October 25, 1991. 10.17 Employment Agreement dated as of October 14, 1991, between the Company* and Wayne P. Garten. Incorporated by reference to the Company's* Current Report on Form 8-K dated October 25, 1991. 10.18 Amendment No. 1 to the Employment Agreement dated as of June 18, 1993 between the Company and Wayne P. Garten. FILED HEREWITH. 10.19 Registration Rights Agreement dated as of October 14, 1991 between the Company* and Wayne P. Garten. Incorporated by reference to the Company's* Current Report on Form 8-K dated October 25, 1991. 10.20 Form of Indemnification Agreement among the Company* and each of the Company's directors and executive officers. Incorporated by reference to the Company's* Current Report on Form 8-K dated October 25, 1991. 10.21 Letter Agreement dated May 5, 1989 among the Company*, Theodore H. Kruttschnitt, J. David Hakman and Edmund R. Manwell. Incorporated by reference to the Company's* Current Report on Form 8-K dated May 10, 1989. 10.22 Hanover Direct, Inc. Savings Plan as amended. FILED HEREWITH. 10.23 Restricted Stock Plan. Incorporated by reference to the Company's* Registration Statement on Form S-8 filed on February 24, 1993, Registration No. 33-58760. 10.24 All Employee Equity Investment Plan. Incorporated by reference to the Company's* Registration Statement on Form S-8 filed on February 24, 1993, Registration No. 33-58756. 68 70 10.25 Executive Equity Incentive Plan. Incorporated by reference to the Company's* Registration Statement on Form S-8 filed on February 24, 1993, Registration No. 33-58758. 10.26 Form of Supplemental Retirement Plan. FILED HEREWITH. 10.27 Form of License Agreement dated as of January 1, 1994 between Hanover Ventures, Inc. and Sears. Incorporated by reference to the Company's Current Report on Form 8-K dated January 1, 1994. 21.1 Subsidiaries of the Registrant. FILED HEREWITH. 23.1 Consent of Independent Public Accountants. FILED HEREWITH. * Hanover Direct, Inc., a Delaware corporation, is the successor by merger to The Horn & Hardart Company and The Hanover Companies. 69 EX-3.1 2 CERTIFICATE OF INCORPORATION 1 Exhibit 3.1 CERTIFICATE OF INCORPORATION OF HANOVER DIRECT, INC. FIRST: The name of the corporation (hereinafter called the "Corporation") is Hanover Direct, Inc. SECOND: The Corporation's registered office in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, Delaware 19801. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The nature of the business and purposes to be conducted or promoted are to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of Delaware. FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 163,172,403 shares, of which 40,000 shares shall be class B 8% cumulative preferred stock, par value $.01 per share and stated value of $1,000 per share (the "Class B Preferred"), 861,900 shares shall be shares of 7.5% cumulative convertible preferred stock, par value $.01 and stated value of $20.00 per share (the "7.5% Preferred"), 150,000,000 shares shall be shares of common stock, par value $.66-2/3 per share (the "Common Stock"), and 12,270,503 shares shall be shares of class B common stock, par value $.01 per share (the "Class B Common Stock"). The designation and the powers, preferences and rights, and the qualifications, limitations or restrictions of each class of shares of the Corporation which are fixed by this Certificate of Incorporation, and the express grant of authority to the Board of Directors of the Corporation to fix by resolution or resolutions certain designations and powers, preferences and rights of such shares, and the qualifications, limitations or restrictions thereof, are as follows: 1. Class B Preferred. (a) Dividends. The holders of record of shares of the Class B Preferred shall be entitled to receive preferential cumulative dividends, when and as declared by the Board of Directors out of funds legally available therefor, at a rate of 8% of the stated value per annum. 2 Dividends on the Class B Preferred shall commence to accrue on March 18, 1993, and shall accrue cumulatively on a daily basis whether or not earned or expressly declared by the Board of Directors. Until June 30, 1993, all such dividends shall be payable in cash or in Common Stock at the option of the Corporation (an "8% Stock Dividend"). From July 1, 1993 through December 31, 1996, all such dividends shall be payable in cash or in Common Stock upon the written request of the holders of record of 51% of the shares of the Class B Preferred delivered to the Corporation within 20 days after service of written notice by the Corporation upon the holders of the Class B Preferred of the record date for such dividend. From January 1, 1997, all such dividends shall be payable in cash only. If any dividend is paid in Common Stock, (i) no fractional shares shall be issued, but a cash payment in an amount equal to the value of such fractional share shall be made in lieu thereof, and (ii) such stock shall be valued at the average per-share closing price (regular way) for a round lot of the Common Stock during the 20 consecutive trading days immediately preceding the date on which the dividend is paid if such stock is listed for trading on the American Stock Exchange, the New York Stock Exchange or the National Association of Securities Dealers, Inc. National Market System (if not so listed, the stock shall be valued by an appraiser selected by mutual agreement of the parties, or, if they cannot agree, selected by the American Arbitration Association); provided, however, that, for this purpose, the Common Stock shall never be valued at less than $2.00 or more than $5.00 per share. In case the Corporation shall have taken any of the steps described in Section 2(g)(i) of this Article Fourth, then such dollar amount per share shall be adjusted to equal (x) such dollar amount per share multiplied by the number of shares of Common Stock to which the holder would have been entitled upon exchange immediately prior to the taking of such step divided by (y) the number of shares of Common Stock to which the holder shall be entitled upon exchange immediately after the taking of any such step. Dividends on the Class B Preferred shall be payable each year in equal semi-annual installments on the 23rd day of September and March (the "8% Dividend Payment Dates") when and as declared by the Board of Directors to holders of record as they appear on the records of the Corporation on such respective dates (not exceeding 60 days preceding such 8% Dividend Payment Dates) as may be determined by the Board of Directors in advance of the payment of each particular dividend. Dividends in arrears may be declared by the Board and paid at any time out of funds legally available therefor, without reference to any regular 8% Dividend Payment Date, to holders of record on such date (not exceeding 60 days preceding the payment date thereof) as may be fixed by the Board of Directors. -2- 3 Dividends payable on the Class B Preferred shall be computed on the basis of a 360-day year consisting of twelve 30-day months. No dividends shall be declared or paid or set aside for payment or distribution on any stock or warrants of the Corporation (other than the 7.5% Preferred) for any period unless full cumulative dividends through and including the most recent 8% Dividend Payment Date in respect of the Class B Preferred have been or contemporaneously are declared and either paid in cash or Common Stock or a sum of money (or shares) sufficient for payment has been set apart therefor. Additionally, commencing June 30, 1993, no Common Stock or other stock of the Corporation (other than the 7.5% Preferred) or securities of the Corporation convertible or exchangeable into Common Stock shall be redeemed, purchased or otherwise acquired for any consideration (or any monies be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Corporation. (b) Liquidation Preference. In the event of any distribution of assets upon any liquidation, dissolution or winding- up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation, the holder of each share of the then outstanding Class B Preferred shall be entitled to receive out of the assets of the Corporation, whether such assets are capital, surplus or earnings, before any payments or distributions are made to, or set aside for, the holders of the Common Stock or any other equity security of the Corporation other than the holders of the then outstanding 7.5% Preferred, an amount equal to the sum of (x) $710.14 and (y) all cumulative dividends accrued on such share of Class B Preferred since April 7, 1992, which have not been paid. If the assets of the Corporation are insufficient to pay such amounts in full, then the entire assets of the Corporation shall be distributed pro rata to the holders of shares of the Class B Preferred. (c) Voting Rights. The holders of shares of Class B Preferred shall not be entitled to any voting rights, except as hereinafter provided or as otherwise required by law. Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least a majority of all of the shares of the Class B Preferred, at the time outstanding, given in person or by proxy either in writing or by a vote at a meeting called for such purpose at which the holders of such shares shall vote as a separate class without regard to -3- 4 shares of any other class or series, shall be necessary for (i) the creation by the Corporation of any series or class of preferred stock of the Corporation which is on a parity with the Class B Preferred as to dividends or upon liquidation, dissolution or winding-up or which provides that any shares of such preferred stock of the Corporation be mandatorily redeemed on the redemption of the Class B Preferred, (ii) the Corporation to increase the number of authorized shares of the Class B Preferred, and (iii) the Corporation directly or indirectly to redeem, purchase or otherwise acquire for value any preferred stock of any series, or stock of any other class, ranking, as to dividends or on liquidation, dissolution or winding up, junior to the Class B Preferred. Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least 66-2/3% of all of the shares of the Class B Preferred at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of such shares shall vote as a separate class without regard to any shares of any other class or series, shall be necessary for (i) authorizing, effecting or validating the amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation or of any amendatory certificate thereto so as to amend the rights, preferences, privileges or voting power of shares of the Class B Preferred and (ii) authorizing or increasing the authorized amount of any class of stock, or establishing or designating any series of stock, or the issuing or selling of any obligation, security or instrument convertible into, exchangeable for, or evidencing the right to purchase, acquire or subscribe for shares of a class or series of stock of the Corporation, if, in any such case, such class or series of stock ranks prior to the Class B Preferred as to dividends or distribution of assets upon liquidation, dissolution or winding up or which provides that any shares of such class or series of stock be mandatorily redeemed prior to the redemption of the Class B Preferred. (d) Redemption of the Class B Preferred. The Corporation shall have the right to redeem the Class B Preferred at any time and from time to time after December 31, 1996 at the liquidation value of such shares payable in cash together with any accrued but unpaid dividends accrued on the Class B Preferred since March 18, 1993, which have not been paid. In the event the Corporation shall redeem the Class B Preferred, notice of such redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 days nor more than 60 days prior to the redemption date (the "Redemption Date"), to each holder of record of the shares to be redeemed at such -4- 5 holder's address as the same appears on the stock register of the Corporation; provided, however, that no failure to mail such notice nor any defect therein shall affect the validity of the proceeding for the redemption of the Class B Preferred to be redeemed except as to the holder to whom the Corporation has failed to mail said notice or except as to the holder whose notice was defective. Each such notice shall state: (i) the Redemption Date, (ii) the redemption price (including accrued but unpaid dividends), (iii) the place or places where certificates for such shares are to be surrendered for payment of the redemption price, and (iv) that dividends on the shares to be redeemed will cease to accrue on the day following the Redemption Date unless the Corporation defaults in making such payment. Upon the Redemption Date, the holders of the Class B Preferred shares which are to be redeemed (the "Redemption Shares") shall deliver certificates for their shares to the Corporation against payment of the redemption price. Unless the Corporation shall default in the making of such payment, dividends shall cease to accrue on the Redemption Shares on the day following the Redemption Date whether or not the certificates therefor are delivered to the Corporation. During any period in which any shares of the 7.5% Preferred are then outstanding, the Corporation shall not redeem any shares of the Class B Preferred unless simultaneously therewith or prior thereto, it redeems that number of shares of 7.5% Preferred at the consideration provided for in Section 2(h) of this Article Fourth, such that the aggregate consideration paid by the Corporation for the shares of Class B Preferred to be redeemed by it, pursuant to this Section 1(d), is no greater than the aggregate consideration paid or to be paid by the Corporation for the redemption of shares of 7.5% Preferred (unless the shares of 7.5% Preferred redeemed by the Corporation constitute all of the then outstanding shares of 7.5% Preferred). 2. 7.5% Preferred. (a) Dividends. The holders of record of shares of the 7.5% Preferred shall be entitled to receive preferential cumulative dividends, when and as declared by the Board of Directors out of funds legally available therefor, at a rate of 7.5% of the stated value per annum. Dividends on the 7.5% Preferred shall commence to accrue on March 18, 1993, and shall accrue cumulatively on a daily basis whether or not earned or expressly declared by the Board of Directors. For one 360-day year from September 23, 1992, at the option of the Corporation, the dividends may be paid in shares of 7.5% Preferred (a "7.5% Stock Dividend"); provided, however, that the Corporation shall not declare or pay a 7.5% Stock Dividend during any period with respect to which dividends on the Class B Preferred shall have been -5- 6 paid in cash; and provided further, however, that no fractional shares shall be issued, but a cash payment in an amount equal to the value of such fractional share shall be made in lieu thereof. At all times thereafter, as well as during any period in which the Corporation is prohibited (pursuant to the provisions of the preceding sentence) from declaring or paying a 7.5% Stock Dividend, all dividends shall be payable in cash only. If any dividend is paid in 7.5% Preferred, such stock shall be valued at its stated value. Dividends on the 7.5% Preferred shall be payable each year in equal semi-annual installments on the 23rd day of March and September (the "7.5% Dividend Payment Dates") when and as declared by the Board of Directors to holders of record as they appear on the records of the Corporation on such respective dates (not exceeding 60 days preceding such 7.5% Dividend Payment Dates) as may be determined by the Board of Directors in advance of the payment of each particular dividend. Dividends in arrears may be declared by the Board and paid at any time out of funds legally available therefor, without reference to any regular 7.5% Dividend Payment Date, to holders of record on such date (not exceeding 60 days preceding the payment date thereof) as may be fixed by the Board of Directors. Dividends payable on the 7.5% Preferred shall be computed on the basis of a 360-day year consisting of twelve 30-day months. No payments shall be declared or paid or set apart for payment or distribution on any stock or warrant of the Corporation for any period unless full cumulative dividends through and including the most recent 7.5% Dividend Payment Date in respect of the 7.5% Preferred have been or contemporaneously are declared and paid. As soon as practicable after the declaration of a 7.5% Stock Dividend, the Corporation shall issue and register stock certificates evidencing the shares of 7.5% Preferred (the "Dividend Shares") to which the holders of the 7.5% Preferred are entitled. The Corporation shall pay all documentary stamp taxes that are attributable to the issuance of the Dividend Shares. The Corporation shall reserve and keep available a sufficient number of authorized but unissued shares of 7.5% Preferred to enable the Board of Directors to issue the Dividend Shares. (b) Liquidation Preference. In the event of any distribution of assets upon any liquidation, dissolution or winding- up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation, the holders of the then outstanding 7.5% Preferred shall be entitled to receive out of the assets of the Corporation, whether such -6- 7 assets are capital, surplus or earnings, before any payments or distributions are made to, or set aside for, the holders of the Common Stock, or any other equity security of the Corporation, an amount equal to the sum of (x) the stated value of such shares and (y) all cumulative, accrued but unpaid dividends. If the assets of the Corporation are insufficient to pay such amounts in full, then the entire assets of the Corporation shall be distributed pro rata to the holders of shares of the 7.5% Preferred. (c) Voting Rights. The holders of shares of 7.5% Preferred shall not be entitled to any voting rights, except as hereinafter provided or as otherwise required by law. Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least a majority of all of the shares of the 7.5% Preferred, at the time outstanding, given in person or by proxy either in writing or by a vote at a meeting called for such purpose at which the holders of such shares shall vote as a separate class without regard to shares of any other class or series, shall be necessary for (i) the creation by the Corporation of any series or class of preferred stock of the Corporation which is on a parity with the 7.5% Preferred as to dividends or upon liquidation, dissolution or winding-up or which provides that any shares of such preferred stock of the Corporation be mandatorily redeemed on the redemption of the 7.5% Preferred, (ii) the Corporation to increase the number of authorized shares of the 7.5% Preferred, and (iii) the Corporation directly or indirectly to redeem, purchase or otherwise acquire for value any preferred stock of any series (other than with respect to the Class B Preferred as provided in Section 1(d) of this Article Fourth), or stock of any other class, ranking, as to dividends or on liquidation, dissolution or winding up, junior to the 7.5% Preferred. If and whenever at any time or times dividends payable on the 7.5% Preferred pursuant to Section 2(a) of this Article Fourth shall have been in arrears and unpaid in an aggregate amount equal to or exceeding the amount of dividends payable thereon for any four quarterly periods (whether or not consecutive), then the number of directors constituting the Board of Directors shall, without further action, be increased by two and the holders of the 7.5% Preferred shall have the exclusive right, voting separately as a class, to elect directors of the Corporation to fill such newly created directorships, the remaining directors to be elected by the other class or classes of stock entitled to vote therefor, at each meeting of stockholders held for the purpose of electing directors. -7- 8 Whenever such voting right shall have vested, such right may be exercised initially either at a special meeting of the holders of the 7.5% Preferred, called as hereinafter provided, or at any annual meeting of stockholders held for the purpose of electing directors, and thereafter at such annual meetings or by the written consent of the holders of the 7.5% Preferred pursuant to Section 228 of the Delaware General Corporation Law. Such voting right shall continue until such time as all cumulative dividends accumulated on the 7.5% Preferred together with additional dividends accrued thereon, if any, shall have been paid in full, at which time such voting right of the holders of the 7.5% Preferred shall terminate, subject to re-vesting in the event of each and every subsequent event of default of the character indicated above. At any time when such voting right shall have vested in the holders of the 7.5% Preferred, and if such right shall not already have been initially exercised, a proper officer of the Corporation shall, upon the written request of holders of record of 25% of the shares of the 7.5% Preferred then outstanding, addressed to the Secretary of the Corporation, call a special meeting of holders of the 7.5% Preferred and of any other class or classes of stock having voting power with respect thereto for the purpose of electing directors. Such meeting shall be held at the earliest practicable date upon the notice required for annual meetings of stockholders at the place for holding annual meetings of stockholders of the Corporation or, if none, at a place in the City of New York designated by the Secretary of the Corporation. If such meeting shall not be called by the proper officers of the Corporation within 30 days after the personal service of such written request upon the Secretary of the Corporation, or within 30 days after mailing the same within the United States, by registered mail, addressed to the Secretary of the Corporation at its principal office (such mailing to be evidenced by the registry receipt issued by the postal authorities), then the holders of record of 25% of the shares of the 7.5% Preferred then outstanding may designate in writing a holder of the 7.5% Preferred to call such meeting at the expense of the Corporation, and such meeting may be called by such person so designated upon the notice required for annual meetings of stockholders and shall be held at the same place as is elsewhere provided in this Section 2(c). Any holder of the 7.5% Preferred entitled to vote at such meeting shall have access to the stock books of the Corporation for the purpose of causing a meeting of stockholders to be called pursuant to the provisions of this Section 2(c). Notwithstanding the provisions of this Section 2(c), however, no such special meeting shall be called during a period within 60 days immediately preceding the date fixed for the next annual meeting of stockholders. -8- 9 At any meeting held for the purpose of electing directors at which the holders of the 7.5% Preferred shall have the right to elect directors as provided herein, the presence in person or by proxy of the holders of a majority of the then outstanding shares of the 7.5% Preferred shall be required and be sufficient to constitute a quorum of such class for the election of directors by such class. At any such meeting or adjournment thereof (i) the absence of a quorum of the holders of the 7.5% Preferred having such right shall not prevent the election of directors other than those to be elected by the holders of the 7.5% Preferred and the absence of a quorum or quorums of the holders of capital stock entitled to elect such other directors shall not prevent the election of directors to be elected by the holders of the 7.5% Preferred entitled to elect such directors and (ii) in the absence of a quorum of the holders of any class of stock entitled to vote for the election of directors, a majority of the holders of such class present in person or by proxy shall have the power to adjourn the meeting for the election of directors which the holders of such class are entitled to elect, from time to time, without notice (except as required by law) other than announcement at the meeting, until a quorum shall be present. The term of office of all directors elected by the holders of the 7.5% Preferred pursuant to this Section 2(c) in office at any time when the aforesaid voting rights are vested in the holders of the 7.5% Preferred shall terminate upon the election of their successors at any meeting of stockholders for the purpose of electing directors (it being understood that such successors shall be elected by the holders of the 7.5% Preferred). Upon any termination of the aforesaid voting rights, the term of office of all directors elected by the holders of the 7.5% Preferred pursuant to this Section 2(c) then in office shall thereupon terminate and upon such termination the number of directors constituting the Board of Directors shall, without further action, be reduced by two, subject always to the increase of the number of directors pursuant to this Section 2(c) in case of the future right of the holders of the 7.5% Preferred to elect directors. For the purposes of this Section 2(c) no shares of the 7.5% Preferred held by the Corporation or a subsidiary of the Corporation shall be deemed to be outstanding shares of the 7.5% Preferred. Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the consent of the holders of at least 66-2/3% of all of the shares of the 7.5% Preferred at the time outstanding, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of such -9- 10 shares shall vote as a separate class without regard to any shares of any other class or series, shall be necessary for (i) authorizing, effecting or validating the amendment, alteration or repeal of any of the provisions of the Certificate of Incorporation or of any amendatory certificate thereto so as to amend the rights, preferences, privileges or voting power of shares of the 7.5% Preferred and (ii) authorizing or increasing the authorized amount of any class of stock, or establishing or designating any series of stock, or the issuing or selling of any obligation, security or instrument convertible into, exchangeable for, or evidencing the right to purchase, acquire or subscribe for shares of a class or series of stock of the Corporation, if, in any such case, such class or series of stock ranks prior to the 7.5% Preferred as to dividends or distribution of assets upon liquidation, dissolution or winding up or which provides that any shares of such class or series of stock be mandatorily redeemed prior to the redemption of the 7.5% Preferred. (d) Conversion at the Option of the Holder. Subject to the provisions of Section 2(f) of this Article Fourth, the holders of the 7.5% Preferred shall be entitled at any time and from time to time to convert the 7.5% Preferred into shares of Common Stock. (e) Conversion at the Option of the Corporation. At any time subsequent to the date upon which the per-share closing price (regular way) for a round lot of the Common Stock on the American Stock Exchange (or such other exchange or system on which the Common Stock shall from time to time be traded) has been greater than $6.00 for 20 trading days in a 30 consecutive trading day period, the Corporation shall have the right to require the conversion of the 7.5% Preferred subject to the provisions of Section 2(f) of this Article Fourth. In case the Corporation shall have taken any of the steps described in Section 2(g) of this Article Fourth during such period, then such price shall be adjusted as provided for in, or as may be appropriate pursuant to the provisions of, such Section. The Corporation shall provide holders of the 7.5% Preferred with at least 30 days written notice of the date upon which conversion of the 7.5% Preferred is required by the Corporation pursuant to this Section 2(e) (the "7.5% Conversion Date"). Upon the 7.5% Conversion Date, the holders of the 7.5% Preferred shares which are to be converted (the "7.5% Conversion Shares") shall deliver certificates for their shares to the Corporation against delivery of appropriate documentation for the securities into which they are to be converted. Dividends shall cease to accrue on the 7.5% Conversion Shares on the day following the 7.5% Conversion Date whether or not the certificates therefor are delivered to the Corporation. -10- 11 (f) Conversion Terms and Procedures. Each share of 7.5% Preferred shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such share, into a number of shares of Common Stock determined by dividing the stated value of the share by the Conversion Price. The "Conversion Price" shall be $5.00 at all times except during the Conversion Window (as defined hereafter), if one should occur, and shall be subject to adjustment from time to time as provided herein. During the Conversion Window, the Conversion Price shall be an amount equal to the average per-share closing price (regular way) for a round lot of the Common Stock on the American Stock Exchange (or such other exchange or system on which the Common Stock shall from time to time be traded) on each of the 20 trading days immediately preceding the Conversion Window; provided, however, that the Conversion Price shall not be less than $2.50, subject to adjustment from time to time as provided for in the next sentence. In case the Corporation shall have taken any of the steps described in Section 2(g) of this Article Fourth during such period, then such Conversion Price shall be adjusted as provided for in, or as may be appropriate pursuant to the provisions of, such Section. The "Conversion Window" shall occur only if the per-share closing price (regular way) for a round lot of the Common Stock on the American Stock Exchange (or such other exchange or system on which the Common Stock shall from to time be traded) has never been $5.00 or more on 20 trading days during any 30 consecutive trading day period occurring prior to September 24, 1998. The Conversion Window shall be a 60-calendar-day period beginning on September 24, 1998. The conversion of the 7.5% Preferred shall be effected by the surrender to the Corporation of the certificates representing the shares of the 7.5% Preferred to be converted at the principal office of the Corporation's transfer agent at any time during its usual business hours, together with written notice by the holder specifying the number of shares represented by such certificate or certificates to be so converted. The notice shall also state the name or names (and addresses) and denominations in which the certificate or certificates shall be issued for the shares of Common Stock to be delivered upon such conversion and shall include instructions for delivery thereof. Surrender of such certificates together with such notice shall obligate the Corporation to deliver, in accordance with such instructions, the certificate or certificates for the Common Stock deliverable upon such conversion and, in the event that only a part of the shares -11- 12 of the 7.5% Preferred evidenced by such certificate or certificates are converted, the Corporation shall deliver a certificate evidencing the number of shares of the 7.5% Preferred that are not converted. The Corporation shall make such deliveries as soon as practicable after the surrender of the certificate or certificates evidencing shares of the 7.5% Preferred for conversion and shall pay all accrued but unpaid dividends on the 7.5% Preferred. To the extent permitted by law, such conversion shall be deemed to have been effected as of the close of business on the date on which such certificates shall have been surrendered and such notice shall have been received by the Corporation, and at such time the person or persons in whose name or names any certificate or certificates for such shares are issuable upon such conversion shall be deemed to have become the holder or holders of record thereof. (g) Anti-dilution Provisions. The Conversion Price shall be subject to adjustment from time to time as set forth in this Section 2(g), and as so adjusted or readjusted, shall remain in effect until a further adjustment or readjustment thereof is required hereby. (i) STOCK DIVIDENDS, SUBDIVISIONS AND COMBINATIONS. In case, at any time or from time to time, the Corporation shall - take a record of the holders of the Common Stock for the purpose of entitling them to receive a dividend payable in, or other distribution of, Common Stock or other securities convertible into or exchangeable for Common Stock (in which latter event the number of shares of Common Stock issuable upon the conversion or exchange of such securities shall be deemed to be distributed) (collectively, a "Dividend") or - subdivide its outstanding shares of Common Stock into a larger number of shares of Common Stock (a "Subdivision"), or - combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock (a "Combination"), then the Conversion Price in effect immediately prior to such Subdivision or at the record date of such Dividend shall, simultaneously with the effectiveness of such Subdivision or immediately after the record date of such Dividend, be proportionately reduced, and conversely, in the case of a Combination, the Conversion Price in effect immediately prior to such Combination shall simultaneously -12- 13 with the effectiveness of such Combination, be proportionately increased. Any adjustment to the Conversion Price under this Section 2(g)(i) shall become effective at the close of business on the record date for such Dividend or on the date such Subdivision or Combination referred to herein becomes effective, as the case may be. (ii) CERTAIN OTHER DIVIDENDS AND DISTRIBUTIONS. In case, at any time or from time to time, the Corporation shall make or issue, or take a record of the holders of its Common Stock for the purpose of entitling them to receive any dividend or other distribution of - any evidence of its indebtedness, any shares of its stock (other than Common Stock) or any other securities or property of any nature whatsoever (other than cash), or - any warrants or other rights to subscribe for or purchase any evidence of its indebtedness, any shares of its stock or any other securities or property of any nature whatsoever, then, and in each such event, the holder shall be entitled to receive upon conversion of the shares of 7.5% Preferred such evidence of indebtedness, shares of stock, warrants or other rights or any other securities or property of any nature whatsoever as the holder would have actually been entitled to as a holder of Common Stock if the holder had exercised the conversion rights immediately prior thereto. Such evidence of indebtedness, shares of stock, warrants or other rights or any other securities or other property shall be paid to the holder at the time of delivery by the Corporation of the certificate or certificates for the Common Stock deliverable upon conversion of the 7.5% Preferred. A reclassification of the Common Stock into shares of Common Stock and shares of any other class of stock shall be deemed a distribution by the Corporation to the holders of its Common Stock of such shares of such other class of stock within the meaning of this Section and, if the outstanding shares of Common Stock shall be changed into a larger or smaller number of shares of Common Stock as a part of such reclassification, this shall be deemed a Subdivision or Combination, as the case may be, of the outstanding shares of Common Stock within the meaning of Section 2(g)(i) of this Article Fourth. (iii) OTHER PROVISIONS APPLICABLE TO ADJUSTMENTS UNDER THIS SECTION. The following provision shall be applicable to the making of adjustments of the number of -13- 14 shares of Common Stock to which the holder shall be entitled upon conversion as provided for in this Section 2(g): - When Adjustments to be Made. The adjustments required shall be made whenever and as often as required. For the purpose of any adjustment, any specified event shall be deemed to have occurred at the close of business on the date of its occurrence. - Fractional Interests. In computing adjustments under this Section 2(g), fractional interests in Common Stock shall be taken into account to the nearest one-tenth of a share. - When Adjustment Not Required. If the Corporation shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or distribution and shall, thereafter and before the distribution thereof to stockholders, abandon its plan to pay or deliver such dividend or distribution under circumstances such that it shall not have become (or shall no longer remain) obligated under applicable law to pay or deliver the same, then no adjustment shall be required by reason of the taking of such record and any such adjustment previously made in respect thereof shall be rescinded and annulled. (iv) CHANGES IN CAPITAL STOCK. In case at any time the Corporation shall be a party to any transaction (including, without limitation, a merger, consolidation, sale or other disposition of all or substantially all of the Corporation's assets or capital reorganization), in which previously outstanding Common Stock shall be changed into or exchanged for common stock or other securities of another corporation or interests in a non-corporate entity or other property (including cash) or any combination of any of the foregoing (each such transaction being hereinafter referred to as a "Transaction") then, as a condition to the consummation of the Transaction, lawful and adequate provision shall be made so that the holder, upon conversion at any time on or after the consummation of the Transaction, shall be entitled to receive the highest amount of securities, cash or other property to which the holder would actually have been entitled as a holder of Common Stock upon the consummation of the Transaction if the holder had converted immediately prior thereto (subject to adjustments from and after the consummation of the Transaction as nearly equivalent as possible to the adjustment provided for in this Section 2(g) (including, without limitation, provisions for adjustments of the Conversion Price)). -14- 15 (v) SALE OF ADDITIONAL SHARES. If at any time or from time to time the Corporation shall issue or sell Additional Shares of Common Stock (as hereinafter defined) other than as a dividend or other distribution on any class of stock and other than as a subdivision or combination of shares of Common Stock as provided in Section 2(g)(i) of this Article Fourth, for a consideration per share less than the Then Existing Market Price (as hereinafter defined), then, and in each such case, the then existing Conversion Price shall be reduced, as of the opening of business on the date of such issuance or sale, to a price determined by dividing (A) an amount equal to the sum of (1) the Conversion Price immediately prior to such issue or sale multiplied by the number of shares of Common Stock outstanding at the close of business on the day next preceding the date of such issue or sale, plus (2) the aggregate consideration, if any, received or to be received by the Corporation upon such issue or sale, by (B) the number of shares of Common Stock outstanding at the close of business on the date of such issue or sale after giving effect to the issuance of such Additional Shares of Common Stock. "Additional Shares of Common Stock" shall mean all shares of Common Stock issued by the Corporation, whether or not subsequently reacquired or retired by the Corporation, other than shares of Common Stock issued upon the conversion of the 7.5% Preferred. "Then Existing Market Price" as used in this Section shall mean the per-share closing price (regular way) for a round lot of the Common Stock on the American Stock Exchange (or such other exchange or system on which the Common Stock shall from time to time be traded) on the day next preceding the date of such issue or sale of Additional Shares of Common Stock. For the purpose of making any adjustment in the Conversion Price or number of shares of Common Stock to be issued upon conversion of the 7.5% Preferred, as provided above, the consideration received by the Corporation for any issue or sale of any securities shall: - To the extent it consists of cash, be computed at the net amount of cash received by the Corporation after deduction of any expenses payable directly or indirectly by the Corporation and any underwriting or similar commissions, compensations, discounts or concessions paid or allowed by the Corporation in connection with such issue or sale; - To the extent it consists of property other than cash, the consideration other than cash shall be computed at the fair market value thereof as determined in good faith by the Board of Directors of the Corporation, at or about, but as -15- 16 of, the date of the adoption of the resolution specifically authorizing such issuance or sale, irrespective of any accounting treatment thereof; provided, however, that such fair market value as determined by such Board of Directors, when added to any cash consideration received in connection with such issuance or sale, shall not exceed the aggregate market price of the Additional Shares of Common Stock being issued, as of the date of the adoption of such resolution; and - If Additional Shares of Common Stock, Convertible Securities (as hereinafter defined) or rights or options to purchase either Additional Shares of Common Stock or Convertible Securities are issued or sold together with other stock or securities or other assets of the Corporation for consideration which covers both, the consideration received for the Additional Shares of Common Stock, Convertible Securities or rights or options shall be computed as that portion of the consideration so received which is reasonably determined in good faith by the Board of Directors of the Corporation to be allocable to such Additional Shares of Common Stock, Convertible Securities or rights or options. For the purpose of making any adjustment in the Conversion Price provided in this Section, if at any time, or from time to time, the Corporation issues any stock or other securities convertible into Additional Shares of Common Stock (such stock or other securities being hereinafter referred to as "Convertible Securities") or issues any rights or options to purchase Additional Shares of Common Stock or Convertible Securities (such rights or options being hereinafter referred to as "Rights"), then, and in each such case, if the Effective Conversion Price (as hereinafter defined) of such Rights or Convertible Securities shall be less than the Conversion Price immediately prior to the issuance of such Rights or Convertible Securities, the Corporation shall be deemed to have issued at the time of the issuance of such Rights or Convertible Securities the maximum number of Additional Shares of Common Stock issuable upon exercise or conversion thereof and to have received in consideration for the issuance of such shares an amount equal to the aggregate Effective Conversion Price of such Rights or Convertible Securities. For the purposes of this Section, "Effective Conversion Price" shall mean an amount equal to the sum of the lowest amount of consideration, if any, received or receivable by the Corporation with respect to any one Additional Share of Common Stock upon issuance of the Rights or Convertible Securities and upon their exercise or -16- 17 conversion, respectively. No further adjustment of the Conversion Price adjusted upon the issuance of such Rights or Convertible Securities shall be made as a result of the actual issuance of Additional Shares of Common Stock on the exercise of any such Rights or the conversion of any such Convertible Securities. (vi) OTHER DILUTING EVENTS. In case any event shall occur as to which the provisions of this Section 2(g) are not strictly applicable but the failure to make any adjustment would not in the opinion of the holders fairly protect the rights of the holders in accordance with the essential intent and principles of this Section, then, in each such case, upon the written request of the holders of at least 25% of all of the shares of the 7.5% Preferred at the time outstanding, the Corporation shall appoint a firm of independent certified public accountants of recognized national standing (which may be the regular auditors of the Corporation), which shall give their opinion upon the adjustment, if any, on a basis consistent with the essential intent and principles established in this Section, necessary to preserve, without dilution of the rights of the holders. Upon receipt of such opinion, the Corporation will promptly mail a copy thereof to the holders and shall make the adjustments described therein. (vii) NO DILUTION OR IMPAIRMENT. The Corporation shall not, by amendment of this Certificate of Incorporation or through any consolidation, merger, reorganization, recapitalization, transfer of assets, dissolution, issuance or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Section 2(g), but shall at all times in good faith use its best efforts to assist in carrying out all of such terms and in the taking of all such action as may be necessary or appropriate in order to protect the rights of the holders against dilution or other impairment. (viii) COMMON STOCK. "Common Stock" as used in this Section 2(g) shall mean any shares of any class of the Corporation's capital stock other than the Corporation's preferred stock; provided that such class of preferred stock has a fixed limit on dividends and a fixed amount payable in the event of a voluntary or involuntary liquidation, dissolution or winding up of the Corporation. The Common Stock issuable upon conversion of the 7.5% Preferred, however, shall be the Common Stock of the Corporation as constituted on the date hereof, except as otherwise provided in this Section 2(g). (ix) ACCOUNTANTS' CERTIFICATE OF ADJUSTMENT. In each case of an adjustment or readjustment of the Conversion Price or the number of shares of Common Stock or other -17- 18 securities issuable upon conversion of the 7.5% Preferred, the Corporation, at its expense, shall cause the independent public accountants then auditing the books of the Corporation to compute such adjustment or readjustment in accordance with this Article and prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first-class mail, postage prepaid, to each registered holder of the 7.5% Preferred at the holder's address as shown on the Corporation's stock transfer books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based, including a statement of (A) the consideration received or to be received by the Corporation for any Additional Shares of Common Stock issued or sold or deemed to have been issued or sold, (B) the Conversion Price at the time in effect for the 7.5% Preferred, and (C) the number of Additional Shares of Common Stock and the type and amount, if any, of other property which at the time would be received upon conversion of the 7.5% Preferred. Such notice may be given in advance of such adjustment or readjustment and may be included as part of a notice required to be given pursuant to Section 2(g)(x) of this Article Fourth. (x) NOTICES OF RECORD DATE. In the event the Corporation shall propose to take any action of the type or types requiring an adjustment to the Conversion Price or the number or character of the 7.5% Preferred as set forth herein, the Corporation shall give notice to the holders of the 7.5% Preferred in the manner set forth in Section 2(g)(ix) of this Article Fourth, which notice shall specify the record date, if any, with respect to any such action and the date on which such action is to take place. Such notice shall also set forth such facts with respect thereto as shall be reasonably necessary to indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Conversion Price and the number, kind or class of shares or other securities or property which shall be deliverable upon the occurrence of such action or deliverable upon the conversion of the 7.5% Preferred. In the case of any action which would require the fixing of a record date, such notice shall be given at least 20 days prior to the date so fixed, and in case of all other action, such notice shall be given at least 30 days prior to the taking of such proposed action. (xi) PAYMENT OF TAXES. The Corporation shall pay all documentary stamp taxes that are attributable to the issuance of shares of Common Stock or other securities or property upon conversion of shares of the 7.5% Preferred. (xii) SURRENDERED SHARES. All certificates representing the 7.5% Preferred surrendered for conversion -18- 19 or redemption shall be appropriately canceled on the books of the Corporation, and the shares so converted represented by such certificates shall be restored to the status of authorized but unissued shares of the 7.5% Preferred of the Corporation, but may not be reissued as part of the 7.5% Preferred. (xiii) CLOSING OF BOOKS. The Corporation will not close its transfer books against the transfer of any shares of the 7.5% Preferred or of any shares of Common Stock issued or issuable upon the conversion of any shares of the 7.5% Preferred in any manner that interferes with the timely conversion of such 7.5% Preferred, except as may otherwise be required to comply with applicable securities laws. (h) Redemption of the 7.5% Preferred. The Corporation shall have the right to redeem any or all of the outstanding shares of the 7.5% Preferred at any time and from time to time at the stated value of such shares payable in cash together with any accrued but unpaid dividends thereon. In the event the Corporation shall redeem shares of the 7.5% Preferred, notice of such redemption shall be given by first-class mail, postage prepaid, mailed not less than 30 days nor more than 60 days prior to the redemption date (the "7.5% Redemption Date"), to each holder of record of the shares to be redeemed at such holder's address as the same appears on the stock register of the Corporation; provided, however, that no failure to mail such notice nor any defect therein shall affect the validity of the proceeding for the redemption of any shares of the 7.5% Preferred to be redeemed except as to the holder to whom the Corporation has failed to mail said notice or except as to the holder whose notice was defective. Each such notice shall state: (i) the 7.5% Redemption Date, (ii) the number of shares of the 7.5% Preferred to be redeemed and, if less than all the shares held by such holder are to be redeemed from such holder, the number of shares to be redeemed from such holder, (iii) the redemption price (including accrued but unpaid dividends), (iv) the place or places where certificates for such shares are to be surrendered for payment of the redemption price, and (v) that dividends on the shares to be redeemed will cease to accrue on the day following the 7.5% Redemption Date unless the Corporation defaults in making such payment. Upon the 7.5% Redemption Date, the holders of the 7.5% Preferred shares which are to be redeemed (the "7.5% Redemption Shares") shall deliver certificates for those shares to the Corporation against payment of the redemption price. Unless the Corporation shall default in the making of such payment, dividends shall cease to accrue on the 7.5% Redemption Shares on the day following the 7.5% Redemption -19- 20 Date whether or not the certificates therefor are delivered to the Corporation. If less than all of the shares of the 7.5% Preferred are to be redeemed, the Corporation shall select the shares of the 7.5% Preferred to be redeemed in whole shares on a pro rata basis (or as close thereto as practical). 3. Common Stock and Class B Common Stock. (a) Except as otherwise provided in this Section 3, all shares of common stock of whatever class or series shall be identical and shall entitle the holders thereof to the same rights and privileges. (b) Holders of shares of Common Stock shall be entitled to one vote per share registered on the books of the Corporation on matters submitted to stockholders. Holders of shares of Class B Common Stock shall be entitled to one vote per share registered on the books of the Corporation on matters submitted to stockholders. Except as otherwise required by law, holders of Common Stock and Class B Common Stock shall vote together as one class on all matters submitted to stockholders. (c) In the event of a liquidation, dissolution or winding-up of the Corporation whether voluntary or involuntary, subject to the proviso below and subject to the rights of the holders of the Class A Preferred, the Class B Preferred, the 7.5% Preferred and any other class or series of stock ranking senior to the Common Stock or the Class B Common Stock as to liquidation preferences, the holders of shares of Common Stock and Class B Common Stock then outstanding shall be entitled to share ratably, according to the number of shares held, in the distribution of assets; provided, however, that any such distribution of assets to holders of shares of Class B Common Stock shall be limited to an amount equal to $.01 per share. FIFTH: The name and mailing address of the sole incorporator is Monte E. Wetzler, Breed, Abbott & Morgan, 153 East 53rd Street, New York, New York 10022. SIXTH: The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors consisting of not less than three nor more than twelve directors, the exact number of directors to be determined from time to time by resolution adopted by affirmative vote of a majority of the entire Board of Directors. The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one- -20- 21 third of the total number of directors constituting the entire Board of Directors. Initially, the Class I director shall be Alan G. Quasha, Hanover Direct, Inc., 1500 Harbor Boulevard, Weehawken, New Jersey 07087, the Class II director shall be Jack E. Rosenfeld, Hanover Direct, Inc., 1500 Harbor Boulevard, Weehawken, New Jersey 07087 and the Class III directors shall be Michael P. Sherman and Wayne P. Garten, both at Hanover Direct, Inc., 1500 Harbor Boulevard, Weehawken, New Jersey 07087. From the date of incorporation, Class III directors shall serve for a one-year term, Class II directors for a two-year term and Class I directors for a three-year term. At each annual meeting of stockholders beginning in 1994, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in each class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. A director shall hold office until the annual meeting for the year in which his term expires and until his successor shall be elected and shall qualify, subject, however, to prior death, registration, retirement, disqualification or removal from office. Any vacancy on the Board of Directors that results from an increase in the number of directors may be filled by a majority of the Board of Directors then in office, and any other vacancy occurring in the Board of Directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessors. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of preferred stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article Sixth unless expressly provided by such terms. The election of directors of the Corporation need not be by ballot unless the Bylaws so require. The Board of Directors and stockholders may hold their meetings and have -21- 22 an office or offices outside the State of Delaware, if the Bylaws so provide. Notwithstanding any other provision of this Certificate of Incorporation, no amendment of this Certificate of Incorporation shall amend, alter or repeal any provision of this Article Sixth unless such amendment shall be approved by the holders of shares of stock of the Corporation representing at least 75% of the votes entitled to be cast thereon at a meeting of the stockholders duly called for the consideration of such amendment. SEVENTH: No director of the Corporation shall be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional, misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Indemnification. Except as prohibited by Section 145 of the Delaware General Corporation Law, every director and officer of the Corporation shall be entitled as a matter of right to be indemnified by the Corporation against reasonable expense and any liability paid or incurred by such person in connection with any actual or threatened claim, action, suit or proceeding, civil, criminal, administrative, investigative or other, whether brought by or in the right of the Corporation or otherwise, in which he or she may be involved, as a party or otherwise, by reason of such person being or having been a director or officer of the Corporation or by reason of the fact that such person is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or other representative of the Corporation or another corporation, partnership, joint venture, trust, employee benefit plan or other entity (such claim, action, suit or proceeding hereinafter being referred to as an "action"); provided, however, that no such right of indemnification shall exist with respect to an action brought by a director or officer against the Corporation other than in a suit for indemnification as provided hereunder. Such indemnification shall include the right to have expenses incurred by such person in connection with an action paid in advance by the Corporation prior to final disposition of such action, subject to such conditions as may be prescribed by law. As used herein, "expense" shall include, among other things, fees and expenses of counsel selected by such person, and "liability" shall include amounts of judgments, excise taxes, fines and penalties, and amounts paid in settlement. -22- 23 Insurance; Other Funding. The Corporation may purchase and maintain insurance to protect itself and any person eligible to be indemnified hereunder against any liability or expense asserted or incurred by such person in connection with any action, whether or not the Corporation would have the power to indemnify such person against such liability or expense by law or under the provisions of this Article Seventh. The Corporation may make other financial arrangements, which may include, among other things, a trust fund, program of self-insurance, grant of a security interest or other lien on any assets of the Corporation, or establishment of a letter of credit, guaranty or surety, to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. Non-Exclusive; Nature and Extent of Rights. The right of indemnification provided for herein (i) shall not be deemed exclusive of any other rights, whether now existing or hereafter created, to which those seeking indemnification hereunder may be entitled under any agreement, by-law or article provision, vote of the stockholders or directors or otherwise, (ii) shall be deemed to create contractual rights in favor of persons entitled to indemnification hereunder, (iii) shall continue as to persons who have ceased to have the status pursuant to which they were entitled or were designated as entitled to indemnification hereunder and shall inure to the benefit of the heirs and legal representatives of persons entitled to indemnification hereunder and (iv) shall be applicable to actions, suits or proceedings commenced after the adoption of this Article Seventh, whether arising from acts or omissions occurring before or after the adoption hereof. The right of indemnification provided for herein may not be amended, modified or repealed so as to limit in any way the indemnification provided for herein with respect to any acts or omissions occurring prior to the adoption of any such amendment or repeal. The undersigned, being the sole incorporator, for the purposes of forming a corporation pursuant to the General Corporation Law of the State of Delaware, does make this certificate and does hereby declare and certify that it is his act and deed and the facts stated herein are true, and accordingly does hereunto set his hand this 14th day of April, 1993. /s/ Monte E. Wetzler -------------------------- Monte E. Wetzler Sole Incorporator -23- EX-3.2 3 CERTIFICATE OF AMENDMENT TO CERT. OF INCORPORATION 1 Exhibit 3.2 CERTIFICATE OF AMENDMENT OF CERTIFICATE OF INCORPORATION OF HANOVER DIRECT, INC. (Pursuant to Section 242 of the General Corporation Law of the State of Delaware) _________________________________________________ The undersigned hereby certifies as follows: 1. That he is President of HANOVER DIRECT, INC. 2. That the Certificate of Incorporation was filed with the Secretary of the State of Delaware on the 15th day of April, 1993. 3. That the amendment to the Certificate of Incorporation as set forth herein and recommended by the Board of Directors was duly adopted in accordance with Sections 228 and 242 of the General Corporation Law of the State of Delaware. RESOLVED: That the first paragraph of ARTICLE FOURTH be amended as follows: FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue is 168,172,403 shares, of which 40,000 shares shall be class B 8% cumulative preferred stock, par value $.01 per share and stated value of $1,000 per share (the "Class B Preferred"), 861,900 shares shall be shares of 7.5% cumulative convertible preferred stock, par value $.01 and stated value of $20.00 per share (the "7.5% Preferred"), 5,000,000 shares shall be shares of additional preferred stock, par value $.01 per share (the "Additional Preferred Stock"), 150,000,000 shares shall be shares of common stock, par value $.66-2/3 per share (the "Common Stock"), and 12,270,503 shares shall be shares of class B common stock, par value $.01 per share (the "Class B Common Stock"). 2 RESOLVED: That the following paragraph be added to the end of ARTICLE FOURTH: 4. Additional Preferred Stock (a) The Additional Preferred Stock may be issued from time to time in one or more series, with such distinctive designation or title and in such number of shares as may be fixed by resolution of the Board of Directors without further action by stockholders. The Board of Directors is expressly granted authority to establish, by resolution or resolutions adopted before the issuance of any shares of a particular series of Additional Preferred Stock, the powers, preferences and rights of each series and the qualifications, limitations or restrictions thereof, including but not limited to the following: (i) The voting powers, full, special or limited, or no voting powers, of such series of Additional Preferred Stock; (ii) The rate, terms and conditions on which dividends, if any, shall be paid, whether such dividends will be cumulative and what preference such dividends have in relation to the dividends on other series or classes of stock; (iii) The rights, terms and conditions, if any, for conversion of such series of Additional Preferred Stock into shares of other series or classes of stock; (iv) Any right of the Corporation to redeem the shares of such series of Additional Preferred Stock, and the price, time and conditions of such redemption, including the provisions for any sinking fund; and (v) The rights of holders of such series of Additional Preferred Stock upon liquidation, distribution of assets, consolidation or sale of assets by the Corporation. (b) Unless the Board of Directors otherwise provides in the resolution establishing a series of Additional Preferred Stock, upon repurchase of the Corporation, redemption or conversion, the shares of Additional Preferred Stock shall revert to authorized but unissued shares and may be reissued as shares of any series of Additional Preferred Stock. (c) In case the stated dividends and the amounts payable on liquidation are not paid in full, each share of any series of Additional Preferred Stock shall share ratably with each other share of any series of Additional Preferred -2- 3 Stock, but not with any shares of Common Stock, (a) in the payment of dividends, including cumulations, if any, in accordance with the sums which would be payable on such share if all dividends were declared and paid in full and (b) in any distribution of assets other than by way of dividends, in accordance with the sums which would be payable in such distribution if all sums payable were discharged in full. (d) The holders of Additional Preferred Stock shall be entitled to receive when and as declared by the Board of Directors, but only out of assets legally available for the payment of dividends, cash dividends at the annual rate of each series fixed by the Board of Directors at the time of the original authorization of the issue of the shares of such series. (e) So long as any share of Additional Preferred Stock shall be outstanding, the Corporation shall not declare, pay or set apart for payment any dividends (other than dividends payable in Common Stock) on the Common Stock, make any other distributions on the Common Stock, or redeem, purchase or otherwise acquire for consideration or permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any Common Stock unless all accrued dividends of the Additional Preferred Stock of all series, including any unpaid cumulative dividends thereon, but without interest, shall have been paid and full dividends thereon for the then current dividend period shall have been paid or declared, and a sum sufficient for the payment thereof set apart. Notwithstanding the foregoing, the Corporation may at any time redeem, purchase or otherwise acquire shares of Common Stock in exchange for, or out of the net proceeds from the sale of other use of, other shares of Common Stock. (f) In the event of a liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, but before any distribution or payment shall be made to the holders of the Common Stock, the holders of each series of Additional Preferred Stock shall be entitled to be paid in cash the applicable liquidation price per share fixed at the time of the original authorization of shares of such series and, in the case of each share of Additional Preferred Stock having cumulative dividend rights, an amount equal to all dividends (whether or not earned or declared) accrued and unpaid thereon, but without interest, to the date fixed for such distribution or payment. -3- 4 IN WITNESS WHEREOF, Hanover Direct, Inc. has caused this Certificate of Amendment of the Certificate of Incorporation to be signed on its behalf by Edward J. O'Brien, the Senior Vice President, and attested by Michael P. Sherman, the Secretary, this 19th day of January, 1994. HANOVER DIRECT, INC. By:/s/ Edward J. O'Brien --------------------- Edward J. O'Brien Senior Vice President Attest: By:/s/ Michael P. Sherman ---------------------- Michael P. Sherman Secretary -4- 5 CERTIFICATE OF DESIGNATION OF SERIES A CONVERTIBLE ADDITIONAL PREFERRED STOCK OF HANOVER DIRECT, INC. __________________________________ (Pursuant to Section 151 of the General Corporation Law of the State of Delaware) ___________________________________ Hanover Direct, Inc., a corporation organized and existing under the laws of Delaware (the "Corporation"), does hereby certify that, pursuant to authority conferred on the Board of Directors of the Corporation by the Certificate of Incorporation of the Corporation and in accordance with Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors of the Corporation adopted the following resolution establishing and creating a series of 234,900 shares of additional preferred stock, par value $.01 per share, of the Corporation designated as "Series A Convertible Additional Preferred Stock": RESOLVED, that pursuant to the authority conferred on the Board of Directors of the Corporation by the Certificate of Incorporation, a series of additional preferred stock, par value $.01 per share, of the Corporation is hereby established and created, and that the designation and number of shares and the voting and other powers, preferences and relative, participating, optional or other rights of the shares of such securities, and the qualifications, limitations and restrictions thereof, are as follows: Series A Convertible Additional Preferred Stock (a) Designation and Amount. There shall be a series of additional preferred stock, par value $.01 per share (the "Additional Preferred Stock"), designated as "Series A Convertible Additional Preferred Stock," and the number of shares constituting such series shall be 234,900, each share having a stated value upon issuance of $10.00. Such series is referred to herein as the "Series A Preferred." 6 (b) Rank. As to payment of dividends and as to distributions of assets upon liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, all shares of Series A Preferred shall rank prior to all of the Corporation's Common Stock, par value $.66-2/3 per share (the "Common Stock"), and Class B Common Stock, par value $.01 per share, shall rank equal to any other hereinafter issued series of Additional Preferred Stock and shall be subordinate to all of the Corporation's 7.5% cumulative convertible preferred stock, par value $.01 and stated value of $20 per share (the "7.5% Preferred"), and the class B 8% cumulative preferred stock, par value $.01 per share and stated value of $1,000 per share (the "Class B Preferred"). (c) Dividends. The holders of record of shares of the Series A Preferred shall be entitled to receive dividends, out of funds legally available therefor, at a rate of 6% of the stated value per annum. Dividends on the Series A Preferred shall commence to accrue on September 30, 1993, and shall accrue cumulatively and be added to the stated value on a daily basis whether or not earned or expressly declared by the Board of Directors. (d) Liquidation Preference. In the event of any distribution of assets upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Corporation, the holder of each share of the then outstanding Series A Preferred shall be entitled to receive out of the assets of the Corporation, whether such assets are capital, surplus or earnings, an amount equal to the then stated value of each share of Series A Preferred, before any payments or distributions are made to, or set aside for, any other equity security of the Corporation other than the holders of the 7.5% Preferred, the Class B Preferred and any other series of Additional Preferred Stock. If the assets of the Corporation are insufficient to pay such amounts in full, then the entire assets of the Corporation shall first be distributed to the holders of the 7.5% Preferred and the Class B Preferred and then, pro rata, to the holders of shares of Additional Preferred Stock. Neither a consolidation, merger or other business combination of the Corporation with or into another corporation or other entity nor a sale or transfer of all or part of the Corporation's assets for cash, securities or other property shall be considered a liquidation, dissolution or winding up of the Corporation for purposes of this paragraph (d). (e) Conversion. On September 30, 1994, each holder of the Series A Preferred shall automatically, without any action being required on the part of such -2- 7 holder, have one-third of each such holders holdings of Series A Preferred (the "First Conversion Allotment") converted into a number of shares of Common Stock of the Corporation determined by dividing the then stated value of the shares by the Conversion Price. On September 30, 1995, each holder of the Series A Preferred shall automatically, without any action being required on the part of such holder, have one-half of each such holders holdings of Series A Preferred (the "Second Conversion Allotment") converted into a number of shares of Common Stock determined by dividing the then stated value of the shares by the Conversion Price. On September 30, 1996, all shares of the Series A Preferred that remain outstanding (the "Final Conversion Allotment") shall automatically, without any action being required on the part of the holders thereof, be converted into a number of shares of Common Stock determined by dividing the then stated value of the shares by the Conversion Price. Each of September 30, 1994, September 30, 1995 and September 30, 1996 is referred to herein as a "Conversion Date." The "Conversion Price" shall be an amount equal to the average of the per-share closing prices (regular way) for a round lot of the Common Stock on the American Stock Exchange (or, if the Common Stock is then not listed for trading on the American Stock Exchange, such other exchange or system on which the Common Stock shall from time to time be traded) on each of the five trading days immediately preceding a Conversion Date. Promptly upon the occurrence of a Conversion Date, the Corporation, or its stock transfer agent at the direction of the Corporation, shall give notice by first class mail, postage prepaid, to each holder of record on the Conversion Date of the Series A Preferred at such holder's address as it shall appear upon the stock transfer books of the Corporation. Each such notice of conversion shall specify the Conversion Date and the number of shares of Common Stock into which such shares of Series A Preferred have been converted, and be accompanied by certificates representing the number of full shares of Common Stock into which such Series A Preferred has been converted, registered in the same name and address in which such Series A Preferred is then registered, and any cash adjustment in lieu of fractional shares as hereinafter provided. Any notice that is mailed as herein provided shall be conclusively presumed to have been duly given, whether or not the holder of the Series A Preferred receives such notice; and failure to give such notice by mail, or any defect in such notice, to the holders of any of the shares of outstanding Series A Preferred shall not affect the validity of the proceedings for the conversion of any of the shares of Series A Preferred. Within 5 days following receipt of such notice, holders of shares of Series A -3- 8 Preferred shall surrender the certificate or certificates for such shares of Series A Preferred at the office of the Corporation or the Corporation's stock transfer agent, which certificate or certificates, if the Corporation shall so require, shall be duly endorsed to the Corporation or in blank, or accompanied by proper instruments of transfer to the Corporation or in blank. Subject to the provisions hereof, such conversion shall be deemed to have been made as of the Conversion Date, and the person or persons entitled to receive the Common Stock deliverable upon conversion of such Series A Preferred shall be treated for all purposes as the record holder or holders of such Common Stock on such date. No fractional shares or scrip representing fractional shares of Common Stock shall be issued upon conversion of Series A Preferred. If more than one certificate representing shares of Series A Preferred shall be surrendered for conversion at one time by the same holder, the number of full shares issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series A Preferred so surrendered. Instead of any fractional share of Common Stock that would otherwise be issuable upon conversion of any shares of Series A Preferred, the Corporation will pay a cash adjustment in respect of such fractional interest in an amount equal to the same fraction of the Conversion Price per share of Common Stock. The Corporation shall at all times receive and keep available, out of its authorized and unissued stock, solely for the purpose of affecting the conversion of the Series A Preferred, such number of shares of its Common Stock free of preemptive rights as shall from time to time be sufficient to effect the conversion of all shares of Series A Preferred from time to time outstanding. The Corporation shall from time to time, in accordance with the laws of the State of Delaware, increase the authorized number of shares of Common Stock if at any time the number of shares of Common Stock not outstanding shall not be sufficient to permit the conversion of all the then outstanding shares of Series A Preferred. The Corporation will pay any and all issue or other taxes that may be payable in respect of any issue or delivery of shares of Common Stock on conversion of any shares of Series A Preferred. The Corporation shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issue or delivery of Common Stock (or other securities or assets) in a name other than that in which the shares of Series A Preferred so converted were registered, and no such issue or delivery -4- 9 shall be made unless and until the person requesting such issue has paid to the Corporation the amount of such tax or has established, to the satisfaction of the Corporation, that such tax has been paid. (f) Redemption. The Corporation shall have the right to redeem the First Conversion Allotment at any time prior to September 20, 1994, the Second Conversion Allotment at any time prior to September 20, 1995 and the Final Conversion Allotment at any time prior to September 20, 1996 at the liquidation value (initial stated value plus all accrued but unpaid dividends) of such shares payable in cash. In the event the Corporation shall redeem any such shares of Series A Preferred, notice of such redemption shall be given by first-class mail, postage prepaid, mailed not less than 10 days nor more than 30 days prior to the redemption date (the "Redemption Date"), to each holder of record of the shares to be redeemed at such holder's address as the same appears on the stock register of the Corporation; provided, however, that no failure to mail such notice nor any defect therein shall affect the validity of the proceeding for the redemption of any shares of Series A Preferred to be redeemed except as to the holder to whom the Corporation has failed to mail said notice or except as to the holder whose notice was defective. Each such notice shall state: (i) the Redemption Date, (ii) the redemption price, (iii) the place or places where certificates for such shares are to be surrendered for payment of the redemption price, and (iv) that dividends on the shares to be redeemed will cease to accrue on the day following the Redemption Date unless the Corporation defaults in making payment of the redemption price. Upon the Redemption Date, the holders of the Series A Preferred shares which are to be redeemed (the "Redemption Shares") shall deliver certificates for their shares to the Corporation against payment of the redemption price. Unless the Corporation shall default in the making of such payment, dividends shall cease to accrue on the Redemption Shares on the day following the Redemption Date whether or not the certificates therefor are delivered to the Corporation. (g) Voting Rights. The holders of the Series A Preferred shall not have any voting rights except as may be required by law. (h) Status of Acquired Shares. Shares of Series A Preferred received by the Corporation pursuant to paragraphs (e) or (f) hereof, or otherwise acquired by the Corporation, will be restored to the status of authorized and unissued shares of Additional Preferred Stock, without -5- 10 designation as to series, and may thereafter be issued, but not as shares of Series A Preferred. (i) Preemptive Rights. The Series A Preferred is not entitled to any preemptive or subscription rights in respect of any securities of the Corporation. -6- 11 IN WITNESS WHEREOF, Hanover Direct, Inc. has caused this Certificate of Designation of Series A Convertible Additional Preferred Stock to be signed on its behalf by Edward J. O'Brien, the Senior Vice President, and attested by Michael P. Sherman, the Secretary, this 19th day of January, 1994. HANOVER DIRECT, INC. By:/s/ Edward J. O'Brien --------------------- Edward J. O'Brien Senior Vice President Attest: By:/s/ Michael P. Sherman ---------------------- Michael P. Sherman Secretary -7- 12 STATE OF New Jersey, ) ) ss. COUNTY OF Hudson. ) On this 19th day of January, 1994, personally appeared before me, a notary public, EDWARD J. O'BRIEN, as Senior Vice President of Hanover Direct, Inc., personally known to me to be the person whose name is subscribed to the above instrument and who acknowledged that he executed the above instrument on behalf of the Corporation. Patricia Linda Williams Notary Public of New Jersey Commission expires Jan. 10, 1997 STATE OF New Jersey, ) ) ss. COUNTY OF Hudson. ) On this day of January, 1994, personally appeared before me, a notary public, MICHAEL P. SHERMAN, as Secretary of Hanover Direct, Inc., personally known to me to be the person whose name is subscribed to the above instrument and who acknowledged that he executed the above instrument on behalf of the Corporation. Patricia Linda Williams Notary Public of New Jersey Commission expires Jan. 10, 1997 -8- EX-4.1 4 INDENTURE 1 Exhibit 4.1 THE HANOVER COMPANIES, Issuer and THE HORN & HARDART COMPANY and CERTAIN SUBSIDIARIES OF THE HANOVER COMPANIES, Guarantors _________________________ $20,000,000 9.25% Senior Subordinated Notes _________________________ Indenture Dated as of August 17, 1993 FIRST TRUST NATIONAL ASSOCIATION Trustee 2 TABLE OF CONTENTS ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.1. Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Section 1.2. Other Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Section 1.3. Incorporation by Reference of Trust Indenture Act . . . . . . . . . . . . . . . . 18 Section 1.4. Rules of Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE 2 THE SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 2.1. Form and Dating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 2.2. Execution and Authentication . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Section 2.3. Registrar and Paying Agent. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Section 2.4. Paying Agent to Hold Money in Trust . . . . . . . . . . . . . . . . . . . . . . . 21 Section 2.5. Securityholder Lists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 2.6. Transfer and Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Section 2.7. Replacement Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 2.8. Outstanding Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 Section 2.9. Treasury Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 2.10. Temporary Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 2.11. Cancellation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 2.12. Defaulted Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Section 2.13. Home Office Payment Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 25 ARTICLE 3 REDEMPTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 3.1. Notices to Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 Section 3.2. Selection of Securities to Be Redeemed . . . . . . . . . . . . . . . . . . . . . 25 Section 3.3. Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 Section 3.4. Effect of Notice of Redemption . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 3.5. Deposit of Redemption Price . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Section 3.6. Securities Redeemed in Part . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ARTICLE 4 COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 4.1. Payment of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 4.2. SEC Reports, Financial Reports . . . . . . . . . . . . . . . . . . . . . . . . . 28 Section 4.3. Compliance Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 Section 4.4. Stay, Extension and Usury Laws . . . . . . . . . . . . . . . . . . . . . . . . . 31 Section 4.5. Limitations on Distributions and Investments . . . . . . . . . . . . . . . . . . 31 Section 4.6. Corporate Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 4.7. Payment of Taxes and Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Section 4.8. Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 4.9. Limitation on Encumbrances . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
-i- 3 Section 4.10. Indebtedness to Consolidated Earnings Ratio . . . . . . . . . . . . . . . . . . . . . . . . 34 Section 4.11. Limitation on Incurrences of Additional Indebtedness . . . . . . . . . . . . . . . . . . . 34 Section 4.12. Maintenance of Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 4.13. Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Section 4.14. Restriction on Payment of Management Fees . . . . . . . . . . . . . . . . . . . . . . . . . 37 Section 4.15. Limitation on Transactions With Affiliates . . . . . . . . . . . . . . . . . . . . . . . . 38 Section 4.16. Maintenance of Properties; Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 4.17. Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 4.18. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 Section 4.19. Environmental Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Section 4.20. Fixed Charge Coverage Ratio. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 4.21 Repayment of Certain Existing Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 4.22 Limitation on Ranking of Future Indebtedness . . . . . . . . . . . . . . . . . . . . . . . 41 Section 4.23 Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 Section 4.24 Sale and Leaseback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 Section 4.25 Limitation on Payment Restrictions Affecting Subsidiaries . . . . . . . . . . . . . . . . . 42 Section 4.26. Accounting Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 4.27 PPN Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 Section 4.28 Limitations on Sales of Assets and Subsidiary Stock . . . . . . . . . . . . . . . . . . . . 43 Section 4.29. Repurchase of the Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 4.30. Amendments of CFC Credit Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Section 4.31. Execution of Guaranties by Restricted Subsidiaries . . . . . . . . . . . . . . . . . . . . 48 Section 4.32. Limitation on Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 4.33. Working Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 ARTICLE 5 SUCCESSORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Section 5.1. When Company, the Guarantor or Their Subsidiaries May Merge, etc . . . . . . . . . . . . . 49 Section 5.2. Successor Corporation Substituted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 ARTICLE 6 DEFAULTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 6.1. Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 Section 6.2. Acceleration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 6.3. Other Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 6.4. Waiver of Past Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 6.5. Control by Majority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Section 6.6. Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 6.7. Rights of Holders to Receive Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 6.8. Collection Suit by Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 Section 6.9. Trustee may File Proofs of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 6.10. Priorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Section 6.11. Undertaking for Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
-ii- 4 ARTICLE 7 TRUSTEE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 7.1. Duties of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Section 7.2. Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Section 7.3. Individual Rights of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Section 7.4. Trustee's Disclaimer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Section 7.5. Notice of Defaults . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Section 7.6. Reports by Trustee to Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Section 7.7. Compensation and Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 Section 7.8. Replacement of Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Section 7.9. Successor Trustee by Merger, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Section 7.10. Eligibility; Disqualification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Section 7.11. Preferential Collection of Claims Against Company . . . . . . . . . . . . . . . . . . . . . 62 ARTICLE 8 DISCHARGE OF INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 Section 8.1. Termination of Company's, Guarantor's and the Guarantor Subsidiaries' Obligations . . . . . 62 Section 8.2. Application of Trust Money . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 8.3. Repayment to Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 Section 8.4. Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 ARTICLE 9 AMENDMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 9.1. Without Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 9.2. With Consent of Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Section 9.3. Compliance with Trust Indenture Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 9.4. Revocation and Effect of Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 Section 9.5. Notation on or Exchange of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 9.6. Trustee Protected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 ARTICLE 10 SUBORDINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Section 10.1. Securities Subordinated to Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . 66 Section 10.2. Liquidation; Dissolution; Bankruptcy . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 Section 10.3. Default on Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 Section 10.4. When Distribution Must Be Paid Over . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 10.5. Notice by Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 10.6. Subrogation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 Section 10.7. Relative Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 Section 10.8. Subordination May Not Be Impaired by Company . . . . . . . . . . . . . . . . . . . . . . . 70 Section 10.9. Distribution or Notice to Representatives . . . . . . . . . . . . . . . . . . . . . . . . . 71 Section 10.10. Rights of Trustee and Paying Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 Section 10.11. Trustee Entitled to Assume Payments Not Prohibited in Absence of Notice . . . . . . . . . . 71 Section 10.12. Application by Trustee of Monies Deposited With It . . . . . . . . . . . . . . . . . . . . 71
-iii- 5 Section 10.13. Trustee's Compensation Not Prejudiced . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Section 10.14. Officer's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Section 10.15. Certain Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Section 10.16. Names of Representatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Section 10.17. Article 10 Not To Prevent Events of Default or Limit Right To Accelerate . . . . . . . . . 73 Section 10.18. Reliance by Holders of Senior Indebtedness on Subordination Provisions . . . . . . . . . . 73 Section 10.19. Proof of Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 Section 10.20. No Fiduciary Duty to Holders of Senior Indebtedness . . . . . . . . . . . . . . . . . . . . 73 Section 10.20. Limitations on Application of Article 10. . . . . . . . . . . . . . . . . . . . . . . . . . 74 ARTICLE 11 GUARANTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 11.1. Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 Section 11.2. Execution and Delivery of Guaranty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 ARTICLE 12 SECURITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Section 12.1. Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Section 12.2. Recording, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 Section 12.3. Suits to Protect the Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 ARTICLE 13 MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Section 13.1. Trust Indenture Act Controls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Section 13.2. Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 Section 13.3. Communication by Holders with Other Holders . . . . . . . . . . . . . . . . . . . . . . . . 81 Section 13.4. Certificate and Opinion as to Conditions Precedent . . . . . . . . . . . . . . . . . . . . 81 Section 13.5. Statements Required in Certificate or Opinion . . . . . . . . . . . . . . . . . . . . . . . 81 Section 13.6. Rules by Trustee and Agents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 13.7. Legal Holidays . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 13.8. Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 13.9. Variable Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Section 13.10. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Section 13.11. No Adverse Interpretation of Other Agreements . . . . . . . . . . . . . . . . . . . . . . . 83 Section 13.12. Successors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Section 13.13. Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Section 13.14. Qualification of Indenture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Section 13.15. Table of Contents, Headings, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 Section 13.16. Consent to Jurisdiction and Service of Process . . . . . . . . . . . . . . . . . . . . . . 84 Section 13.17. Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
-iv- 6 INDENTURE dated as of August 17, 1993 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 this Indenture and First Trust National Association, a national association, as Trustee (the "Trustee"). Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the holders of the Company's 9.25% Senior Subordinated Notes due August 1, 1998 (the "Securities"): ARTICLE 1 DEFINITIONS AND INCORPORATION BY REFERENCE Section 1.1. Definitions. "Affiliate" of any specified person means any other person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified person. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such person, whether through the ownership of voting securities or by agreement or otherwise. "Agent" means any Registrar, Paying Agent or coregistrar. "Average Life" means, as of the date of determination, with respect to any security or instrument, the quotient obtained by dividing (i) the sum of the products of the number of years from the date of determination to the dates of each successive scheduled principal (or redemption) payment of such security or instrument multiplied by the amount of such principal (or redemption) payment by (ii) the sum of all such principal (or redemption) payments. "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal, state or foreign law for the relief of debtors. "Benefit Plan" means a defined benefit plan as defined in Section 3(35) of ERISA, other than a Multiemployer Plan, in respect of which the Company, the Guarantor or any ERISA Affiliate is, or within the immediately preceding six (6) years was, an "employer" as defined in Section 3(5) of ERISA; provided, however, that the term "Benefit Plan" shall not include any such defined benefit plan for any period during which the termination of or withdrawal from such defined benefit plan by such ERISA 7 Affiliate could not subject the Company, the Guarantor or any Guarantor Subsidiary to any liability under the Internal Revenue Code or ERISA. "Board of Directors" or "Board" means the Board of Directors or any authorized committee of the Board of the Company or the Guarantor empowered to act on such matters. "Board Resolution" means, with respect to any Person, a duly adopted resolution of the Board of Directors of such Person, a certified copy of which has been sent to the Trustee. "Capital Stock" means with respect to any Person any and all shares, interests, warrants, rights, options, participations or other equivalents (however designated) of, in or to corporate stock, including of, in or to common stock and preferred stock (whether or not included in shareholders' equity). "Capitalized Lease Obligation" means, as applied to any Person for any period, any lease of any property (whether real, personal or mixed) by that Person as lessee that, in conformity with GAAP, is or should be accounted for as a capital lease on the balance sheet or for which the amount of the asset or liability thereunder as if so capitalized should be disclosed in a footnote to such balance sheet of that Person and the amount of such obligation shall be the capitalized amount thereof, determined in accordance with such principles. "Cash and Marketable Securities" means cash, cash equivalents of U.S. Government Obligations or certificates of deposit maturing within nine months from the date of issuance thereof issued by a commercial bank or trust company organized under the laws of the United States of America or any state thereof or the District of Columbia or any other short-term money market type obligations of such corporation, each having a rating for its unsecured long-term debt of "A" or better from both Standard & Poor's Corporation ("S&P") and Moody's Investors Service, Inc. ("Moody's") and commercial paper rated A-1/P-1 by S&P and Moody's and not maturing more than 90 days from the date of acquisition thereof. "CERCLA" means the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. Section Section 9601, et seq. or any analogous or similar state law. "CFC Credit Agreement" means that certain Amended and Restated Loan and Security Agreement, dated as of July 9, 1993, by and among Congress Financial Corporation, a California corporation, Hanover Direct Fulfillment, Inc., a Pennsylvania corporation, Brawn California, Inc., a California corporation, Gump's By Mail, Inc., a Delaware corporation, and GSF Acquisition -2- 8 Corp., a California corporation, as the same may be amended, modified or supplemented. "Change in Control" means (i) directly or indirectly a sale, transfer or other conveyance of all or substantially all of the assets of the Guarantor (or HDI after the Reorganization), on a consolidated basis, to any "person" or "group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable), excluding transfers or conveyances to or among Restricted Subsidiaries and to HDI, pursuant to the Reorganization, as an entirety or substantially as an entirety in one transaction or series of related transactions, (ii) any "person" or "group" (as such terms are used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) other than NAR, directly or through its subsidiaries, is or becomes the "beneficial owner" (as that term is used in Rules 13d-3 and 13d-5 under the Exchange Act, whether or not applicable, except that a person shall be deemed to have "beneficial ownership" of all Capital Stock that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of a sufficient number of issued and outstanding shares of Capital Stock of the Company or the Guarantor on a fully diluted basis, to elect a majority of the members of the respective Boards of Directors of the Company or the Guarantor, as the case may be, or (iii) during any period of 24 consecutive months, individuals who at the beginning of such period constituted the Board of Directors of the Company or the Guarantor, as the case may be (together with any new directors whose election by such Board or whose nomination for election by the shareholders of the Company or the Guarantor was approved by a vote of a majority of the directors then still in office who were either directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board of Directors of the Company or the Guarantor then in office. "Class B Preferred Stock" shall mean the Class B preferred stock, par value $.01 per share, of the Company. "Collateral" shall mean the collateral pledged pursuant to the Collateral Documentation. "Collateral Documentation" shall mean the Pledge and Security Agreement, the Pledged Note, financing statements and all other deeds of trust, assignments, endorsements, collateral assignments and other instruments, documents, agreements or conveyances at any time creating or evidencing Liens or assigning Liens to the Trustee, to secure the obligations of the Company, the Guarantor or the Guarantor Subsidiaries under the Documents. -3- 9 "Common Stock" shall mean the common stock, par value $.662/3 per share, of the Guarantor. "Company" means the Person named as such above until a successor replaces it in accordance with Article 5, including without limitation pursuant to the Reorganization, and thereafter means the successor. "Consolidated Current Assets" shall mean at any date, all amounts which, in conformity with GAAP, would be included under current assets on a consolidated balance sheet of the Company, the Guarantor and the Restricted Subsidiaries, as at such date. "Consolidated Current Liabilities" shall mean at any date, all amounts which, in conformity with GAAP, would be included under current liabilities on a consolidated balance sheet of the Company, the Guarantor and the Restricted Subsidiaries, excluding the Revolving Loan Balance to the extent included in such current liabilities, as at such date. "Consolidated Earnings" shall mean, with respect to any period, the sum for such period of (i) Consolidated Net Income, plus (ii) taxes not currently due and payable of the Company and the Restricted Subsidiaries, in each case as determined on a consolidated basis and in accordance with GAAP. "Consolidated Net Income" shall mean, with respect to any period, the net income (or loss) of the Company and the Restricted Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP consistently applied for each period, adjusted to exclude (only to the extent included in computing such net income (or loss)), extraordinary and nonrecurring items and gains (or losses) on investments or assets, unremitted equity in earnings of Affiliates (except for such unremitted equity that is within the complete control of the Company and is not otherwise restricted and for which funds are currently available for disbursement), minority interests, gains on retirement of debt, cash dividends received in liquidation or discontinuance of any Affiliate or in the form of intercompany transfer of cash not constituting repayment of Indebtedness or payment in respect of liquidation or discontinuance of the transferor or any write-up of any asset and any deferred credit or amortization of a deferred credit arising from any acquisition in any manner of any Person. "Consolidated Assets" shall mean, at any date, the consolidated assets of the Company, the Guarantor and their subsidiaries as determined on a consolidated basis and in accordance with GAAP. -4- 10 "Consolidated Net Worth" shall mean, at any date, the total shareholders' equity of each of the Company, the Guarantor and its respective subsidiaries determined on a consolidated basis in accordance with GAAP , less (i) any item that by its terms (or by the terms of any security which it is convertible into or exchangeable for) or upon the happening of any event is (a) convertible into or exchangeable for Indebtedness, or (b) matures or is mandatorily redeemable pursuant to a sinking fund or otherwise, less (ii) declared but unpaid dividends on any class of Capital Stock and less (iii) any treasury stock. "Consolidated Subsidiary" of any specific Person means any subsidiary, all of whose shares of Capital Stock are owned by such Person and/or by another Consolidated Subsidiary of such Person, and the accounts of which are, or under GAAP are required to be, consolidated with the accounts of such Person. "Convertible Preferred Stock" shall mean the 7.5% cumulative convertible preferred stock, par value $.01 per share and stated value $20 per share, of the Company. "Corporate Trust Office of the Trustee" shall be at the address of the Trustee specified in Section 13.9 or such other address of which the Trustee may give notice to the Company and the Guarantors. "Corporation" includes corporations, associations, companies and business trusts. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Distribution Facility Subsidiary" shall mean a Consolidated Subsidiary of the Company formed after the date hereof to acquire the New Distribution Facility. "Documents" means the Purchase Agreement, the Indenture, the Registration Rights Agreement, the Securities, the Guaranty, the Collateral Documentation, the Escrow Agreement and all other security agreements, mortgages, deeds of trust, financing statements, lease assignments, guaranties and other agreements and instruments, together with any assignments, endorsements of, exhibits, schedules or other attachments to all of the foregoing, delivered in connection with the transactions contemplated hereby or thereby, all as amended, supplemented or otherwise modified from time to time. "Environmental Law" means any federal, state or local law, statute, ordinance, rule, license, order, permit or regulation pertaining to health, industrial hygiene, hazardous waste or the environmental conditions on, under, from or about any real property, including without limitation, CERCLA and RCRA. -5- 11 "Equity Interests" means Capital Stock or warrants, options or other rights to acquire Capital Stock or other equity participations, excluding any debt securities that are convertible into or exchangeable for Capital Stock or other equity participations. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time, and any successor statute. "ERISA Affiliate" means any (i) corporation which is a member of the same controlled group of corporations (within the meaning of Section 414(b) of the Internal Revenue Code) as the Company, (ii) partnership or other trade or business (whether or not incorporated) under common control (within the meaning of Section 414(c) of the Internal Revenue Code) with the Company; and (iii) member of the same affiliated service group (within the meaning of Section 414(m) of the Internal Revenue Code) as the Company. "Excess Availability" shall mean at any date, the aggregate amount, as determined by any lender according to any revolving loans or lines of credit that stipulates the amount of funds available to the Company, the Guarantor and the Restricted Subsidiaries, for immediate and unrestricted drawdown or advance, and which pursuant to any such drawdown or advance will by its nature increase the aggregate outstanding balance owed to such lender by the Company, the Guarantor and the Restricted Subsidiaries. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fixed Charge Coverage Ratio" shall mean, for any period, the ratio of (a) the sum for such period of (i) Consolidated Net Income, plus (ii) Interest Expense (excluding interest income) (whether or not capitalized), plus (iii) federal, state and local income tax expense to the extent deducted in determining Consolidated Net Income, plus (iv) principal and interest on Capital Lease Obligations, plus (v) operating rents less directly associated sublease income to the extent that (x) such sublease income does not exceed the associated rents of the Company and (y) the sublease is for a term equal to or beyond the stated maturity of the Securities, to (b) the sum for such period of (i) Interest Expense (excluding interest income) (whether or not capitalized), plus (ii) Capital Lease Obligations, plus (iii) cash dividends declared or due for payment (whether paid or not), plus (iv) operating rents less directly associated sublease income to the extent that (x) such sublease income does not exceed the associated rents of the Company and (y) the sublease is for a term equal to or beyond the stated maturity of the Securities. For purposes of the preceding -6- 12 definition, interest on Capital Lease Obligations shall be deemed to accrue at an interest rate implicit in such Capital Lease Obligations in accordance with GAAP. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board, or in such other statements by such other entity as may be in general use by significant segments of the accounting profession, which are applicable to the circumstances as of the date of determination, consistently applied. "GECC Agreement" means the Account Purchase Agreement, dated as of December 31, 1992, by and among the Company, Hanover Direct Fulfillment, Inc., a Pennsylvania corporation, Brawn of California, Inc., a California corporation, GSF Acquisition Corp., a California corporation, Gump's by Mail, Inc., a Delaware corporation, Gump's Holdings, Inc., a Delaware corporation, and General Electric Capital Corporation, a New York corporation, as the same may be further amended or modified or supplemented. "Governmental Authority" means any agency, authority, board, bureau, commission, department, office or instrumentality of any nature whatsoever of any city or other political subdivision or otherwise and whether now or hereafter in existence, or any officer or official thereof. "Guarantor" means the Person named as such above until a successor replaces it in accordance with Article 5, including without limitation pursuant to the Reorganization, and thereafter means the successor. "Guarantor Subsidiaries" means the Restricted Subsidiaries of the Company on the date hereof (except for Gump's Corp., a California corporation) and any subsidiary of the Company that becomes a Restricted Subsidiary after the date hereof pursuant to Section 4.31. "Hazardous Materials" means any flammable, explosive, radioactive, hazardous or toxic waste, substance, material or constituent (whether in solid, liquid, gaseous or any other form) ("substance") and any other substance defined, designated or regulated as a hazardous or toxic substance, material, waste, contaminant or pollutant by any Environmental Law presently in effect or as amended or promulgated in the future and shall include, without limitation: (i) those substances included within the definitions of, or classified as "hazardous substances" pursuant to CERCLA; -7- 13 (ii) petroleum or its constituents, products, byproducts or related substances; and (iii) such other substances which are or become regulated, or which are classified as hazardous, toxic, flammable, explosive, or radioactive, under any Environmental Law. "HDI" means Hanover Direct, Inc., a Delaware corporation. "Holder" or "Securityholder" means a Person in whose name a Security is registered from time to time. "Indebtedness" means, without duplication, with respect to any Person, (a) all obligations of such person (i) in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such person or only to a portion thereof), (ii) evidenced by bonds, notes, debentures or similar instruments, (iii) representing the balance deferred and unpaid of the purchase price of any property or services (other than accounts payable outstanding less than ninety (90) days and arising in the ordinary course of business), (iv) evidenced by bankers' acceptances or similar instruments issued or accepted by banks, (v) for the payment of money relating to a Capitalized Lease Obligation, or (vi) evidenced by a letter of credit or a reimbursement obligation of such person with respect to any letter of credit (other than trade letters of credit on which amounts have been owed for less than 180 days and arising in the ordinary course of business and consistent with past practices); (b) all obligations of such person under interest swap obligations and foreign currency hedges; (c) all liabilities of others of the kind described in the preceding clauses (a) or (b) that such person has guaranteed or that is otherwise its legal liability; (d) all obligations secured by a Lien to which the property or assets (including, without limitation, leasehold interests and any other tangible or intangible property rights) of such person are subject, whether or not the obligations secured thereby shall have been assumed by or shall otherwise be such person's legal liability; (e) indebtedness under conditional sales contracts and other types of title retention agreements; and (f) any and all deferrals, renewals, extensions, refinancings and refundings (whether direct or indirect) of, or amendments, modifications or supplements to, any liability of the kind described in any of the preceding clauses (a), (b), (c) or (d), (e), or this clause (f), whether or not between or among the same parties. "Indenture" means this Indenture as amended or supplemented from time to time. -8- 14 "Independent" when used with respect to any specified Person means such a Person who (i) is in fact independent, (ii) does not have any direct financial interest or any material indirect financial interest in the Company or any other obligor upon the Securities or in any Affiliate of the Company or such other obligor, and (iii) is not connected with the Company or such other obligor or any Affiliate of the Company or such other obligor, as an officer, employee, promoter, underwriter, trustee, partner, director or Person performing similar functions. Whenever it is herein provided that any Independent Person's opinion or certificate shall be furnished to the Trustee, such Person shall be appointed by a written order of the Company and approved by the Trustee in the exercise of reasonable care and such opinion or certificate shall state that the signer has read this definition and that the signer is Independent within the meaning hereof. "Independent Financial Advisor" means an accounting, appraisal or investment banking firm of nationally recognized standing that is, in the reasonable judgment of the Company's Board of Directors, as the case may be, (i) qualified to perform the task for which it has been engaged, and (ii) disinterested and Independent insofar as it relates to such engagement with respect to the Company, all of its subsidiaries, and each Affiliate of the Company and/or their subsidiaries. "Interest Expense" shall mean, for any period, the total interest expense of the Company and its subsidiaries during such period, determined on a consolidated basis in accordance with GAAP. "Internal Revenue Code" means the Internal Revenue Code of 1986, as amended from time to time hereafter, and any successor statute. "Investments" means any direct or indirect purchase or other acquisition by a Person of, or a beneficial interest in, Capital Stock or other securities of any other Person other than a Person that prior to the relevant time was a subsidiary of that Person, or any direct or indirect loan, advance (other than advances to employees for moving and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or capital contribution by that Person to any other Person including all Indebtedness and accounts receivable from that other Person that are not current assets or did not arise from sales to that other Person in the ordinary course of business and any agreement to purchase, sell or lease assets, products, supplies, materials, transportation or services, or to advance funds and/or guaranty such, for the purpose of giving financial assurance to any creditors of any Person, or grant any lien on property of such Person to secure any obligations of another Person. -9- 15 "Lien" means, with respect to any asset, any mortgage, lien, pledge, charge, security interest, collateral assignment, encumbrance or adverse claim affecting title or resulting in a charge against real or personal property of any kind in respect of such asset (including any agreement to give any security interest). For the purposes of this Indenture, a Person shall be deemed to own subject to a Lien any asset that it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, any option or other agreement to sell, Capitalized Lease Obligation or other title retention agreement relating to such asset. "Mail Order Joint Venture" shall mean any joint undertaking in which any Person not an Affiliate of the Company, the Guarantor or their subsidiaries is engaged with the Company, the Guarantor or their subsidiaries, including, without limitation, a joint venture, partnership, business trust, licensing agreement or other similar entity or arrangement, for the purpose of research, marketing and development of the direct specialty retail business of the Company. "Management Fee" means any fee or other compensation payable to NAR or any Affiliate or related party of NAR by the Company or any of its subsidiaries or Affiliates for services rendered with respect to the management of the Company or any of its subsidiaries or Affiliates. "Management Incentive Stock Option Agreement" shall mean the 1993 Equity Incentive Plan of the Guarantor and the 1993 All-Employee Equity Investment Plan of the Guarantor or any successor or replacement plan having substantially similar terms. "Multiemployer Plan" means a "multiemployer plan" as defined in Section 4001(a)(3) of ERISA and subject to Title IV of ERISA which is, or within the immediately preceding six (6) years was, contributed to by the Company, the Guarantor, any Guarantor Subsidiary or any ERISA Affiliate; provided, however, that the term "Multiemployer Plan" shall not include any such multiemployer plan for any period during which the withdrawal from such multiemployer plan by such ERISA Affiliate could not subject the Company, the Guarantor or any Guarantor Subsidiary to any liability under the Internal Revenue Code or ERISA. "NAR" means North American Resources Limited, a British Virgin Islands corporation. "Net Cash Flow" shall mean four (4) times the Consolidated Net Income for the immediately preceding fiscal quarter plus, to the extent deducted in determining Consolidated Net Income for such quarter, depreciation, amortization (including without limitation, amortization of assets under Capitalized Lease Obligations), depletion, and provision for -10- 16 taxes not currently due. To the extent that Net Cash Flow for the immediately preceding fiscal quarter is less than zero, then "Net Cash Flow" shall mean two (2) times Consolidated Net Income for the immediately preceding two (2) fiscal quarters plus, to the extent deducted in determining Consolidated Net Income for such quarters, depreciation, amortization (including without limitation, amortization of assets under Capitalized Lease Obligations), depletion, and provision for taxes not currently due. "New Distribution Facility" means the new fulfillment center and distribution facility established, acquired and improved by the Distribution Facility Subsidiary to be used exclusively by the Company, the Guarantor and their subsidiaries in their mail order and retail businesses. "Officer's Certificate" means a certificate signed by any duly authorized officer, who must be the President, the Chief Financial Officer, the Treasurer or a Vice President of the Company or a Consolidated Subsidiary thereof, as the context may indicate. "Opinion of Counsel" means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Company, the Guarantor or the Trustee. "Permitted Encumbrances" means (i) Liens (other than any Lien imposed under ERISA or any Environmental Laws) for taxes, assessments, or charges of any Governmental Authority for claims not yet due or which are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, and with respect to which adequate reserves of other appropriate provisions are being maintained in accordance with the provisions of GAAP and enforcement thereof is not being sought or is stayed; (ii) Liens of landlords, carriers, warehousemen, mechanics, materialmen and other Liens (other than any Lien imposed under ERISA) not voluntarily granted for amounts not yet due or which are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted, and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with the provisions of GAAP, and enforcement thereof is not being sought or stayed; (iii) Liens (other than any Lien imposed under ERISA) incurred or deposits made in the ordinary course of business (including, without limitation, surety bonds, appeal bonds and letters of credit, in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts (other than for the repayment of Indebtedness), statutory obligations and other similar obligations or arising as a result of progress payments under government contracts; (iv) -11- 17 easements (including, without limitation, reciprocal easement agreements and utility agreements), rights-of-way, covenants, consents, reservations, encroachments, variations and other similar restrictions, charges or encumbrances (whether or not recorded) and other Liens incurred in the ordinary course of business, which do not secure Indebtedness or the deferred purchase price of any asset and which do not interfere materially with the ordinary conduct of the business of the Company or any subsidiary and which do not materially detract from the value of the property to which they attach or materially impair the use thereof to the Company or any subsidiary; (v) building restrictions, zoning laws and other statutes, laws, rules, regulations, ordinances and restrictions, and any amendments thereto, now or at any time hereafter adopted by any governmental authority having jurisdiction; (vi) the Liens set forth on Schedule II hereto, including renewals and extensions thereof, (vii) a Lien in connection with a first mortgage on the New Distribution Facility, provided that the associated Indebtedness is used for expansion of the New Distribution Facility and other capital expenditures associated with it and (viii) Liens pursuant to capital leases incurred pursuant to Section 4.24. "Permitted Investments" means (i) Cash and Marketable Securities, (ii) investments in Restricted Subsidiaries that are Consolidated Subsidiaries and (iii) investments in a Mail Order Joint Venture that is not a subsidiary of the Company, the Guarantor or any of their subsidiaries, provided that the aggregate amount of capital, investments, equity, loans, payments or assets of any kind contributed, directly or indirectly, by the Company, the Guarantor and its subsidiaries to all Mail Order Joint Ventures shall not exceed (i) $5,000,000 for the period from the date hereof through December 31, 1993 and (ii) $10,000,000 for the period from the date hereof and thereafter. "Person" and "person" mean any individual, corporation, partnership, joint venture, association, joint stock company, trust or estate, unincorporated organization or government or any agency or political subdivision thereof or any other entity, foreign or domestic. "Pledged Note" means a demand note in an aggregate principal amount as required under paragraph 6 of the Securities from the Distribution Facility Subsidiary in favor of the Company in the form of Exhibit E attached hereto. "Purchase Agreement" means that certain Purchase Agreement dated as of August 17, 1993 by and among the Company and the Purchaser. "Purchaser" means Sun Life Insurance Company of America, including its transferees and assigns. -12- 18 "RCRA" means the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section Section 6901, et seq. "Registered Exchange Offer" means the offer by the Company, pursuant to an effective registration statement filed with the SEC, to exchange all of the Series B Securities for all of the outstanding Series A Securities in accordance with the terms and provisions of the Registration Rights Agreement. "Registered Exchange Offer Consummation Date" means the date on which the Registered Exchange Offer is consummated in accordance with the terms and provisions of the Registration Rights Agreement. "Registration Rights Agreement" means the Registration Rights Agreement attached as Annex B to the Purchase Agreement. "Registration Statements" means the Company's Form S-4 Registration Statement containing a joint proxy statement prospectus relating to the distribution of certain securities in connection with the Mergers initially filed with the Securities and Exchange Commission on April 19, 1993. "Reorganization" means the reorganization of the Company and the Guarantor as described in the Registration Statement on Form S-4 (File No. 33-61252) of Hanover Direct, Inc., a Delaware corporation. "Representative" means the indenture trustee or other trustee, agent or representative, if any, for an issue of Senior Indebtedness. "Restricted Investment" means any Investment, contribution or transfer of property, assets or value in consideration or on account of any Indebtedness or equity interest (by way of transfers of property, contribution to capital, acquisitions of stock, securities or evidences of Indebtedness, or otherwise) in or to any Person, except in any Permitted Investment. "Restricted Securities" means Securities which were acquired by the Holder thereof other than pursuant to an effective registration statement under the Securities Act of 1933, as amended, or acquired in a public transaction that complies with Rules 144 or 144A (or any successor rules) under such Act, whether or not the exemption provided by paragraph (k) of Rule 144 (or any comparable exemption) is available. "Restricted Subsidiary" means any subsidiary of the Company, including, without limitation, the Distribution Facility Subsidiary, that is not an Unrestricted Subsidiary. -13- 19 "Revolving Loan Balance" shall mean any date, the aggregate outstanding balance owed to one or more lenders by the Company, the Guarantor and the Restricted Subsidiaries consisting of secured loans and advances made on a revolving basis (involving advances, repayments and readvances) whose primary purpose is to provide the Company, the Guarantor or the Restricted Subsidiaries with working capital. "SEC" means the Securities and Exchange Commission, or any successor Governmental Authority. "Securities" means the securities issued under this Indenture. "Security and Pledge Agreement" means the agreement in the form attached hereto as Exhibit D executed or to be executed by the Company pledging the Pledged Note as security for the respective obligations under the Documents. "Senior Indebtedness" means the principal of, and interest on, any Indebtedness of the Company, the Guarantor or the Guarantor Subsidiaries, whether outstanding on the date of this Indenture or hereafter created, incurred for borrowed money, including amounts drawn under letters of credit or other similar financial accommodations, unless, in the case of any particular Indebtedness, the instrument creating or evidencing the same expressly provides that such Indebtedness shall be pari passu or subordinate in right of payment to the Securities; provided, however, Senior Indebtedness shall not include (a) in the case of the respective obligation of the Company, the Guarantor and the Guarantor Subsidiaries in respect of each Security, the respective obligation of the Company, the Guarantor and the Guarantor Subsidiaries in respect of other Securities, (b) Indebtedness of the Company, the Guarantor or any Guarantor Subsidiary to a subsidiary of the Company, the Guarantor or any Guarantor Subsidiary or an Affiliate of the Company, the Guarantor or any Guarantor Subsidiary, (c) Indebtedness to, or guaranteed on behalf of, any individual shareholder, director, officer or employee of the Company, the Guarantor or of any subsidiary of the Company or the Guarantor (including, without limitation, amounts owed for compensation), (d) Indebtedness and other amounts incurred in connection with obtaining goods, materials or services, (e) Indebtedness incurred in violation of this Indenture and (f) Indebtedness that by its terms is subordinated to any other Indebtedness of the Company, the Guarantor or the Guarantor Subsidiaries. "Series A Securities" means the 9.25% Senior Subordinated Notes due August 1, 1998, Series A, being issued and sold pursuant to the Purchase Agreement and this Indenture. -14- 20 "Series B Securities" means the 9.25% Senior Subordinated Notes due August 1, 1998, Series B (the terms of which are identical to the Series A Securities except that the Series B Securities shall be registered under the Securities Act of 1933, as amended, and shall not contain the restrictive legend on the face of the form of Series A Securities), to be issued in exchange for the Series A Securities pursuant to the Registered Exchange Offer and this Indenture. "Subordination Agreement" means the Subordination Agreement among Congress Financial Corporation, a California corporation, Sun Life Insurance Company of America, attached hereto as Exhibit C, as in effect on the date hereof and as amended or modified. "subsidiary" of any specified Person means (i) a corporation a majority of whose Capital Stock with voting power, under ordinary circumstances, to elect directors is at the time, directly or indirectly, owned by such Person or by such Person and a subsidiary or subsidiaries of such Person or by a subsidiary or subsidiaries of such Person, (ii) any other Person (other than a corporation) in which such Person or such Person and a subsidiary or subsidiaries of such Person or a subsidiary or subsidiaries of such Person directly or indirectly, at the date of determination thereof, has at least a majority ownership interest, or (iii) any other person in which such person, one or more subsidiaries of such person, directly or indirectly, at the date of determination thereof is required by GAAP or the rules and regulations of the SEC to be combined or consolidated with such person for purposes of general financial reporting. "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code Section Section 77aaa-77bbbb), as amended, as in effect on the date of this Indenture, until such time as this Indenture is qualified under the TIA, and thereafter as in effect on the date on which this Indenture is qualified under the TIA, except as otherwise provided in Section 9.3. "Trustee" means the Person named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor. "Trust Officer" means the any officer or assistant officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "Unrestricted Subsidiary" means the subsidiaries of the Company or the Guarantor listed on Schedule 1.1 hereof. In addition, Unrestricted Subsidiaries shall mean any subsidiary of the Company or the Guarantor that: -15- 21 (i) is formed or acquired after the date hereof prior to the occurrence of an Event of Default (or an event that, after notice or lapse of time, or both, would become an Event of Default) which is continuing at the time of receipt of such notice; (ii) has been formed or acquired without any direct or indirect investment, whether in cash or property, of the Company, the Guarantor or any Restricted Subsidiary, other than Capital Stock of the Company or the Guarantor upon which no dividends are paid or payable (except dividends paid or payable in additional Capital Stock of the Company or the Guarantor similarly restricted as to dividends), by the Company, the Guarantor or any Restricted Subsidiary and without the incurrence of any Indebtedness, directly or indirectly, by either of the Company, the Guarantor or any Restricted Subsidiary in connection with such acquisition or the business to be engaged in by such Unrestricted Subsidiary; (iii) maintains separate books and records and engages in no transaction, direct or indirect, with the Company, the Guarantor or any Restricted Subsidiary, other than such Unrestricted Subsidiary's declaration and payment to the Company, the Guarantor or any Restricted Subsidiary of dividends in its own Capital Stock, or the payment by such Unrestricted Subsidiary to the Company, the Guarantor or any Restricted Subsidiary, of overhead and other administrative charges in the ordinary course of business; and (iv) obtains financing, if any, on a completely stand alone basis, i.e., not requiring any direct or indirect guarantee or other form of financial support or credit enhancement from the Company, the Guarantor or any Restricted Subsidiary, other than the non-recourse pledge of the Capital Stock of another Unrestricted Subsidiary and cross-corporate guaranties between or among Unrestricted Subsidiaries formed or acquired at the same time as part of a single transaction upon the consummation of which such cross-guaranties are executed in favor of the provider of such stand alone financing. Any subsidiary of the Company or the Guarantor formed or acquired after the date hereof which at any time does not meet or no longer meets any of the foregoing requirements shall not be considered, for purposes hereof, or if initially so considered, shall lose its status as, an Unrestricted Subsidiary and shall be subject to all of the requirements set forth herein with respect to Restricted Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary of the Company or the Guarantor; provided, however, that immediately after giving effect to such designation, on a pro forma basis, as if such Unrestricted Subsidiary had been a Restricted Subsidiary for the entire immediately preceding four (4) consecutive fiscal -16- 22 quarters (x) the Company is in compliance with all of the terms, conditions and covenants of the Securities and this Indenture and (y) no Default or Event of Default shall have occurred and be continuing. Any such designation by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the Board Resolution giving effect to such designation and an Officer's Certificate certifying that such designation complied with the foregoing provisions. "U.S. Legal Tender" shall mean such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts. "8% Notes" shall mean the Amended 8% Senior Subordinated Notes due 1994 of the Company. "14% Debentures" shall mean the 14% Senior Subordinated Debentures due 1997 of the Guarantor. "71/2% Convertible Debentures" shall mean the 71/2% Convertible Subordinated Debentures due 2007 of the Guarantor. "8% Senior Subordinated Note Indenture" shall mean the Indenture, dated as of October 15, 1984, by and between the Company, as assignee of the Guarantor, and BankAmerica National Trust Company (formerly BankAmerica Trust Company of New York), as Trustee, as amended, governing the 8% Notes. Section 1.2. Other Definitions.
Defined in Terms Section ----- ------- "Bankruptcy Law" 6.1 "Change in Control Date" 4.13 "Custodian" 6.1 "Event of Default" 6.1 "Guaranty" 11.1 "Legal Holiday" 13.7 "Officer" 13.9 "Paying Agent" 2.3 "Registrar" 2.3 "Repurchase Date" 4.13 "Repurchase Offer" 4.13 "Repurchase Price" 4.13
-17- 23
Defined in Terms Section ----- ------- "Restricted Payments" 4.5 "U.S. Government Obligations" 8.1
Section 1.3. Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Securities; "indenture security holder" means a Securityholder; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; "obligor" on the Securities means the Company, the Guarantor, and any other obligor upon the Securities. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. Section 1.4. Rules of Construction. Unless the context otherwise requires: (1) a term has the meaning assigned to it; (2) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (3) "or" is not exclusive; (4) words in the singular include the plural, and in the plural include the singular; and (5) provisions apply to successive events and transactions. -18- 24 ARTICLE 2 THE SECURITIES Section 2.1. Form and Dating. The Series A Securities shall be substantially in the form of Exhibit A-1, which is part of this Indenture. The Series B Securities shall be substantially in the form of Exhibit A-2, which is part of this Indenture. The Securities may have notations, legends or endorsements required by law, stock exchange rule or usage. Each Security shall be dated the date of its authentication. After the Securities have ceased to be Restricted Securities, the Company shall deliver to the Trustee a printed form of Security. The terms and provisions contained in the Securities shall constitute, and are hereby expressly made, a part of this Indenture, and to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Section 2.2. Execution and Authentication. One Officer, duly authorized, shall sign the Securities for the Company by manual or facsimile signature. The Company's seal shall be reproduced on the Securities. If an officer whose signature is on a Security no longer holds that office at the time the Security is authenticated, the Security shall nevertheless be valid. A Security shall not be valid until authenticated by the manual signature of the Trustee. The signature shall be conclusive evidence that the Security has been authenticated under this Indenture. The Trustee shall authenticate Series A Securities for original issue in the aggregate principal amount of up to $20,000,000 upon a written order of the Company signed by two Officers. In addition, on or prior to the Registered Exchange Offer Consummation Date, the Trustee shall authenticate Series B Securities issued at the time of the Registered Exchange Offer in the aggregate principal amount of up to $20,000,000 upon a written order of the Company signed by two Officers. The written order shall specify the amount of Series B Securities to be authenticated and the date on which the original issue of Series B Securities pursuant to the Registered Exchange Offer is to be authenticated. The aggregate principal amount of Securities outstanding at any time may not exceed $20,000,000, except as provided in Section 2.7. -19- 25 The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Securities. An authenticating agent may authenticate Securities whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with the Company or an Affiliate. Section 2.3. Registrar and Paying Agent. The Company shall maintain in the county where the principal corporate office of the Trustee is located and in such other locations as it shall determine (i) an office or agency where Securities may be presented for registration of transfer or for exchange ("Registrar") and (ii) an office or agency where Securities may be presented for payment ("Paying Agent"); provided, however, that neither the Company nor any of its Affiliates may service as Paying Agent or Registrar. The Registrar shall keep a register of the Securities and of their transfer and exchange. The Company shall appoint one or more co-registrars and one or more paying agents. The term "Paying Agent" includes any paying agent. Subject to the foregoing provisions, the Company may change any Paying Agent, Registrar or co-registrar upon notice to the Trustee. The Company shall notify the Trustee of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar or Paying Agent, the Trustee shall act as such. The Company shall, if the Securities are listed on the New York Stock Exchange, designate as authenticating agent, co-registrar and Paying Agent with respect to the Securities a bank or trust company in good standing, organized under the laws of the United States of America or any State, doing business in or having a correspondent relationship with a bank or trust company doing business in the Borough of Manhattan, City of New York, State of New York, and having a capital and surplus (including subordinated capital notes and earned surplus) aggregating at least $100,000,000. Whenever, pursuant to this Indenture, the Trustee is obligated, empowered or authorized to perform any act with respect to the authentication and issuance of the Securities, or their transfer, other than the authentication and issuance of Securities upon original issue or in cases of Securities mutilated, destroyed, lost or stolen, such act may be performed by the authenticating agent and co-registrar, notwithstanding anything in this Indenture to the contrary. Whenever, pursuant to this Indenture, the Trustee is obligated, empowered or authorized to perform any act with respect to payment of the principal of (and premium, if any) or interest on the Securities, such acts may be performed by the Paying Agent, notwithstanding anything in this Indenture to the contrary. -20- 26 The Company covenants that whenever necessary to avoid or fill a vacancy in the office of authenticating agent, co-registrar and Paying Agent, the Company will appoint a successor authenticating agent, co-registrar and Paying Agent so that there shall, at all times that the Securities are listed for trading on the New York Stock Exchange, be one or more offices or agencies in the Borough of Manhattan, City of New York, State of New York, acceptable to the New York Stock Exchange, where Securities may be presented or surrendered for payment and where Securities may be surrendered for registration of transfer or exchange. In case, at the time of the appointment of a successor to the authenticating agent, any of the Securities shall have been authenticated but not delivered, any such successor may adopt the certificate of authentication of the original authenticating agent or of any successor to it as authenticating agent hereunder, and deliver such Securities so authenticated; and in case at any time any of the Securities shall not have been authenticated, any successor to the authenticating agent by merger or consolidation may authenticate such securities either in the name of its predecessor hereunder or in the name of the successor authenticating agent; and in all such cases such certificate shall have the full force which it is anywhere in the Securities or in this Indenture provided that the certificate of authentication shall have. Section 2.4. Paying Agent to Hold Money in Trust. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Securityholders or the Trustee all money received by the Paying Agent for the payment of principal or interest or other amounts owed on the Securities (whether such money has been paid to it by the Company or any other obligor on the Securities or any other Person), and will notify the Trustee of any default by the Company (or any other obligor on the Securities or any other Person) in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or a subsidiary) shall have no further liability for the money. The Trustee shall not be responsible for paying interest while holding any money in trust, unless otherwise previously agreed to in writing. If the Company or a subsidiary acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Securityholders all money held by it as Paying Agent. -21- 27 Section 2.5. Securityholder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders. If the Trustee is not the Registrar, the Company and any other obligor shall furnish to the Trustee on or before each interest payment date and at such other times as the Trustee may request in writing, but in any event at least semi-annually, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Securityholders. Section 2.6. Transfer and Exchange. (a) Where Securities are presented to the Registrar or a co-registrar with a request to register a transfer or to exchange them for an equal principal amount of Securities of other denominations, the Registrar shall, subject to clause (c) of this Section 2.6 in the case of a Registered Exchange Offer, register the transfer or make the exchange if its requirements for such transactions are met (including, if required by the Company for transfers with respect to which no registration statement has been declared effective, an opinion of counsel to the Holder requesting transfer that an exemption from registration under the Securities Act of 1933, as amended, is available for such transfer). To permit registrations of transfer and exchanges, the Company shall issue and the Trustee shall authenticate Securities at the Registrar's request. No service charge shall be made to the Holder for any registration of transfer or exchange (except as otherwise expressly permitted herein), but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer tax or similar governmental charge payable upon exchanges pursuant to Section 2.10, 3.6 or 9.5). (b) The Company shall not be required (i) to issue, register the transfer of or exchange Securities during a period beginning at the opening of business 15 days before the day of any selection of Securities for redemption under Section 3.02 and ending at the close of business on the day of selection or (ii) to register the transfer or exchange of any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. (c) Any Series A Securities which are presented to the Registrar or a co-registrar for exchange pursuant to a Registered Exchange Offer shall be exchanged for Series B Securities of equal principal amount upon surrender to the Registrar or coregistrar of the Series A Securities to be exchanged; provided, however, that the Series A Securities surrendered for exchange in a Registered Exchange Offer shall be duly endorsed and -22- 28 accompanied by a letter of transmittal or written instrument of transfer in form satisfactory to the Company, the Trustee and the Registrar or co-registrar, duly executed by the Holder thereof or his attorney who shall be duly authorized in writing to execute such document. Whenever any Series A Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver to the Registrar or coregistrar, the same aggregate principal amount of Series B Securities as the aggregate principal amount of Series A Securities that have been surrendered. Section 2.7. Replacement Securities. If the Holder of a Security claims that the Security has been lost, damaged, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security if the Trustee's requirements are met. If required by the Trustee or the Company, an indemnity bond must be provided which is sufficient in the judgment of both to protect the Company, the Trustee, any Agent or any authenticating agent from any loss which any of them may suffer if a Security is replaced. The Company may charge for its expenses in replacing a Security. The Company is not required to provide a replacement Security that is called for redemption in accordance with its terms. Every replacement Security is an additional obligation of the Company and shall be entitled to the benefits of this Indenture. Section 2.8. Outstanding Securities. The Securities outstanding at any time are all the Securities authenticated by the Trustee except for those cancelled by it, those delivered to it for cancellation and those described in this Section as not outstanding. If a Security is replaced pursuant to Section 2.7, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Security is held by a bona fide purchaser. If Securities are considered paid under Section 4.1, they cease to be outstanding and interest on them ceases to accrue. Subject to Section 2.9, a Security does not cease to be outstanding because the Company or an Affiliate of the Company holds the Security. -23- 29 Section 2.9. Treasury Securities. In determining whether the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company, the Guarantor, any of their subsidiaries or any other obligor on the Securities or an Affiliate of the Company, the Guarantor, any of their subsidiaries or any other obligor on the Securities shall be considered as though they are not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which the Trustee knows are so owned shall be so disregarded. Section 2.10. Temporary Securities. Until definitive Securities are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities. Temporary securities shall be substantially in the form of definitive Securities but may have variations that the Company considers appropriate for temporary Securities without charge to the Securityholders. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate definitive securities in exchange for temporary Securities without charge to the Securityholders. Section 2.11. Cancellation. The Company at any time may deliver Securities to the Trustee for cancellation. The Registrar and Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer, exchange or payment. The Trustee shall cancel all Securities surrendered for registration of transfer, exchange (including, without limitation, exchange pursuant to a Registered Exchange Offer), payment, replacement or cancellation and shall dispose of cancelled Securities as the Company directs. The Company may not issue new securities to replace Securities that it has paid or that have been delivered to the Trustee for cancellation. Section 2.12. Defaulted Interest. If the Company fails to make a payment of interest on the Securities, it shall pay such defaulted interest plus any interest payable on the defaulted interest, if any, in any lawful manner. It may pay such defaulted interest, plus any such interest payable on it, to the Persons who are Securityholders on a subsequent special record date. The Company shall fix any such record date and payment date. At least 15 days before any such record date, the Company shall mail to Securityholders a notice that states the record date, payment date and amount of such interest to be paid. -24- 30 Section 2.13. Home Office Payment Agreements. Notwithstanding any provisions of this Indenture and of the Securities to the contrary, payments of interest on, and all or any portion of the principal of, any Security, other than the final payment of principal on a Security, shall be made by the Paying Agent directly to the Holder of such Security or their designee without surrender or presentation thereof to the Paying Agent, if the Company has so agreed with such Holder and has filed with the Trustee a copy of the Purchase Agreement or an agreement between the Company and a Holder who is not a Purchaser (or the Person for whom such Holder is a nominee) providing that (i) such payment will be so made and (ii) such Holder (or the Person for whom such Holder is a nominee) will, before selling, transferring or otherwise disposing of any such Security, make a notation thereon, or submit the same to the Trustee for notation thereon, of the date to which interest has been paid with respect thereof and, in the event redemptions previously have been made thereof, surrender the same to the Trustee in exchange for a Security or Securities aggregating the same principal amount as the unredeemed principal amount of the Securities surrendered. The Company will indemnify and save the Trustee and Paying Agent harmless against any liability resulting from any act or omission to act on the part of the Company in connection with any such agreement or which the Paying Agent may incur as a result of making any payment in accordance with any such agreement. ARTICLE 3 REDEMPTION Section 3.1. Notices to Trustee. If the Company elects to redeem the Securities pursuant to the optional redemption provisions of Paragraph 5 of the Securities, or is required to redeem Securities pursuant to the mandatory redemption provisions of Paragraph 6 of the Securities, it shall notify the Trustee in writing of the redemption date and the principal amount of the Securities to be redeemed. The Company shall give each notice provided for in this Section at least 60 days before the redemption date (unless a shorter notice period shall be satisfactory to the Trustee); provided, however, that the Trustee shall have no liability to any Holder if it deems such shorter notice period satisfactory to it. Section 3.2. Selection of Securities to Be Redeemed. If less than all of the Securities are to be redeemed, the Trustee shall select the Securities to be redeemed as follows: -25- 31 (1) each redemption shall be pro rata as between Restricted Securities and the remaining Securities, (2) the Trustee shall select the Restricted Securities to be redeemed on a substantially pro rata basis in multiples of $1,000 among the Holders of Restricted Securities, and (3) the Trustee shall select the remaining Securities to be redeemed on a substantially pro rata basis among the Holders of the remaining Securities in accordance with a method the Trustee considers fair and appropriate (in such manner as complies with applicable legal and stock exchange requirements, if any). The amount of remaining Securities shall be calculated as the aggregate principal amount of Securities originally issued hereunder less (i) the aggregate principal amount of outstanding Restricted Securities and (ii) the aggregate principal amount of any Securities previously redeemed. The Trustee shall make the selection not more than 60 days and not less than 30 days before the redemption date from outstanding Securities not previously called for redemption. The Trustee shall promptly notify the Company of the Securities or portions of Securities to be called for redemption. The Trustee may select for redemption portions of the principal of Securities that have denominations larger than $1,000. Securities and portions of them it selects shall be in amounts of $1,000 or integral multiples of $1,000. Provisions of this Indenture that apply to Securities called for redemption also apply to portions of Securities called for redemption. Section 3.3. Notice of Redemption. At least 30 days but not more than 60 days before a redemption date, the Company shall mail by first class mail, postage prepaid a notice of redemption to each Holder whose Securities are to be redeemed. The notice shall identify the Securities to be redeemed and shall state: (1) the redemption date; (2) the redemption price; (3) if any Security is being redeemed in part, the portion of the principal amount of such Security to be redeemed and that, after the redemption date, upon surrender of such Security, a new Security or -26- 32 Securities in principal amount equal to the unredeemed portion will be issued; (4) the name and address of the Paying Agent;. (5) that Securities called for redemption must be surrendered to the Paying Agent to collect the redemption price; (6) that interest on Securities called for redemption ceases to accrue on and after the redemption date; and (7) the paragraph of the Securities pursuant to which the Securities called for redemption are being redeemed. At the Company's written request which shall include an Officer's Certificate setting forth the information to be stated in such notice, the Trustee shall give the notice of redemption in the Company's name and at the Company's expense. Section 3.4. Effect of Notice of Redemption. Once notice of redemption is mailed, Securities called for redemption become due and payable on the redemption date at the price set forth in the Security. Section 3.5. Deposit of Redemption Price. On or before the redemption date, the Company shall deposit with the Trustee or with the Paying Agent immediately available funds sufficient to pay the redemption price of and accrued interest on all Securities to be redeemed on that date. The Trustee or the Paying Agent shall return to the Company any money not required to pay the redemption price of all Securities to be redeemed. Section 3.6. Securities Redeemed in Part. Upon surrender of a Security that is redeemed in part, the Company shall issue and the Trustee shall authenticate for the Holder at the expense of the Company a new Security equal in principal amount to the unredeemed portion of the Security surrendered. -27- 33 ARTICLE 4 COVENANTS Section 4.1. Payment of Securities. The Company shall pay the principal of and interest on the Securities on the dates and in the manner provided in the Securities. With respect to interest payments pursuant to Section 3(b) of the Registration Rights Agreement, the Company shall notify the Trustee within five (5) business days prior to any interest payment date of the amount of such interest payable to each Holder. Principal and interest shall be considered paid on the date due if the Paying Agent (other than the Company or a subsidiary or an Affiliate) holds on that date money designated for and sufficient to pay all principal and interest and any other amounts then due. To the extent lawful, the Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on (i) overdue principal at the rate borne by the Securities plus three percent (3%) per annum, compounded annually (without regard to any applicable grace period) and (ii) installments of interest overdue (without regard to any applicable grace period), at the rate borne by the Securities plus three percent (3%) per annum. The obligation of the Company described in the preceding two (2) sentences is absolute and unconditional, irrespective of any tax or accounting treatment of such obligation. Section 4.2. SEC Reports, Financial Reports. The Company and the Guarantor shall deliver to the Trustee and the Holders of at least $1,000,000 in aggregate principal amount of Restricted Securities, within 15 days after it files with the SEC, and shall make available to all of the Holders upon request, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which it is required to file with the SEC pursuant to Section 13 or 15(d) of the Exchange Act. If the Company or the Guarantor is not subject to, or for any reason is not complying with, the requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file with the Trustee and the Holders of at least $1,000,000 in aggregate principal amount of Restricted Securities, within 15 days after any of them would have been required to file such with the SEC, and shall make available to all of the Holders upon request, quarterly and annual reports, including financial statements, notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and information, documents or other reports comparable to that which the Company and the -28- 34 Guarantor would have been required to file with the SEC if each were subject to the requirements of Section 13 or 15(d) of the Exchange Act. The Company will deliver, at the time it delivers the reports, including financial statements, as required above in this Section 4.2, consolidated and consolidating unaudited balance sheets of the Company and the Guarantor Subsidiaries as at the end of such period and consolidated and consolidating unaudited statements of income and expense and changes in financial position for the Company and the Guarantor Subsidiaries for such period, together with the accompanying notes thereto, if any, all in reasonable detail, fairly presenting the financial position and results of operation of the Company and the Guarantor Subsidiaries as at the date thereof and for such periods, prepared in accordance with GAAP. The Company will deliver or cause to be delivered within ten (10) days after requested by any holder of Restricted Securities, any other information specified in subsection (d)(4) of Rule 144A. Subsequent to the qualification of the Indenture under the TIA, the Company, the Guarantor and the Guarantor Subsidiaries also shall comply with the provisions of TIA Section 314(a). The Company, the Guarantor and the Guarantor Subsidiaries shall timely comply with its reporting and filing obligations under applicable federal securities law. The foregoing requirements do not replace or supersede and are in addition to the requirements set forth in the Purchase Agreement and in any of the Documents. Section 4.3. Compliance Certificate. (a) The Company and the Guarantor shall deliver to the Trustee and Holders of at least $1,000,000 in aggregate principal amount of Securities, within ninety (90) days after the end of each fiscal year and within forty-five (45) days after the end of each fiscal quarter, an Officer's Certificate stating that a review of the activities of the Company, the Guarantor and their respective subsidiaries during the preceding fiscal period has been made under the supervision of the signing officers with a view to determining whether the Company, the Guarantor and the Guarantor Subsidiaries, as the case may be, have kept, observed, performed and fulfilled its obligations under this Indenture and the Documents, as applicable, and further stating (including all relevant calculations in reasonable detail), as to each such officer signing such certificate, that to the best of his or her knowledge the Company, the Guarantor and the Guarantor Subsidiaries have kept, observed, performed and fulfilled each and every covenant contained in this Indenture and the Documents, -29- 35 as applicable, and is not in default in the performance or observance of any of the terms, provisions and conditions hereof or thereof (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he may have knowledge) and that to the best of his knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the Securities are prohibited, or if such event has occurred, a description of the event. (b) So long as not contrary to the then current recommendations of the American Institute of Certified Public Accountants or to a written policy adopted by the independent, public accountants of the Company and the Guarantor or their subsidiaries which has been previously applied (a copy of which shall be delivered to the Trustee), the annual financial statements delivered pursuant to Section 4.2 shall be accompanied by a written statement of the independent public accountants (which shall be a firm listed in Section 4.26(b)) of the Company and the Guarantor that in making the examination necessary for certification of such financial statements nothing has come to their attention which would lead them to believe that the Company or the Guarantor has violated any provisions of Article 4 or 5 of this Indenture or any of the Documents pursuant to engagement instructions directing such determination of compliance, or, if any such violation has occurred, specifying the nature and period of existence thereof, it being understood that such accountants shall not be liable directly or indirectly to any Person for any failure to obtain knowledge of any such violation that would not be disclosed in the course of an audit examination conducted in accordance with generally accepted auditing standards. (c) The Company and the Guarantor will, so long as any of the Securities are outstanding, deliver to the Trustee and the Securityholders, within two days of becoming aware of (i) any Default, Event of Default or default in the performance of any covenant, agreement or condition contained in this Indenture or any Document or (ii) any default under the CFC Credit Agreement or (iii) any event of default under any other mortgage, indenture, instrument or agreement as that term is used in Section 6.1(4), an Officer's Certificate specifying such Default, Event of Default, default, or event of default. (d) The Company and the Guarantor shall deliver to the Trustee and the Holders of the Restricted Securities, and shall make available to all of the Holders upon request, copies of all information and calculations provided to the lenders under the CFC Credit Agreement if a Default or Event of Default shall have occurred and be continuing and copies of all notices delivered or received by the Company and the Guarantor under the CFC Credit Agreement, within 5 days of the provision of such information and calculations by the Company and the Guarantor to such lenders or -30- 36 the delivery by or receipt of such notices by the Company and the Guarantor. Section 4.4. Stay, Extension and Usury Laws. Each of the Company, the Guarantor and the Guarantor Subsidiaries covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture or any other Document; and the Company, the Guarantor and the Guarantor Subsidiaries (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law has been enacted. Section 4.5. Limitations on Distributions and Investments. (a) Neither the Company nor the Guarantor shall, directly or indirectly, nor cause or permit any Restricted Subsidiary or any person controlled by the Company, the Guarantor or any Restricted Subsidiary to, declare, pay or make any dividends or distributions on any shares of Capital Stock (other than dividends or distributions payable in the Guarantor's Capital Stock, or warrants to purchase the Guarantor's Capital Stock, or splitups or reclassifications of the Guarantor's Capital Stock into additional or other shares of the Company's or the Guarantor's Capital Stock or dividends from Consolidated Subsidiaries solely to the Company or Consolidated Subsidiaries of the Company), or pay any Management Fee permitted under Section 4.14 in excess of $750,000 in the aggregate in any fiscal year or make or permit or suffer to exist any Restricted Investments (collectively, "Restricted Payments"), unless, at the time of and after giving effect to such Restricted Payment: (i) the aggregate amount of Restricted Payments (and to the extent applicable, the amount of any Restricted Payment shall be the original principal or capital or guarantee amount thereof less returns of principal or equity thereon without adjustment by reason of the financial condition or results of operations of any subsidiary or investment), declared, paid or made during the period beginning July 1, 1993 to and including the date any such Restricted Payment is made (excluding any amounts permitted under subsection (c) below) would not exceed twenty percent (20%) of aggregate Consolidated Net Income (plus, in determining the amount available to make any Restricted -31- 37 Payment consisting solely of a Restricted Investment, the amount of the net proceeds from the issuance and sale of Capital Stock by the Company, the Guarantor or any Restricted Subsidiary) for the period from July 1, 1993 to the end of the immediately preceding ended fiscal quarter at the date any such Restricted Payment is made (it being agreed that the amount of any Restricted Payment made by transfer of property of any Person other than cash shall be the greater of (A) the fair market value of such property, as determined in good faith by the Board of Directors of such Person and evidenced by a Board Resolution or (B) the book value of such property); (ii) the Company could incur $1.00 of additional Indebtedness pursuant to the covenants of the Indenture, the CFC Credit Agreement and any other instrument or evidence of Indebtedness; and (iii) no Default or Event of Default (and no event that, after notice or lapse of time, or both, would become an Event of Default) shall have occurred and be continuing. (b) Neither the Company nor the Guarantor shall, directly or indirectly, nor cause or permit any Restricted Subsidiary or any person controlled by the Company, the Guarantor or any Restricted Subsidiary to, (1) redeem, purchase, repurchase, prepay, defease or otherwise acquire, reduce or retire for value, prior to scheduled maturity, scheduled repayment or scheduled sinking final payment or pay interest on, any debt of the Guarantor, the Company or any subsidiary pari passu with or subordinated to the Securities, (2) redeem, purchase, repurchase or otherwise acquire, reduce or retire for value any shares of the Company's, the Guarantor's or any Restricted Subsidiary's Capital Stock, other than through conversion of the Company's Convertible Preferred Stock into the Company's Common Stock. (c) Notwithstanding subsections (a) and (b) above, the Company and the Guarantor shall be permitted to (i) pay interest on debt subordinated to the Securities; provided that such interest payment is fully subordinated in all respects to the Securities and subject to subordination provisions that are consented to in writing by a majority of Holders in principal amount of the then outstanding Securities, (ii) make payments in respect of cancellation of options to purchase the Common Stock pursuant to the Management Incentive Stock Option Agreement; provided that (x) at the time of and after giving effect to such payment, no Event of Default shall have occurred and be continuing and (y) the redemption price is not greater than the then market price of the Common Stock, (iii) make loans to employees of the Company or the Guarantor for the purpose of acquiring Common Stock pursuant to an equity incentive or equity -32- 38 investment plan; provided that such loans do not result in the transfer of any assets of the Company or the Guarantor other than Capital Stock and the purchase price therefor, (iv) make one-time loans to employees of the Company or the Guarantor not to exceed $350,000 in the aggregate, and (v) pay dividends to the holders of Convertible Preferred Stock and Class B Preferred Stock; provided that (x) at the time of and after giving effect to such payment, no Event of Default shall have occurred and be continuing and (y) the aggregate amount of such payments made during the immediately preceding four (4) consecutive fiscal quarters does not exceed $4,060,000. (d) Notwithstanding anything else contained herein, neither the Company nor the Guarantor shall, directly or indirectly, increase the dividend rate or other consideration paid with respect to any class of preferred stock of the Company, the Guarantor or any Restricted Subsidiary. (e) Without limiting the foregoing, neither the Company nor the Guarantor shall permit to exist any Unrestricted Subsidiary except as permitted by this Section 4.5. Section 4.6. Corporate Existence. Subject to Article 5 hereof, each of the Company and the Guarantor will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each subsidiary of the Company or the Guarantor in accordance with the respective organizational documents of each such subsidiary and the rights (charter and statutory), licenses and franchises of the Company, the Guarantor and their subsidiaries; provided, however, that the Company and the Guarantor shall not be required to preserve any such right, license or franchise, or corporate, partnership or other existence of any subsidiary, if the Board of Directors of the Company or the Guarantor, as the case may be, shall determine in good faith in accordance with the Company's or the Guarantor's charter, as applicable, that the preservation thereof is no longer desirable in the conduct of the business of the Company and its subsidiaries or the Guarantor and its subsidiaries, if any, in each case taken as a whole, and that the loss thereof is not adverse in any material respect to the Holders. Section 4.7. Payment of Taxes and Claims. The Company and the Guarantor shall, and shall cause each of their subsidiaries to, pay, prior to delinquency, all taxes, assessments and other governmental levies imposed upon the Company, the Guarantor or any of their subsidiaries, except as contested in good faith by appropriate proceedings or where failure to pay would not have a material adverse effect on the -33- 39 Company, the Guarantor or the Guarantor and its subsidiaries taken as a whole. Section 4.8. Investment Company Act. Neither the Company, the Guarantor nor any Restricted Subsidiary shall become an investment company subject to registration under the Investment Company Act of 1940, as amended. Section 4.9. Limitation on Encumbrances. The Company and the Guarantor will not, and will not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist or otherwise cause or suffer to become effective any Lien of any kind other than Permitted Encumbrances. Section 4.10. Indebtedness to Consolidated Earnings Ratio. The Company shall not permit, as at the end of any fiscal quarter commencing during each period set forth below, the ratio of (i) Indebtedness of the Company and its Restricted Subsidiaries and the Guarantor, determined on a consolidated basis as at such date, to (ii) Consolidated Earnings on such date of determination, to exceed the ratio set forth opposite such period:
Period Ratio - ------------------------------------ ----------- December 31, 1993 to December 31, 1994 5.0 to 1.0 January 1, 1995 to December 31, 1996 4.5 to 1.0 January 1, 1997 to July 1, 1998 4.0 to 1.0
For the purposes of this Section 4.10, Consolidated Earnings shall be calculated on the basis of the financial performance for the immediately preceding four (4) consecutive fiscal quarters. Section 4.11. Limitation on Incurrences of Additional Indebtedness. The Company and the Guarantor shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create, incur, assume, guarantee, suffer to exist or otherwise in any manner become liable or commit to become liable with respect to any Indebtedness except for: (a) the Securities; -34- 40 (b) Indebtedness existing on the date hereof as set forth in Schedule 2.5 (except Indebtedness which is to be repaid from the proceeds of the sale of the Securities); and (c) intercompany Indebtedness between (i) the Company and a Restricted Subsidiary and (ii) a Restricted Subsidiary and another Restricted Subsidiary, provided that such intercompany Indebtedness is fully subordinated in all respects to the Securities and subject to subordination provisions that are consented to in writing by a majority of Holders in principal amount of the then outstanding Securities; and (d) other Indebtedness that on a proforma basis, as if such Indebtedness were outstanding for the entire immediately preceding four (4) consecutive fiscal quarters, complies with all the terms, conditions and covenants of the Securities and this Indenture, provided, that (i) on the date such Indebtedness is incurred, created or assumed, and after giving effect thereto, no Default or Event of Default shall have occurred and be continuing and (ii) if such Indebtedness is to be used to redeem any Securities pursuant to paragraph 5 of the Securities, such Indebtedness shall (x) have an interest cost that is equal to or less than the interest cost on the Securities and (y) not have an Average Life shorter than the remaining Average Life of the Securities at the time of such redemption. Section 4.12. Maintenance of Consolidated Net Worth. The Company and the Guarantor shall not permit Consolidated Net Worth of the Company or the Guarantor at the end of any fiscal quarter commencing during each period set forth below to be less than the amount set forth below opposite such period:
Consolidated Net Period Worth ------------------------------------ ---------------- July 1, 1993 to December 31, 1993 $13,000,000 January 1, 1994 to December 31, 1994 18,000,000 January 1, 1995 to December 31, 1998 28,000,000 January 1, 1996 to July 1,1998 40,000,000
Section 4.13. Change in Control. If there is a Change in Control (such time of a Change in Control being referred to as the "Change in Control Date"), then the Company shall within ten (10) business days following the Change in Control Date, (a) commence an offer to repurchase -35- 41 (the "Repurchase Offer") all of the then outstanding Securities at the price (the "Redemption Price") equal to 101% of the principal amount of each Security, plus accrued interest to the Repurchase Date (as defined below) and other amounts owing under the Securities, and (b) deposit with the Paying Agent an amount equal to the aggregate Repurchase Price for all Securities then outstanding so as to be available for payment to the Holders of Securities who elect to require the Company to repurchase all or a portion of their Securities. If the Repurchase Date is on or after an interest payment record date and on or before the related interest payment date, any accrued interest will be paid to the Person in whose name a Security is registered at the close of business on such record date, and no additional interest will be payable to Holders who tender Securities pursuant to the Repurchase offer. Notice of any Repurchase Offer shall be mailed by certified mail by the Company to the Trustee and the Holders of the Securities at their last registered addresses. The Repurchase Offer shall remain open from the time of mailing until the repurchase date which shall be no earlier than 30 days nor later than 60 days from the date of such mailing (the date on which the Repurchase Offer closes being the "Repurchase Date"). The notice shall contain all instructions and materials necessary to enable such Holders to tender Securities pursuant to the Repurchase Offer. The notice, which shall govern the terms of the Repurchase Offer, shall state: (1) that the Repurchase Offer is being made pursuant to this Section 4.11 and that Securities will be accepted for payment either (A) in whole or (B) in part in integral multiples of $1,000; (2) the Repurchase Price and the Repurchase Date; (3) that any Security not tendered will continue to accrue interest; (4) that any Security accepted for payment pursuant to the Repurchase Offer shall cease to accrue interest from and after the Repurchase Date; (5) that Holders electing to have a Security purchased pursuant to the Repurchase Offer will be required to surrender the Security, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Security completed, to the Paying Agent at the address specified in the notice prior to the close of business on the Repurchase Date; -36- 42 (6) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than three business days before the Repurchase Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of Securities the Holder delivered for repurchase and a statement that such Holder is withdrawing his election to have such Securities repurchased; and (7) that Holders whose Securities are purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered. If any consent under the CFC Credit Agreement is necessary to permit the Company to effect the Repurchase Offer, the Company will obtain the requisite consent under the CFC Credit Agreement; provided, however, that the failure to obtain such consent will not in any event excuse any failure by the Company to perform its obligations under this Section 4.13. On the Repurchase Date, the Company shall, to the extent lawful, (i) accept for payment Securities or portions thereof tendered pursuant to the Repurchase Offer and (ii) deliver to the Trustee Securities so tendered together with an Officer's Certificate stating the Securities or portions thereof accepted for payment by the Company. The Paying Agent shall in accordance with written wire transfer instructions promptly wire transfer in immediately available funds to Holders of Securities so accepted payment in an amount equal to the Repurchase Price. The Trustee shall promptly authenticate and mail or deliver to each Holder who tendered a Security, a new Security or Securities equal in outstanding principal amount to any untendered portion of the Security surrendered. The Paying Agent shall invest funds deposited with it pursuant to this Section 4.13 for the benefit of, and at the written direction of, the Company to the Repurchase Date. Section 4.14. Restriction on Payment of Management Fees. The Company and the Guarantor shall not, directly or indirectly, nor cause or permit any Restricted Subsidiary or any person controlled by the Company, the Guarantor or any Restricted Subsidiary to, pay any Management Fees except for Management Fees paid in equal quarterly installments that in the aggregate do not exceed $750,000 in any twelve-month period, provided that such Management Fees may not be paid unless (i) at the time of and after giving effect to payment of any Management Fee, no Event of Default shall have occurred and be continuing, (ii) an independent committee of the Board of Directors of the Company or the Guarantor, as the case may be, has approved the management -37- 43 agreement applicable to the relevant period and the payment of such Management Fee as evidenced by a Board Resolution and (iii) any Management Fee payment is fully subordinated in all respects to the Securities and made subject in right and time of payment to amounts owing under the Securities, and, provided, further, however, that the aggregate amount of any Management Fees paid pursuant to this Section 4.14 in excess of $750,000 in any fiscal year shall be Restricted Payments and permitted only to the extent allowed under Section 4.5(a). Section 4.15. Limitation on Transactions With Affiliates. Neither the Company nor the Guarantor shall, nor shall either of them permit any Restricted Subsidiary to (i) sell, lease, transfer or otherwise dispose of any of its properties, assets or securities to, (ii) purchase or lease any property, assets or securities from, (iii) make any Restricted Investment in, (iv) make any loan or advance on the guaranty of any Indebtedness, or (v) obtain services or enter into or amend any contract or agreement with or for the benefit of, either an (A) Affiliate of any of them, (b) any person or person who is a member of a group (as such term is used for purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable) that, directly or indirectly, is the beneficial holder of 5% or more of any class of equity securities of the Company, the Guarantor or any of their subsidiaries or any Affiliates thereof, (C) any person who is an Affiliate of any such holder, or (D) any officers, directors, or employees of any of the above (each case, an "Affiliate Transaction"), except for transactions evidenced by an Officer's Certificate addressed and delivered to the Trustee stating that such Affiliate Transaction is made in good faith, and that the terms of such Affiliate Transaction are fair and reasonable to the Company and on terms no less favorable than those obtainable in an arm's length transaction with a third party that is not an Affiliate, the Guarantor or such Restricted Subsidiary, as the case may be, provided, that with respect to any Affiliate Transaction with an aggregate value (to either party) in excess of $1,000,000, the Company must, prior to the consummation thereof, obtain a written favorable opinion that such transactions is favorable to the Company and to the Holders from an Independent Financial Advisor from a financial point of view. Notwithstanding the foregoing, (x) transactions exclusively between or among the Company, the Guarantor and any Restricted Subsidiaries, (y) loans and advances to employees of the Company, the Guarantor or any Restricted Subsidiaries for expenses in the ordinary course of business and consistent with past practices and (z) Restricted Payments made in compliance with Section 4.5, payments made in compliance with Section 4.14 and transactions permitted by, and complying with, the provisions of Article Five shall not constitute "Affiliate Transactions." -38- 44 Section 4.16. Maintenance of Properties; Insurance. The Company and the Guarantor shall maintain or cause to be maintained in good repair, working order and condition all properties used or useful in its business and from time to time shall make or cause to be made all appropriate repairs, renewals and replacements thereof. The Company and the Guarantor shall maintain or cause to be maintained, with financially sound and reputable insurers, insurance in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Company, the Guarantor and their subsidiaries operate. All insurance policies shall be maintained and renewed with insurance carriers having an A.M. Best & Co. rating of "A" or better. Section 4.17. Compliance with Laws. The Company, the Guarantor and their subsidiaries shall comply with all laws, rules, regulations and judicial decisions or decisions of arbitrators applicable to or binding upon each of them and any property owned or leased by each of them (including without limitation, all Legal Requirements and all Environmental Laws) noncompliance with which could have a material adverse effect upon the condition (financial or otherwise), business, operations, assets, nature of assets, liabilities or prospects of the Company, the Guarantor and their subsidiaries, taken as a whole, or the ability of the Company or the Guarantor to perform their obligations under the Indenture and other Documents. Section 4.18. ERISA. (a) The Company, the Guarantor and the Guarantor Subsidiaries shall not, and shall not permit any of their subsidiaries or any ERISA Affiliate to: (i) permit to exist with respect to any Benefit Plan any accumulated funding deficiency (as defined in Section 302 of ERISA or Section 412 of the Internal Revenue Code) whether or not waived; (ii) fail to make any contribution or payment to any Multiemployer Plan required to be made by it under any agreement relating to such Multiemployer Plan, or a law pertaining thereto, which shall have become due; (iii) terminate any Benefit Plan other than in a "standard termination" within the meaning of Section 4041(b) of ERISA; (iv) fail to pay with respect to any Benefit Plan any installment or other payment required under Section 412 -39- 45 of the Internal Revenue Code on or before the due date for such installment or other payment; or (v) amend any Benefit Plan so as to increase current liability for the plan year such that the Company, the Guarantor, the Guarantor Subsidiaries, any of their subsidiaries or any ERISA Affiliate is required to provide security to such Benefit Plan under Section 401(a)(29) of the Internal Revenue Code; and (b) the Company, the Guarantor, the Guarantor Subsidiaries and their subsidiaries will not engage in any prohibited transaction (within the meaning of Section 406(a) of ERISA or Section 4975(c)(1)(A), (B), (C) or (D) of the Internal Revenue Code) for which an administrative or statutory exemption is not available; if any such event or condition described in clauses (a)(i) through (a)(iv) and clause (b) above could reasonably be expected to result in a liability on the part of, or any event described in clause (a)(v) above results in the posting of security under section 401(a)(29) of the Internal Revenue Code by, the Company, the Guarantor or any Guarantor Subsidiary which liability or posting of security, individually or in the aggregate, would have a material adverse effect on the business, operations, condition (financial or otherwise), properties or assets of the Company, the Guarantor and the Guarantor Subsidiaries, taken as a whole. Section 4.19. Environmental Matters. None of the Company, the Guarantor, the Guarantor Subsidiaries or any of their subsidiaries (i) will use, generate, manufacture, produce, store, discharge, dispose of, place, handle or release (collectively, "manage"), or cause any Person to manage, any Hazardous Materials on, from or under, any real property now or hereafter owned, operated or leased by the Company, the Guarantor or any of their subsidiaries or (ii) will transport or cause any Person to transport any Hazardous Materials to or from such real property, in a manner so that such management or transport of Hazardous Materials constitutes a violation of, or could lead to liability under, applicable Environmental Law that could reasonably be expected to have a material adverse effect upon the condition (financial or otherwise), business, operations, assets, nature of the assets, liabilities or prospects of the Company, the Guarantor and their subsidiaries, taken as a whole. None of the Company, the Guarantor or any of their subsidiaries will cause any real property now or hereafter owned, operated or leased by any of them to be used in a manner that could constitute a violation of, or could lead to liability under, applicable Environmental Law that could reasonably be expected to have a material adverse effect upon the condition (financial or otherwise), business, -40- 46 operations, assets, nature of the assets, liabilities or prospects of the Company, the Guarantor and their subsidiaries, taken as a whole. Section 4.20. Fixed Charge Coverage Ratio. The Company shall not permit, as at the end of any fiscal quarter commencing during each period set forth below, the Fixed Charge Coverage Ratio of the Company to be less than the ratio set forth opposite such period:
Minimum Fixed Charge Period Coverage Ratio - ------------------------------------ -------------- July 1, 1993 to December 31, 1993 1.70 to 1.00 January 1, 1994 to December 31, 1994 1.80 to 1.00 January 1, 1995 to December 31, 1996 2.00 to 1.00 January 1, 1997 to December 31, 1998 2.15 to 1.00 and at all times thereafter
For purposes of this Section 4.20, the Fixed Charge Coverage Ratio shall be calculated on the basis of the financial performance for the immediately preceding four (4) consecutive fiscal quarters. Section 4.21 Repayment of Certain Existing Indebtedness. (a) The Company shall have on or prior to the date hereof delivered an irrevocable notice of redemption to all holders of the 8% Notes and deposited with the trustee under the 8% Subordinated Note Indenture an amount of money sufficient to pay the principal amount of, and accrued interest on, all of the outstanding 8% Notes and (b) the Guarantor shall redeem in full or retire the 14% Debentures in connection with the Reorganization. Section 4.22 Limitation on Ranking of Future Indebtedness. Neither the Company nor the Guarantor shall, directly or indirectly, incur, create, or suffer to exist any Indebtedness which is subordinated or junior in right of payment (to any extent) to any Senior Indebtedness and senior or superior in right of payment (to any extent) to the Securities. Section 4.23 Books and Records. The Company and the Guarantor shall, and shall cause each of their subsidiaries to, keep books and records which -41- 47 accurately reflect all of their respective material business affairs and transactions. Section 4.24 Sale and Leaseback. Neither the Company nor the Guarantor shall, nor shall either permit any Restricted Subsidiary to, (i) enter into any arrangement with any lender or investor or to which such lender or investor is a party providing for the lease by the Company, the Guarantor or any such Restricted Subsidiary of real or personal property or any other asset, tangible or intangible, which has been or is to be sold or transferred by the Company, the Guarantor or such Restricted Subsidiary to such lender or investor or to any person to whom the funds have been or are to be advanced by such lender or investor, which advance is secured by such property, assets or rental obligations of the Company, the Guarantor or such Restricted Subsidiary or (ii) sell or transfer any real or personal property or any other asset, tangible or intangible, that is used or useful in conducting the business of the Company, the Guarantor or any Restricted Subsidiary and then or thereafter rent or lease any other real or personal property or other asset that is to be used for substantially the same purpose as such property or asset that has been sold or transferred. Notwithstanding the foregoing, and subject to the provisions set forth in this Indenture, the Company, the Guarantor or any Restricted Subsidiary shall be permitted to (A) enter into a transaction described in the foregoing clauses (i) and (ii) provided that such transaction is only between or among the Company, the Guarantor and any Restricted Subsidiary, (B) enter into a capital lease at the time of, or within four (4) months after, the initial acquisition or completion of construction by the Company, the Guarantor or any Restricted Subsidiary of the property or other asset that is subject to such capital lease and (C) renew or extend any capital lease permitted under the foregoing clause (B) of this sentence. Section 4.25 Limitation on Payment Restrictions Affecting Subsidiaries. The Company and the Guarantor shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or suffer to exist or allow to become effective any consensual encumbrance or restriction on the ability of (i) any of the subsidiaries of the Company or the Guarantor to (a) pay dividends or make other distributions on its Capital Stock or pay any obligation, liability or any Indebtedness owed to the Company, the Guarantor or any Restricted Subsidiary, (b) make loans or advances to the Company, the Guarantor or any Restricted Subsidiary or (c) transfer any of its properties or assets to the Company, the Guarantor or any Restricted Subsidiary, or (ii) the Company, the Guarantor or any Restricted Subsidiary to receive or retain vis-a-vis the transferor any such amounts set forth in -42- 48 clauses (i) (a), (i) (b) or (i) (c) above, except for encumbrances or restrictions existing on the date hereof contained in this Indenture, the CFC Credit Agreement, any replacement of the CFC Credit Agreement, provided that such encumbrances or restrictions are no more restrictive with respect to matters set forth in clauses (i) and (ii) above than those under the CFC Credit Agreement as in effect on the date hereof, or under or by reason of applicable law. Section 4.26. Accounting Changes. (a) The Company and the Guarantor shall not, and shall not permit any of their subsidiaries to, (i) make or permit any change in accounting principles or reporting practices, except as permitted by GAAP or (ii) change its fiscal year other than with respect to any subsidiary acquired after the date hereof to that of the Company. (b) The Company, the Guarantor and the Restricted Subsidiaries will use one of the following accounting firms, or their respective successors: KPMG Peat Marwick Arthur Andersen Coopers & Lybrand Ernst & Young Deloitte & Touche Price Waterhouse Section 4.27. PPN Application. Promptly after the date hereof, the Company shall file an application with Standard & Poor's Corporation CUSIP Service Bureau for the assignment of a Private Placement Number with respect to each of the Securities and the Company shall file with such bureau all documents and materials required to be submitted with such application. All of the costs associated with the filing of such application or the obtaining of such a Private Placement Number shall be borne solely by the Company. Section 4.28. Limitations on Sales of Assets and Subsidiary Stock. (a) Neither the Company, the Guarantor nor any Restricted Subsidiary shall in one or a series of related transactions convey, sell, transfer, assign or otherwise dispose of, directly or indirectly, any of its property, business or assets, tangible or intangible (including shares of Capital Stock of any direct or indirect subsidiaries of the Company or the Guarantor, by sale, issuance or otherwise) whether now owned or hereafter acquired (an "Asset Sale"), unless (A) the Net Cash Proceeds (as defined below) therefrom (1) within a period of not -43- 49 greater than twelve (12) months after the date of such Asset Sale, are invested in assets or property that are directly related to the fundamental nature of the business of the Company, the Guarantor and the Restricted Subsidiaries as of the date of this Indenture or in the acquisition of a Restricted Subsidiary that is engaged in a business that is directly related to the fundamental nature of the business of the Company, the Guarantor and the Restricted Subsidiaries as of the date of the Indenture, or, (2) if such Net Cash Proceeds are not invested within twelve (12) months as provided for in the foregoing clause (1), the Company applies the amount not so invested of such Net Cash Proceeds to the redemption of the Securities pursuant to paragraph 5 of the Securities or the repurchase of the Securities pursuant to an Offer to Purchase (as defined below), (B) 50% of the value of the consideration for such Asset Sale consists of U.S. Legal Tender or unrestricted marketable securities and (C) any promissory note received in connection with such Asset Sale shall not have a maturity, including any extensions thereof, greater than seven (7) years. Notwithstanding the foregoing provisions of this Section 4.28: (i) the Company, the Guarantor and any Restricted Subsidiary may convey, sell, transfer or otherwise dispose of assets or Capital Stock of any Unrestricted Subsidiary of the Company or the Guarantor, provided that such conveyance, sale, transfer or other disposition is without recourse, except for warranties, indemnities and price adjustments, to the Company, Guarantor or any Restricted Subsidiary; (ii) the Company, the Guarantor and any Restricted Subsidiary may in the ordinary course of business and consistent with past practices lease customer and mailing lists; (iii) the Company, the Guarantor and any Restricted Subsidiary may convey, sell, lease, transfer or otherwise dispose of assets pursuant to and in accordance with the provisions of Article Five of this Indenture; (iv) the Company, the Guarantor and any Restricted Subsidiary may for value convey, sell, transfer or otherwise dispose of inventories in the ordinary course of business and consistent with past practices; (v) the Company, the Guarantor and any Restricted Subsidiary may for value convey, sell, lease, transfer, or assign property no longer necessary for the proper conduct of the business (as evidenced by a Board Resolution and as disclosed to the Trustee in an Officer's Certificate immediately thereupon for Asset Sales with a fair market value of at least $250,000); -44- 50 (vi) the Company, the Guarantor and any Restricted Subsidiary may abandon assets and properties of the Company or the Guarantor which are no longer useful in its business and cannot be sold and may for value convey, sell, lease, transfer, or assign damaged, worn out or other obsolete property in the ordinary course of business; (vii) the Company, the Guarantor and any Restricted Subsidiary may sell accounts pursuant to the GECC Agreement and may in the ordinary course of business and consistent with past practices sell accounts receivable for fair market value and without recourse or claim against the Company, the Guarantor or any Restricted Subsidiary; (viii) the Company, the Guarantor and any Restricted Subsidiary may convey, sell, lease, transfer, assign or otherwise dispose of assets to the extent that the aggregate Net Cash Proceeds from all such Asset Sales occurring on or after the date of this Indenture in any consecutive twelve (12) months (other than Asset Sales otherwise permitted in clauses (i) through (vii) above) do not exceed ten percent (10%) of the Consolidated Assets of the Company, the Guarantor and the Restricted Subsidiaries as at the end of the most recent fiscal quarter. For purposes of this Section 4.28, "Net Cash Proceeds" means the aggregate amount of U.S. Legal Tender received by the Company, the Guarantor and the Restricted Subsidiaries in respect of an Asset Sale, other than those expressly permitted in clauses (i) through (viii) above, less the sum of (a) all reasonable fees, commissions and other expenses incurred in connection with such Asset Sale, including the amount (estimated reasonably in good faith by the Company and the Guarantor and evidenced by a Board Resolution) of income, franchise, sales and other applicable taxes required to be paid by the Company, the Guarantor or any Restricted Subsidiary in connection with such Asset Sale; provided, however, that if actual taxes paid are less than such estimated taxes, the difference shall be reincluded in Net Cash Proceeds and (b) the aggregate amount of U.S. Legal Tender so received which is used to retire any existing Indebtedness of the Company, the Guarantor or the Restricted Subsidiaries which is required by the express terms of the instruments to which they relate to be repaid in connection with such Asset Sale. The Company shall accumulate all Net Cash Proceeds in excess of the amount provided in clause (viii) above, and the aggregate amount of such accumulated Net Cash Proceeds not used for the purposes permitted by this Section 4.28(a) and within the time provided by this Section 4.28(a) shall be referred to as the "Accumulated Amount." -45- 51 Notwithstanding anything contained in this Section 4.28, none of the Company, the Guarantor or any Restricted Subsidiary shall convey, sell, transfer, assign or otherwise dispose of, any of its property, business or assets, if immediately before or immediately after giving effect to such transaction, a Default or an Event of Default (including an event that, after notice or lapse of time, or both, would become an Event of Default) shall have occurred and be continuing. (b) For the purposes of this Section 4.28, "Minimum Accumulation Date" means each date on which the Accumulated Amount exceeds $3,000,000. Not later than 10 Business Days after each Minimum Accumulation Date the Company shall make an unconditional offer (an "Offer to Purchase") to the Holders to purchase, on a pro rata basis, Securities having a principal amount (the "Offer Amount") equal to the Accumulated Amount, at a purchase price (the "Offer Price") equal to 100% of principal amount, plus (i) accrued but unpaid interest to, and including, the date (the "Purchase Date") the Securities tendered are purchased and paid for in accordance with this Section 4.28 and, (ii) any premium that would be payable if the Company were to have, on such Purchase Date, redeemed the Securities pursuant to Article Three and paragraph 5 of the Securities. Notice of an Offer to Purchase shall be sent, at least twenty (20) Business Days prior to the close of business on the Final Put Date (as defined below), by first- class mail, by the Company to each Holder at its registered address, with a copy to the Trustee. The notice to the Holders shall contain all information, instructions and materials required by applicable law or otherwise material to such Holders' decision to tender Securities pursuant to the Offer to Purchase. The Notice, which shall govern the terms of the Offer to Purchase shall state: (1) that the Offer to Purchase is being made pursuant to such notice and this Section 4.28; (2) the Offer Amount, the Offer Price (including the amount of accrued and unpaid interest and any premium over the principal amount), the Final Put Date (as defined below), and the Purchase Date, which Purchase Date shall be on or prior to 25 Business Days following the date the Accumulated Amount was at least $3,000,000; (3) that any Security or portion thereof not tendered or accepted for payment will continue to accrue interest; (4) that, unless the Company defaults in depositing U.S. Legal Tender with the Paying Agent in accordance with the last paragraph of this clause (b) or payment to Holders is otherwise prevented, any Security, or portion thereof, accepted for payment pursuant to the Offer to Purchase shall cease to accrue interest after the Purchase Date; -46- 52 (5) that Holders electing to have a Security, or portion thereof, purchased pursuant to an Offer to Purchase will be required to surrender the Security, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Security completed, to the Paying Agent (which may not for purposes of this Section 4.28, notwithstanding any other provision of this Indenture, be the Company or any Affiliate of the Company) at the address specified in the notice prior to the close of business on the third Business Day prior to the Purchase Date (the "Final Put Date"); (6) that Holders will be entitled to withdraw their elections, in whole or in part, if the Paying Agent (which may not for purposes of this Section 4.28, notwithstanding any other provision of this Indenture, be the Company, the Guarantor or any Affiliate of the Company or the Guarantor) receives, up to the close of business on the Final Put Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Securities the Holder is withholding and a statement containing a facsimile signature that such Holder is withdrawing his election to have such principal amount of Securities purchased; (7) that if Securities in a principal amount in excess of the principal amount of Securities to be acquired pursuant to the Offer to Purchase are tendered and not withdrawn, the Company shall purchase Securities on a pro rata basis (with such adjustments as may be deemed appropriate by the Company so that only Securities in denominations of $1,000 or integral multiples of $1,000 shall be acquired); (8) that Holders whose Securities were purchased only in part will be issued new Securities equal in principal amount to the unpurchased portion of the Securities surrendered; and (9) the circumstances and relevant facts regarding such Asset Sales. Any such Offer to Purchase shall comply with all applicable provisions of Federal and state laws, including those regulating tender offers, if applicable, and any provisions of this Indenture that conflict with such laws shall be deemed to be superseded by the provisions of such laws. On or before a Purchase Date, the Company shall (i) accept for payment Securities or portions thereof properly tendered pursuant to the Offer to Purchase on or prior to the Final Put Date (on a pro rata basis if required pursuant to paragraph (7) above, (ii) deposit with the Paying Agent U.S. Legal Tender sufficient to pay the Offer Price for all Securities or portions thereof so accepted and (iii) deliver to the Trustee Securities so accepted together with an Officer's Certificate -47- 53 setting forth the Securities or portions thereof being purchased by the Company. The Paying Agent shall promptly mail or deliver to Holders of Securities so accepted payment in an amount equal to the Offer Price for such Securities, and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Security equal in principal amount to any unpurchased portion of the Security surrendered. Any Securities not so accepted shall be promptly mailed or delivered by the Company to the Holder thereof. The Company will publicly announce the results of the Offer to Purchase on or as soon as practicable after the Purchase Date. (c) If the amount required to acquire all Securities tendered by Holders pursuant to the Offer to Purchase (the "Acceptance Amount") shall be less than the Offer Amount, the excess of the Offer Amount over the Acceptance Amount may be used by the Company for general corporate purposes without restriction, unless otherwise restricted by the other provisions of this Indenture. Upon consummation of any Offer to Purchase made in accordance with the terms of this Section 4.28, the Accumulated Amount as of the Minimum Accumulation Date shall be reduced to zero and accumulations thereof shall be deemed to recommence from the day next following such Minimum Accumulation Date. Section 4.29. Repurchase of the Securities. Notwithstanding anything to the contrary contained herein, other than pursuant to a Registered Exchange Offer, Section 4.13 or 4.28 of this Indenture or as set forth in paragraph 5 of the Securities, neither the Guarantor, the Company, any of their subsidiaries nor any Affiliate of any of the foregoing may, directly or indirectly, purchase, acquire, hold, redeem, prepay, or own any Securities prior to July 1, 1998. Section 4.30. Amendments of CFC Credit Agreement. None of the Company, the Guarantor or any of their subsidiaries shall amend, supplement or otherwise modify the CFC Credit Agreement in any respect that would (a) accelerate the repayment of any Indebtedness thereunder or (b) limit the Company's or the Guarantor's ability to receive distributions or dividends from any of their subsidiaries. Section 4.31. Execution of Guaranties by Restricted Subsidiaries. The Company shall cause any Restricted Subsidiary that is not a Guarantor Subsidiary on the date hereof, except for Gump's Corp., to execute and deliver to the Trustee, immediately after such subsidiary becomes a Restricted Subsidiary, a guaranty -48- 54 agreement pursuant to which such Restricted Subsidiary will guarantee payment of the Securities and the performance of the Company's other obligations under this Indenture to the extent set forth in Article 11 hereof. Section 4.32. Limitation on Activities. The Company and the Guarantor shall not, and shall not permit any material Restricted Subsidiary to, primarily engage in any business or investment activities other than those necessary for, incident to, connected with or arising out of the Company's and the Guarantor's principal activities in direct specialty retailing or directly related activities. Section 4.33. Working Capital Adequacy The Company shall not permit, as at the end of any fiscal quarter, the sum of Consolidated Current Assets plus Net Cash Flow plus Excess Availability to be less than the sum of Consolidated Current Liabilities plus Revolving Loan Balance. ARTICLE 5 SUCCESSORS Section 5.1. When Company, the Guarantor or Their Subsidiaries May Merge, etc. The Company and the Guarantor shall not, and shall not permit any Restricted Subsidiary to, consolidate with or merge with or into any other entity or sell, convey, assign, transfer, lease or otherwise dispose of all or substantially all of its properties and assets (determined on a consolidated basis for the Company, the Guarantor and their subsidiaries taken as a whole) to any entity, unless: (1) either (a) the Company shall be the continuing corporation or (b) the entity (if other than the Company) formed by such consolidation or into which the Company is merged or the entity that acquires, by sale, conveyance, assignment, transfer, lease or disposition, all or substantially all of the properties and assets of the Company or the Guarantor shall be a corporation, partnership or trust organized and validly existing under the laws of the United States or any state thereof or the District of Columbia, and shall expressly assume by a supplemental indenture or in the case of HDI by signing this Indenture the due and punctual payment of the principal of and premium, if any, and interest on all the Securities and the performance and observance of every covenant of the Indenture and the other Documents on the part of the Company or the Guarantor, as the case may be, to be performed or observed, provided, -49- 55 however, that such assumption by HDI is conditioned upon the consummation of the Reorganization. (2) immediately before and immediately thereafter, no Event of Default (and no event that, after notice or lapse of time, or both, would become an Event of Default) shall have occurred and be continuing; (3) immediately after giving effect to any such transaction involving the incurrence by the Company, the Guarantor or any of their subsidiaries, directly or indirectly, of additional Indebtedness (and treating any Indebtedness not previously an obligation of the Company or any of its subsidiaries incurred in connection with or as a result of such transaction as having been incurred at the time of such transaction), the Company (if it is the continuing corporation), the Guarantor (if it is the continuing corporation) or such other entity could incur at least $1.00 of additional Indebtedness pursuant to Section 4.18; and (4) immediately thereafter, the Company (if it is the continuing corporation), the Guarantor (if it is the continuing corporation) or such other entity shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transaction. The Company and the Guarantor shall deliver to the Trustee prior to the consummation of the proposed transaction an Officer's Certificate to the foregoing effect and an Opinion of Counsel stating that the proposed transaction and such supplemental indenture comply with this Indenture. (b) Notwithstanding any of the provisions contained in this Article 5, any Restricted Subsidiary of the Company may consolidate or merge with or into, or sell, convey, assign, transfer or otherwise dispose of all or substantially all of its assets to, the Company, or any other Restricted Subsidiary of the Company so long as the Company or a Restricted Subsidiary of the Company shall be the continuing corporation. Section 5.2. Successor Corporation Substituted. Upon any consolidation or merger, or any sale, lease, conveyance or other disposition of assets in accordance with Section 5.1, the successor corporation, including without limitations, HDI after the Reorganization, formed by such consolidation or into or with which the Company, the Guarantor or any Restricted Subsidiary is merged or to which such sale, lease, conveyance or other disposition is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company, the Guarantor or the Restricted Subsidiaries, as the case may be, under this Indenture and the Documents with the same -50- 56 effect as if such successor Person, including without limitations, HDI after the Reorganization, had been named as the Company, the Guarantor or the Restricted Subsidiary, as the case may be, herein or therein; provided, however, that the predecessor Company, Guarantor or the Restricted Subsidiary, as the case may be, including without limitations, HDI after the Reorganization, in the case of a sale, lease, conveyance or other disposition shall not be released from the obligation to pay the principal of and interest on the Securities or the obligations under the Purchase Agreement and the Registration Rights Agreement, or any of the other Documents, as the case may be. ARTICLE 6 DEFAULTS AND REMEDIES Section 6.1. Events of Default. An "Event of Default" occurs if: (1) the Company, the Guarantor or the Guarantor Subsidiaries default in the payment of interest or any other amounts owing on any Security when the same becomes due and payable and the Default continues for a period of ten (10) days; or the Distribution Facility Subsidiary defaults in the payment of interest or any other amounts owing on the Pledged Note when the same becomes due and payable; (2) the Company defaults in the payment of the principal of any Security when the same becomes due and payable at maturity, upon redemption or otherwise; or the Distribution Facility Subsidiary defaults in the payment of the principal of the Pledged Note when the same becomes due and payable upon demand, upon acceleration, upon redemption or otherwise; or the Company fails to pay to the Holders any interest, principal, proceeds, assets or other amounts collected by the Company with respect to the Pledged Note within one day after receipt thereof; or any payment default occurs under the CFC Credit Agreement or any default under Section 6.18 or 6.19 of the CFC Credit Agreement occurs and continues for a period of forty-five (45) days; or the Trustee receives a Payment Block Notice pursuant to the Subordination Agreement; or any representation or warranty made in the Purchase Agreement or any other Document was false in any material respect on the date as of which made or deemed made. (3) either the Company, the Guarantor or the Guarantor Subsidiaries fail to comply with any of its other agreements or covenants in, or provisions of, the Securities, this Indenture, the Guaranty or the other Documents to which it is a party and such failure shall have -51- 57 continued for a period of thirty (30) days after the earlier of written notice by the Trustee or when such failure shall first have become known to the Company, the Guarantor or the Guarantor Subsidiaries; (4) an acceleration of payment prior to scheduled maturity occurs under any mortgage, indenture, instrument or agreement under which there may be issued or by which there may be secured or evidenced any Indebtedness of the Company, the Guarantor or any of their subsidiaries in an aggregate amount in excess of $1,000,000 (other than the CFC Credit Agreement covered by subsection (2) hereof), whether such Indebtedness now exists or shall be created hereafter; (5) a final judgment or final judgments for the payment of money are entered by a court or courts of competent jurisdiction against the Company, the Guarantor or any Restricted Subsidiary and such remains undischarged for a period (during which execution shall not be effectively stayed) of 60 days, provided that the aggregate of all such judgments exceeds $1,000,000; (6) the Company, the Guarantor or any Restricted Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (A) commences a voluntary case, (B) consents to the entry of an order for relief against it in an involuntary case, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, (D) makes a general assignment for the benefit of its creditors, or (E) admits in writing its inability generally to pay its debts as the same become due; (7) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (A) is for relief against any of the Company, the Guarantor or any Restricted Subsidiary in an involuntary case, (B) appoints a Custodian of any of the Company, the Guarantor or any Restricted Subsidiary or -52- 58 for all or substantially all of the property of the Company, the Guarantor or any Restricted Subsidiary, or (C) orders the liquidation of any of the Company, the Guarantor or any Restricted Subsidiary, and the order or decree remains unstayed and in effect for 60 days; (8) there has occurred a revocation, suspension or involuntary loss of any material license, contract or franchise of the Company, the Guarantor or any Guarantor Subsidiary which results in the cessation of operation of the business of any of such entities for a period of more than 30 consecutive days; (9) a court of competent jurisdiction enters a final judgment holding any of the Guaranty or any other Documents to be invalid or unenforceable and such judgment remains unstayed and is in effect for a period of 60 consecutive days; or if either the Company, the Guarantor or any Guarantor Subsidiary shall assert, in any pleading filed in such a court, that the Guaranty or any other Documents are invalid or unenforceable; (10) the Company, the Guarantor or any Guarantor Subsidiary default in the payment of any amounts due pursuant to the terms of the Purchase Agreement, the Registration Rights Agreement or the other Documents (other than payments already covered by subsection (1) and (2) hereof) when the same become due and payable; or (11) the Company or the Guarantor admits in any writing that it is unable to pay its debts as they become due. The term "Bankruptcy Law" means title 11, U.S. Code or any similar federal or state law for the relief of debtors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. In the case of any Event of Default pursuant to the provisions of this Section 6.1 occurring by reason of any willful action (or inaction) taken (or not taken) by or on behalf of the Company, the Guarantor or the Guarantor Subsidiaries with the intention of avoiding payment of the premium which the Company would have had to pay if the Company then had elected to redeem the Securities pursuant to Paragraph 5 of the Securities, an equivalent premium shall also become and be immediately due and payable to the extent permitted by law, anything in this Indenture or in the Securities contained to the contrary notwithstanding. -53- 59 Section 6.2. Acceleration. If an Event of Default (other than an Event of Default specified in clause (6) or (7) of Section 6.1) occurs and is continuing, the Trustee by notice to the Company (on behalf of itself and the Guarantor Subsidiaries) and the Guarantor, or the Holders of at least 25% in principal amount of the then outstanding Securities by notice to the Company (on behalf of itself and the Guarantor Subsidiaries) and the Guarantor, and the Trustee, may declare the unpaid principal of and any accrued interest on all the Securities to be due and payable. Upon such declaration, the principal and interest shall be due and payable immediately. If an Event of Default specified in clause (6) or (7) of Section 6.1 occurs, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Holders of a majority in principal amount of the then outstanding Securities by notice to the Trustee may rescind an acceleration and its consequences if the rescission would not conflict with any judgment or decree and if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration. Section 6.3. Other Remedies. If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal or interest on the Securities or to enforce the performance of any provision of the Securities, the Guaranty, this Indenture or the Documents. The Trustee may maintain a proceeding even if it does not possess any of the Securities or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Securityholder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. Section 6.4. Waiver of Past Defaults. The Holders of a majority in principal amount of the then outstanding Securities by notice to the Trustee may waive an existing Default or Event of Default and its consequences except a continuing Default or Event of Default in the payment of the principal of or interest on any Security. Section 6.5. Control by Majority. The Holders of a majority in principal amount of the then outstanding Securities may direct the time, method and place of conducting any proceeding for any remedy available to the -54- 60 Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, that is unduly prejudicial to the rights of other Securityholders, or would involve the Trustee in personal liability. Section 6.6. Limitation on Suits. A Securityholder may pursue a remedy with respect to this Indenture or the Securities only if: (1) the Holder gives to the Trustee notice of a continuing Event of Default; (2) the Holders of at least 25% in principal amount of the then outstanding Securities make a written request to the Trustee to pursue the remedy; (3) such Holder or Holders offer to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and (5) during such 60-day period the Holders of a majority in principal amount of the then outstanding securities do not give the Trustee a direction inconsistent with the request. A Securityholder may not use this Indenture to prejudice the rights of another Securityholder or to obtain a preference or priority over another Securityholder. Section 6.7. Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder of a Security to receive payment of principal and interest on the Security, on or after the respective due dates expressed in the Security, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder. Section 6.8. Collection Suit by Trustee. If an Event of Default specified in Section 6.1(1) or (2) occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company, the Guarantor or any other obligor on the Securities for the whole amount of principal and interest remaining unpaid on -55- 61 the Securities and interest on overdue principal and interest and such further amount as shall be sufficient to cover the costs and, to the extent lawful, expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. Section 6.9. Trustee may File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Securityholders allowed in any judicial proceedings relative to the Company, the Guarantor or any other obligor or their respective creditors or property. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Securityholder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Securityholder in any such proceeding. Section 6.10. Priorities. If the Trustee collects any money pursuant to this Article or by exercise of its remedies under the Documents, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 7.7 hereof; Second: to holders of Senior Indebtedness to the extent permitted under Article 10 hereof; Third: to Securityholders for amounts due and unpaid on the Securities for principal and interest and premium, if any, ratably, first to interest, then principal and then premium, according to the amounts due and payable on the Securities for principal and interest and premium, if any, respectively; and Fourth: to Securityholders for other amounts due under the Indenture, the Securities and the other Documents; and Fifth: to the Company, the Guarantor or any other obligors on the Securities, as their interests may appear, or as a court of competent jurisdiction may direct. The Trustee may fix a record date and payment date for any payment to Securityholders. -56- 62 Section 6.11. Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 6.7, or a suit by Holders of more than 10% in principal amount of the then outstanding Securities. ARTICLE 7 TRUSTEE Section 7.1. Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (b) Except during the continuance of an Event of Default: (1) The Trustee need perform only those duties that are specifically set forth in this Indenture and no others. (2) In the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (1) This paragraph does not limit the effect of paragraph (b) of this Section. (2) The Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, -57- 63 unless it is proved that the Trustee was negligent in ascertaining the pertinent facts. (3) The Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 6.5. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section. (e) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense. (f) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company, the Guarantor and the Guarantor Subsidiaries. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. Section 7.2. Rights of Trustee. (a) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officer's Certificate or an opinion of Counsel, or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officer's Certificate or opinion of Counsel. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. (e) The Trustee may consult with an attorney and shall not be liable for any action it takes or omits to take in reliance on such attorney's advice. Section 7.3. Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Securities and may otherwise deal -58- 64 with the Company, the Guarantor, the Guarantor Subsidiaries or an Affiliate of any of them with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to Sections 7.10 and 7.11. Section 7.4. Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture, the Securities, the Guaranty or any other Document, it shall not be accountable for the Company's use of the proceeds from the Securities, and it shall not be responsible for any statement of the Company or the Guarantor or the Guarantor Subsidiaries in the Indenture or any other Document or any statement in any Security other than its authentication. Section 7.5. Notice of Defaults. If a Default or Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to Securityholders a notice of the Default or Event of Default within 15 days after it occurs. Except in the case of a Default or Event of Default in payment on any Security (including any failure to make any mandatory redemption payment required hereunder), the Trustee may withhold the notice if and so long as a committee of its Trust officers in good faith determines that withholding the notice is in the interests of Securityholders. Section 7.6. Reports by Trustee to Holders. Within 60 days after the reporting date stated in Section 13.9, the Trustee shall mail to Securityholders a brief report dated as of such reporting date that complies with TIA Section 313(a). The Trustee also shall comply with TIA Section 313(b)(1) and TIA Section 313(b)(2). The Trustee shall also transmit by mail all reports as required by TIA Section 313(c). Commencing at the time this Indenture is qualified under the TIA, a copy of each report at the time of its mailing to Securityholders shall be filed with the SEC and each stock exchange on which the Securities are listed. The Company shall notify the Trustee when the Securities are listed on any stock exchange. Section 7.7. Compensation and Indemnity. The Company shall pay to the Trustee from time to time reasonable compensation for its services hereunder. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred by it. Such expenses shall include the -59- 65 reasonable compensation and out-of-pocket expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee against any loss or liability incurred by it except as set forth in the next paragraph. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel, and the Company shall pay the reasonable fees and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through negligence or bad faith. To secure the Company's payment obligations in this Section, the Trustee shall have a lien prior to the Securities on all money or property held or collected by the Trustee, except that held in trust to pay principal and interest on particular Securities. When the Trustee incurs expenses or renders services after an Event of Default specified in Section 6.01(6) or (7) occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. Section 7.8. Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section. The Trustee may resign by so notifying the Company in writing. The Holders of a majority in principal amount of the then outstanding Securities may remove the Trustee by so notifying the Trustee and the Company in writing. The Company may remove the Trustee if: (1) the Trustee fails to comply with Section 7.10; (2) the Trustee is adjudged as bankrupt or insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (3) a Custodian or public officer takes charge of the Trustee or its property; or -60- 66 (4) the Trustee becomes incapable of acting or is not performing to the satisfaction of Holders of a majority in aggregate principal amount of the then outstanding Securities. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company, the Guarantor and any other obligor shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Securities may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee (at the expense of the Company), the Company or the Holders of at least 10% in principal amount of the then outstanding Securities may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 7.10, any Securityholder may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Securityholders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 7.7. Notwithstanding replacement of the Trustee pursuant to this Section 7.8, the Company's obligations under Section 7.7 hereof shall continue for the benefit of the retiring trustee with respect to expenses and liabilities incurred by it prior to such replacement. Section 7.9. Successor Trustee by Merger, etc. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business to, another corporation, the successor corporation without any further act shall be the successor Trustee. Section 7.10. Eligibility; Disqualification. This Indenture shall always have a Trustee who satisfies the requirements of TIA Section 310(a)(1). The Trustee shall always have a combined capital and surplus as stated in Section -61- 67 13.9. The Trustee is subject to TIA Section 310(b), including the optional provision permitted by the second sentence of TIA Section 310(b)(9). Section 7.11. Preferential Collection of Claims Against Company. The Trustee is subject to TIA Section 311(a), excluding any creditor relationship listed in TIA Section 311(b). A Trustee who has resigned or been removed shall be subject to TIA Section 311(a) to the extent indicated therein. ARTICLE 8 DISCHARGE OF INDENTURE Section 8.1. Termination of Company's, Guarantor's and the Guarantor Subsidiaries' Obligations. This Indenture shall cease to be of further effect (except that the Company's obligations under Section 7.7 and the Company's and the Trustee's obligations under Section 8.3 shall survive) when all outstanding Securities theretofore authenticated and issued have been delivered to the Trustee for cancellation, and the Company, the Guarantor or the Guarantor Subsidiaries have paid all sums payable hereunder and under the other Documents. In addition, the Company, the Guarantor and the Guarantor Subsidiaries may terminate all of their respective obligations under this Indenture (except the Company's obligations under Sections 7.7 and 8.3) if: (1) the Company irrevocably deposits in trust with the Trustee money or U.S. Government Obligations sufficient to pay principal and interest and premium, if any, on the Securities to maturity or redemption, as the case may be, and to pay all other sums payable by it hereunder; and (2) the Company shall have delivered to the Trustee an opinion of Counsel satisfactory to the Trustee that the Holders of the Securities should not recognize income, gain or loss for federal income tax purposes as a result of the Company's exercise of its option under this Section 8.1 and will be subject to federal income tax on the same amount and in the same manner and at the same times as would have been the case if such option had not been exercised. However, the Company's, the Guarantor's and the Guarantor Subsidiaries' obligations in Sections 2.3, 2.4, 2.5, 2.6, 2.7, 4.1, 7.7, 8.3 and 8.4 shall survive until the Securities are no -62- 68 longer outstanding. Thereafter, only the Company's obligations in Sections 7.7 and 8.3 shall survive. After a deposit made pursuant to this Section 8.01, the Trustee upon request shall acknowledge in writing the discharge of the Company's, the Guarantor's and the Guarantor Subsidiaries' obligations under this Indenture except for those surviving obligations specified above. "U.S. Government Obligations" means direct obligations of the United States of America, or obligations unconditionally guaranteed by the United States of America, for the payment of which the full faith and credit of the United States of America is pledged. In order to have money available on a payment date to pay principal or interest on the Securities, the U.S. Government Obligations shall be payable as to principal or interest on or before such payment date in such amounts as will provide the necessary money. U.S. Government Obligations shall not be callable at the issuer's option. Section 8.2. Application of Trust Money. The Trustee shall hold in trust money or U.S. Government Obligations deposited with it pursuant to Section 8.1. It shall apply the deposited money and the money from U.S. Government Obligations through the Paying Agent and in accordance with this Indenture to the payment of principal and interest on the Securities. Section 8.3. Repayment to Company. The Trustee and the Paying Agent shall promptly pay to the Company upon request any excess money or securities held by them at any time. The Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal or interest that remains unclaimed for two years after the date upon which such payment shall have become due; provided, however, that the Company shall have first caused notice of such payment to the Company to be mailed to each Securityholder entitled thereto no less than 30 days prior to such payment. After payment to the Company, Securityholders entitled to the money must look to the Company for payment as general creditors unless an applicable abandoned property law designates another Person. Section 8.4. Reinstatement. If (i) the Trustee or Paying Agent is unable to apply any money in accordance with Section 8.2 by reason of any order or judgment of any court or governmental authority enjoining, -63- 69 restraining or otherwise prohibiting such application and (ii) the Holders of at least a majority in principal amount of the then outstanding Securities so request by written notice to the Trustee, the Company's and the Guarantor's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 8.1 until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 8.2. ARTICLE 9 AMENDMENTS Section 9.1. Without Consent of Holders. The Company, the Guarantor, the Guarantor Subsidiaries and the Trustee may amend this Indenture, the Securities or the other Documents without the consent of any Securityholder: (1) to comply with Section 5.1; (2) to comply with any requirements of the SEC in connection with the qualification or requalification of this Indenture under the TIA; or (4) to provide for uncertificated Securities in addition to certificated Securities. Within five (5) days after an amendment under this Section becomes effective, the Company shall mail to Securityholders and the Trustee a notice briefly describing the amendment. Section 9.2. With Consent of Holders. Subject to Section 6.7, the Company, the Guarantor, the Guarantor Subsidiaries and the Trustee may amend this Indenture, the Securities or any other Document with the written consent of the Holders of at least a majority in principal amount of the then outstanding Securities. Subject to Sections 6.4 and 6.7, the Holders of a majority in principal amount of the Securities then outstanding may also waive compliance in a particular instance by the Company or the Guarantor with any provision of this Indenture or the Securities or any other Document. However, without the consent of each Securityholder affected, an amendment or waiver under this Section may not: (1) reduce the amount of Securities whose Holders must consent to an amendment or waiver; (2) reduce the rate of or change the time for payment of interest on any Security; -64- 70 (3) reduce the principal of or change the fixed maturity of any Security or alter the redemption provisions with respect thereto; (4) make any Security payable in money other than that stated in the Security; (5) make any change in Section 6.4, 6.7 or 9.2 (this sentence); or (6) waive a default in the payment of the principal of, or interest or premium on, any Security. To secure a consent of the Holders under this Section it shall not be necessary for the Holders to approve the particular form of any proposed amendment or waiver, but it shall be sufficient if such consent approves the substance thereof. Within five (5) days after an amendment or waiver under this Section becomes effective, the Company shall mail to Securityholders and the Trustee a notice briefly describing the amendment or waiver. Section 9.3. Compliance with Trust Indenture Act. From the date on which this Indenture is qualified under the TIA, every amendment, waiver or supplement under this Indenture or the Securities shall comply with the TIA as then in effect. Section 9.4. Revocation and Effect of Consents. Until an amendment or waiver becomes effective, a consent to it by a Holder of a Security is a continuing consent by the Holder and every subsequent Holder of a Security or portion of a Security that evidences the same Indebtedness as the consenting Holder's Security, even if notation of the consent is not made on any Security. However, any such Holder or subsequent Holder may revoke the consent as to his Security or portion of a Security if the Trustee receives notice of revocation before the date on which the Trustee receives an Officer's Certificate certifying that the Holders of the requisite principal amount of Securities have consented to the amendment or waiver (or before such later date as may be required by law or stock exchange rule). The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment or waiver. If a record date is fixed, then notwithstanding the provisions of the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only those -65- 71 Persons, shall be entitled to consent to such amendment or waiver or to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No consent shall be valid or effective for more than 90 days after such record date unless consents from Holders of the principal amount of Securities required hereunder for such amendment or waiver to be effective shall have also been given and not revoked within such 90-day period. After an amendment or waiver becomes effective it shall bind every Securityholder, unless it is of the type described in any of clauses (1) through (6) of Section 9.2. In such case, the amendment or waiver shall bind each Holder of a Security who has consented to it and every subsequent Holder of a Security that evidences the same debt as the consenting Holder's Security. Section 9.5. Notation on or Exchange of Securities. The Trustee may place an appropriate notation about an amendment or waiver on any Security thereafter authenticated. The Company in exchange for all Securities may issue and the Trustee shall authenticate new Securities that reflect the amendment or waiver. Section 9.6. Trustee Protected. The Trustee shall sign all supplemental indentures, except that the Trustee need not sign any supplemental indenture that adversely affects its rights. The Trustee may request an opinion of Counsel and an Officer's Certificate stating that such supplemental indenture is permitted hereunder and all conditions precedent have been complied with in the form set forth in Sections 12.04 and 12.05. ARTICLE 10 SUBORDINATION Section 10.1. Securities Subordinated to Senior Indebtedness. Each of the Company, the Guarantor and the Guarantor Subsidiaries agrees, and each Holder by accepting a Security agrees, that the Indebtedness evidenced by the Securities and the Guaranties, including for all purposes of this Article 10, all repurchase and redemption obligations with respect to the Securities, is subordinated in right of payment, to the extent and in the manner provided in this Article 10, to the prior payment in full of all existing and future Senior Indebtedness and that the subordination is for the benefit of and enforceable by the holders of Senior Indebtedness, and authorizes and directs the Trustee to take such action as may be necessary or -66- 72 appropriate to acknowledge or effectuate the subordination as provided in this Article 10 and the Subordination Agreement and appoints the Trustee as attorney-in-fact for any and all such purposes. Only Indebtedness of the Company, the Guarantor and the Guarantor Subsidiaries which is Senior Indebtedness shall rank senior to the Securities in accordance with the provisions set forth herein. This Article 10 shall remain in full force and effect as long as any Senior Indebtedness is outstanding or any commitment to advance Senior Indebtedness exists, assuming that all conditions precedent to any such advance could be satisfied. Section 10.2. Liquidation; Dissolution; Bankruptcy. Upon any payment or distribution, whether of cash, securities or other property, to creditors of the Company, the Guarantor or any Guarantor Subsidiary in a liquidation (total or partial), reorganization or dissolution of the Company, the Guarantor or any Guarantor Subsidiary, whether voluntary or involuntary, or in a bankruptcy, reorganization, insolvency, receivership, assignment for the benefit of creditors, marshalling of assets or similar proceeding relating to each of the Company, the Guarantor, any Guarantor Subsidiary or its respective properties: (1) holders of Senior Indebtedness shall be entitled to receive payment in full, in cash or cash equivalents, of such Senior Indebtedness before Holders shall be entitled to receive from the Company, the Guarantor or any Guarantor Subsidiary, any payment of principal of, or interest on, or any other distribution with respect to, the securities; and (2) until the Senior Indebtedness is paid in full as provided in clause (1) above, any distribution to which Holders would be entitled from the Company, the Guarantor or the Guarantor Subsidiaries but for this Article 10 shall be made to the holders of Senior Indebtedness as their interests may appear; in each case except that Holders may receive shares of stock and debt securities that are subordinated to Senior Indebtedness to at least the same extent and pursuant to the same or more stringent terms as are the Securities. Upon any distribution of assets of the Company, the Guarantor or any Guarantor Subsidiary referred to in this Section 10.2, the Trustee and the Holders shall be entitled to rely upon any order or decree of a court of competent jurisdiction in which such bankruptcy, reorganization, insolvency, receivership, assignment for the benefit of creditors, marshalling of assets or -67- 73 similar proceedings are pending, or a certificate of the liquidating trustee or agent or other such person making any distribution to the Trustee or to the Holders, for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of Senior Indebtedness, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section 10.2. The Trustee shall be entitled to rely on the delivery to it of a written notice by a person representing himself to be a holder of Senior Indebtedness or a Representative, as the case may be, to establish that such notice has been given by a holder of Senior Indebtedness or a Representative, as the case may be. In the event that the Trustee determines, in good faith, that further evidence is required with respect to the right of any person, as a holder of Senior Indebtedness, to participate in any payment or distribution pursuant to this Section 10.2, the Trustee may request such person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of such Senior Indebtedness held by such person, as to the extent to which such person is entitled to participation in such payment or distribution and as to other facts pertinent to the rights of such person under this Section 10.2, and, if such evidence is not furnished, the Trustee may defer any payment to such person (or to the Securityholder) pending judicial determination as to the right of such person to receive such payment. Section 10.3. Default on Senior Indebtedness. During the continuance of any event of default with respect to Senior Indebtedness pursuant to which the maturity of such Senior Indebtedness may be accelerated immediately without further notice (except such notice as may be required to effect such acceleration), upon the occurrence of receipt by the Trustee of written notice from the Representative with respect to, or the holders of at least a majority in aggregate principal amount of, such Senior Indebtedness then outstanding, no direct or indirect payment may be made by the Company, the Guarantor or the Guarantor Subsidiaries upon or in respect of the Securities for a period (a "Payment Blockage Period") commencing on the earlier of the date of receipt of such notice by the Trustee or the date of such acceleration and ending 120 days thereafter (unless such Payment Blockage Period shall be terminated by written notice to the Trustee from such Representative or such holders). Not more than one Payment Blockage Period in the aggregate may be commenced with respect to the Securities during any period of 360 consecutive days, irrespective of the number of defaults with respect to Senior Indebtedness during such period. In no event will a Payment Blockage Period extend beyond 119 days from the date such payment upon or in respect of the Securities was due; and there must be 180 days in any 360-day period in which no Payment Blockage Period is in effect as to the Company, the -68- 74 Guarantor or the Guarantor Subsidiaries. For all purposes of this Section 10.3, no default or event of default which existed or was continuing on the date of the commencement of the Payment Blockage Period with respect to the Senior Indebtedness initiating such Payment Blockage Period shall be, or be made, the basis for the commencement of a subsequent Payment Blockage Period by the Representative or requisite holders of such Senior Indebtedness whether or not within a period of 360 consecutive days unless such default or event of default shall have been cured or waived for a period of not less than 90 consecutive days. Section 10.4. When Distribution Must Be Paid Over. In the event that the Company, the Guarantor or any Guarantor Subsidiary shall make any payment to the Trustee pursuant to the Securities at a time when such payment is prohibited by Section 10.2 or 10.3, such payment shall be held by the Trustee, in trust for the benefit of, and shall be paid forthwith over and delivered to, the holders of Senior Indebtedness (pro rata as to each of such holders on the basis of the respective amounts of Senior Indebtedness held by them) or their Representatives, as their respective interests may appear, for application to the payment of all Senior Indebtedness remaining unpaid to the extent necessary to pay all Senior Indebtedness in full in accordance with its terms, after giving effect to any concurrent payment or distribution to or for the holders of Senior Indebtedness. If a distribution is made to Holders that because of this Article 10 should not have been made to them, the Holders who receive the distribution shall hold it in trust for holders of Senior indebtedness and pay it over to them as their interests may appear. Section 10.5. Notice by Company. The Company shall promptly notify the Trustee and any Paying Agent by an appropriate Officer's Certificate of the Company delivered to a Trust Officer and the Paying Agent of any facts known to the Company that would cause a payment under the Securities of principal of or interest on the Securities to violate this Article 10, but failure to give such notice shall not affect the subordination of the Securities to the Senior Indebtedness provided in this Article 10. Section 10.6. Subrogation. After all Senior Indebtedness is paid in full and all commitments to advance Senior Indebtedness have been terminated, and until the Securities are paid in full pursuant to the Securities and this Indenture or otherwise, Holders shall be -69- 75 subrogated to the rights of holders of Senior Indebtedness to receive distributions applicable to Senior Indebtedness to the extent that distributions otherwise payable to Holders have been applied to payment of Senior Indebtedness. A distribution made under this Article 10 to holders of Senior Indebtedness which otherwise would have been made to Holders is not, as between the Company and the Holders, a payment by the Company on Senior Indebtedness. Section 10.7. Relative Rights. This Article 10 defines the relative rights of Holders and holders of Senior Indebtedness. Nothing in this Indenture (but subject to the provisions of paragraph 5 of the Securities) shall: (1) impair, as between the Company, the Guarantor or the Guarantor Subsidiaries and the Holders, the obligation of the Company, the Guarantor and the Guarantor Subsidiaries, which is absolute and unconditional, to pay principal of and interest on the Securities, including the Guaranty, in accordance with their terms; (2) affect the relative rights of Holders and creditors of the Company, the Guarantor and the Guarantor Subsidiaries other than such creditors as are holders of Senior Indebtedness; (3) prevent the Trustee or any Holder from exercising its available remedies upon a Default or Event of Default, subject to the rights of holders of Senior Indebtedness to receive distributions otherwise payable to Holders; or (4) create or imply the existence of any commitment on the part of the holders of Senior Indebtedness to extend credit to the Company other than as set forth in the terms governing such Senior Indebtedness. Section 10.8. Subordination May Not Be Impaired by Company. No right of any present or future holder of Senior Indebtedness to enforce the subordination of the Indebtedness evidenced by the Securities and this Article 10 shall be impaired by any act or failure to act by the Company, the Guarantor or any Guarantor Subsidiary or anyone in custody of its assets or property or by its failure to comply with this Indenture. -70- 76 Section 10.9. Distribution or Notice to Representatives. Whenever a distribution is to be made or a notice given to holders of Senior Indebtedness, the distribution may be made and the notice given to their Representatives, if any. Section 10.10. Rights of Trustee and Paying Agent. Notwithstanding Section 10.2 or 10.3, the Trustee or any Paying Agent may continue to make payments of principal of or interest on the Securities unless, in the case of the Trustee, a Trust Officer or, in the case of a Paying Agent other than the Trustee, an officer of such Paying Agent, shall have received, at least three Business Days prior to the date such payments are due and payable, written notice of the occurrence of an event under Section 10.2 or 10.3 and that any payment under the Securities would violate this Article 10. Only the Company or a Representative with respect to or holders of a least a majority in principal amount of an issue of Senior Indebtedness may give such notice. Nothing contained in this Section 10.10 shall limit the right of any holder of Senior Indebtedness to recover payments as contemplated by Section 10.4. The Trustee in its individual or any other capacity may hold Senior Indebtedness with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. The Trustee shall be entitled to all the rights set forth in this Article 10 with respect to Senior Indebtedness which may at any time be held by it, to the same extent as any other holder of Senior Indebtedness; and nothing in Article 7 shall deprive the Trustee of any of its rights as such holder, except as otherwise provided by the TIA. Section 10.11. Trustee Entitled to Assume Payments Not Prohibited in Absence of Notice. Notwithstanding any of the provisions of this Article 10 or any other provision of this Indenture, unless a Trust Officer has received a written notice pursuant to Section 10.10, the Trustee shall not at any time be charged with knowledge of the existence of any facts which would prohibit the making of any payment to or by the Trustee, and in the absence of such written notice the Trustee may make such payment without liability or obligation to the Senior Indebtedness. Section 10.12. Application by Trustee of Monies Deposited With It. Nothing contained in this Article 10 or elsewhere in this Indenture, or in the Securities, shall (i) affect the obligation of the Company, the Guarantor or the Guarantor -71- 77 Subsidiaries to make, or prevent the Company, the Guarantor or the Guarantor Subsidiary from making, at any time except as specified in Section 10.2 or 10.3 to the extent provided therein, payments at any time pursuant to the Securities, (ii) prevent the application by the Trustee or any Paying Agent of any monies or the proceeds of any U.S. Government Obligations received from the Company and held by the Trustee or such Paying Agent in trust for the benefit of the Holders of Securities as to which notice of redemption shall have been given, to the payment of or on account of the principal of or interest on the Securities if, at the time such notice was given, a payment by the Company under the Securities would not have been prohibited by the foregoing provisions of this Article 10 or (iii) prevent the application by the Trustee or any Paying Agent of any monies or the proceeds of any U.S. Government Obligations deposited with it by the Company under Article 8 hereof to the payment of or on account of the principal of or interest on the Securities if, at the time of such deposit, a payment by the Company under the Securities would not have been prohibited by the foregoing provisions of this Article 10. Section 10.13. Trustee's Compensation Not Prejudiced. Nothing in this Article 10 shall apply to claims of, or payments to, the Trustee pursuant to Section 7.7. Section 10.14. Officer's Certificate. If there occurs any event referred to in Section 10.2, the Company, the Guarantor or any Guarantor Subsidiary, as the case may be, shall promptly give to the Trustee an Officer's Certificate (on which the Trustee may conclusively rely) identifying all holders of Senior Indebtedness and the principal amount of Senior Indebtedness then outstanding held by each such holder and stating the reasons why such Officer's Certificate is being delivered to the Trustee. Section 10.15. Certain Payments. Nothing in this Article 10 shall prevent or delay (i) the Company from or in redeeming any Securities pursuant to Sections 4.13 or 4.28 of this Indenture or paragraph 5 of the Securities or (ii) the receipt by the Holders of payments of principal of and interest on the Securities as provided in Section 8.2. Section 10.16. Names of Representatives. The Company, the Guarantor and the Guarantor Subsidiaries shall from time to time, upon request of the Trustee, provide to the Trustee an Officer's Certificate setting -72- 78 forth the name and address of each Representative of all outstanding Senior Indebtedness. Section 10.17. Article 10 Not To Prevent Events of Default or Limit Right To Accelerate. The failure to make a payment pursuant to the Securities by reason of any provision in this Article 10 shall not be construed as preventing the occurrence of a Default. Nothing in this Article 10 shall have any effect on the right of the Holders or the Trustee to accelerate the maturity of the Securities. Section 10.18. Reliance by Holders of Senior Indebtedness on Subordination Provisions. Each Holder by accepting a Security acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration to each holder of any Senior Indebtedness, whether such Senior Indebtedness was created or acquired before or after the issuance of the Securities, to acquire and continue to hold, or to continue to hold, such Senior Indebtedness and such holder of Senior Indebtedness shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Indebtedness. No provision in any supplemental indenture which modifies this Article 10 in any manner adverse to the holders of Senior Indebtedness shall be effective against the holders of Senior Indebtedness who have not consented thereto in accordance with the provisions of the documents governing such Senior Indebtedness. Section 10.19. Proof of Claim. In the event that the Company, the Guarantor or any Guarantor Subsidiary is subject to any proceeding under any Bankruptcy Law and the Holders and the Trustee fail to file any proof of claim permitted to be filed in such proceeding with respect to the Securities, then any Representative of Senior Indebtedness may file such proof of claim no earlier than the later of (i) the expiration of 15 days after such Representative notifies the Trustee of its intention to do so and (ii) 30 days preceding the last day permitted to file such claim. Section 10.20. No Fiduciary Duty to Holders of Senior Indebtedness. With respect to the holders of Senior Indebtedness, the Trustee undertakes to perform or to observe only such of its covenants and obligations as are specifically set forth in this Article 10, and no implied covenants or obligations with respect -73- 79 to the holders of Senior Indebtedness shall be read into this indenture against the Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the holders of Senior Indebtedness, and, subject to the provisions of Article 7, the Trustee shall not be liable to any holder of Senior Indebtedness if it shall mistakenly pay over or deliver to Holders, the Company, the Guarantor, the Guarantor Subsidiaries or any other person, monies or assets to which any holder of Senior Indebtedness shall be entitled by virtue of this Article 10 or otherwise. Section 10.20. Limitations on Application of Article 10. (a) This Article 10 shall not apply to any payments or proceeds received by the Holders from the Company which are paid to the Holders from amounts due on or proceeds of the Pledged Note. (b) This Article 10 shall only apply to persons other than those subject to the Subordination Agreement. ARTICLE 11 GUARANTY Section 11.1. Guaranty. The Guarantor and the Guarantor Subsidiaries hereby unconditionally, jointly and severally, guarantee (such guarantee being the "Guaranty") to each Holder of a Security authenticated and delivered by the Trustee and to the Trustee and its successors and assigns, irrespective of the validity and enforceability of this Indenture, the Securities or the other Documents or the obligations of the Company under this Indenture, the Securities or the other Documents, that: (i) the principal of and interest on and premium, if any, and any other amounts owing on the Securities will be paid in full when due, whether at the maturity or interest payment date, by acceleration, redemption or otherwise, and interest on the overdue principal and interest, if any, of the Securities and all other obligations of the Company to the Holders or the Trustee under this Indenture, the Securities or the other Documents will be promptly paid in full or performed, all in accordance with the terms of this Indenture, the Securities and the other Documents; and (ii) in case of any extension of time of payment or renewal of any Securities or any of such other obligations, they will be paid in full when due or performed in accordance with the terms of the extension or renewal, whether at maturity, by acceleration or otherwise. Failing timely payment when due of any amount so guaranteed for whatever reason, the Guarantor and the Guarantor Subsidiaries will be jointly and severally obligated to pay the same whether -74- 80 or not such failure to pay has become an Event of Default which could cause acceleration pursuant to Section 6.2 hereof. The Guarantor and the Guarantor Subsidiaries hereby agree that its obligations with regard to this Guaranty shall be absolute, unconditional, joint and several, irrespective of the validity, regularity or enforceability of the Securities, this Indenture or the other Documents, the absence of any action to enforce the same, any waiver or consent by any Holder of the Securities with respect to any provisions hereof or thereof or of any other Document, the recovery of any judgment against the Company or any other obligor on the Securities, any action to enforce the same or any other circumstances which might otherwise constitute a legal or equitable discharge or defense of a guarantor. The Guarantor and the Guarantor Subsidiaries hereby waive diligence, notice, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Company, the Guarantor, any Guarantor Subsidiary or any other obligor on the Securities, any right to require a proceeding first against the Company, the Guarantor, any Guarantor Subsidiary or any other obligor on the Securities, protest, notice and all demands whatsoever and covenant that this Guaranty will not be discharged except by complete performance of the obligations contained in the Securities, this Indenture and the other Documents. If any Securityholder or the Trustee is required by any court, proceedings in bankruptcy or reorganization or otherwise to return to the Company, the Guarantor, any Guarantor Subsidiary or any custodian, trustee, or similar official acting in relation to either the Company, the Guarantor or any Guarantor Subsidiary any amount paid by the Company, the Guarantor or any Guarantor Subsidiary to the Trustee or such Securityholder, this Guaranty, to the extent theretofore discharged, shall be reinstated in full force and effect. The Guarantor and the Guarantor Subsidiaries further agree that, as between the Guarantor and the Guarantor Subsidiaries, on the one hand, and the Holders and the Trustee, on the other hand, (i) the maturity of the obligations guaranteed hereby may be accelerated as provided in Section 6.2 of the Indenture for the purposes of this Guaranty, notwithstanding any stay, injunction or other prohibition preventing such acceleration as to the Company, the Guarantor, any Guarantor Subsidiary or any other obligor on the Securities of the obligations guaranteed hereby, and (ii) in the event of any declaration of acceleration of those obligations as provided in Section 6.2 of the Indenture, those obligations (whether or not due and payable) will forthwith become due and payable by the Guarantor and the Guarantor Subsidiaries for the purpose of this Guaranty. -75- 81 The Guarantor and each Guarantor Subsidiary hereby acknowledge that the guarantee in this Article 11 constitutes an instrument for the payment of money, and consent and agree that any Holder or the Trustee, at its sole option, in the event of a dispute by the Guarantor or any Guarantor Subsidiary in the payment of any moneys due hereunder, shall have the right to bring motion-action under New York CPLR Section 3324. The Guarantor and each Guarantor Subsidiary and by its acceptance hereof each Holder hereby confirms that it is the intention of all such parties that the guarantee by the Guarantor and the Guarantor Subsidiaries pursuant to this Guaranty not constitute a fraudulent transfer or conveyance for purposes of the Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar Federal or state law. To effectuate the foregoing intention, the Holders and the Guarantor and the Guarantor Subsidiaries hereby irrevocably agree that the obligations of the Guarantor and the Guarantor Subsidiaries under this Guaranty shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of the Guarantor and any Guarantor Subsidiary and after giving effect to any collections from or payments made by or on behalf of the Guarantor or any Guarantor Subsidiary in respect of the obligations of the Guarantor or such other Guarantor Subsidiary under its Guaranty or pursuant to the contribution rights hereunder, result in the obligations of the Guarantor or such Guarantor Subsidiary under this Guaranty not constituting such fraudulent transfer or conveyance. In order to provide for just and equitable contribution among the Guarantor and the Guarantor Subsidiaries, the Guarantor and the Guarantor Subsidiaries agree, inter se, that in the event any payment or distribution is made by the Guarantor or any Guarantor Subsidiary (a "Funding Guarantor") under this Guaranty, such Funding Guarantor shall be entitled to a contribution from all other Guarantors, including Guarantor Subsidiaries, in a pro rata amount based on the Adjusted Net Assets of each Guarantor and each Guarantor Subsidiary (including the Funding Guarantor) for all payments, damages and expenses incurred by that Funding Guarantor in discharging the Company's obligations with respect to the Securities or any other Guarantors' obligations with respect to the Guaranty. "Adjusted Net Assets" of the Guarantor or such Guarantor Subsidiary, as the case may be, at any date shall mean the lesser of the amount by which (x) the fair value of the property of the Guarantor or such Guarantor Subsidiary, as the case may be, exceeds the total amount of liabilities, including, without limitation, contingent liabilities, but excluding liabilities under the Guaranty, of the Guarantor or such Guarantor Subsidiary, as the case may be, at such date and (y) the present fair salable value of the assets of the Guarantor or such Guarantor Subsidiary, as the case may be, at such date exceeds the amount that will be required to pay the probably -76- 82 liability of, the Guarantor or such Guarantor Subsidiary, as the case may be, on its debts (after giving effect to all other fixed and contingent liabilities incurred or assumed on such date), excluding debt in respect of this Guaranty, as they become absolute and matured. If any subsidiary becomes a Guarantor Subsidiary hereunder subsequent to the date hereof, then for purposes of this paragraph such subsequent Guarantor Subsidiary shall be deemed to have been a Guarantor Subsidiary as of the date hereof and the aggregate present fair saleable value of all assets and the amount of all the debts and liabilities, of such Guarantor Subsidiary as of the date hereof shall be deemed to be equal to such value and amount on the date such Guarantor Subsidiary becomes a Guarantor Subsidiary hereunder. The provisions of this paragraph shall supersede all other rights of subrogation and contribution, whether arising by contract or operation of law (including, without limitation, any such right arising under the Bankruptcy Code) or otherwise by reason of any payment by any Guarantor Subsidiary pursuant to the provisions of this Article 11 and, to the extent that any Guarantor Subsidiary shall have any such other rights of subrogation or contribution, such Guarantor Subsidiary hereby irrevocably waives the same. The Guarantor and the Guarantor Subsidiaries hereby irrevocably waive any claim or other rights which it may now or hereafter acquire against the Company that arise from the existence, payment, performance or enforcement of the Guarantor's and the Guarantor Subsidiaries' obligations under this Guaranty, this Indenture, and the other Documents, including, without limitation, any right of subrogation, reimbursement, exoneration, indemnification, and any right to participate in any claim or remedy of any Holder of Securities against the Company, whether or not such claim, remedy or right arises in equity, or under contract, statute or common law, including, without limitation, the right to take or receive from the Company, directly or indirectly, in cash or other property or by set-off or in any other manner, payment or security on account of such claim or other rights until payment in full of all obligations guaranteed hereby. If any amount shall be paid to the Guarantor or any Guarantor Subsidiary in violation of the preceding sentence and the Securities shall not have been paid in full, such amount shall have been deemed to have been paid to the Guarantor or such Guarantor Subsidiary for the benefit of, and held in trust for the benefit of, the Holders of the Securities, and shall, forthwith be paid to the Trustee for the benefit of such Holders to be credited and applied upon the Securities, whether matured or unmatured, in accordance with the terms of this Indenture. The Guarantor and the Guarantor Subsidiaries acknowledge that it will receive direct and indirect benefits from the financing arrangements contemplated by this Indenture and that the waiver set forth herein is knowingly made in contemplation of such benefits. -77- 83 In case any provision of this Guaranty shall be invalid, illegal or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 11.2. Execution and Delivery of Guaranty. To evidence the Guaranty set forth in Section 11.1, the Guarantor and the Guarantor Subsidiaries agree that a notation of the Guaranty substantially in the form of Exhibit B shall be endorsed on each Security authenticated and delivered by the Trustee and that this Indenture shall be executed on behalf of each of the Guarantor by its Chairman of the Board, its President, its Chief Financial Officer or one of its Vice Presidents, under a facsimile of its seal reproduced on this Indenture and attested to by an officer other than the officer executing the Indenture. The Guarantor and the Guarantor Subsidiaries agree that the Guaranty set forth in Section 11.1 will remain in full force and effect and apply to all the Securities notwithstanding any failure to endorse on each Security a notation of the Guaranty. If an Officer whose facsimile signature is on a Security no longer holds that office at the time the Trustee authenticates the Security on which the Guaranty is endorsed, the Guaranty shall be valid nevertheless. The delivery of any Security by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Guaranty set forth in this Indenture on behalf of the Guarantor and the Guarantor Subsidiaries. ARTICLE 12 SECURITY Section 12.1. Security. The performance of the Company, the Guarantor and the Guarantor Subsidiaries shall be secured by the Collateral. Section 12.2. Recording, etc. The Guarantor, the Guarantor Subsidiaries and the Company will have caused or will cause this Indenture, the Collateral Documentation and the other Documents and all amendments or supplements to each of the foregoing to be registered, recorded and filed and/or rerecorded, re-filed and renewed in such manner and in such place or places, if any, as may be required by law or reasonably requested by the Trustee or the Holders of a majority of the then outstanding Securities in -78- 84 order fully to preserve and protect the Lien of the Indenture, the Collateral Documentation and the other Documents on all parts of the Collateral to effectuate and preserve the security of the Holders and all rights of the Trustee. The Company, the Guarantor and the Guarantor Subsidiaries shall furnish, and shall cause any other obligor to furnish, to the Trustee: (i) promptly after the execution and delivery of the Indenture, and promptly after the execution and delivery of any Collateral Documentation or other instrument of further assurance or amendment, an Opinion of Counsel either (a) stating that, in the opinion of such counsel, this Indenture, the Collateral Documentation and all other instruments of further assurance or amendment have been properly recorded, registered and filed to the extent necessary to make effective the Lien intended to be created by the Indenture and the Collateral Documentation and reciting the details of such action or referring to prior opinions of Counsel in which such details are given, and stating that as to the Indenture and Collateral Documentation and such other instruments such recording, registering and filing are the only recordings, registerings and filings necessary to give notice thereof and that no rerecordings, re-registerings or re-filings are necessary to maintain such notice, and further stating that all financing statements and continuation statements and mortgages have been executed and filed that are necessary fully to preserve and protect the rights of the Holders and the Trustee hereunder and under the Collateral Documentation or (b) stating that, in the opinion of such counsel, no such action is necessary to make such Lien and pledge effective; and (ii) on or before March 1 in each year beginning with the year 1994, an Opinion of Counsel, dated as of such date, either (a) stating that, in the opinion of such counsel, such action has been taken with respect to the recording, registering, filing, re-recording, re-registering and re-filing of the Indenture and all supplemental indentures, financing statements, continuation statements and mortgages or other instruments of further assurance as is necessary to maintain the Lien of the Indenture and the Collateral Documentation and reciting the details of such action or referring to prior opinions of Counsel in which such details are given, and stating that all financing statements and continuation statements and mortgages have been executed and filed that are necessary fully to preserve and protect the rights of the Holders and the Trustee hereunder and under the Collateral Documentation or (b) stating that, in the opinion of such counsel, no such action is necessary to maintain such Lien. -79- 85 The Guarantor, the Guarantor Subsidiaries, the Company and any other obligor shall cause TIA Section 314(d) relating to the release of Collateral from the Liens under the Collateral Documentation to be complied with. Any certificate or opinion required by TIA Section 314(d) may be made by any Officer; provided, however, that to the extent required by TIA Section 314(d), any such certificate or opinion shall be made by an Independent Person. Section 12.3. Suits to Protect the Collateral. To the extent permitted thereunder, the Trustee shall have power to institute and to maintain such suits and proceedings as it may deem expedient to prevent any impairment of the Collateral by any acts that may be unlawful or in violation of the Collateral Documentation or this Indenture, and such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and the interests of the Holders in the Collateral and the Collateral Documentation or this Indenture, and in the profits, rents, revenues and other income arising therefrom, including power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the Collateral or be prejudicial to the interests of the Holders or the Trustee. ARTICLE 13 MISCELLANEOUS Section 13.1. Trust Indenture Act Controls. If any provision of this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the required provision shall control. Section 13.2. Notices. Any notice or communication by the Company, the Guarantor, the Guarantor Subsidiaries or the Trustee to any of the others is duly given if in writing and delivered in Person or mailed by first-class mail to the others' addresses stated in Section 13.10. The Company, the Guarantor or the Trustee by notice to the others may designate additional or different addresses for subsequent notices or communications. Any notice or communication to a Securityholder shall be mailed by first-class mail to his address shown on the register kept by the Registrar. Failure to mail a notice or -80- 86 communication to a Securityholder or any defect in it shall not affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company or the Guarantor mails a notice or communication to Securityholders, it shall mail a copy to the Trustee and each Agent at the same time. All other notices or communications shall be in writing. Section 13.3. Communication by Holders with Other Holders. Securityholders may communicate pursuant to TIA Section 312(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Guarantor, the Trustee, the Registrar and anyone else shall have the protection of TIA Section 312(c). Section 13.4. Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company, the Guarantor, the Guarantor Subsidiaries or any other obligor to the Trustee to take any action under this Indenture, the Company, the Guarantor, the Guarantor Subsidiaries or any other obligor, as the case may be, shall furnish to the Trustee: (a) an Officers, Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (b) an opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Section 13.5. Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (1) a statement that the Person making such certificate or opinion has read such covenant or condition; -81- 87 (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of such Person, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with. Section 13.6. Rules by Trustee and Agents. The Trustee may make reasonable rules for action by or a meeting of Securityholders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its. functions. Section 13.7. Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions in the State of New Jersey or New York are not required to be open. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. Section 13.8. Counterparts. This Indenture may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 13.9. Variable Provisions. "Officer" means the Chairman of the Board, the President, any Vice President, the Chief Financial Officer, the Treasurer, the Secretary, the Director of Finance, any Assistant Treasurer or any Assistant Secretary of the Company, the Guarantor or a subsidiary thereof, as the context may indicate. The Company initially appoints the Trustee as Paying Agent, Registrar and authenticating agent. -82- 88 The first certificate pursuant to Section 4.3 shall be for the first fiscal year of each of the Company and the Guarantor ending on or after the date of this Indenture. The reporting date for Section 7.6 is May 15 of each year. The first reporting date is May 15, 1994. The Trustee shall always have a combined capital and surplus (including subordinated capital notes) of at least $25,000,000 as set forth in its most recent published annual report of condition. The Company's address is: 1500 Harbor Boulevard Weehawken, New Jersey 07087 Attention: Michael P. Sherman General Counsel The Trustee's address is: First Trust Center 180 East Fifth Street P.O. Box 64111 St. Paul, Minnesota 55164 Attention: Frank P. Leslie III Section 13.10. Governing Law. THE LAWS OF THE STATE OF NEW YORK SHALL GOVERN THIS INDENTURE AND THE SECURITIES AND THE GUARANTY, WITHOUT REGARD TO THE CONFLICTS OF LAWS PROVISIONS THEREOF. Section 13.11. No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company, the Guarantor or any of their subsidiaries. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. Section 13.12. Successors. All agreements of the Company and the Guarantor in this Indenture and the Securities shall bind their respective successors. All agreements of the Trustee in this Indenture shall bind its successor. Section 13.13. Severability. -83- 89 In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 13.14. Qualification of Indenture. The Company shall qualify this Indenture under the TIA in accordance with the terms and conditions of the Registration Rights Agreement and shall pay all costs and expenses (including attorneys' fees for the Company, the Trustee and the Holders of the Securities) incurred in connection therewith, including, but not limited to, costs and expenses of qualification of the Indenture and the Securities and printing this Indenture and the Securities. In connection with any such qualification of this Indenture under the TIA, the Trustee shall be entitled to receive from the Company any such officers' Certificates, opinions of Counsel or other documentation as it may reasonably request. Section 13.15. Table of Contents, Headings, etc. The Table of Contents, Cross-Reference Table and Headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. Section 13.16. Consent to Jurisdiction and Service of Process. ALL JUDICIAL PROCEEDINGS BROUGHT AGAINST THE COMPANY OR THE GUARANTOR OR WITH RESPECT TO THIS INDENTURE, THE GUARANTY, ANY SECURITY OR ANY OTHER DOCUMENT MAY BE BROUGHT IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE BOROUGH OF MANHATTAN, THE STATE OF NEW YORK, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY AND THE GUARANTOR ACCEPTS, FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY, THE NONEXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN CONNECTION WITH THIS INDENTURE, THE GUARANTY, ANY SECURITY OR ANY OTHER DOCUMENT FROM WHICH NO APPEAL HAS BEEN TAKEN OR IS AVAILABLE. EACH OF THE COMPANY, THE GUARANTOR AND THE GUARANTOR SUBSIDIARIES IRREVOCABLY DESIGNATES AND APPOINTS CT CORPORATION SYSTEM, OR ANY OTHER ADDRESS IN THE STATE OF NEW YORK COMMUNICATED BY CT CORPORATION SYSTEM TO THE TRUSTEE, AS ITS AGENT TO RECEIVE ON ITS BEHALF SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT, SUCH SERVICE BEING HEREBY ACKNOWLEDGED BY SUCH PERSONS TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. EACH OF THE COMPANY, THE GUARANTOR AND THE GUARANTOR SUBSIDIARIES IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR -84- 90 CERTIFIED MAIL, POSTAGE PREPAID, TO ITS NOTICE ADDRESS SPECIFIED IN SECTION 13.10 HEREOF, SUCH SERVICE TO BECOME EFFECTIVE TEN (10) DAYS AFTER SUCH MAILING. EACH OF THE COMPANY, THE GUARANTOR, THE GUARANTOR SUBSIDIARIES AND THE TRUSTEE IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH JURISDICTION. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT OF THE TRUSTEE OR ANY SECURITYHOLDER TO BRING PROCEEDINGS AGAINST THE COMPANY, THE GUARANTOR OR THE GUARANTOR SUBSIDIARIES IN THE COURTS OF ANY OTHER JURISDICTION. Section 13.17. Waiver of Jury Trial. EACH OF THE COMPANY, THE GUARANTOR AND THE TRUSTEE AND EACH SECURITYHOLDER BY ACCEPTANCE OF A SECURITY HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS INDENTURE, THE GUARANTY OR ANY SECURITY OR ANY OTHER DOCUMENTS OR ANY DEALINGS BETWEEN THEM RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. The scope of this waiver is intended to be all-encompassing of any and all disputes that may be filed in any court and that relate to the subject matter of the transactions contemplated by this Indenture and the other Documents, including without limitation, contract claims, tort claims, breach of duty claims, and all other common law and statutory claims. The Company, the Guarantor, the Guarantor Subsidiaries and the Trustee and each Securityholder by acceptance of a Security each acknowledge that this waiver is a material inducement to enter into a business relationship, that each has already relied on the waiver in entering into this Indenture, the Guaranty and the other Documents and in issuing and purchasing the Securities and that each will continue to rely on the waiver in their related future dealings. The Company, the Guarantor, the Guarantor Subsidiaries and the Trustee and each Securityholder by acceptance of a Security further warrant and represent that each has reviewed this waiver with its legal counsel, and that each knowingly and voluntarily waives its jury trial rights following consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS INDENTURE OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THE SECURITIES. IN THE EVENT OF LITIGATION, THIS INDENTURE MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT. [signature page follows] -85- 91 SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed as of the date first written above. THE HANOVER COMPANIES By /S/ Attest: ---------------------------- /S/ - ------------------------------ (SEAL) THE HORN & HARDART COMPANY By /S/ Attest: ---------------------------- /S/ - ------------------------------ (SEAL) HANOVER DIRECT FULFILLMENT, INC. By /S/ Attest: ---------------------------- /S/ - ------------------------------ (SEAL) BRAWN OF CALIFORNIA, INC. By /S/ Attest: ---------------------------- /S/ - ------------------------------ (SEAL) 92 D.M. ADVERTISING, INC. BY /S/ --------------------------- Attest: /S/ - ----------------------------- (SEAL) GUMP'S BY MAIL, INC. By /S/ Attest: --------------------------- /S/ - ----------------------------- (SEAL) GUMP'S HOLDINGS, INC. By /S/ Attest: ---------------------------- /S/ - ------------------------------ (SEAL) HANOVER DIRECT MAIL MARKETING, INC. By /S/ Attest: ---------------------------- /S/ - ----------------------------- (SEAL) 93 HANOVER LIST MANAGEMENT INC. By /S/ Attest: ---------------------------- /S/ - ------------------------------ (SEAL) HANOVER SYNDICATION CORP. By /S/ Attest: ---------------------------- /S/ - ------------------------------ (SEAL) H.I.M. INC. By /S/ Attest: ---------------------------- /S/ - ------------------------------ (SEAL) LEAVITT ADVERTISING AGENCY, INC. By /S/ Attest: ---------------------------- /S/ - ------------------------------ (SEAL) 94 RING RESPONSE LTD. By /S/ Attest: ------------------------------ /S/ - ------------------------------ (SEAL) YORK FULFILLMENT COMPANY, INC. By /S/ Attest: ------------------------------ /S/ - ------------------------------ (SEAL) FIRST TRUST NATIONAL ASSOCIATION, as Trustee By /S/ Attest: ----------------------------- /S/ - ------------------------------ 95 The undersigned, pursuant to Article 5 of this Indenture, agrees that it hereby assumes the due and punctual payment of the principal of and premium, if any, and interest on all the Securities and the performance and observance of every covenant of this Indenture and the other Documents on the part of the Company and the Guarantor to be performed or observed, such assumption being effective upon consummation of the Reorganization (as defined herein). HANOVER DIRECT, INC., a Delaware corporation By /S/ --------------------------------- Attest: /S/ - --------------------------------- (SEAL) 96 EXHIBIT A-1 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT. PPN _____________ (Face of Series A Security) No. $ THE HANOVER COMPANIES promises to pay to or registered assigns, the principal sum of Dollars on August 1, 1998 9.25% SENIOR SUBORDINATED NOTE SERIES A Interest Payment Dates: July 1, October 1, January 1 and April 1 Record Dates: June 15, September 15, December 15 and March 15 Dated: THE HANOVER COMPANIES By ------------------------------- By ------------------------------- Authenticated: (SEAL) First Trust National OR (Authenticating Agent's name) Association By By -------------------------- ------------------------------- Authorized Signature Authorized Signature A1-1 97 (Back of Series A Security) THE HANOVER COMPANIES 9.25% Senior Subordinated Note due August 1 1998, Series A 1. Interest and Maturity. (a) The Hanover Companies, a Nevada corporation (the "Company," which term includes any successor corporation under the Indenture referred to herein), hereby promises to pay interest (computed on the basis of a 360-day year of twelve 30-day months) on the principal amount of this Series A Security at a rate of 9.25% per annum from the date hereof. The Company will pay interest quarterly on July 1, October 1, January 1 and April 1 of each year commencing on October 1, 1993, until said principal shall have become due and payable, and to pay interest (so computed) at the rate of 12.25% per annum on any overdue principal and prepayment charge and, to the extent permitted by applicable law, on any interest overdue (without regard to any applicable grace period), until the same shall be paid. (b) Notwithstanding anything to the contrary in the foregoing, the Company also promises to pay in cash any interest required by Section 3(b) of the Registration Rights Agreement dated as of August 17, 1993, as required thereunder. 2. Method of Payment. The Company will pay interest on the Series A Securities (except defaulted interest) to the persons who are registered holders of Series A Securities (each, a "Holder") at the close of business on the record date for the next Interest Payment Date even though Series A Securities are cancelled after the record date and on or before the Interest Payment Date. Holders must surrender Series A Securities to a Paying Agent to collect principal payments. The Company will pay principal and interest or premium, if any, and any other amounts owing under the Securities in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Company, however, may pay principal and interest or premium, if any, and any other moneys owing under the Securities by wire transfer of immediately available funds in such money. It may mail an interest check to a Holder's registered address. Upon written request of a Holder of non-Restricted Series A Securities in aggregate principal amount equal to at least $1,000,000, the Company shall make payment of principal or interest or premium, if any, by wire transfer of immediately available funds to the wire address specified in such notice. A1-2 98 3. Paying Agent and Registrar. The Trustee will initially act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-registrar without prior notice to any Securityholder. Subject to the approval in writing of a majority of Holders in principal amount of the then outstanding Securities (which approval shall be revocable at any time), the Company may act in any such capacity. 4. Indenture. The Company issued the Series A Securities under an Indenture dated as of August 17, 1993 (the "Indenture") among the Company, The Horn & Hardart Company, a Nevada corporation (the "Guarantor"), certain subsidiaries of the Company and the Trustee. The terms of the Series A Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code Section Section 77aaa-77bbbb) as in effect on the date of the Indenture. The Series A Securities are subject to, and qualified by, all such terms, certain of which are summarized herein, and Securityholders are referred to the Indenture and such Act for a statement of such terms. The Series A Securities are general obligations of the Company limited to $20,000,000 in aggregate principal amount and are subordinated to Senior Indebtedness to the extent set forth in the Indenture. 5. Optional Redemption. The Company, at its option, may redeem the Securities in whole or from time to time in part in each case at the greater of (a) 100% of the outstanding principal amount, plus accrued interest and other amounts then due and owing on the Securities to the redemption date, or (b) the present value of the scheduled principal and interest payments due on such Security, computed using a discount rate equal to the Treasury Rate, plus accrued interest and other amounts then due and owing on the Securities. "Treasury Rate" means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled by and published in the most recent Federal Reserve Statistical Release H.15(519) which has become publicly available at least two business days prior to the date fixed for prepayment (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the then remaining average life of the Securities; provided, that if the average life of the Securities is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the average life of the Securities is less than one year, the weekly average yield on actually traded United States Treasury A1-3 99 securities adjusted to a constant maturity of one year shall be used. 6. Mandatory Redemption. The Company shall redeem $6,000,000 (or such lesser amount as provided below) principal amount of the Securities on February 15, 1994 or the Extended Date (as defined below), unless prior to such date the Company has (i) established or acquired the New Distribution Facility and loaned $6,000,000 principal amount of the Securities to the Distribution Facility Subsidiary for the establishment or acquisition of, or to make improvements to, or capital expenditures, including but not limited to computer systems (including, without limitation, hardware and software) and distribution equipment, in connection with, assets for the New Distribution Facility, (ii) acquired the Pledged Note in an aggregate principal amount of $6,000,000 and (iii) entered into the Security and Pledge Agreement and delivered to the Trustee the Pledged Note duly endorsed in blank. The "Extended Date" shall mean April 15, 1994 if prior to or on February 15, 1994 the Company has entered into a written agreement to acquire the New Distribution Facility. Notwithstanding the foregoing, as long as the Company has otherwise satisfied clauses (i) through (iii) of this Paragraph 6 except that with respect to clause (i) the Company used less than $6,000,000 (the "Expended Amount") in connection with the New Distribution Facility and with respect to clause (ii) the Company acquired the Pledged Note in an aggregate principal amount equal to the Expended Amount, the Company shall be required to redeem an amount equal to the difference between $6,000,000 and the Expended Amount, unless such amount is less than $1,000,000 in which case no redemption pursuant to this paragraph 6 shall be required. Any such redemption under this Paragraph 6 shall be made at 100% of the principal amount thereof, plus accrued interest on such principal amount to the date of redemption. 7. Notice of Redemption. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder of Securities to be redeemed at his registered address. Securities in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. In the event of a redemption of less than all of the Securities, the Securities will be chosen for redemption by the Trustee, generally pro rata or by lot. On and after the redemption date, interest ceases to accrue on Securities or portions of them called for redemption. If this Security is redeemed subsequent to a record date with respect to any Interest Payment Date specified above and on or prior to such Interest Payment Date, then any accrued interest will be paid to the person in whose name this Security is registered at the close of business on such record date. A1-4 100 8. Denominations, Transfer, Exchange. The Series A Securities are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Series A Securities may be registered, and Series A Securities may be exchanged, as provided in the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Series A Security or portion of a Series A Security selected for redemption. Also, it need not exchange or register the transfer of any Series A Securities for a period of 15 days before a selection of Series A Securities to be redeemed. 9. Persons Deemed Owners. The registered holder of a Series A Security may be treated as its owner for all purposes. 10. Amendments and Waivers. Subject to certain exceptions, the Indenture, the Securities and the other Documents may be amended with the consent of the Holders of at least a majority in principal amount of the then outstanding Securities, and any existing default may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Securities. Without the consent of any Securityholder, the Indenture, the Securities or the other Documents may be amended, among other things, to cure any ambiguity, defect or inconsistency, to provide for assumption of the Company's or the Guarantor's obligations to Securityholders or to make any change that does not adversely affect the rights of any Securityholder. 11. Defaults and Remedies. If an Event of Default (as set forth in the Indenture) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Securities may declare all the Securities to be due and payable immediately, except that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all outstanding Securities become due and payable immediately without further action or notice. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Company must furnish quarterly and annual compliance certificates to the Trustee. 12. Trustee Dealings with Company. First Trust National Association, the Trustee under the Indenture, in its A1-5 101 individual or any other capacity, may make loans to, accept deposits from and perform services for the Company or its Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not Trustee. 13. Change in Control. If there is a Change in Control (as defined in the Indenture), then the Company shall commence an offer to repurchase all of the outstanding Securities upon the terms set forth in the Indenture. 14. Subordination. The indebtedness evidenced by the Securities is, to the extent and in the manner provided in the Indenture, expressly subordinate in right of prior payment in full of all existing and future senior indebtedness as set forth in the Indenture and the Subordination Agreement (as defined in the Indenture), and this Security is issued subject to the provisions of the Indenture and the Subordination Agreement with respect to such subordination. Each holder of this Security, by accepting the same, covenants and agrees to and shall be bound by such provisions and authorizes and directs the Trustee to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and appoints the Trustee as attorney-in fact for any and all such purposes. 15. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company or the Guarantor shall not have any liability for any obligations of the Company or the Guarantor under the Series A Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Securityholder by accepting a Series A Security waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Series A Securities. 16. Authentication. This Series A Security shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 17. Abbreviations. Customary abbreviations may be used in the name of a Securityholder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). The Company will furnish to any Securityholder upon written request and without charge a copy of the Indenture. Request may be made to: THE HANOVER COMPANIES A1-6 102 1500 Harbor Boulevard Weekhawken, New Jersey 07087 Attn: Chief Financial Officer A1-7 103 ASSIGNMENT FORM To assign this Series A Security, fill in the form below: (I) or (we) assign and transfer this Series A Security to _______________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint _______________________________________ ______________________________________________________ agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. _______________________________________________________________ Date: __________ Your Signature: ____________________________ (Sign exactly as your name appears on the other side of this Series A Security) Signature Guarantee A1-8 104 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Series A Security purchased by the Company pursuant to Section 4.13 or Section 4.28 of the Indenture, check the appropriate box: [ ] Section 4.13 [ ] Section 4.28 If you want to elect to have only part of this Series A Security purchased by the Company pursuant to Section 4.13 or Section 4.28 of the Indenture, state the amount (which must be $1,000 or an integral multiple of $1,000): $_________________ Date: ___________ Your Signature: ____________________________ ___________________________________________ (Sign exactly as your name appears on the other side of this Series A Security) Signature Guarantee A1-9 105 EXHIBIT A-2 (Face of Series B Security) No. $ THE HANOVER COMPANIES promises to pay to or registered assigns, the principal sum of Dollars on August 1, 1998 9.25% SENIOR SUBORDINATED NOTE SERIES B Interest Payment Dates: July 1, October 1, January 1 and April 1 Record Dates: June 15, September 15, December 15 and March 15 Dated: THE HANOVER COMPANIES By _______________________________ By _______________________________ Authenticated: (SEAL) First Trust National OR (Authenticating Agent's name) Association By ___________________________ By __________________________ Authorized Signature Authorized Signature A2-1 106 (Back of Series B Security) THE HANOVER COMPANIES 9.25% Senior Subordinated Note due August 1, 1998, Series B 1. Interest and Maturity. (a) The Hanover Companies, a Nevada corporation (the "Company," which term includes any successor corporation under the Indenture referred to herein), hereby promises to pay interest (computed on the basis of a 360-day year of twelve 30-day months) on the principal amount of this Series B Security at a rate of 9.25% per annum from the date hereof. The Company will pay interest quarterly on July 1, October 1, January 1 and April 1 of each year commencing on October 1, 1993, until said principal shall have become due and payable, and to pay interest (so computed) at the rate of 12.25% per annum on any overdue principal and prepayment charge and, to the extent permitted by applicable law, on any interest overdue (without regard to any applicable grace period), until the same shall be paid. (b) Notwithstanding anything to the contrary in the foregoing, the Company also promises to pay in cash any interest required by Section 3(b) of the Registration Rights Agreement dated as of August 17, 1993, as required thereunder. 2. Method of Payment. The Company will pay interest on the Series B Securities (except defaulted interest) to the persons who are registered holders of Series B Securities (each, a "Holder") at the close of business on the record date for the next Interest Payment Date even though Series B Securities are cancelled after the record date and on or before the Interest Payment Date. Holders must surrender Series B Securities to a Paying Agent to collect principal payments. The Company will pay principal and interest or premium, if any, and other amounts owing under the Securities in money of the United States that at the time of payment is legal tender for payment of public and private debts. The Company, however, may pay principal and interest or premium, if any, and other amounts owing under the Securities by wire transfer of immediately available funds in such money. It may mail an interest check to a Holder's registered address. Upon written request of a Holder of non-Restricted Series B Securities in aggregate principal amount equal to at least $1,000,000, the Company shall make payment of principal or interest or premium, if any, by wire transfer of immediately available funds to the wire address specified in such notice. A2-2 107 3. Paying Agent and Registrar. The Trustee will initially act as Paying Agent and Registrar. The Company may change any Paying Agent, Registrar or co-registrar without prior notice to any Securityholder. Subject to the approval in writing of a majority of Holders in principal amount of the then outstanding Securities (which approval shall be revocable at any time), the Company may act in any such capacity. 4. Indenture. The Company issued the Series B Securities under an Indenture dated as of August 17, 1993 (the "Indenture") among the Company, The Horn & Hardart Company, a Nevada corporation (the "Guarantor"), certain subsidiaries of the Company and the Trustee. The terms of the Series B Securities include those stated in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S. Code Section Section 77aaa-77bbbb) as in effect on the date of the Indenture. The Series B Securities are subject to, and qualified by, all such terms, certain of which are summarized herein, and Securityholders are referred to the Indenture and such Act for a statement of such terms. The Series B Securities are general obligations of the Company limited to $20,000,000 in aggregate principal amount. 5. Optional Redemption. The Company, at its option, may redeem the Securities in whole or from time to time in part in each case at the greater of (a) 100% of the outstanding principal amount, plus accrued interest and other amounts then due and owing on the Securities to the redemption date, or (b) the present value of the scheduled principal and interest payments due on such Security, computed using a discount rate equal to the Treasury Rate, plus accrued interest and other amounts then due and owing on the Securities. "Treasury Rate" means the yield to maturity at the time of computation of United States Treasury securities with a constant maturity (as compiled by and published in the most recent Federal Reserve Statistical Release H.15(519) which has become publicly available at least two business days prior to the date fixed for prepayment (or, if such Statistical Release is no longer published, any publicly available source of similar market data)) most nearly equal to the then remaining average life of the Securities; provided, that if the average life of the Securities is not equal to the constant maturity of a United States Treasury security for which a weekly average yield is given, the Treasury Rate shall be obtained by linear interpolation (calculated to the nearest one-twelfth of a year) from the weekly average yields of United States Treasury securities for which such yields are given, except that if the average life of the Securities is less than one year, the weekly average yield on actually traded United States Treasury securities adjusted to a constant maturity of one year shall be used. A2-3 108 6. Mandatory Redemption. The Company shall redeem $6,000,000 (or such lesser amount as provided below) principal amount of the Securities on February 15, 1994 or the Extended Date (as defined below), unless prior to such date the Company has (i) established or acquired the New Distribution Facility and loaned $6,000,000 principal amount of the Securities to the Distribution Facility Subsidiary for the establishment or acquisition of, or to make improvements to, or capital expenditures, including but not limited to computer systems (including, without limitation, hardware and software) and distribution equipment, in connection with, assets for the New Distribution Facility, (ii) acquired the Pledged Note in an aggregate principal amount of $6,000,000 and (iii) entered into the Security and Pledge Agreement and delivered to the Trustee the Pledged Note duly endorsed in blank. The "Extended Date" shall mean April 15, 1994 if prior to or on February 15, 1994 the Company has entered into a written agreement to acquire the New Distribution Facility. Notwithstanding the foregoing, as long as the Company has otherwise satisfied clauses (i) through (iii) of this Paragraph 6 except that with respect to clause (i) the Company used less than $6,000,000 (the "Expended Amount") in connection with the New Distribution Facility and with respect to clause (ii) the Company acquired the Pledged Note in an aggregate principal amount equal to the Expended Amount, the Company shall be required to redeem an amount equal to the difference between $6,000,000 and the Expended Amount, unless such amount is less than $1,000,000 in which case no redemption pursuant to this paragraph 6 shall be required. Any such redemption under this Paragraph 6 shall be made at 100% of the principal amount thereof, plus accrued interest on such principal amount to the date of redemption. 7. Notice of Redemption. Notice of redemption will be mailed at least 30 days but not more than 60 days before the redemption date to each Holder of Securities to be redeemed at his registered address. Securities in denominations larger than $1,000 may be redeemed in part but only in whole multiples of $1,000. In the event of a redemption of less than all of the Securities, the Securities will be chosen for redemption by the Trustee, generally pro rata or by lot. On and after the redemption date, interest ceases to accrue on Securities or portions of them called for redemption. If this Security is redeemed subsequent to a record date with respect to any Interest Payment Date specified above and on or prior to such Interest Payment Date, then any accrued interest will be paid to the person in whose name this Security is registered at the close of business on such record date. 8. Denominations, Transfer, Exchange. The Series B Securities are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The A2-4 109 transfer of Series B Securities may be registered, and Series B Securities may be exchanged, as provided in the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Series B Security or portion of a Series B Security selected for redemption. Also, it need not exchange or register the transfer of any Series B Securities for a period of 15 days before a selection of Series B Securities to be redeemed. 9. Persons Deemed Owners. The registered holder of a Series A Security may be treated as its owner for all purposes. 10. Amendments and Waivers. Subject to certain exceptions, the Indenture, the Securities and the other Documents may be amended with the consent of the Holders of at least a majority in principal amount of the then outstanding Securities, and any existing default may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Securities. Without the consent of any Securityholder, the Indenture, the Securities or the other Documents may be amended, among other things, to cure any ambiguity, defect or inconsistency, to provide for assumption of the Company's or the Guarantor's obligations to Securityholders or to make any change that does not adversely affect the rights of any Securityholder. 11. Defaults and Remedies. If an Event of Default (as set forth in the Indenture) occurs and is continuing, the Trustee or the Holders of at least 25% in principal amount of the then outstanding Securities may declare all the Securities to be due and payable immediately, except that in the case of an Event of Default arising from certain events of bankruptcy or insolvency, all outstanding Securities become due and payable immediately without further action or notice. Securityholders may not enforce the Indenture or the Securities except as provided in the Indenture. The Trustee may require indemnity satisfactory to it before it enforces the Indenture or the Securities. Subject to certain limitations, Holders of a majority in principal amount of the then outstanding Securities may direct the Trustee in its exercise of any trust or power. The Trustee may withhold from Securityholders notice of any continuing default (except a default in payment of principal or interest) if it determines that withholding notice is in their interests. The Company must furnish quarterly and annual compliance certificates to the Trustee. 12. Trustee Dealings with Company. First Trust National Association, the Trustee under the Indenture, in its individual or any other capacity, may make loans to, accept deposits from and perform services for the Company or its A2-5 110 Affiliates, and may otherwise deal with the Company or its Affiliates, as if it were not Trustee. 13. Change in Control. If there is a Change in Control (as defined in the Indenture), then the Company shall commence an offer to repurchase all of the outstanding Securities upon the terms set forth in the Indenture. 14. Subordination. The indebtedness evidenced by the Securities is, to the extent and in the manner provided in the Indenture, expressly subordinate in right of prior payment in full of all existing and future senior indebtedness as set forth in the Indenture and the Subordination Agreement (as defined in the Indenture), and this Security is issued subject to the provisions of the Indenture and the Subordination Agreement with respect to such subordination. Each holder of this Security, by accepting the same, covenants and agrees to and shall be bound by such provisions and authorizes and directs the Trustee to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination so provided and appoints the Trustee as attorney-in fact for any and all such purposes. 15. No Recourse Against Others. A director, officer, employee or stockholder, as such, of the Company or the Guarantor shall not have any liability for any obligations of the Company or the Guarantor under the Series B Securities or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Securityholder by accepting a Series B Security waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Series B Securities. 16. Authentication. This Series B Security shall not be valid until authenticated by the manual signature of the Trustee or an authenticating agent. 17. Abbreviations. Customary abbreviations may be used in the name of a Securityholder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors Act). The Company will furnish to any Securityholder upon written request and without charge a copy of the Indenture. Request may be made to: THE HANOVER COMPANIES 1500 Harbor Boulevard Weekhawken, New Jersey 07087 A2-6 111 Attn: Chief Financial Officer A2-7 112 ASSIGNMENT FORM To assign this Series B Security, fill in the form below: (I) or (we) assign and transfer this Series B Security to _______________________________________________________________ (Insert assignee's soc. sec. or tax I.D. no.) _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ _______________________________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint _______________________________________ ______________________________________________________ agent to transfer this Security on the books of the Company. The agent may substitute another to act for him. _______________________________________________________________ Date: __________ Your Signature: ____________________________ (Sign exactly as your name appears on the other side of this Series B Security) Signature Guarantee A2-8 113 OPTION OF HOLDER TO ELECT PURCHASE If you want to elect to have this Series B Security purchased by the Company pursuant to Section 4.13 or Section 4.28 of the Indenture, check the appropriate box: [ ] Section 4.13 [ ] Section 4.13 If you want to elect to have only part of this Series B Security purchased by the Company pursuant to Section 4.13 or Section 4.28 of the Indenture, state the amount (which must be $1,000 or an integral multiple of $1,000): $_________________ Date: ___________ Your Signature: ____________________________ ___________________________________________ (Sign exactly as your name appears on the other side of this Series B Security) Signature Guarantee A2-9 114 EXHIBIT B FORM OF GUARANTY [THE GUARANTY IS INCLUDED IN THIS BINDER AS A SEPARATE DOCUMENT] 115 EXHIBIT C SUBORDINATION AGREEMENT [THE SUBORDINATION AGREEMENT IS INCLUDED IN THIS BINDER AS A SEPERATE DOCUMENT] 116 Exhibit D SECURITY AND PLEDGE AGREEMENT This SECURITY AND PLEDGE AGREEMENT, dated as of [_______] __, 199[_] (this "Agreement"), is between THE HANOVER COMPANIES, a Nevada corporation (the "Pledgor"), and First Trust National Association, a national association, as trustee for the holders of the Notes, as defined below (the "Trustee"). RECITALS a. The Pledgor, The Horn & Hardart Company, a Nevada corporation (the "Guarantor"), and certain subsidiaries of the Pledgor (collectively, the "Guarantor Subsidiaries" and together with the Guarantor, the "Guarantors") have entered into that certain Purchase Agreement, dated as of August 17, 1993 (the "Purchase Agreement"), with the Purchaser (as defined in the Purchase Agreement), and that certain Indenture, dated as of August 17, 1993 (the "Indenture"), with the Trustee. The Guarantors have agreed to enter into that certain Guaranty attached to the Indenture as Exhibit B (the "Guaranty"). b. The Purchase Agreement and Indenture provided for the issuance by the Company of its 9.25% Senior Subordinated Notes due 1998 in an aggregate principal amount of $20,000,000 (the "Notes"). Any Person (as defined below) that holds any of the Notes now or hereafter shall be referred to herein as a "Noteholder". c. Prior to or simultaneously with the execution hereof, the Company shall have used $[__________] principal amount of the Notes to establish or acquire a new distribution facility which is a wholly owned subsidiary of the Pledgor (the "Distribution Facility Subsidiary") and the Distribution Facility Subsidiary shall have issued a promissory note in favor of the Pledgor (the "Subsidiary Note"). d. To induce the Noteholders to enter into the Purchase Agreement, and the documents related thereto, and to induce the Trustee to enter into the Indenture, and the documents related thereto, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Pledgor has agreed to pledge and grant a security interest in the Collateral (as defined below) as security for the Secured Obligations (as defined below). 117 AGREEMENT Now therefore, in consideration of the above recitals and other consideration and the mutual covenants hereinafter set forth herein, the parties hereto agree as follows: Section 1. Definitions. Capitalized terms used but not defined herein have the respective meanings ascribed to such terms in the Indenture. In addition, as used herein: "Collateral" has the meaning ascribed to such term in Section 3 hereof. "Documents" means the Purchase Agreement, the Indenture, the Registration Rights Agreement, the Securities, the Guaranty, the Collateral Documentation, and all other security agreements, mortgages, deeds of trust, financing statements, lease assignments, guaranties and other agreements and instruments, together with any assignments, endorsements of, exhibits, schedules or other attachments to all of the foregoing, delivered in connection with the transactions contemplated hereby or thereby, all as amended, supplemented or otherwise modified from time to time. "Guarantor" and "Guarantors" have the meaning ascribed to each such term in the first Recital hereof. "Guaranty" has the meaning ascribed to such term in the first Recital hereof. "Indenture" has the meaning ascribed to such term in the first Recital hereof. "Noteholder" has the meaning ascribed to such term in the second Recital hereof. "Notes" has the meaning ascribed to such term in the second Recital hereof. "Pledged Note" has the meaning ascribed to such term in Section 3(a) hereof. "Proceeds" has the meaning ascribed to such term in Section 4.9 hereof. "Purchase Agreement" has the meaning ascribed to such term in the first Recital hereof. "Secured Obligations" means all obligations of the Pledgor, the Guarantor and the Guarantor Subsidiaries under -2- 118 the Indenture, the Notes, the Purchase Agreement, the Guaranty and the other Documents. "Subsidiary Note" has the meaning ascribed to such term in the third Recital hereof. "Trustee" has the meaning ascribed to such term in the first paragraph hereof. "Uniform Commercial Code" means the Uniform Commercial Code as in effect from time to time in the State of New York. Section 2. Representations and Warranties. The Pledgor represents and warrants to the Noteholders and the Trustee that: (a) The Pledgor is the sole beneficial owner of the Collateral and no Lien exists or will exist upon the Collateral at any time (and no right or option to acquire the same exists in favor of any other Person), except for the pledge and security interest in favor of the Trustee for the benefit of the Noteholders created or provided for herein, which pledge and security interest constitutes a first priority perfected pledge and security interest in and to all of the Collateral. (b) The issuance of the Subsidiary Note has been duly authorized by all necessary corporate action on the part of the Distribution Facility Subsidiary. The Subsidiary Note constitutes a legally valid and binding obligation of the Distribution Facility Subsidiary in accordance with its terms, subject to applicable bankruptcy, reorganization, insolvency, moratorium or other similar laws affecting creditors' rights generally and to general principles of equity (regardless of whether such enforcement is sought in a proceeding in equity or at law), and the Subsidiary Note is not nor will be subject to any contractual restriction, or any restriction under the charter or by-laws of the Distribution Facility Subsidiary, upon the transfer of such Subsidiary Note (except for any such restriction contained herein). Section 3. The Pledge. As collateral security for the prompt payment in full when due (whether at stated maturity, by acceleration or otherwise) of the Secured Obligations, the Pledgor hereby pledges and grants to the Trustee, for the benefit of the Noteholders as hereinafter provided, a security interest in and to all of the Pledgor's right, title and interest in the following property, whether now owned by the Pledgor or hereafter acquired and whether now existing or hereafter coming into existence (all being collectively referred to herein as "Collateral"): -3- 119 (a) the Subsidiary Note in the aggregate principal amount of $[_____________] issued by the Distribution Facility Subsidiary in favor of the Pledgor (the "Pledged Note"); (b) all securities, moneys or property representing interest or other payments on the Pledged Note; and (c) all proceeds of and to any of the property of the Pledgor described in clauses (a) and (b) above in this Section 3. Section 4. Further Assurances; Remedies. In furtherance of the grant of the pledge and security interest pursuant to Section 3 hereof, the Pledgor hereby agrees with the Trustee as follows: 4.1 Delivery and Other Perfection. The Pledgor shall: (a) if any of the above-described securities, monies or property required to be pledged by the Pledgor under clauses (a), (b) and (c) of Section 3 hereof are received by the Pledgor, forthwith either (i) transfer and deliver to the Trustee such securities so received by the Pledgor (together with the certificates for any such securities duly endorsed in blank or accompanied by undated stock powers duly executed in blank) all of which thereafter shall be held by the Trustee, pursuant to the terms of this Agreement, as part of the Collateral or (ii) take such other action as the Trustee shall deem necessary or appropriate to duly perfect the Lien created hereunder in such shares, securities, monies or property referred to in said clauses (a), (b) and (c); (b) give, execute, deliver, file and/or record any financing statements, notices, instruments, documents, agreements or other papers that may be necessary or desirable (in the judgment of the Trustee) to create, preserve, perfect or validate the security interest granted pursuant hereto or to enable the Trustee to exercise and enforce its rights hereunder with respect to such pledge and security interest, including, without limitation, causing any or all of the Collateral to be transferred of record into the name of the Trustee or its nominee (and the Trustee agrees that if any Collateral is transferred into its name or the name of its nominee, the Trustee will thereafter promptly give to the Pledgor copies of any notices and communications received by it with respect to the Collateral); and (c) permit representatives of the Trustee, upon reasonable notice, at any time during normal business hours -4- 120 to inspect and make abstracts from its books and records pertaining to the Collateral, and permit representatives of the Trustee to be present at the Pledgor's place of business to receive copies of all communications and remittances relating to the Collateral, and forward copies of any notices or communications received by the Pledgor with respect to the Collateral, all in such manner as the Trustee may require. 4.2 Other Financing Statements and Liens. Except as otherwise permitted hereunder, without the prior written consent of the Trustee, the Pledgor shall not file or suffer to be on file, or authorize or permit to be filed or to be on file, in any jurisdiction, any financing statement or like instrument with respect to the Collateral in which the Trustee is not named as the sole secured party. 4.3 Preservation of Rights. The Trustee shall not be required to take steps necessary to preserve any rights against prior parties to any of the Collateral. 4.4 Note Collateral. (a) So long as no Event of Default shall have occurred and be continuing, the Pledgor shall have the right to exercise all voting, consensual and other powers in any bankruptcy proceeding pertaining to the Collateral for all purposes not inconsistent with the terms of this Agreement, the Purchase Agreement, the Indenture, the Notes or any other instrument or agreement referred to herein or therein, provided that the Pledgor agrees that it will not vote the Collateral in any manner that is inconsistent with the terms of this Agreement, the Purchase Agreement, the Indenture, the Notes or any such other instrument or agreement; and the Trustee shall execute and deliver to the Pledgor or cause to be executed and delivered to the Pledgor all such proxies, powers of attorney, dividend and other orders, and all such instruments, without recourse, as the Pledgor may reasonably request for the purpose of enabling the Pledgor to exercise the rights and powers which it is entitled to exercise pursuant to this Section 4.4(a). (b) The Pledgor shall pay over to the Trustee any principal or interest payments paid on the Collateral. (c) If any Event of Default shall have occurred, then so long as such Event of Default shall continue, and whether or not the Trustee or any Noteholder exercises any available right to declare any Secured Obligation due and payable or seeks or pursues any other relief or remedy available to it under applicable law or under this Agreement, the Purchase Agreement, the Indenture, the Notes or any other agreement relating to such Secured Obligations, all interest payments and other -5- 121 distributions on the Collateral shall be paid directly to the Trustee and retained by it as part of the Collateral, subject to the terms of this Agreement, and, if the Trustee shall so request in writing, the Pledgor agrees to execute and deliver to the Trustee appropriate additional interest payment, distribution and other orders and documents to that end, provided that if such Event of Default is cured, any such distribution theretofore paid to the Trustee shall, upon request of the Pledgor (except to the extent theretofore applied to the Secured Obligations) be returned by the Trustee to the Pledgor. (d) No provision of the Pledged Note may be amended or waived without the written consent of the Trustee. 4.5 Events of Default, etc. During the period during which an Event of Default shall have occurred and be continuing: (a) the Trustee shall have all of the rights and remedies with respect to the Collateral of a secured party under the Uniform Commercial Code (whether or not said Code is in effect in the jurisdiction where the rights and remedies are asserted) and such additional rights and remedies to which a secured party is entitled under the laws in effect in any jurisdiction where any rights and remedies hereunder may be asserted, including, without limitation, the right, to the maximum extent permitted by law, to exercise all voting, consensual and other powers of ownership pertaining to the Collateral as if the Trustee were the sole and absolute owner thereof (and the Pledgor agrees to take all such action as may be appropriate to give effect to such right); (b) the Trustee in its discretion may, in its name or in the name of the Pledgor or otherwise, demand, sue for, collect or receive any money or property at any time payable or receivable on of account or in exchange for any of the Collateral, but shall be under no obligation to do so; and (c) the Trustee may, upon 10 business days' prior written notice to the Pledgor of the time and place, with respect to the Collateral or any part thereof which shall then be or shall thereafter come into the possession, custody or control of the Trustee, the Noteholders or any of their respective agents, sell, lease, assign or otherwise dispose of all or any part of such Collateral, at such place or places as the Trustee deems best, and for cash or on credit or for future delivery (without thereby assuming any credit risk), at public or private sale, without demand of performance or notice of intention to effect any such disposition or of time or place thereof (except such notice as is required above or by applicable statute and cannot be waived) and the Trustee or any Noteholder or anyone else may -6- 122 be the purchaser, lessee, assignee or recipient of any or all of the Collateral so disposed of at any public sale (or, to the extent permitted by law, at any private sale), and thereafter hold the same absolutely, free from any claim or right of whatsoever kind, including any right or equity of redemption (statutory or otherwise), of the Pledgor, any such demand, notice or right and equity being hereby expressly waived and released. The Trustee may, without notice or publication, adjourn any public or private sale or cause the same to be adjourned from time to time by announcement at the time and place fixed for the sale, and such sale may be made at any time or place to which the same may be so adjourned. The proceeds of each collection, sale or other disposition under this Section 4.5 shall be applied in accordance with Section 4.9 hereof. The Pledgor recognizes that, by reason of certain prohibitions contained in the Securities Act of 1933, as amended, and applicable state securities laws, the Trustee may be compelled, with respect to any sale of all or any part of the Collateral, to limit purchasers to those who will agree, among other things, to acquire the Collateral for their own account, for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges that any such private sales may be at prices and on terms less favorable to the Trustee than those obtainable through a public sale with such restrictions, and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner and that the Trustee shall have no obligation to engage in public sales and no obligation to delay the sale of any Collateral for the period of time necessary to permit the issuer thereof to register it for public sale. 4.6 Deficiency. If the proceeds of sale, collection or other realization of or upon the Collateral pursuant to Section 4.5 hereof are insufficient to cover the costs and expenses of such realization and the payment in full of the Secured Obligations, the Pledgor shall remain liable for any deficiency. 4.7 Removals, Etc. Without at least 30 days' prior written notice to the Trustee, the Pledgor shall not maintain any of its books and records with respect to the Collateral at any office or maintain its principal place of business at any other place other than at the following address: 1500 Harbor Boulevard, Weehawken, New Jersey 07087. 4.8 Private Sale. The Trustee and the Noteholders shall incur no liability as a result of the sale of the Collateral, or any part thereof, at any private sale pursuant to -7- 123 Section 4.5 hereof conducted in a commercially reasonable manner. The Pledgor hereby waives any claims against the Trustee or any Noteholder arising by reason of the fact that the price at which the Collateral may have been sold at such a private sale was less than the price which might have been obtained at a public sale or was less than the aggregate amount of the Secured Obligations. 4.9 Application of Proceeds. Except as otherwise herein expressly provided, the proceeds of any collection, sale or other realization of all or any part of the Collateral pursuant hereto, and any other cash at the time held by the Trustee under this Section 4, shall be applied by the Trustee: First, to the payment of the costs and expenses of such collection, sale or other realization, including reasonable out-of-pocket costs and expenses of the Trustee and the fees and expenses of its agents and counsel, and all reasonable expenses, and advances made or incurred by the Trustee in connection therewith; Next, to the payment in full of the Secured Obligations, in each case equally and ratably in accordance with the respective amounts thereof then due and owing or as the Noteholders holding the same may otherwise agree; Finally, to the payment to the Pledgor, or its successors or assigns, or as a court of competent jurisdiction may direct, of any surplus then remaining. As used in this Section 4, "proceeds" of Collateral shall mean cash, securities and other property realized in respect of, and distributions in kind of, the Collateral, including any thereof received under any reorganization, liquidation or adjustment of debt of the Pledgor or any issuer of or obligor on any of the Collateral. 4.10 Attorney-in-Fact. Without limiting any rights or powers granted by this Agreement to the Trustee while no Event of Default has occurred and is continuing, upon the occurrence and during the continuance of any Event of Default the Trustee is hereby appointed the attorney-in-fact of the Pledgor for the purpose of carrying out the provisions of this Section 4 and taking any action and executing any instruments which the Trustee may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, so long as the Trustee shall be entitled under this Section 4 to make collections in respect of the Collateral, the Trustee shall have the right and power to receive, endorse and collect all checks made payable to the order of the Pledgor representing any dividend, payment, or other distribution in -8- 124 respect of the Collateral or any part thereof and to give full discharge for the same. 4.11 Perfection. Prior to or concurrently with the execution and delivery of this Agreement, the Pledgor shall deliver to the Trustee the Subsidiary Note identified in Section 3(a) hereof. 4.12 Termination. When all Secured Obligations shall have been paid in full, this Agreement shall terminate, and the Trustee shall forthwith cause to be assigned, transferred and delivered, against receipt but without any recourse, warranty or representation whatsoever, any remaining Collateral and money received in respect thereof, to or on the order of the Pledgor and will execute and deliver such release as the Pledgor shall reasonably request. 4.13 Expenses. The Pledgor agrees to pay to the Trustee all reasonable out-of-pocket expenses (including reasonable expenses for legal services of every kind) of, or incident to, the enforcement of any of the provisions of this Section 4, or performance by the Trustee of any obligations of the Pledgor in respect of the Collateral which the Pledgor has failed or refused to perform, or any actual or attempted sale, or any exchange, enforcement, collection, compromise or settlement in respect of any of the Collateral, and for the care of the Collateral and defending or asserting rights and claims of the Trustee in respect thereof, by litigation or otherwise and all such expenses shall be Secured Obligations to the Trustee secured under Section 3 hereof. 4.14 Further Assurances. The Pledgor agrees that, from time to time upon the written request of the Trustee, the Pledgor will execute and deliver such further documents and do such other acts and things as the Trustee may reasonably request in order fully to effect the purposes of this Agreement. 4.15 Indemnification. The Pledgor shall indemnify the Trustee against any loss, liability or expense incurred by it in connection with the performance of this Agreement and its duties hereunder, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder, except that this Section 4.15 shall not apply to losses, liabilities or expenses incurred as a result of the gross or wilful misconduct or negligence of the Trustee. The Trustee shall notify the Pledgor promptly of any claim for which it may seek indemnity. The Pledgor shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel, and the Pledgor shall pay the reasonable fees and expenses of such counsel. -9- 125 Section 5. Miscellaneous. 5.1 No Waiver. No failure on the part of the Trustee or any of its agents to exercise, and no course of dealing with respect to, and no delay in exercising, any right, power or remedy hereunder shall operate as a waiver thereof; nor shall any single or partial exercise by the Trustee or any of its agents of any right, power or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein are cumulative and are not exclusive of any remedies provided by law. 5.2 Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES THEREOF. 5.3 Notices. Any notice or communication hereunder shall be in writing and delivered to the intended recipient at its address or telecopy number specified pursuant to Section 11.2 of the Indenture. 5.4 Waivers, etc. The terms of this Agreement may be waived, altered or amended only by an instrument in writing duly executed by the Pledgor and the Trustee. Any such amendment or waiver shall be binding upon the Trustee and each Noteholder, each holder of any of the Secured Obligations and the Pledgor. 5.5 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the respective successors and assigns of the Pledgor, the Trustee, the Noteholders and each holder of any of the Secured Obligations (provided, however, that the Pledgor shall not assign or transfer its rights hereunder without the prior written consent of the Trustee). 5.6 Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and any of the parties hereto may execute this Agreement by signing any such counterpart. 5.7 Severability. If any provision hereof is invalid or unenforceable in any jurisdiction, then, to the fullest extent permitted by law, (i) the other provisions hereof shall remain in full force and effect in such jurisdiction and shall be liberally construed in favor of the Trustee and the Noteholders in order to carry out the intentions of the parties hereto as nearly as may be possible and (ii) the invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of such provision in any other jurisdiction. -10- 126 5.8 No Limitation. Nothing contained in this Agreement shall be deemed or interpreted to limit the rights of the Trustee or the Noteholders under the terms of Article 10 of the Indenture. [Signature page follows] -11- 127 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. THE HANOVER COMPANIES, a Nevada corporation By:_______________________________ Name: Title: [Address] Fax: (___) ___-_____ Attn: _______________ With a copy to: [Name] Fax: (___) ___-____ Attn: ________________ _________________________________ a _________ corporation, as Trustee By:_______________________________ Name: Title: [Address] Fax: (__) ___-____ Attn: ______________ With a copy to: [Name] [Address] Attn: ________________ 128 Exhibit E THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY BE OFFERED AND SOLD ONLY IF SO REGISTERED OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE [Distribution Facility Subsidiary] DEMAND PROMISSORY NOTE Dated as of __________, 199__ $[____________] [Distribution Facility Subsidiary], a __________ corporation (the "Company"), for value received, promises to pay to The Hanover Companies, a Nevada corporation or its successors and assigns (the "Lender"), the sum of [________________] Dollars ($___________.__) upon written demand of the Lender (such date being herein called the "Demand Date"), and to pay interest (computed on the basis of a 360-day year of twelve 30-day months) from the date of this Note on the unpaid balance thereof, at the rate of 9.25% per annum. The Company will pay interest on July 1, October 1, January 1 and April 1 of each year commencing on [______________] 1, 1993, until the entire principal amount shall be paid in full, payable at the Demand Date to the registered holder thereof, and to pay interest (so computed) at the rate of 12.25% per annum on any overdue principal and prepayment charge and, to the extent permitted by applicable law, on any interest overdue (without regard to any applicable grace period), until the same shall be paid. Payments of principal and interest on this Note shall be made by wire transfer in immediately available funds to the account specified by the registered holder hereof to the Company for such purpose and in such manner and at such other place as the holder hereof shall designate in writing to the Company, in lawful money of the United States of America. This note is subject to the following additional provisions, terms and conditions: 1. Definitions. "Bankruptcy Law" has the meaning specified in Section 2 hereof. 129 "Business Day" shall mean a day of the year in which banks are not required or authorized to close in New York. "Custodian" has the meaning specified in Section 2 hereof. "Debt" of any Person as of any date shall mean and include (i) all indebtedness for money borrowed or evidenced by notes, bonds, debentures or similar evidences of indebtedness, and (ii) indebtedness representing the deferred and unpaid purchase price of any property or business (excluding in any event trade payables incurred in the ordinary course of business and constituting current liabilities), in the case of each of the foregoing clauses (i) and (ii) in the principal amount that such indebtedness would be shown on a balance sheet of such Person prepared as of such date in accordance with GAAP. "Event of Default" has the meaning specified in Section 2 hereof. "GAAP" shall mean generally accepted accounting principles in the United States. "Indenture" shall mean the Indenture, dated as of August 17, 1993, among the Lender, The Horn & Hardart Company, a Nevada corporation, certain subsidiaries of the Lender and First Trust National Association, as Trustee, relating to $20,000,000 in aggregate principal amount of 9.25% Senior Subordinated Notes due 1998 of the Lender. "Loan" shall mean the loan being hereunder. "Note" shall mean this note. "Officers' Certificate" shall mean a certificate signed by two Officers or by an Officer. "Person" shall mean any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Security and Pledge Agreement" shall mean the Security and Pledge Agreement, dated as of the date hereof, between the Lender and First Trust National Association, as Trustee, pursuant to which the Lender pledged and granted a security interest in this Note. 2. Events of Default. An "Event of Default" occurs if any Event of Default under and as set forth in the Indenture shall occur. -2- 130 If an Event of Default shall occur and be continuing, the holder hereof may declare, by notice in writing given to the Company, the entire unpaid principal amount of this Note, together with interest accrued thereon, to be immediately due and payable, in which case this Note shall become immediately due and payable, both as to principal and interest, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, notwithstanding anything herein. If any Event of Default shall have occurred and be continuing, the holder of this Note may proceed to protect and enforce its rights either by suit in equity or by action at law, or both, whether for specific performance of any covenant or agreement contained in this Note or in aid of the exercise of any power granted to the holder of this Note, or the holder of this Note may proceed to enforce any other legal or equitable right as the holder of such Note. No remedy is intended to be exclusive and each remedy shall be cumulative. If the Company shall default in the payment of principal of or interest on this Note, it will pay to the holder hereof further amounts, to the extent lawful, as shall be sufficient to pay the costs and expenses of collection, including reasonable counsel fees and expenses. 3. Miscellaneous. (a) Paragraph Headings. The paragraph headings contained in this Note are for reference purposes only and shall not affect the meaning or interpretation of this Note. (b) Notices. Any communications, notices or demand to be given hereunder, under the Note shall be deemed duly given if delivered or mailed by certified or registered mail, postage prepaid, return receipt requested, as follows: (i) If to the Company, at: [Name] [Address] ------------------------- (ii) If to the Lender, at: The Hanover Companies 1500 Harbor Boulevard Weehawken, New Jersey 07087 Attention: Michael P. Sherman General Counsel -3- 131 or, in each case, at any other address which shall have been furnished to the person giving such notice by a previous notice hereunder from the person receiving such notice. (c) Amendment and Waiver. This Note is pledged as collateral pursuant to the Security and Pledge Agreement and no provision of this Note may be amended or waived without the written consent of the Trustee under the Indenture. (d) Successors, Assigns and Transferors. The obligations of the Company under this Note shall be binding upon, and inure to the benefit of, and be enforceable by, the Company and the holder hereof, and their respective successors and assigns, whether or not so expressed. Subject to the holder's compliance with all applicable securities laws, the holder hereof may transfer this Note at any time to any one or more persons, and at the request of such holder, the Company shall issue a new Note or Notes registered in the name or names of such transferees. (e) Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the Company has executed and delivered this Note as of the date hereinabove first written. [DISTRIBUTION FACILITY SUBSIDIARY] By: ----------------------------- Name: Title: -4- EX-4.2 5 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 4.2 REGISTRATION RIGHTS AGREEMENT Dated as of August 17, 1993 by and among THE HANOVER COMPANIES, THE HORN & HARDART COMPANY, and SUN LIFE INSURANCE COMPANY OF AMERICA 2 This Registration Rights Agreement (the "Agreement") is made and entered into as of August 17, 1993, by and among THE HANOVER COMPANIES, a Nevada corporation (the "Company"), THE HORN & HARDART COMPANY, a Nevada corporation (the "Guarantor"), and SUN LIFE INSURANCE COMPANY OF AMERICA (the "Purchaser"). This Agreement is made pursuant to the Purchase Agreement, dated as of August 17, 1993, among the Company, the Guarantor, certain subsidiaries of the Company and the Purchaser (the "Purchase Agreement"). In order to induce the Purchaser to enter into the Purchase Agreement, the Company and the Guarantor have agreed to provide the registration rights set forth in this Agreement. The execution of this Agreement is a condition to the Closing under the Purchase Agreement. The parties hereby agree as follows: 1. Definitions As used in this Agreement, the following capitalized terms shall have the following meanings: Agent: Any Person authorized to act and who acts on behalf of the Purchaser or any holder of Registrable Securities with respect to the transactions contemplated by this Agreement, the Indenture (as hereinafter defined), the Purchase Agreement or the Collateral Documentation. Company: The Person named as such above, its successors and assigns, including without limitation pursuant to the Reorganization. Completion Date: See Section 3. Consummate: The term "Consummate" a Registered Exchange Offer hereunder shall mean (a) the filing of and causing to become effective under the Securities Act of a Registration Statement covering the Registered Exchanged Offer, (b) the maintenance of such Registration Statement continuously effective for a period of not less than the period required under applicable Federal and state securities laws (provided that in no event shall such Registered Exchange Offer remain open and the Registration Statement relating thereto remain continuously effective, in each case, for less than 20 business days), and (c) the delivery by the Company to the Registrar under the Indenture of Series B Notes in the same aggregate principal amount as the aggregate principal amount of Series A Notes tendered by holders pursuant to a Registered Exchange Offer. Consummation Date: See Section 3. - 1 - 3 Effectiveness Date: See Section 3. Exchange Act: The Securities Exchange Act of 1934, as amended from time to time. Guarantor: The Person named as such above, its successors and assigns, including without limitation pursuant to the Reorganization. Guaranty: The unconditional guaranty of the Guarantor endorsed on each of the Notes. Indemnified Holder: See Section 9(a). Indenture: The Indenture dated as of August 17, 1993 among the Company, the Guarantor, certain subsidiaries of the Company and First Trust National Association, as Trustee. NASD: National Association of Securities Dealers, Inc. Notes: The Series A Notes and any debt securities issued in exchange or substitution for the Series A Notes. Person: An individual, partnership, corporation, trust or unincorporated organization, or a government or agency or political subdivision thereof. Piggyback Registration: See Section 5. Prospectus: The prospectus included in any Registration Statement, as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of (a) the Series B Notes pursuant to a Registered Exchange Offer or (b) the Transfer Restricted Securities, pursuant to any other registrations, as the case may be, covered by the Registration Statement and by all other amendments and supplements to the prospectus, including post-effective amendments and all material incorporated by reference in such prospectus. Registered Exchange Offer: The registration by the Company and the Guarantor under the Securities Act of all of the Series B Notes pursuant to a Registration Statement under which the Company offers each holder of Transfer Restricted Securities the opportunity to exchange all outstanding Transfer Restricted Securities held by such holder for Series B Notes in an aggregate principal amount equal to the aggregate principal amount of Transfer Restricted Securities held by such holder. - 2 - 4 Registrable Securities: The Notes and the Guaranties; provided that a Note and the related Guaranty cease to be Registrable Securities when each is no longer a Transfer Restricted Security. Registration Expenses: See Section 8. Registration Statement: Any registration statement of the Company or the Guarantor which covers any of the Series B Notes and related Guaranties or the Transfer Restricted Securities, as the case may be, pursuant to the provisions of this Agreement, including the Prospectus, amendments and supplements to such Registration Statement, including post-effective amendments, and all exhibits and all material incorporated by reference in such Registration Statement. Reorganization: The Reorganization of the Company and the Guarantor as described in the Registration Statement on Form S-4 (File No. 33-61252) of Hanover Direct, Inc., a Delaware corporation. Securities Act: The Securities Act of 1933, as amended from time to time. SEC: The Securities and Exchange Commission. Series A Notes: The 9.25% Senior Subordinated Notes, Series A, being sold and issued pursuant to the Purchase Agreement and the Indenture in an aggregate principal amount of $20,000,000. Series B Notes: The 9.25% Senior Subordinated Notes, Series B, to be issued and offered in exchange for the Series A Notes pursuant to a Registered Exchange Offer and the Indenture. Shelf Registration: See Section 3. TIA: The Trust Indenture Act of 1939. Transfer Restricted Securities: The Series A Notes and the related Guaranties upon original issuance thereof, and at all times subsequent thereto, until, in the case of any such Series A Notes and Guaranties, the earlier of the following: (i) such Series A Notes and Guaranties have been effectively registered under Section 5 of the Securities Act and disposed of in accordance with the Registration Statement covering it or (ii) such Series A Notes and Guaranties have been distributed to the public pursuant to Rule 144 (or any similar provisions then in force) of the Securities Act. - 3 - 5 Trustee: The Trustee under the Indenture. underwritten registration or underwritten offering: A registration in which securities of the Company or the Guarantor are sold to an underwriter for reoffering to the public. 2. Securities Subject to this Agreement (a) Registrable Securities. The securities entitled to the benefits of this Agreement are the Registrable Securities. (b) Holders of Registrable Securities. A Person is deemed to be a holder of Registrable Securities whenever such Person is the beneficial owner of Registrable Securities. The Company is entitled to treat the record holder of Registrable Securities as beneficial owner of Registrable Securities unless otherwise notified by such holder. 3. Shelf Registration (a) Timing of Filing, Effectiveness and Period of Usability. Subject to the provisions of Section 4 hereof, the Company and the Guarantor shall file on or before the date 180 days from the date of this Agreement, and thereafter shall use their best efforts to cause to be declared effective as soon as possible but in any event on or before the date 300 days from the date of this Agreement, a "shelf" Registration Statement (a "Shelf Registration") on any appropriate form pursuant to Rule 415 (or similar rule that may be adopted by the SEC) under the Securities Act for all the Registrable Securities, which form shall be available for the sale of the Registrable Securities in accordance with the intended method or methods of distribution thereof. Except as provided in Section 7(k) of this Agreement and the last paragraph of Section 7, each of the Company and the Guarantor agrees to use its best efforts to keep the Registration Statement continuously effective and usable for resale of Registrable Securities for a period of 730 days from the date the Shelf Registration is declared effective by the SEC or such shorter period which will terminate when all the Registrable Securities covered by such Registration Statement have been sold pursuant to such Registration Statement or when all Registrable Securities otherwise have been sold pursuant to Rule 144 or are freely tradable in essentially the same manner as contemplated in Section 4 below. - 4 - 6 (b) Additional Interest for Illiquidity. (1) In addition to the interest required to be paid pursuant to paragraph 1(a) of the Notes, if a Shelf Registration or a Registered Exchange Offer shall not have been declared effective by the SEC on or before the date 300 days from the date of this Agreement, then on that date and thereafter interest shall accrue with respect to the Notes that are Transfer Restricted Securities at the rate of one quarter of one percent (.25%) per annum, which interest shall be payable by the Company in cash directly to the holders thereof on each of the Interest Payment Dates set forth on the Notes after which any additional interest accrues pursuant to this subsection (1) of this Section 3(b), in the manner and subject to the same terms and conditions set forth in the Indenture, as nearly as may be as though the interest rate provided in paragraph 1(a) of the Notes had been increased by one quarter of one percent (.25%) per annum. Such additional interest shall cease to accrue on and after the date on which a Shelf Registration or a Registered Exchange Offer is declared effective by the SEC (the "Effectiveness Date"), and any such additional interest accrued on a Note but unpaid on such Effectiveness Date shall be due and payable on the Interest Payment Date next succeeding such date to the holder of record of such Note at the close of business on the date preceding such date. (2) In addition to the interest required to be paid pursuant to subsection (1) of this Section 3(b) and pursuant to paragraph 1(a) of the Notes, if neither (i) a Shelf Registration shall have been declared effective pursuant to Section 3(a) hereof on or before the date 300 days from the date of this Agreement nor (ii) a Registered Exchange Offer shall have been Consummated pursuant to Section 4 hereof on or before the date 330 days from the date of this Agreement, then on the date 331 days from the date of this Agreement and thereafter interest shall accrue with respect to the Notes that are Transfer Restricted Securities at the rate of one quarter of one percent (.25%) per annum, which interest shall be payable by the Company in cash directly to the holders thereof on each of the Interest Payment Dates set forth on the Notes after which any additional interest accrues pursuant to this subsection (2) of this Section 3(b), in the manner and subject to the same terms and conditions set forth in the Indenture, as nearly as may be as though the interest rate provided in paragraph 1(a) of the Notes had been increased by one quarter of one percent (.25%) per annum. The rate of additional interest shall continue to increase by an additional one quarter of one - 5 - 7 percent (.25%) per annum, on a cumulative basis, on each subsequent Interest Payment Date until a Shelf Registration has been declared effective or a Registered Exchange Offer has been Consummated. Such additional interest shall cease to accrue on and after the earlier of (i) the Effectiveness Date of a Shelf Registration or (ii) the date a Registered Exchange Offer is Consummated (the "Consummation Date"), and any such additional interest accrued on a Note but unpaid on such Effectiveness Date or Consummation Date, as the case may be, shall be due and payable on the Interest Payment Date next succeeding such date to the holder of record of such Note at the close of business on the date preceding such date. (3) The Guarantor hereby agrees to guarantee unconditionally the payment by the Company of any additional interest pursuant to this Section 3(b), upon the same terms and conditions as set forth in the Guaranty as nearly as may be as though the interest rate provided in paragraph 1(a) of the Notes had been increased accordingly. (c) Selection of Underwriters. If at any time or from time to time any of the holders of the Registrable Securities covered by the Registration Statement desire to sell Registrable Securities in an underwritten offering, the investment banker or investment bankers and manager or managers that will administer the offering will be selected by the holders of a majority in aggregate principal amount of the Registrable Securities included in such offering; provided that such investment bankers and managers must be reasonably satisfactory to the Company. 4. Registered Exchange Offer The Company and the Guarantor may, at their option, Consummate a Registered Exchange Offer. If the Company or the Guarantor elect to consummate a Registered Exchange Offer and file on or before the date 180 days from the date of this Agreement a Registration Statement for such purpose, the obligations of the Company and the Guarantor to file a "shelf" Registration Statement pursuant to Section 3(a) shall be suspended until the date 330 days from the date of this Agreement; provided, however, that payment of additional interest for illiquidity pursuant to Section 3 shall apply without regard to this sentence. Upon Consummation, such Registered Exchange Offer shall satisfy and be in lieu of any and all obligations of each of the Company and the Guarantor set forth in Section 3 above if (i) the securities received by such holders of Registrable Securities in the Registered Exchange Offer are, upon receipt, tradable by each such holder (other than a holder which is an affiliate of the Company or the Guarantor at any time on or - 6 - 8 prior to the Consummation Date) without restriction under the Securities Act and the Exchange Act and without material restrictions under the blue sky or securities laws of substantially all of the States and (ii) none of the holders of Registrable Securities abstains from participation in a Registered Exchange Offer based on a written opinion of counsel, the basis and reasoning of which shall be set forth in the opinion and a copy of which opinion shall be sent to the Company, that either (a) such participation is not legally permitted or (b) a court decision or administrative action may reasonably be expected to have a material adverse effect on such holder in the event that such holder participates in a Registered Exchange Offer. The Company shall give written notice that a Registration Statement filed in connection with a Registered Exchange Offer is effective to each holder of Registrable Securities promptly after receiving notice of effectiveness from the SEC. The Registered Exchange Offer shall be on the appropriate form permitting registration of the Series B Notes to be offered in exchange for the Transfer Restricted Securities. Upon the making of any such Registered Exchange Offer in accordance with this Section 4, the Company and the Guarantor may omit to comply with such of the procedures set forth in Section 7 hereof as may be appropriate under the circumstances without materially and adversely affecting the interest of the holders of Registrable Securities under this Agreement, taken as a whole, but the other provisions of this Agreement shall continue to apply as set forth in such provisions. Notwithstanding the foregoing, the Company and the Guarantor agree to use their best efforts to Consummate a Registered Exchange Offer as soon as practicable after receipt of a written request of Sun Life Insurance Company of America to proceed with the Registered Exchange Offer on behalf of the holders of Registrable Securities eligible to participate while concurrently maintaining a Shelf Registration pursuant to Section 3 hereof for holders of Registrable Securities not eligible to participate pursuant to the terms of this Section 4. 5. Piggyback Registration (a) Right to Include Registrable Securities. If at any time the Company or the Guarantor proposes to register any of its debt or equity securities (other than a registration effected solely to implement an employee benefit plan, a transaction to which Rule 145 promulgated under the Securities Act is applicable or a transaction eligible to be registered on Form S-4 or any successor form) under the Securities Act, whether or not for its own account, and there are Transfer Restricted Securities outstanding which, at such time, cannot be sold under the Shelf Registration or Rule 144(k) (or any similar provision then in force), then the Company or the Guarantor, as the case may be, shall give written notice of such proposed filings to the holders - 7 - 9 of Transfer Restricted Securities at least 20 days before the anticipated filing date. Such notice shall offer each such holder the opportunity to register such amount of Transfer Restricted Securities as each such holder may request (a "Piggyback Registration"). Subject to the provisions of Section 5(b) below, the Company or the Guarantor, as may be the case, shall include in each such Piggyback Registration all Transfer Restricted Securities with respect to which the Company or the Guarantors, as may be the case, have received written requests for inclusion therein within 15 business days after notice has been duly given to the applicable holder. The holder of Transfer Restricted Securities shall be permitted to withdraw all or any part of the Transfer Restricted Securities from a Piggyback Registration at any time prior to the effective date of such Piggyback Registration. (b) Priority on Piggyback Registration. Each of the Company and the Guarantor shall use its best efforts to cause the managing underwriter or underwriters of a proposed underwritten offering to permit holders of Transfer Restricted Securities requested to be included in the registration for such offering to include all such Transfer Restricted Securities in such offering on the same terms and conditions as any other securities included therein. Notwithstanding the foregoing, if the managing underwriter or underwriters of such offering deliver(s) a written opinion to the holders of Transfer Restricted Securities to the effect that in its reasonable judgment, the total amount or nature of securities which such holders, the Company, the Guarantor, and any other persons or entities having registration rights intend to include in such offering is such as to materially and adversely affect the success of such offering, then the amount of Transfer Restricted Securities to be offered for the account of holders of Transfer Restricted Securities shall be reduced pro rata among such holders on the basis of the dollar amount of Transfer Restricted Securities requested to be included therein by each such holder, to the extent necessary to reduce the total amount of securities to be included in such offering to the amount recommended by such managing underwriter or underwriters; provided, however, that if securities are being offered for the account of other persons or entities as well as the Company or the Guarantor by nature of their also having "piggyback" registration rights, such reduction, to the extent permitted by the terms of such registration rights, shall be made on a pro rata basis with such other securities. (c) Registration of Securities Other than Transfer Restricted Securities. Except for registration rights that may be granted with respect to equity securities that may be resold pursuant to the Guarantor's registration statement on Form S-3 (No. 33-66394), which was declared effective by the SEC on - 8 - 10 August 3, 1993, without the written consent of the holders of a majority in aggregate principal amount of the then outstanding Transfer Restricted Securities, the Company and the Guarantor shall not, after the date hereof, grant to any Person the right to request the Company or the Guarantor to register any securities of any of them under the Securities Act if the terms thereof would adversely affect the registration rights granted to the holders of Transfer Restricted Securities pursuant to this Agreement. 6. Hold-Back Agreements (a) Restrictions on Public Sale by Holder of Registrable Securities. Each holder of Registrable Securities whose Registrable Securities are covered by a Registration Statement filed pursuant to Section 3 or 5 hereof agrees, if requested by the managing underwriters in an underwritten offering, not to effect any public sale or distribution of securities of the same class as the securities included in such Registration Statement, including a sale pursuant to Rule 144 under the Securities Act (except as part of such underwritten registration), during the 10-day period prior to, and during the 90-day period beginning on, the closing date of each underwritten offering made pursuant to such Registration Statement, to the extent timely notified in writing by the Company or the managing underwriters. The foregoing provisions shall not apply to any holder of Registrable Securities if such holder is prevented by applicable statute or regulation from entering into any such agreement; provided that any such holder shall undertake, in its request to participate in any such underwritten offering, not to effect any public sale or distribution of the applicable class of Registrable Securities commencing on the date of sale of such applicable class of Registrable Securities pursuant to the underwritten offering unless it has provided 45 days' prior written notice of such sale or distribution to the underwriter or underwriters. (b) Restrictions on Public Sale by the Company and Others. Each of the Company and the Guarantor agrees: (1) not to effect any public or private sale or distribution of its debt securities, including a sale pursuant to Regulation D under the Securities Act, during the 10-day period prior to, and during the 90-day period beginning on, the closing date of each underwritten offering made pursuant to a Registration Statement filed under - 9 - 11 Section 3, to the extent timely requested in writing by the managing underwriters (except as part of such underwritten registration or pursuant to registrations on Form S-4 or any successor form to such Form), and (2) to cause each holder of privately placed debt securities issued by the Company or the Guarantor at any time on or after the date of this Agreement to agree on or before the date such securities are issued not to effect any public sale or distribution of any such securities, including a sale pursuant to Rule 144 under the Securities Act, during such period to the extent timely requested in writing by the managing underwriters of an underwritten offering made pursuant to a Registration Statement filed under Section 3 (except as part of such underwritten registration, if permitted). 7. Registration Procedures In connection with the Company's and the Guarantor's obligations to file Registration Statements pursuant to Sections 3, 4, and 5 hereof, the Company and the Guarantor will use their respective best efforts to effect such registration to permit the sale of such Registrable Securities in accordance with the intended method or methods of disposition thereof, and pursuant thereto the Company and the Guarantor will as expeditiously as possible: (a) before filing a Registration Statement or Prospectus or any amendments or supplements thereto, furnish to the holders of the Registrable Securities covered by such Registration Statement and the underwriters, if any, a copy of all such documents proposed to be filed, which documents will be subject to the review of such holders and underwriters, and neither the Company nor the Guarantor will file any Registration Statement or amendment thereto or any Prospectus or any supplement thereto to which the holders of a majority in aggregate principal amount of the Registrable Securities covered by such Registration Statement or the underwriters, if any, shall promptly and reasonably object; (b) prepare and file with the SEC such amendments and post-effective amendments to the Registration Statement, and such supplements to the Prospectus, as may be requested by any holder of Registrable Securities or any underwriter of Registrable Securities or as may be required by the rules, regulations or instructions applicable to the registration form utilized by the Company and the Guarantor or by the Securities Act or rules and regulations thereunder for shelf registration or otherwise necessary to keep the Registration Statement effective for the - 10 - 12 applicable period and cause the Prospectus as so supplemented to be filed pursuant to Rule 424 under the Securities Act; and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended methods of disposition by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus; (c) notify the selling holders of Registrable Securities and the managing underwriters, if any, promptly, and (if requested by any such Person) confirm such advice in writing, (1) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to the Registration Statement or any post-effective amendment, when the same has become effective, (2) of any request by the SEC for amendments or supplements to the Registration Statement or the Prospectus or for additional information, (3) of the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose, (4) if at any time, to the best knowledge of the Company or the Guarantor, the representations and warranties of the Company or the Guarantor contemplated by paragraph (o) below cease to be true and correct in any material respect, (5) of the receipt by the Company or the Guarantor of any notification with respect to the suspension of the qualification of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose, and (6) of the existence of any fact known to the Company or the Guarantor which results in the Registration Statement, the Prospectus or any document incorporated therein by reference containing an untrue statement of material fact or omitting to state a material fact required to be stated therein or necessary to make the statements therein not misleading; (d) make every reasonable effort to obtain the withdrawal of any order suspending the effectiveness of the Registration Statement at the earliest possible moment; - 11 - 13 (e) if requested by the managing underwriter or underwriters or a holder of Registrable Securities being sold in connection with an underwritten offering, promptly incorporate in a Prospectus supplement or post-effective amendment such information as the managing underwriters and the holders of a majority in aggregate principal amount of the Registrable Securities being sold agree should be included therein relating to the plan of distribution with respect to such Registrable Securities, including, without limitation, information with respect to the principal amount of Registrable Securities being sold to such underwriters, the purchase price being paid therefor by such underwriters and with respect to any other terms of the underwritten (or best efforts underwritten) offering of the Registrable Securities to be sold in such offering; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after being notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment; (f) furnish, without charge, to (i) counsel to the selling holders of Registrable Securities and each managing underwriter, at least one signed copy of the Registration Statement and (ii) each selling holder of Registrable Securities, at least one conformed copy of the Registration Statement, and, with respect to copies furnished pursuant to both clauses (i) and (ii) hereof, any post-effective amendment thereto, including financial statements and schedules, all documents incorporated therein by reference and all exhibits (including those incorporated by reference); (g) deliver to each selling holder of Registrable Securities and the underwriters, if any, without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons may reasonably request; the Company and the Guarantor consent to the use of the Prospectus or any amendment or supplement thereto by each of the selling holders of Registrable Securities and the underwriters, if any, in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto; (h) prior to any public offering of Registrable Securities, register or qualify or cooperate with the selling holders of Registrable Securities, the underwriters, if any, and their respective counsel in connection with the registration or qualification of such Registrable Securities for offer and sale under the securities or blue sky laws of such jurisdictions as any seller or underwriter reasonably requests in writing and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Registrable - 12 - 14 Securities covered by the Registration Statement; provided that neither the Company nor the Guarantor will be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process in any such jurisdiction where it is not then so subject; (i) cooperate with the selling holders of Registrable Securities and the managing underwriters, if any, to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends; and enable such Registrable Securities to be in such denominations and registered in such names as the managing underwriters may request at least two business days prior to any sale of Registrable Securities to the underwriters; (j) use their best efforts to cause the Registrable Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof or the underwriters, if any, to consummate the disposition of such Registrable Securities; (k) if any fact contemplated by paragraph (c)(6) above shall exist, prepare a supplement or post- effective amendment to the Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading; provided, however, that nothing in this Agreement shall require the Company or the Guarantor to disclose non-public information that, in the exercise of reasonable judgment, the Company deems advisable not to disclose, in which case the time periods referred to in Section 3(a) shall be extended as provided in the last paragraph of this Section 7; (l) use their best efforts to cause all Registrable Securities covered by the Registration Statement to be listed on each securities exchange on which similar securities issued by the Company or the Guarantor are then listed, if requested by the holders of a majority in aggregate principal amount of such Registrable Securities or the managing underwriters, if any; (m) use their best efforts to cause the Registrable Securities covered by the Registration Statement to be rated with the appropriate rating agencies, if so requested by the holders of a majority in aggregate principal amount of such Registrable Securities or the managing underwriters; - 13 - 15 (n) obtain a CUSIP number for all Registrable Securities, not later than the Effectiveness Date; (o) enter into agreements (including customary underwriting agreements) and take all other appropriate actions in order to expedite or facilitate the disposition of such Registrable Securities and in such connection whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration: (1) make such representations and warranties to the holders of such Registrable Securities and the underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings of similar securities; (2) obtain opinions of counsel to the Company and the Guarantor and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the managing underwriters, if any, and the holders of a majority in principal amount of the Registrable Securities being sold) addressed to each selling holder and the underwriters, if any, covering the matters customarily covered in opinions requested in underwriting offerings and such other matters as may be reasonably requested by such holders and underwriters; (3) obtain "cold comfort" letters and updates thereof from the Company's and the Guarantor's independent certified public accountants addressed to the selling holders of Registrable Securities and the underwriters, if any, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters to underwriters in connection with primary underwritten offerings; (4) if an underwriting agreement is entered into, cause the same to set forth in full the indemnification provisions and procedures of Section 9 hereof with respect to all parties to be indemnified pursuant to said Section; and (5) deliver such documents and certificates as may be reasonably requested by the holders of a majority in principal amount of the Registrable Securities being sold and the managing underwriters, if any, to evidence compliance with clause (k) above and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company or the Guarantor. - 14 - 16 The above shall be done at (i) the effectiveness of such Registration Statement, (ii) each closing under any underwriting or similar agreement as and to the extent required thereunder and (iii) from time to time as may be requested by any selling holder in connection with the disposition of Registrable Securities pursuant to such Registration Statement (except that, if the offering is not an underwritten offering, the Company's obligation to furnish the representations and warranties, opinions, "cold comfort" letters and other documents and certificates required under clauses (1), (2), (3) and (5) of this paragraph (o), other than at the effectiveness of a Registration Statement or the closing of any such transaction, shall be conditioned on the receipt by the Company of an opinion of counsel to the selling holders of Registrable Securities requesting the same to the effect that the same would assist such holders in establishing a "due diligence" defense should such holders be deemed to be statutory underwriters with respect to such offering); (p) make available for inspection during normal business hours by a representative of the holders of a majority in principal amount of the Registrable Securities, any underwriter participating in any disposition pursuant to such Registration Statement, and any attorney or accountant retained by the sellers or underwriter, all financial and other records, pertinent corporate documents and properties of the Company and the Guarantor, and cause the Company's and the Guarantor's officers, directors and employees to supply all information reasonably requested by any such representative, underwriter, attorney or accountant in connection with the Registration Statement; provided that all such records, information or documents shall be kept confidential by such Persons unless disclosure of such records, information or documents is required by court or administrative order or is generally available to the public other than as a result of disclosure in violation of this paragraph (p); (q) otherwise use its best efforts to comply with all applicable rules and regulations of the SEC, and make generally available to their security holders, earnings statements satisfying the provisions of Section 11(a) of the Securities Act (in accordance with Rule 158 thereunder or otherwise), no later than 45 days after the end of any 12-month period (or 90 days, if such period is a fiscal year) (1) commencing at the beginning of the fiscal quarter following that in which Registrable Securities are sold to underwriters in an underwritten offering, or, if not sold to underwriters in such an offering, (2) beginning with the first month of the Company's or the Guarantor's, as the case may be, first fiscal quarter commencing after the Effectiveness Date, which statements shall cover said 12-month periods; - 15 - 17 (r) use its best efforts to cause the Indenture to be qualified under the TIA, provide an indenture trustee for the Registrable Securities not later than the Effectiveness Date and, in connection therewith, cooperate with the trustee under the Indenture and the holders of the Notes to effect such changes to the Indenture as may be required for the Indenture to be so qualified in accordance with the terms of the TIA and execute, and use their best efforts to cause the trustee to execute, all documents as may be required to effect such changes, and all other forms and documents required to be filed with the SEC to enable the Indenture to be so qualified in a timely manner; (s) cooperate and assist in any filings required to be made with the NASD and in the performance of any due diligence investigation by any underwriter (including any "qualified independent underwriter" that is required to be retained in accordance with the rules and regulations of the NASD); and (t) promptly prior to the filing of any document which is to be incorporated by reference into the Registration Statement or the Prospectus (after initial filing of the Registration Statement) provide draft copies of such document to counsel to the selling holders of Registrable Securities and to the managing underwriters, if any, make the Company's and the Guarantor's representatives available for discussion of such document. Each selling holder of Registrable Securities as to which any registration is being effected agrees, as a condition to the registration obligations with respect to such holder provided herein, to furnish to the Company and the Guarantor such information regarding the distribution of such securities as the Company or the Guarantor may from time to time reasonably request in writing. Each holder of Registrable Securities agrees by acquisition of such Registrable Securities that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 7(k) hereof, such holder will forthwith discontinue disposition of Registrable Securities until such holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 7(k) hereof, or until it is advised in writing by the Company that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings which are incorporated by reference in the Prospectus, and, if so directed by the Company, such holder will deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such holder's possession, of the Prospectus covering such Registrable Securities current at the time of receipt of such notice. In the - 16 - 18 event the Company shall give any such notice, the time periods mentioned in Section 3(a) hereof shall be extended by the number of days during the period from and including the date of the giving of such notice to and including the date when each seller of Registrable Securities covered by such Registration Statement either receives the copies of the supplemented or amended prospectus contemplated by Section 7(k) hereof or is advised in writing by the Company that the use of the Prospectus may be resumed. In connection with the Registered Exchange Offer (if to be made pursuant to Section 4 hereof): (a) As a condition to its participation in the Registered Exchange Offer pursuant to the terms of this Agreement, each holder of Transfer Restricted Securities shall be required to furnish, upon the request of the Company or the Guarantor, as applicable, prior to the Consummation thereof a written representation to the Company or the Guarantor, as applicable, that it is not engaged in, and does not intend to engage in, a distribution of the Series B Notes to be received in the Registered Exchange Offer and that it is acquiring the Series B Notes in its ordinary course of business. (b) Prior to effectiveness of the Registration Statement relating to the Registered Exchange Offer, the Company or the Guarantor, as applicable, shall provide a supplemental letter to the SEC (i) stating that the Company or the Guarantor, as applicable, is registering the Registered Exchange Offer in reliance on the position of the SEC enunciated in Exxon Capital Holdings Corporation (available April 13, 1988) and Morgan Stanley and Co. Inc. (available June 5, 1991) no- action letters and (ii) including a representation that the Company or the Guarantor, as applicable, has not entered into any arrangement or understanding with any Person to distribute the Series B Notes to be received in the Registered Exchange Offer and that, to the best of the Company's or the Guarantor's, as applicable, information and belief, each holder participating in the Registered Exchange Offer is acquiring the Series B Notes in its ordinary course of business and has no arrangement or understanding with any Person to participate in the distribution of the Series B Notes received in the Registered Exchange Offer. (c) The Company and the Guarantor shall cause the Indenture to be qualified under the TIA not later than the effective date of the Registration Statement relating to the Registered Exchange Offer; and, in connection therewith, will cooperate with the Trustee and the holders of the Class A Notes to effect such changes to the Indenture as may be required for such Indenture to be so qualified in accordance with the terms of - 17 - 19 the TIA; and will execute, and make its reasonable best efforts to cause such Trustee to execute, all documents as may be required to effect such changes and all other forms and documents required to be filed with the SEC to enable such Indenture to be so qualified in a timely manner. 8. Registration Expenses (a) All expenses incident to the Company's and the Guarantor's performance of or compliance with this Agreement, including without limitation: (1) all registration and filing fees (including with respect to filings required to be made with the NASD); (2) fees and expenses of compliance with securities or blue sky laws (including reasonable fees and disbursements of counsel in connection with blue sky qualifications of the Registrable Securities and determination of their eligibility for investment under the laws of such jurisdictions as the managing underwriters or holders of a majority in principal amount of the Registrable Securities being sold may reasonably designate); (3) printing, messenger, telephone and delivery expenses; (4) fees and disbursements of counsel for the Company, the Guarantor and for the sellers of the Registrable Securities (subject to the provisions of Section 8(b) hereof); (5) fees and disbursements of all independent certified public accountants of the Company and the Guarantor (including the expenses of any special audit necessary to satisfy the requirements of the Securities Act and any "cold comfort" letters required by or incident to such performance); (6) fees and disbursements of underwriters customarily required to be paid by the issuer or selling security holders in underwritten public offerings of debt securities managed by a major bracket underwriter (excluding discounts, commissions or fees of underwriters, selling brokers, dealer managers or similar securities industry professionals relating to the distribution of the Registrable Securities or legal expenses of such underwriter or any other Person other than the Company, the Guarantor or the selling holders); - 18 - 20 (7) securities act liability insurance if the Company or the Guarantor so desire; (8) fees and expenses of other Persons retained by the Company or the Guarantor; and (9) NASD filing fees and expenses associated with any NASD filing required to be made in connection with the Registration Statement, including, if applicable, the fees and expenses of any "qualified independent underwriter" (and its counsel) that is required to be retained in accordance with the rules and regulations of the NASD (all such expenses being herein called "Registration Expenses") will be borne by the Company and the Guarantor regardless of whether the Registration Statement becomes effective. Each of the Company and the Guarantor will, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit, the fees and expenses incurred in connection with the listing of the securities to be registered on each securities exchange on which similar securities issued by the Company or the Guarantor are then listed, rating agency fees and the fees and expenses of any Person, including special experts, retained by the Company or the Guarantor. (b) In connection with each Registration Statement required hereunder, the Company and the Guarantor will reimburse the holders of Registrable Securities being registered pursuant to such Registration Statement for the reasonable fees and disbursements of not more than one counsel chosen by the holders of a majority in principal amount of such Registrable Securities. 9. Indemnification (a) Indemnification by the Company and the Guarantor. The Company and the Guarantor agree, jointly and severally, to indemnify and hold harmless each holder of Registrable Securities, its officers, directors, employees and Agents and each Person who controls such holder within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act (each such person being sometimes hereinafter referred to as an "Indemnified Holder") from and against all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation and legal expenses) arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement or Prospectus or in any amendment or supplement thereto or in any preliminary - 19 - 21 prospectus, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expenses arise out of or are based upon any such untrue statement or omission or allegation thereof based upon information furnished in writing to the Company or the Guarantor by such holder expressly for use therein; provided, however, that the Company and the Guarantor shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement of a material fact contained in any Registration Statement or Prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or expense arise out of or are based upon any such untrue statement or omission or allegation thereof based upon information furnished in writing to the Company or the Guarantor by such holder expressly for use therein; provided, however, that the Company and the Guarantor shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in any preliminary prospectus if (i) such holder failed to send or deliver a copy of the Prospectus with or prior to the delivery of written confirmation of the sale of Registrable Securities and (ii) the Prospectus would have completely corrected such untrue statement or omission; and provided further, that the Company and the Guarantor shall not be liable in any such case to the extent that any such loss, claim, damage, liability or expense arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission in the Prospectus, if such untrue statement or alleged untrue statement, omission or alleged omission is completely corrected in an amendment or supplement to the Prospectus and if, having previously been furnished by or on behalf of the Company or the Guarantor with copies of the Prospectus as so amended or supplemented, such holder thereafter fails to deliver such Prospectus as so amended or supplemented, prior to or concurrently with the sale of a Registrable Security to the person asserting such loss, claim, damage, liability or expense who purchased such Registrable Security which is the subject thereof from such holder. This indemnity will be in addition to any liability which the Company and the Guarantor may otherwise have. The Company and the Guarantor will also indemnify underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, their officers, directors and employees and each - 20 - 22 Person who controls such Persons (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities. If any action or proceeding (including any governmental investigation or inquiry) shall be brought or asserted against an Indemnified Holder in respect of which indemnity may be sought from the Company or the Guarantor, such Indemnified Holder shall promptly notify the Company and the Guarantor in writing, and the Company and the Guarantor shall assume the defense thereof, including the employment of counsel reasonably satisfactory to such Indemnified Holder and the payment of all expenses. Such Indemnified Holder shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall be the expense of such Indemnified Holder unless (a) the Company or the Guarantor have agreed to pay such fees and expenses or (b) the Company and the Guarantor shall have failed to assume the defense of such action or proceeding and have failed to employ counsel reasonably satisfactory to such Indemnified Holder in any such action or proceeding or (c) the named parties to any such action or proceeding (including any impleaded parties) include such Indemnified Holder and the Company or the Guarantor, and such Indemnified Holder shall have been advised by counsel that there may be one or more legal defenses available to such Indemnified Holder which are different from or additional to those available to the Company or the Guarantor (in which case, if such Indemnified Holder notifies the Company in writing that it elects to employ separate counsel at the expense of the Company and the Guarantor, neither the Company nor the Guarantor shall have the right to assume the defense of such action or proceeding on behalf of such Indemnified Holder, it being understood, however, that the Company and the Guarantor shall not, in connection with any one such action or proceeding or separate but substantially similar or related actions or proceedings in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the reasonable fees and expenses of more than one separate firm of attorneys at any time for such Indemnified Holder and any other Indemnified Holders, which firm shall be designated in writing by such Indemnified Holders). Neither the Company nor the Guarantor shall be liable for any settlement of any such action or proceeding effected without its written consent, but if settled with its written consent, or if there be a final judgment for the plaintiff in any such action or proceeding, the Company and the Guarantor agree to indemnify and hold harmless such Indemnified Holders from and against any loss or liability by reason of such settlement or judgment. - 21 - 23 (b) Indemnification by Holder of Registrable Securities. Each holder of Registrable Securities agrees to indemnify and hold harmless the Company and the Guarantor, their respective directors and officers and each Person, if any, who controls the Company or the Guarantor within the meaning of either Section 15 of the Securities Act or Section 20 of the Exchange Act to the same extent as the foregoing indemnity from the Company and the Guarantor to such holder, but only with respect to information relating to such holder furnished in writing by such holder expressly for use in any Registration Statement or Prospectus, or any amendment or supplement thereto, or any preliminary prospectus. In case any action or proceeding shall be brought against the Company or the Guarantor or their respective directors or officers or any such controlling person, in respect of which indemnity may be sought against a holder of Registrable Securities, such holder shall have the rights and duties given the Company and the Guarantor, and the Company or the Guarantor or their respective directors or officers or such controlling person shall have the rights and duties given to each holder by the preceding paragraph. In no event shall the liability of any selling holder of Registrable Securities hereunder be greater in amount than the dollar amount of the proceeds received by such holder upon the sale of the Registrable Securities giving rise to such indemnification obligation. The Company and the Guarantor shall be entitled to receive indemnities from underwriters, selling brokers, dealer managers and similar securities industry professionals participating in the distribution, to the same extent as provided above with respect to information so furnished in writing by such Persons specifically for inclusion in any Prospectus or Resignation Statement. (c) Contribution. If the indemnification provided for in this Section 9 is unavailable to an indemnified party under Section 9(a) or Section 9(b) hereof (other than by reason of exceptions provided in those Sections) in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the Company and the Guarantor on the one hand and of the Indemnified Holder (including that of its officers, directors, employees and Agents) on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative fault of the Company and the Guarantor on the one hand and of the Indemnified Holder (including that of its officers, directors, employees and Agents) on the other shall be - 22 - 24 determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omissions or alleged omission to state a material fact relates to information supplied by the Company or the Guarantor, on the one hand, or by or on behalf of the Indemnified Holder, on the other, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in the second paragraph of Section 9(a), any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The Company, the Guarantor and each holder of Registrable Securities agree that it would not be just and equitable if contribution pursuant to this Section 9(c) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. Notwithstanding the provisions of this Section 9(c), an Indemnified Holder shall not be required to contribute any amount in excess of the amount by which the total price at which the Notes sold by such Indemnified Holder or its affiliated Indemnified Holders and distributed to the public were offered to the public exceeds the amount of any damages which such Indemnified Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. 10. Rule 144 and Rule 144A The Company and the Guarantor covenant that they each will file the reports required to be filed by them under the Securities Act and the Exchange Act and the rules and regulations adopted by the SEC thereunder (or, if the Company or the Guarantor are not required to file such reports, either the Company or the Guarantor, as the case may be, will, upon the request of any holder of Registrable Securities made after the date hereof, (i) make publicly available such information as is necessary to permit sales pursuant to Rule 144 under the Securities Act and (ii) deliver such information to a prospective purchaser as is necessary to permit sales pursuant to Rule 144A under the Securities Act), and the Company or the Guarantor, as the case may be, will take such further action as any holder of Registrable Securities may reasonably request, all to the extent required from time to time to enable such holder to sell - 23 - 25 Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (a) Rule 144 or Rule 144A under the Securities Act, as such Rules may be amended from time to time, or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the request of any holder of Registrable Securities or the Trustee, the Company or the Guarantor, as the case may be, will deliver to such holder or the Trustee, as the case may be, a written statement as to whether it has complied with such information and requirements. 11. Participation in Underwritten Registrations No Person may participate in any underwritten registration hereunder unless such Person (a) agrees to sell such Person's securities on the basis provided in any underwriting arrangements approved by the Persons entitled hereunder to approve such arrangements and (b) completes and executes all questionnaires, powers of attorney, indemnities, underwriting agreements and other documents required under the terms of such underwriting arrangements. 12. Miscellaneous (a) Remedies. Each holder of Registrable Securities, in addition to being entitled to exercise all rights provided herein, in the Indenture, in the Purchase Agreement and granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Agreement. The Company and the Guarantor agree that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by any of them of the provisions of this Agreement and hereby agree to waive the defense in any action for specific performance that a remedy at law would be adequate. (b) No Inconsistent Agreements. None of the Company or the Guarantor will on or after the date of this Agreement enter into any agreement with respect to their securities which is inconsistent with the rights granted to the holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. Except as listed on Schedule 12 hereof, none of the Company or the Guarantor has previously entered into any agreement with respect to its securities granting any registration rights to any Person. (c) Adjustments Affecting Registrable Securities. None of the Company or the Guarantor will take any action, or permit any change to occur, with respect to the Registrable Securities which would adversely affect the ability of the holders of Registrable Securities to include such Registrable - 24 - 26 Securities in a registration undertaken pursuant to this Agreement. (d) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless the Company has obtained the written consent of holders of at least 66-2/3% of the principal amount of the outstanding Registrable Securities. Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of holders of Registrable Securities whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other holders of Registrable Securities may be given by the holders of 66-2/3% of the principal amount of the Registrable Securities being sold. (e) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier or air courier guaranteeing overnight delivery: (1) if to a holder of Registrable Securities, at the most current address given by such holder to the Company in accordance with the provisions of this Section 12(e), which address initially is, with respect to the Purchaser, the address set forth on the first page of the Purchase Agreement, with a copy to Milbank, Tweed, Hadley & McCloy, 601 S. Figueroa Street, Suite 3000, Los Angeles, California 90017, Attention: Eric H. Schunk, Esq.; and (2) if to the Company or the Guarantor initially at their respective addresses set forth in the Purchase Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 12(e), with a copy to Breed, Abbot & Morgan, Citicorp Center, 153 East 53rd Street, New York, New York 10022, Attention: Monte E. Wetzler, Esq. All such notices and communications shall be deemed to have been duly given; at the time delivered by hand, if personally delivered; five business days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt acknowledged, if telecopied; and on the next business day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of such notices, demands or other communications shall be concurrently delivered by the Person giving the same to - 25 - 27 the trustee under the Indenture at the addresses specified in the Indenture. (f) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent holders of Registrable Securities; provided, however, that after the Closing under the Purchase Agreement this Agreement shall not inure to the benefit of or be binding upon a successor or assign of a holder of Notes unless and to the extent such successor or assign acquired Registrable Securities from such holder. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK. (j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted by the Company and the Guarantor with respect to the securities sold pursuant to the Purchase Agreement. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. [signature pages follow] - 26 - 28 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. The Company: THE HANOVER COMPANIES By: /s/ ------------------------ Name: /s/ --------------------- Title: /s/ -------------------- The Guarantor: THE HORN & HARDART COMPANY By: /s/ ------------------------ Name: /s/ --------------------- Title: /s/ -------------------- Purchaser: SUN LIFE INSURANCE COMPANY OF AMERICA By: -------------------------- Name: ------------------------ Title:
----------------------- EX-10.8 6 SECOND AMEND. & RESTAT. LOAN & SECURITY AGREEMENT 1 Exhibit 10.8 SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT BY AND AMONG CONGRESS FINANCIAL CORPORATION, HANOVER DIRECT PENNSYLVANIA, INC., BRAWN OF CALIFORNIA, INC., GUMP'S BY MAIL, INC. GUMP'S CORP. TCSA, INC. SDSA, INC. AND TWEEDS, INC. DATED AS OF OCTOBER 27, 1993 2 INDEX
Page ---- RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 SECTION 2. AMOUNTS AND TERMS OF LOANS AND OTHER FINANCIAL ACCOMMODATIONS 2.1 Revolving Inventory Loans; Additional Advances . . . . . . . . . . . . . . . . . . . . . . . 33 2.2 Lending Sublimits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2.3 Letter of Credit Accommodations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2.4 Maximum Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 2.5 Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 2.6 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 2.7 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 2.8 Conduct of Accounts; Cross-Collateralization . . . . . . . . . . . . . . . . . . . . . . . . 43 2.9 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 SECTION 3. CONDITIONS PRECEDENT TO LOANS AND OTHER FINANCIAL ACCOMMODATIONS 3.1 Conditions to Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 3.2 Additional and Continuing Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 SECTION 4. COLLATERAL 4.1 Security Interests in Borrowers' Property . . . . . . . . . . . . . . . . . . . . . . . . . 49 4.2 Guarantees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 4.3 Security Interests in Property of Guarantors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 4.4 Reduction and Release of IMR Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . 52 4.5 Reduction and Release of First Portion . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 4.6 Reduction and Release of Second Portion; Additional Reduction and Release of First Portion . . . . . . . . . . . . . . . . . . . . . . 53 SECTION 5. REPRESENTATIONS AND WARRANTIES 5.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 5.2 Corporate Power and Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 5.3 Capitalization; Solvency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 5.4 Compliance with Other Agreements and Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 5.5 Governmental Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
(i) 3 5.6 Chief Executive Offices; Collateral Locations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 5.7 Priority of Liens; Title to Properties . . . . . . . . . . . . . . . . . . . . . . . . 62 5.8 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 5.9 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 5.10 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 5.11 Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 5.12 Investment Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 5.13 Regulation G; Securities Exchange Act of 1934 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 5.14 No Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 5.15 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 5.16 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 5.17 Labor Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 5.18 Corporate Name; Prior Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . 67 5.19 Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 5.20 Schedule of Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 5.21 Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 5.22 Common Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 5.23 Subordination of Certain Obligations . . . . . . . . . . . . . . . . . . . . . . . . . 71 SECTION 6. ADDITIONAL COVENANTS 6.1 Tradenames . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71 6.2 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 6.3 Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 6.4 Limitation on Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 6.5 Loans; Investments; Guarantees; Etc . . . . . . . . . . . . . . . . . . . . . . . . . 76 6.6 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 6.7 Maintenance of Existence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 6.8 Sale and Leasebacks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 6.9 Sale of Assets; Consolidation; Merger; Dissolution; Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . 82 6.10 Compliance with Laws; Regulations; Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 6.11 Payment of Taxes and Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 6.12 Properties in Good Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 6.13 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 6.14 Appraisals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 6.15 Compliance with ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86 6.16 Notice of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87 6.17 Financial Statements and Other Information . . . . . . . . . . . . . . . . . . . . . . 87 6.18 Consolidated Working Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 6.19 Consolidated Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 6.20 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 6.21 Sales of Outdated and Surplus Inventory . . . . . . . . . . . . . . . . . . . . . . . 93 6.22 Maintenance and Delivery of Customer Lists . . . . . . . . . . . . . . . . . . . . . . 94 6.23 Rental or Licenses of Customer Lists . . . . . . . . . . . . . . . . . . . . . . . . . 94 6.24 No Termination or Amendment of Credit Card Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 6.25 Obligations to be Senior Indebtedness . . . . . . . . . . . . . . . . . . . . . . . . 95
(ii) 4 6.26 Mail Order Joint Ventures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 6.27 9.25% Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 SECTION 7. EVENTS OF DEFAULT/REMEDIES 7.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 7.2 Remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101 SECTION 8. COLLECTION AND ADMINISTRATION 8.1 Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 8.2 Depository Accounts; Blocked Accounts; Customer Prepayment Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 8.3 Right of Inspection; Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 8.4 Specific Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 SECTION 9. EFFECTIVE DATE; TERMINATION; COSTS; MISCELLANEOUS 9.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 9.2 Expenses and Additional Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 9.3 Survival of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 9.4 No Waiver; Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 9.5 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 9.6 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 9.7 Amendments and Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 9.8 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 9.9 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 9.10 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 9.11 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 9.12 Security Interests of Participants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 9.13 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 9.14 Waiver of Counterclaims; Jurisdiction Service of Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117 9.15 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
(iii) 5 INDEX TO EXHIBITS EXHIBIT A JURISDICTIONS OF QUALIFICATION Section 5.1 EXHIBIT B-1 EXISTING SUBSIDIARIES Section 5.1 EXHIBIT B-2 EXISTING MAIL ORDER Section 5.1 JOINT VENTURES EXHIBIT B-3 EXISTING RESTAURANT Section 5.1 BUSINESS SUBSIDIARIES EXHIBIT B-4 ADDITIONAL EXISTING NON- SECTION 5.1 GUARANTOR SUBSIDIARIES EXHIBIT C PRINCIPAL PLACES OF BUSINESS, Sections 1.29, 5.6, CHIEF EXECUTIVE OFFICES 6.3(h) AND LOCATIONS OF COLLATERAL EXHIBIT D EXISTING LIENS Section 5.7 EXHIBIT E LIST OF H&H AND THC DEBT Section 3.1(d) INSTRUMENTS EXHIBIT F PENDING LITIGATION Section 5.9 EXHIBIT G TRADENAMES Sections 5.18, 6.1 EXHIBIT H-1 EXISTING INDEBTEDNESS Section 5.20(a) EXHIBIT H-2 EXISTING LETTERS OF CREDIT Section 5.20(b) UNDER QCC CREDIT AGREEMENT EXHIBIT H-3 [INTENTIONALLY OMITTED] EXHIBIT H-4 EXISTING INTERCOMPANY Sections 5.20(c), INDEBTEDNESS 6.5(b) EXHIBIT I FORM OF MORTGAGEE/LANDLORD Section 6.8 WAIVER, ACCESS AND USE AGREEMENT EXHIBIT J LIST OF LABOR DISPUTES Section 5.17 EXHIBIT K [INTENTIONALLY OMITTED] EXHIBIT L LIST OF ELIGIBLE LETTER OF Section 2.3 CREDIT ACCOMMODATION BANKS
(iv) 6 SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT AGREEMENT, dated as of October __, 1993, by and among CONGRESS FINANCIAL CORPORATION, a California corporation ("Lender", as hereinafter further defined), HANOVER DIRECT PENNSYLVANIA, INC., a Pennsylvania corporation ("HDPI", as hereinafter further defined), BRAWN OF CALIFORNIA, INC., a California corporation ("Brawn", as hereinafter further defined), GUMP'S BY MAIL, INC., a Delaware Corporation ("GBM", as hereinafter further defined) GUMP'S CORP., a California corporation ("Gump's", as hereinafter further defined), TCSA, INC., a Wisconsin corporation ("TCSA", as hereinafter further defined), SDSA, INC., a California corporation (as hereinafter further defined) and TWEEDS, INC., a Delaware corporation ("Tweeds", as hereinafter further defined; HDPI, Brawn, GBM, GUMP'S, TCSA, SDSA and Tweed's are each individually a "Borrower" and collectively, "Borrowers", as hereinafter further defined). W I T N E S S E T H : WHEREAS, Borrowers, together with certain other members of the Affiliated Borrower Group (as hereinafter defined), operate a direct mail order and retail merchandise business; and WHEREAS, HDPI, Brawn, GBM, Gump's and Lender and certain of their Affiliates (as hereinafter defined) are parties to that certain Amended and Restated Loan and Security Agreement dated as of July 9, 1993, as amended by the First Amendment thereto, dated August 17, 1993 (the "Existing Loan Agreement", as hereinafter further defined) pursuant to which Lender has made loans and advances and provided other financial accommodations to HDPI, Brawn, GBM and Gump's; and WHEREAS, TCSA and SDSA are each wholly-owned subsidiaries of TCSA, Inc., a Delaware corporation ("TCSA-Delaware, as hereinafter further defined) which is a wholly-owned subsidiary of Hanover Direct, Inc., a Delaware corporation ("Hanover", as hereinafter further defined); and WHEREAS, TCSA and SDSA and the other Subsidiaries of TCSA-Delaware were formed for the purposes of acquiring, and have acquired, the direct mail order and retail merchandise assets of The Company Store, Inc., a Wisconsin corporation, and certain affiliates of The Company Store, Inc., debtors-in-possession, pursuant to the TCS Purchase Agreements (as hereinafter defined), and thereafter operated and continue to operate such assets; and WHEREAS, Tweeds is a party to secured financing arrangements with Lender, pursuant to the terms of the Financing Agreement [Security Agreement] dated May 27, 1992 between Lender and Tweeds 7 (the "Tweeds Loan Agreement", and together with all supplements and amendments thereto, the "Tweeds Financing Agreements"); and WHEREAS, TW Acquisitions, Inc., a Delaware corporation and a wholly-owned subsidiary of HDPI, was formed for the purpose of acquiring, and has acquired, all of the outstanding capital stock of Tweeds pursuant to the Tweeds Purchase Agreements (as hereinafter defined); and WHEREAS, Borrowers have requested that Lender continue to make loans and advances and provide other financial accommodations to HDPI, Brawn, GBM and Gump's and that Lender increase the Maximum Credit under the Existing Loan Agreement and make loans and advances and provide other financial accommodations thereunder to TCSA, SDSA and Tweeds; and WHEREAS, Lender is willing to increase the Maximum Credit and make such loans and advances and provide such financial accommodations, subject to the terms and conditions set forth herein and in the other Financing Agreements (as hereinafter defined); and WHEREAS, the parties wish to amend and restate the Existing Loan Agreement and the Tweeds Financing Agreements in their entirety and amend certain of the Financing Agreements in order to evidence the foregoing and other provisions mutually agreed upon; NOW, THEREFORE, in consideration of the foregoing, the mutual covenants and agreements herein contained and other good and valuable consideration, the adequacy and receipt of which is hereby acknowledged, Lender and Borrowers hereby mutually covenant, warrant and agree as follows (the covenants, warranties and agreements of Borrowers, except as otherwise expressly set forth herein, being joint and several): SECTION 1. DEFINITIONS For the purposes of this Agreement, the following terms shall have the respective meanings given to them below: 1.1 "Account Debtor" shall mean account debtor, as such term is defined in the UCC, including, without limitation, each debtor or obligor in any way obligated on or in connection with any Account. 1.2 "Accounts" shall mean, as to any Person, all present and future accounts, contract rights, chattel paper, documents and instruments of such Person, as such terms are defined in the UCC, including, without limitation, all obligations for the - 2 - 8 payment of money arising out of such Person's sale, lease or other disposition of goods or other property or rendition of services. Such term also includes, without limitation, credit card receivables and all credit card charge records and other evidences of credit card transactions. 1.3 "Additional Advances" shall mean the outstanding Obligations owed to Lender by HDPI consisting of the secured loans and advances, heretofore, now or hereafter made by Lender to HDPI pursuant to the Additional Advances Lending Formula, as provided in Section 2.1(b) hereof, on a revolving basis (including advances, repayments and readvances), subject to the terms and conditions of this Agreement and the other Financing Agreements. 1.4 "Additional Advances Lending Formula" shall have the meaning set forth in Section 2.1(b) hereof. 1.5 "Adjusted Cumulative Cash Flow" shall have the meaning set forth in Section 4.4(d) hereof. 1.6 "Aegis Mail Order Joint Venture" shall mean that certain joint venture established pursuant to that certain Agreement, dated as of September 7, 1993 by and between HDPI and Aegis Safety Holdings, Inc., and instruments and agreements to which HDPI or other members of the Affiliated Borrower Group are parties delivered thereunder or related thereto, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.7 "Affiliate" shall mean with respect to a specified Person, a partnership, corporation or any other Person which, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with such Person, and without limiting the generality of the foregoing, includes, with respect to a Person (a) any other Person which beneficially owns or holds twenty percent (20%) or more of any class of voting securities or other securities convertible into voting securities of such Person or beneficially owns or holds twenty percent (20%) or more of any other equity interests in such Person, (b) any other Person with respect to which such Person beneficially owns or holds twenty percent (20%) or more of any class of voting securities or other securities convertible into voting securities of such Person, or owns or holds twenty percent (20%) or more of the equity interests of the other Person, and (c) any director, officer or employee of such Person. Notwithstanding the foregoing, for so long as any one or more members of the NAR Group shall have the ability, through ownership of voting securities, by contract or otherwise, directly or indirectly, to elect a majority of the Board of Directors of any member of the Affiliated Borrower Group, each member of the NAR Group shall in any event be deemed an Affiliate - 3 - 9 of each Person which is a member of, or an Affiliate of any member of, the Affiliated Borrower Group pursuant to the preceding definition. For purposes of this definition, the term "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. 1.8 "Affiliated Borrower Group" shall mean each of Borrowers, Hanover and any other entity that is now or hereafter a direct or indirect Subsidiary of Hanover, other than a Non-Guarantor Subsidiary. 1.9 "Appraiser" shall mean Daley-Hodkin Appraisal Corporation, or such other appraisal firm acceptable to Lender. 1.10 "Assignment of Partnership Interest" shall mean that certain Collateral Assignment and Security Agreement re: General Partnership Interest, dated on or about May 5, 1993, made by HDMM to Lender, as the same now exists or may hereafter be amended, supplemented, modified, renewed, restated or replaced. 1.11 "Avon Mail Order Joint Venture" shall mean that certain joint venture established pursuant to that certain Test Agreement, dated August 21, 1991, by and between HSC and Avon Products, Inc., as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.12 "Banking Day" shall mean any day, other than Saturday or Sunday, when Lender and commercial banks are open in New York, New York and the place(s) where the bank account(s) designated by Borrowers and approved by Lender for the disbursement of loans hereunder are located. 1.13 "Bankruptcy Code" shall mean the United States Bankruptcy Code, being Title 11 of the United States Code as enacted in 1978, as the same may have heretofore been or may hereafter be amended, recodified, modified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.14 "Board" shall mean the Board of Governors of the Federal Reserve System. 1.15 "Borrowers" shall mean each of HDPI, Brawn, GBM, Gump's, TCSA, SDSA and Tweeds, and each of their respective successors and assigns. - 4 - 10 1.16 "Brawn" shall mean Brawn of California, Inc., a California corporation, its successors and assigns. 1.17 "Brawn Lending Sublimit" shall have the meaning set forth in Section 2.2(a) hereof. 1.18 "Collateral" shall have the meaning set forth in Section 4 hereof. 1.19 "Congress" shall mean Congress Financial Corporation, a California corporation, and its successors and assigns. 1.20 "Consolidated Net Worth" shall mean, as to any Person, at any time, in accordance with generally accepted accounting principles, as in effect from time to time consistently applied, on a consolidated basis for such Person and its Subsidiaries, the amount equal to the result obtained by taking total assets and subtracting therefrom total liabilities of such Person and its Subsidiaries. 1.21 "Consolidated Working Capital" shall mean, as to any Person, at any time, in accordance with generally accepted accounting principles as in effect from time to time, consistently applied, on a consolidated basis for such Person and its Subsidiaries, the amount equal to the difference between (a) the aggregate net book value of all assets of such Person and its Subsidiaries, on a consolidated basis, which would, in accordance with generally accepted accounting principles as in effect from time to time, consistently applied, be classified as current assets, calculating the book value of Inventory for this purpose on a first-in-first-out basis and (b) all Indebtedness (including, for this purpose, notwithstanding Section 1.74(c), trade accounts payable incurred in the ordinary course of business whether current or any number of days past due) of such Person and its Subsidiaries, on a consolidated basis, which would in accordance with generally accepted accounting principles as in effect from time to time, consistently applied, be classified as current liabilities; provided, however, that solely for purposes of calculating Consolidating Working Capital hereunder, the outstanding balance of the Revolving Inventory Loans and Additional Advances shall not be considered current liabilities. 1.22 "Credit Card Agreements" shall mean, individually and collectively, the Private Credit Card Agreement, the Third Party Credit Card Agreements, together with all agreements now or hereafter entered into between or among Lender and the parties to the Private Credit Card Agreement or Third Party Credit Card Agreements. 1.23 "Credit Facility" shall mean, individually and collectively, the Revolving Inventory Loans, the Letter of Credit Accommodations and the Additional Advances. - 5 - 11 1.24 "Cumulative Cash Flow" shall have the meaning set forth in Section 4.4(c) hereof. 1.25 "Customer Lists" shall mean the existing and future mailing and customer lists used in the direct mail marketing business of Borrowers, together with all software (including, without limitation, 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 and all other property useful or necessary to gain access to, transfer and fully utilize for all purposes, including, without limitation, analysis, cross-checking and compilation of, and the sale, rental or license of such mailing and customer lists, together with all updates and additions thereto, including, without limitation, all such mailing and customer lists which may be purchased, created or compiled in the future, but not including any customer lists owned by third parties who are not Affiliates of Borrower, which are leased to, or otherwise licensed for use by Borrowers, with permission of such third party owners. 1.26 "Customer List Escrow Agreement" shall mean the Escrow Agreement, dated May 5, 1993, as amended on July 9, 1993 and further amended on or about the date hereof, by and among Borrowers, Lender and a storage and escrow agent acceptable to Lender, providing for, among other things, the deposit in escrow of the Customer Lists with, and the storage of such Customer Lists by, such agent, the obligation of Borrowers to update and deposit in escrow updated Customer Lists periodically and for the storage and escrow agent to hold and store the updated Customer Lists, and the right of Lender to obtain from such agent possession of the Customer Lists, as such Escrow Agreement now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.27 "DM Advertising" shall mean D.M. Advertising, Inc., a New Jersey corporation, its successors and assigns. 1.28 "Early Termination Fee" shall have the meaning set forth in Section 9.1(f) hereof. 1.29 "Eligible Inventory" shall be determined by Lender from time to time, and generally shall consist of General Merchandise Inventory, Gump's Eligible Inventory, Home Furnishings Inventory, Men's Fashion Inventory, TCS Eligible Inventory, Tweeds Eligible Inventory and Women's Fashion Inventory of Borrowers which are first quality, finished goods recorded and carried in a computerized perpetual inventory accounting system, are located at Eligible Inventory Locations and held for resale in the ordinary course of the business of Borrowers. Inventory acquired by Borrowers under documentary letters of credit issued as a Letter of Credit Accommodation - 6 - 12 pursuant to Section 2.3 hereof and the Trade Financing Supplements of Borrowers, which would otherwise be determined by Lender to be Eligible Inventory in all respects, except that such Inventory is in transit to Eligible Inventory Locations, shall be considered Eligible Inventory, if documents of title covering such goods in form and substance satisfactory to Lender are in the possession of Lender or its agent which shall, for these purposes, include the bank issuing such Letter of Credit Accommodation if such issuer has been reimbursed or paid by Lender with respect to drawings paid by the issuer under such Letter of Credit Accommodation and the loan account of Borrower(s) requesting such Letter of Credit Accommodation has been charged for the amounts so reimbursed or paid by Lender to such issuer. Standards of eligibility may be fixed and revised from time to time solely by Lender in its exclusive judgment. In determining eligibility, Lender may, but need not, rely on reports and schedules of Inventory furnished to Lender by Borrowers, but reliance thereon by Lender from time to time shall not be deemed to limit Lender's right to revise standards of eligibility and amounts of Inventory deemed Eligible Inventory at any time. In general, except in Lender's discretion, Eligible Inventory shall exclude (a) packaging and shipping materials, (b) Inventory located at retail stores of Borrowers, other than Eligible Inventory of Gump's located at the Gump's Main Store, or Inventory located at the premises of third parties, except for Inventory which is otherwise Eligible Inventory and is located on the premises of any third parties which are Eligible Inventory Locations hereunder, (c) Inventory subject to any Mail Order Joint Venture or other joint venture or licensing agreement with a third party, (d) Inventory subject to a security interest or lien in favor of any third party, including, without limitation, any Inventory at any time, contrary to the provisions hereof, subject to a lien or security interest in favor of the Private Credit Card Purchaser or any of the parties to the Third Party Credit Card Agreements (the exclusion of any such Inventory from Eligible Inventory shall not limit or impair any other rights of Lender provided in this Agreement or the other Financing Agreements if any such liens or security interests exist), (e) bill and hold goods, (f) Inventory of Borrowers which is not subject to the first priority perfected security interest of Lender (subject to the provisions of Section 6.4), (g) damaged or defective goods, (h) Inventory purchased on consignment, and (i) merchandise that may otherwise be General Merchandise Inventory, Gump's Eligible Inventory, Home Furnishings Inventory, Men's Fashion Inventory, TCS Eligible Inventory, Tweeds Eligible Inventory or Women's Fashion Inventory but which is not among the product categories included in the calculation of Orderly Liquidation Value as set forth in the most current appraisal report delivered by the Appraiser to Lender as required under this Agreement. Any Inventory of Borrowers which Lender determines to be ineligible or unacceptable for lending purposes - 7 - 13 at any time shall nevertheless be and remain at all times part of the Collateral. 1.30 "Eligible Inventory Locations" shall mean (a) the fulfillment centers or warehouses owned or leased by Borrowers listed on Exhibit C attached hereto and the Gump's Main Store, and (b) additional fulfillment centers or warehouses first leased or owned by Borrowers after the date hereof, not located in the State of California, with respect to the acquisition of which Borrowers provide thirty (30) days prior written notice to Lender; provided, however, as to both (a) and (b), Eligible Inventory Locations shall not include the Gump's Main Store or any fulfillment center or warehouse owned or leased by Borrowers, unless Borrowers shall have delivered to Lender all instruments and documents required by Lender to perfect or maintain perfection of Lender's first priority security interest in and liens upon such Inventory, subject to no other liens or claims, except those, if any, expressly permitted hereunder, together with, and without limiting the foregoing, a written agreement in form and substance satisfactory to Lender, from each owner, operator and mortgagee of such location, as the case may be, pursuant to which such owner, operator or mortgagee, if required by Lender: (i) acknowledges the first priority security interest of Lender in such Inventory, (ii) agrees to waive any and all liens, claims and rights of distraint such owner, operator or mortgagee may, at any time, have against such Inventory, whether for unpaid rent, storage or otherwise, and (iii) agrees to permit Lender access to the Inventory, and the premises upon which such Inventory is located, for such time and upon such terms as Lender shall require to exercise its rights and remedies under this Agreement. 1.31 "Equipment" shall mean, as to any Person, all of such Person's now owned and hereafter acquired equipment and fixtures, of every kind and description, wherever located, including, without limitation, any and all equipment, telephones, telex and facsimile machines, machinery, computers, computer hardware, vehicles, tools, dies, jigs, furniture, trade fixtures and fixtures, all attachments, accessions and property now or hereafter affixed thereto or used in connection therewith, and all substitutions and replacements thereof that are owned by such Person. 1.32 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same now exists or may hereafter from time to time be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.33 "Essence Mail Order Joint Venture" shall mean that certain joint venture established pursuant to that certain Partnership Agreement, dated as of July 1, 1984, by and between - 8 - 14 HDMM and Essence Direct Mail Marketing, Inc. establishing Essence By Mail, a Pennsylvania general partnership, as amended by that letter agreement, dated July 10, 1992, by and between HDMM and Essence Direct Mail Marketing, Inc., as the same now exists or may hereafter be amended, supplemented, modified, renewed, restated or replaced. 1.34 "Event of Default" shall have the meaning set forth in Section 7.1 hereof. 1.35 "Excess Availability" shall mean, at any time, the amount, if any, as determined by Lender, by which: (i) the amount of the loans determined by Lender to be available to Borrowers pursuant to the Inventory Lending Formula and the Value of Eligible Inventory, and pursuant to the Additional Advances Lending Formula and the Market Value of the IMR Collateral then pledged to Lender (but not to exceed (A) in the case of loans determined by Lender to be available to HDPI and Brawn, the HDPI/Brawn Lending Sublimit and the Brawn Lending Sublimit, and (B) in the case of loans determined by Lender to be available to GBM and Gump's, the Gump's Lending Sublimits, and (C) in the case of loans determined to be available to TCSA and SDSA, the TCS Lending Sublimit, and (D) in the case of loans determined to be available to Tweeds, the Tweeds Lending Sublimit, and (E) in the case of loans determined by Lender to be available to Borrowers considered together, the Maximum Credit) exceeds (ii) the sum of: (A) the amount of all outstanding and unpaid Obligations of Borrowers, plus (B) the aggregate amount of all reserves established by Lender hereunder, plus (C) the aggregate amount of accounts payable of Borrowers more than sixty (60) days past due, plus (D) the aggregate amount of principal payments due on or prior to, or within thirty (30) days after, the date of calculation, (x) on Indebtedness for Borrowed Money of Borrowers, (y) on Indebtedness for Borrowed Money of any other member of the Affiliated Borrower Group, and (z) for dividends declared or otherwise mandatorily payable by any member of the Affiliated Borrower Group, whether or not Borrowers are obligated - 9 - 15 on such Indebtedness of, and dividends declared or payable by, such other member of the Affiliated Borrower Group (other than dividends declared and payable solely in capital stock of the Person declaring such dividend), but excluding (I) any such principal payments and dividends which are not and will not be permitted hereunder to be paid or funded directly or indirectly by or through Borrowers and (II) daily revolving loan repayments due to Lender and to be made through application of customer remittances and other sales proceeds in the ordinary course, plus (E) the amount of reductions in outstanding and unpaid Obligations of Borrowers required to be disregarded in the calculation of Excess Availability pursuant to the second sentence of Section 4.6(h) hereof. 1.36 "Existing Loan Agreement" shall mean the Amended and Restated Loan and Security Agreement dated as of July 9, 1993 among Lender, HDPI (then known as Hanover Direct Fulfillment, Inc.), Brawn, GBM and Gump's (then known as GSF Acquisition Corp.), acknowledged by the Guarantors which were, as of May 5, 1993, members of the Affiliated Borrower Group. 1.37 "Financing Agreements" shall mean this Agreement, the Trade Financing Supplements, the Supplemental Security Agreements, the Guarantees, including the IMR Limited Guarantee, the IMR Pledge Agreement, the QCC-IMR Subordination Agreement, the Customer List Escrow Agreement, the Third Party Credit Card Acknowledgments, the GECC Lien Clarification Agreement, the Intercompany Subordination Agreement (referred to in Section 3.1(d), the General Security Agreements and the Assignment of Partnership Interest, together with all supplements, agreements, documents and instruments, heretofore, now or at any time hereafter executed and/or delivered to Lender in connection therewith or otherwise relating to this Agreement, the Obligations of Borrowers or Guarantors or the Collateral or Guarantor Collateral, as this Agreement and the foregoing and such supplements, agreements, documents and instruments now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.38 "First Portion" with respect to the IMR Collateral shall have the meaning set forth in Section 4.4(a) hereof. - 10 - 16 1.39 "GBM" shall mean Gump's By Mail, Inc., a Delaware corporation, its successors and assigns. 1.40 "GECC" shall mean General Electric Capital Corporation, a New York corporation, its successors and assigns. 1.41 "GECC Collateral" shall mean the following, wherever located, unless excluded in the proviso below: (a) all GECC Accounts, including GECC Accounts purchased by Borrowers from GECC pursuant to the GECC Account Purchase Agreement, (b) the Written- off Accounts, (c) Account Documentation to the extent pertaining to the GECC Accounts and the Written-off Accounts, (d) guaranties, security interests, or other security held by or granted to Borrowers, any Lessee or GECC by the Retail Sale account debtor or a guarantor of the Retail Sale account debtor (other than Borrowers or any of their affiliates), as security for or guaranteeing payment or performance of, any of the GECC Accounts and the Written-off Accounts, (e) the GECC Reserve Balance, (f) all Borrowers' right, title and interest in and to any and all contracts, whether now or hereafter existing or acquired, with Lessees, but only the provisions of such contracts, if any, which allow Borrowers to charge such Lessees for the unpaid amount of GECC Accounts and the Written-off Accounts, (g) all Merchandise, the Retail Sale of which has given rise to a GECC Account or a Written-off Account, but only to the extent that such Merchandise is subject to a lien or security interest in favor of Borrowers and then only to the extent such Merchandise is not, and does not become, returned, repossessed or reclaimed goods in the possession or under the control of Borrowers or Lender or other Inventory of Borrowers, and (h) the proceeds of the foregoing in any form whatsoever not excluded in the proviso below; provided, however, that the following property of Borrowers, now owned or hereafter arising or acquired, shall not, in any event, be included in the term GECC Collateral and shall be part of the Collateral of Lender covered by this Agreement: (i) all returned, repossessed or reclaimed goods in the possession or under the control of Borrowers or Lender or other Inventory of Borrowers; (ii) all Customer Lists, mailing lists, catalogs, promotional materials, trademarks, trade names, copyrights or other intellectual property or the goodwill symbolized thereby; (iii) all accounts, contract rights, instruments or chattel paper which do not arise from the Retail Sale of Merchandise pursuant to a Credit Agreement or a Lender Credit Card Agreement and all general intangibles which do not consist of an obligation for the payment of money arising from the Retail Sale of Merchandise pursuant to a Credit Agreement or Lender - 11 - 17 Credit Card Agreement, except this clause (iii) shall not exclude the GECC Reserve Balance and the Written-off Accounts; (iv) all accounts, contract rights, instruments, chattel paper or general intangibles arising from the Retail Sale of Merchandise pursuant to a Credit Agreement or a Lender Credit Card Agreement which neither (A) are purchased by GECC from Borrowers for New Value, nor (B) are established or added by GECC for New Value under a Lender Credit Agreement, nor (C) constitute security upon which New Value has otherwise been given by GECC to Borrowers, in each case, pursuant to the GECC Account Purchase Agreement, except this clause (iv) shall not exclude the Written-off Accounts or accounts charged back to Borrowers by GECC or purchased by Borrowers pursuant to the GECC Account Purchase Agreement; (v) all accounts, contract rights, instruments, chattel paper or general intangibles arising from the Retail Sale of Merchandise under a Credit Agreement or a Lender Credit Card Agreement after non-renewal or any termination of the GECC Account Purchase Agreement, whether at maturity or by reason of default by Borrowers or otherwise, except for accounts, contract rights, instruments and chattel paper arising from the Retail Sale of Merchandise pursuant to a Credit Agreement or a Lender Credit Card Agreement, or general intangibles which consist of an obligation for the payment of money arising from the Retail Sale of Merchandise pursuant to a Credit Agreement or a Lender Credit Card Agreement, which accounts, contract rights, instruments, chattel paper or general intangibles are purchased by GECC from Borrowers for New Value, or established or added by GECC for New Value under a Lender Credit Card Agreement, or upon the security of which GECC has otherwise given New Value to Borrowers, in any case during the ten (10) day period following the effective date of non-renewal or any termination of the GECC Account Purchase Agreement, provided that, in respect of the underlying Retail Sales, GECC has, prior to such effective date of non-renewal or termination, given Borrowers its credit authorization; (vi) all accounts, contract rights, general intangibles, chattel paper or instruments generated pursuant to layaway plans; (vii) all Non-Tendered Accounts; and (viii) all products and proceeds, in whatever form, of the foregoing types or items of property described in subparagraphs (i) through (vii) above, other than the items or types of property expressly excepted therefrom. For purposes of the definition of GECC Collateral contained in this Section 1.41, the following terms shall have the following meanings: - 12 - 18 (a) "Account Documentation" shall mean any and all documentation of Borrowers relating to accounts, contract rights, instruments, chattel paper and, to the extent consisting of an obligation for the payment of money, general intangibles, in each case arising from the Retail Sale of Merchandise, including, without limitation, customer applications, Credit Agreements, Lender Credit Card Agreements, sales slips, delivery receipts, billing statements, checks and stubs, and all correspondence, memoranda, computer printouts, magnetic tapes, disks, or hardcopy formats, or any other computer-readable data transmissions or software related thereto, all other written material relating thereto, and any microfilm or microfiche copy of any of the foregoing. (b) "Borrowers" as used in the definition of GECC Collateral and in the other definitions set forth in this Section 1.41 and in the definition of GECC Lien Clarification Agreement, shall mean HDPI, Brawn, GBM and Gump's (but such definition shall not limit the definition of Borrowers set forth in Section 1.15 hereof for purposes of all other provisions of this Agreement and the other Financing Agreements). (c) "Credit Agreement" shall mean a credit agreement initially between Borrowers and an account debtor pursuant to which an account debtor may be permitted to purchase, from time to time, Merchandise from Borrowers or any Lessee on credit, whether or not there is a finance charge computed from time to time, and includes, without limitation, revolving charge plans, extended payment plans and interest free plans. (d) "GECC Account Purchase Agreement" shall mean that certain Account Purchase Agreement, dated as of December 21, 1992, as amended on or about the date hereof, by and among Borrowers, THC, Gump's Holdings and GECC, as the same may be further amended and/or restated from time to time. (e) "GECC Accounts" shall mean all Borrowers' accounts, contract rights, instruments and chattel paper arising from the Retail Sale of Merchandise pursuant to a Credit Agreement or a Lender Credit Card Agreement, and general intangibles which consist of an obligation for the payment of money arising from the Retail Sale of Merchandise pursuant to a Credit Agreement or a Lender Credit Card Agreement, whether now existing or hereafter coming into existence, which accounts, contract rights, instruments, chattel paper and general intangibles are purchased by GECC from Borrowers for New Value, or established or added by GECC for New Value under a Lender Credit Card Agreement, or upon the security of which GECC has otherwise given New Value to Borrowers, in any case so purchased, established, added or given pursuant to and during the term of the GECC Account Purchase Agreement or during the ten (10) day period following the effective date of non-renewal or any - 13 - 19 termination of the GECC Account Purchase Agreement, provided that, in respect of the underlying Retail Sales, GECC has, prior to such effective date of non-renewal or any termination of the GECC Account Purchase Agreement, given Borrowers its credit authorization. Anything contained herein to the contrary notwithstanding, in no event shall the "GECC Accounts" include any accounts, contract rights, instruments, chattel paper or general intangibles for the payment of money, which are not, following their creation, actually submitted by Borrowers to GECC, and accepted by GECC, for purchase by GECC under the terms of the GECC Account Purchase Agreement, whether or not the failure by Borrowers to actually so submit the same shall be a breach or default under the GECC Account Purchase Agreement (the "Non-Tendered Accounts"). (f) "GECC Reserve Balance" shall mean all credit balances and reserve balances now or hereafter due Borrowers from GECC, and other monies now or hereafter due Borrowers from GECC or held by GECC, to the extent of the terms of the GECC Account Purchase Agreement. (g) "Lender Credit Card Agreement" shall mean an agreement between GECC and an account debtor who is issued a card or device by GECC in connection with Borrowers' private label credit card programs giving such account debtor the privilege of purchasing Merchandise from Borrowers or any Lessee on credit to be paid in accordance with such agreement. (h) "Lessee" shall mean any person or entity who, now or hereafter, leases or licenses space in any of Borrowers' Stores and who has an agreement with Borrowers authorizing such person to sell Merchandise. (i) "Merchandise" shall mean those goods and services, including accessories and delivery services sold in conjunction therewith, sold at retail by Borrowers or any Lessee through its mail-order catalog business and in Stores to the general public for personal, family, or household use, and, without limitation, also includes returned, repossessed and reclaimed goods which are resold by Borrowers in a Retail Sale. (j) "New Value" shall have the meaning set forth in Section 547(a)(2) of the Bankruptcy Code. For purposes hereof, Reserve Adjustments shall be considered New Value, but any other amounts credited to the GECC Reserve Balance shall not be considered New Value. (k) "Reserve Adjustments" shall mean amounts credited to the GECC Reserve Balance under the terms of the GECC Account Purchase Agreement. - 14 - 20 (l) "Retail Sale" shall mean any sale by Borrowers or a Lessee in the ordinary course of Borrowers' business through Borrowers' direct mail catalogs or Stores (including "closeout" or outlet stores), but shall not include a sale to a liquidator or other bulk purchaser. (m) "Stores" shall mean Borrowers retail stores operated as of the date hereof or thereafter by Borrowers directly or through another Borrower or operating under the trade name "Hanover Direct" or "International Male" or "Gump's" or any other trade name hereafter used by Borrowers. (n) "Written-off Accounts" shall mean those accounts, chattel paper, instruments, and general intangibles consisting of an obligation for the payment of money, written-off by (1) HDPI or Brawn prior to December 21, 1992, which are subject to recovery efforts by GECC pursuant to Section 3.6 of the GECC Account Purchase Agreement as in effect on December 21, 1992, or (2) written-off by Gump's or GBM or their predecessors in interest prior to the date of the initial purchase by GECC of accounts from GBM and Gump's, which are subject to recovery efforts by GECC pursuant to Section 3.6 of the GECC Account Purchase Agreement as in effect on such date of the initial purchase by GECC of accounts from GBM and Gump's. 1.42 "GECC Lien Clarification Agreement" shall mean that certain Agreement by and between GECC and Lender, dated as of May 5, 1993 and amended on July 9, 1993, setting forth, among other things, the respective rights of each party to certain collateral of Borrowers, as the same now exists or may hereafter be amended, supplemented, renewed, restated or replaced. 1.43 "General Merchandise Inventory" shall mean all Inventory of Borrowers offered for sale in the Hanover House, Colonial Kitchen and Mature Wisdom Catalogs of HDPI, or such other catalogs created by any Borrower covering substantially similar merchandise which such Borrower has requested Lender to include in this Inventory category, which Inventory shall include, among other items, novelties and housewares, kitchen, cookware and storage items, and merchandise for senior citizens. 1.44 "General Security Agreement" shall have the meaning set forth in Section 4.3 hereof. 1.45 "Guarantee" or "Guarantees" shall have the meaning set forth in Section 4.2 hereof. 1.46 "Guarantor Collateral" shall have the meaning set forth in Section 4.3 hereof. 1.47 "Guarantors" shall mean, jointly and severally, individually and collectively (i) Hanover and each existing and - 15 - 21 future direct or indirect Subsidiary of Hanover which owns any assets in excess of Ten Thousand Dollars ($10,000), other than Non-Guarantor Subsidiaries, (ii) IMR as limited guarantor under the IMR Limited Guarantee, and (iii) each of their respective successors and assigns. 1.48 "Gump's" shall mean Gump's Corp., formerly known as GSF Acquisition Corp., a California corporation, its successors and assigns. 1.49 "Gump's Acquisition" shall mean the acquisition by GBM and Gump's, respectively, of the direct mail catalog and retail business and assets of each of Gump's, Inc., a California corporation, and Gump's, Inc., a Texas corporation, respectively, as provided under the Gump's Purchase Agreements, as in effect on July 9, 1993. 1.50 "Gump's Eligible Inventory" shall mean (a) in the case of GBM, all Inventory of GBM in the merchandise categories of gifts, tabletop, interior design, jewelry and fashion, offered for sale by GBM in its "Gump's" catalog, or such other catalogs created by GBM covering substantially similar merchandise which GBM has requested Lender to include in this Inventory category, and (b) in the case of Gump's, all Inventory of Gump's in the merchandise categories of gifts, tabletop, interior design and jewelry, offered for sale by Gump's at the Gump's Main Store. 1.51 "Gump's Holdings" shall mean Gump's Holdings, Inc., a Delaware corporation, its successors and assigns. 1.52 "Gump's Lending Sublimits" shall have the meaning set forth in Section 2.2(d) hereof. 1.53 "Gump's Main Store" shall mean the retail store operated by Gump's, known as Gump's San Francisco, located at 250 Post Street, San Francisco, California. 1.54 "Gump's Purchase Agreements" shall mean, individually and collectively, that certain Asset Purchase Agreement dated as of May 21, 1993 by and among Gump's (then known as GSF Acquisition Corp.), H&H and Gump's, Inc., a Texas corporation, and that certain Asset Purchase Agreement dated as of May 21, 1993 by and among GBM, H&H and Gump's, Inc., a California corporation, together with all bills of sale, assignments and other instruments, certificates, documents and agreements delivered thereunder or in connection therewith, as the same no exist or may be hereafter amended, supplemented, restated, or replaced. 1.55 "H&H" shall mean The Horn & Hardart Company, a Nevada corporation, its successors and assigns, including, without limitation, Hanover as its successor pursuant to the - 16 - 22 reorganization of the Affiliated Borrower Group described in Exhibit K attached to the Existing Loan Agreement. By reason of the consummation of such reorganization, references herein and in the other Financing Agreements to H&H shall, unless the context otherwise requires, mean and refer to Hanover Direct, Inc., a Delaware corporation, its successors and assigns. 1.56 "Hanover" shall mean Hanover Direct, Inc., a Delaware corporation, as successor by merger to the Horn & Hardart Company, a Nevada corporation, and The Hanover Companies, a Nevada corporation, previously referred to in the Existing Loan Agreement as "New HDI", its successors and assigns. 1.57 "Hanover Holdings" shall mean Hanover Holdings, Inc., a Delaware corporation, its successors and assigns. 1.58 "Hanover List" shall mean Hanover List Management, Inc., a New Jersey corporation, its successors and assigns. 1.59 "HDPI" shall mean Hanover Direct Pennsylvania, Inc., a Pennsylvania corporation, f/k/a Hanover Direct Fulfillment, Inc. and prior thereto known as Hanover Direct, Inc. and, prior thereto known as Hanover House Industries, Inc., having been referred to as HDI and a Borrower in the Loan and Security Agreement dated as of May 5, 1993, and the other Financing Agreements as in effect prior to July 9, 1993, and HDFI and a Borrower in the Amended and Restated Loan and Security Agreement, dated as of July 9, 1993, and the other financing Agreements as in effect prior to the date hereof, together with its successors and assigns. 1.60 "HDPI/Brawn Lending Sublimit" shall have the meaning set forth in Section 2.2(b) hereof. 1.61 "HDPI Pennsylvania IRB Financing" shall mean the Eight Million Dollar ($8,000,000) Industrial Revenue Bond financing arrangements of HDPI involving secured financing of the construction and development of a fulfillment center located in Conewago Township, Adams County, Pennsylvania, and the lease of such fulfillment center to HDPI, as such arrangements now exist or may hereafter be amended, supplemented, extended, renewed, restated or replaced. 1.62 "HDPI Securitization Program" shall mean the previous arrangements of the sale and securitization of certain Private Credit Card Receivables effected by HDPI (then known as Hanover Direct, Inc.) through certain of its and certain Guarantors' wholly-owned special purpose Subsidiaries and the Hanover Credit Card Trust 1989 A and the Hanover Credit Card Trust 1991 A. 1.63 "HDMM" shall mean Hanover Direct Mail Marketing, Inc., a Pennsylvania corporation, its successors and assigns. - 17 - 23 1.64 "HIM" shall mean H.I.M. Inc., a California corporation, its successors and assigns. 1.65 "Home Furnishings Inventory" shall mean all Inventory of Borrowers offered for sale in the Domestications and Tapestry catalogs of HDPI, or such other catalogs created by any Borrower covering substantially similar merchandise which such Borrower has requested Lender to include in this Inventory category, which Inventory shall include, among other items, sheets, towels and other such items for the house and decorative home products. 1.66 "HSC" shall mean Hanover Syndication Corp., a Pennsylvania corporation, its successors and assigns. 1.67 "IBJ Schroder" shall mean IBJ Schroder Bank & Trust Company, a New York banking corporation, its successors and assigns. 1.68 "IMR" shall mean Intercontinental Mining & Resources Incorporated, a British Virgin Islands corporation, its successors and assigns. 1.69 "IMR Collateral" shall mean the "Pledged Property", as defined in and from time to time pledged to Lender by IMR pursuant to the IMR Pledge Agreement and the instruments referred to or contemplated thereunder by and between one or more of IMR, IBJ Schroder and Lender, as collateral security for the IMR Limited Guarantee having a Market Value, as of May 5, 1993, of Ten Million Dollars ($10,000,000) and all rollovers, renewals, reinvestments and replacements thereof, except for interest and other income earned thereon to the extent released from the Pledged Property pursuant to the IMR Pledge Agreement. 1.70 "IMR Limited Guarantee" shall mean that certain Limited Guarantee and Waiver dated as of May 5, 1993 delivered by IMR with respect to the Obligations of HDPI and Brawn, by IMR in favor of Lender, as the same now exists or may hereafter be amended, supplemented, extended, renewed, restated or replaced. 1.71 "IMR Pledge Agreement" shall mean that certain Pledge and Security Agreement dated as of May 5, 1993 made by IMR in favor of Lender, granting Lender a first priority perfected security interest in the IMR Collateral, together with the rights and interests of Lender in and to the "Custodial Account" (as defined in such Pledge and Security Agreement), and including all agreements and acknowledgments in favor of Lender by IBJ Schroder or other agent or bailee for Lender in respect of the IMR Collateral, as the same now exist or may hereafter be amended, supplemented, renewed, restated or replaced. 1.72 "IMR Waiting Period" shall have the meaning set forth in Section 4.6(g) hereof. - 18 - 24 1.73 "Incipient Default" shall mean the occurrence of an event or existence of a condition which, upon the lapse of time or giving of notice or both, would constitute an Event of Default. 1.74 "Indebtedness" shall mean, as to any Person, any obligation or liability which is required by generally accepted accounting principles to be shown as part of liabilities on a balance sheet of such Person (other than trade accounts payable, incurred in the ordinary course of business that are sixty (60) days or less past due) and, in any event, shall also include: (a) obligations for borrowed money or capital leases; (b) obligations evidenced by bonds, debentures, notes or other similar instruments; (c) obligations to pay the deferred purchase price of property or for services (other than trade accounts payable incurred in the ordinary course of business that are sixty (60) days or less past due); (d) obligations or liabilities secured by a lien on any asset of the obligor thereunder, whether or not such obligation or liability is assumed; (e) contingent obligations (other than those incurred in the ordinary course of business); (f) obligations under or in connection with letters of credit; (g) obligations under acceptance facilities; and (h) any guarantees of any of the foregoing obligations. 1.75 "Indebtedness for Borrowed Money" shall mean, as to any Person, Indebtedness of the kind described in clauses (a), (b), (c), (f) or (g) described in the definition of Indebtedness, and guarantees thereof. 1.76 "Interest Rate" shall mean a rate of two percent (2%) per annum in excess of the Prime Rate or, after the occurrence and during the continuance of any Event of Default, and after termination or non-renewal hereof, a rate of four percent (4%) per annum in excess of the Prime Rate. In the event that the aggregate Revolving Inventory Loans, Additional Advances and Letter of Credit Accommodations to one or more Borrowers exceeds the amounts determined by Lender to be available pursuant to the Inventory Lending Formula or the Additional Advances Lending Formula, net of reserves and subject to the Brawn Lending Sublimit, the HDPI/Brawn Lending Sublimit, the Gump's Lending Sublimits, the TCS Lending Sublimit, the Tweeds Lending Sublimit and the Maximum Credit, in each case as applicable, the Interest Rate hereunder shall be four percent (4%) per annum in excess of the Prime Rate as to the amount of any such excess(es) (whether or not such excess(es) arise or are made with or without Lender's knowledge or consent and whether made before or after an Event of Default); provided, however, that if such excess(es) arise solely by virtue of the exercise of Lender's discretion under this Agreement to reduce the Inventory Lending Formula in the absence of an Event of Default which is continuing, the Interest Rate hereunder shall be two percent (2%) per annum greater than the Prime Rate as to the amount of any such excess(es) for a period - 19 - 25 of five (5) days after Lender notifies the affected Borrowers of such discretionary reduction in the Inventory Lending Formula and, at and after the expiration of such period of five (5) days, the Interest Rate hereunder shall be four percent (4%) per annum in excess of the Prime Rate as to the amount of any such excess(es) then remaining. The Interest Rate shall increase or decrease by an amount equal to each increase or decrease, respectively, in the Prime Rate, effective on the first day of the month after any change in the Prime Rate, based on the Prime Rate in effect on the last day of the month in which any such change occurs. 1.77 "Inventory" shall mean, as to any Person, all of such Person's raw materials, work-in-process, finished goods and all other inventory of any kind, nature or description, wherever located, whether now owned or hereafter existing or acquired by such Person, including, without limitation, any parts or accessories, all wrapping, packaging, advertising and shipping materials, and all other goods used or consumed in the business of such Person, all labels and other devices, names or marks affixed to or to be affixed thereto for purposes of identifying the same or the seller or manufacturer thereof and all of such Person's right, title and interest therein and thereto. 1.78 "Inventory Lending Formula" shall have the meaning set forth in Section 2.1(a) hereof. 1.79 "IRC" shall mean the Internal Revenue Code of 1986, as the same now exists or may from time to time hereafter be amended, modified, recodified or supplemented, together with all rules, regulations and interpretations thereunder or related thereto. 1.80 "June 30 Excess" shall have the meaning set forth in Section 4.5 hereof. 1.81 "Leavitt" shall mean Leavitt Advertising Agency, Inc., a New York corporation, its successors and assigns. 1.82 "Lender" shall mean Congress Financial Corporation, a California corporation, its successors and assigns. 1.83 "Letter of Credit Accommodations" shall have the meaning set forth in Section 2.3(a) hereof. 1.84 "Mail Order Joint Venture" shall mean one or more Persons, not Affiliate(s) of Borrowers, engaged in a joint undertaking with Borrowers or their Subsidiaries, including, without limitation, a joint venture, a partnership, business trust or other jointly owned and controlled entity for the purpose of jointly engaging in research, marketing and development of the mail order business of Borrowers, with respect - 20 - 26 to products or markets not previously sold or engaged in by Borrowers at the time of formation, including, without limitation, the Aegis Mail Order Joint Venture, Avon Mail Order Joint Venture and the Essence Mail Order Joint Venture. 1.85 "Market Value" when used with reference to the IMR Collateral, or any portion thereof, shall mean the aggregate market price at which a buyer would buy the IMR Collateral, or such portion thereof, as such aggregate market price is quoted at a given time to Lender by IBJ Schroder, any other bank or broker-dealer. 1.86 "Maximum Credit" shall mean the aggregate principal amount of Fifty-Two Million Five Hundred Thousand Dollars ($52,500,000). 1.87 "Men's Fashion Inventory" shall mean all Inventory of Borrowers offered for sale in the International Male, Undergear, Outtakes, H.I.M. and American View catalogs of Brawn, or such other catalogs created by any Borrower covering substantially similar merchandise which such Borrower has requested Lender to include in this Inventory category, including, without limitation, men's activewear and fashion underwear, discount men's fashions, contemporary men's fashions and women's fashion wear offered in such catalogs. 1.88 "NAR" shall mean North American Resources Limited, a British Virgin Islands corporation, its successors and assigns. 1.89 "NAR Group" shall mean NAR and each Person who is now or hereafter controlled by NAR, including, but not limited to, Westmark, Quadrant Group, IMR, QCC and their successors and assigns. 1.90 "9.25% Guarantors" shall mean those Subsidiaries of Hanover and any other entity which now or hereafter has guaranteed payment or performance of the obligations of THC or Hanover (as successor to THC) under the 9.25% Notes. 1.91 "9.25% Note Purchaser" shall mean Sun Life Insurance Company of America, its successors and assigns. 1.92 "9.25% Notes" shall mean the aggregate of $20,000,000 in principal amount of 9.25% Senior Subordinated Notes of THC due August 1, 1998, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, exchanged, restated or replaced. 1.93 "9.25% Subordination Agreement" shall mean the Subordination Agreement dated on or about August 17, 1993 between Lender and the 9.25% Note Purchaser and acknowledged by the Indenture Trustee (as defined therein), THC and the 9.25% - 21 - 27 Guarantors, as the same may now exist or may hereafter be amended, modified, supplemented, restated or replaced. 1.94 "Non-Guarantor Subsidiary" shall mean (a) the Restaurant Business Subsidiaries and (b) any direct Subsidiary of THC or H&H existing as of May 5, 1993 that, as of that date, had assets less than Ten Thousand Dollars ($10,000). In addition, Non-Guarantor Subsidiaries shall mean any Subsidiary of Hanover that: (i) is formed or acquired after the date hereof on not less than thirty (30) days prior written notice to Lender that is received by Lender prior to the occurrence of an Event of Default or Incipient Default which is continuing at the time of receipt of such notice; (ii) is not a direct or indirect Subsidiary of or in the same business as any Borrower or any Guarantor, other than Hanover, and is not a Mail Order Joint Venture or a party thereto; (iii) has been formed or acquired without any direct or indirect investment, whether in cash or in property, other than capital stock of any member of the Affiliated Borrower Group upon which no dividends are paid or payable (except dividends paid or payable in additional capital stock similarly restricted as to dividends), by Borrowers or any other member of the Affiliated Borrower Group and without the incurrence of any Indebtedness in connection with such acquisition, or the business to be engaged in by such Subsidiary, directly or indirectly, by any of Borrowers or any other member of the Affiliated Borrower Group; (iv) engages in no transaction, direct or indirect, with Borrowers or any other member of the Affiliated Borrower Group, other than such Subsidiary's declaration and payment to members of the Affiliated Borrower Group of dividends in its own capital stock, or the payment by such Subsidiary to Borrowers or any other member of the Affiliated Borrower Group, of overhead and other administrative charges in the ordinary course of business; and (v) obtains financing, if any, on a completely stand alone basis, i.e., not requiring any direct or indirect guarantee or other form of financial support or credit enhancement from Borrowers or any other member of the Affiliated Borrower Group, other than the non-recourse pledge of the capital stock of another Non-Guarantor Subsidiary and cross-corporate guaranties between or among Non-Guarantor Subsidiaries formed or acquired at the same time as part of a single transaction upon the consummation of which such cross-guaranties are executed in favor of the provider of such stand alone financing; and provides - 22 - 28 Lender with a thirty (30) day right of first refusal to elect to provide financing to such Subsidiary on the same terms as set forth in any bona fide commitment proposal or offer solicited or received by such Subsidiary or an Affiliate thereof. If Lender elects to exercise its right of first refusal, by written notice, within such thirty (30) day period, of Lender's willingness to provide such financing on such terms, the Five Hundred Dollar ($500) per person per diem field examination charges of Lender plus all out-of- pocket expenses of Lender incurred in respect of its initial field work or other preliminary review and due diligence shall be payable by such Subsidiary or charged to Borrowers' loan accounts hereunder whether or not the transaction closes. If Lender does not exercise its right of first refusal, such charges and expenses of Lender shall not be charged to such Subsidiary or Borrowers' loan accounts hereunder. Any Subsidiary of Hanover formed or acquired after the date hereof which at any time does not meet or no longer meets any of the foregoing requirements shall not be considered, for purposes hereof, or if initially so considered, shall lose its status as, a Non- Guarantor Subsidiary and shall be subject to all of the requirements set forth herein with respect to Subsidiaries which are members of the Affiliated Borrower Group. 1.95 "Obligations" shall mean, as to any Person, any and all now existing and hereafter arising obligations, liabilities and Indebtedness of such Person to Lender of every kind and description, however evidenced, whether direct or indirect, absolute or contingent, joint or several, secured or unsecured, due or not due, primary or secondary, liquidated or unliquidated, whether arising before, during or after the initial or any renewal term hereof or any other Financing Agreement, or after the commencement of any bankruptcy, reorganization, insolvency, receivership or similar proceeding with respect to such Person under the Bankruptcy Code or any similar statute, whether arising directly or acquired by Lender from any other Person, conditionally or as collateral security, by assignment, merger with any other Person, assumption, subrogation or otherwise (excluding participations or interests of Lender in the obligations of such Person to others), whether arising under this Agreement, the other Financing Agreements, by operation of law or otherwise and whether incurred by such Person as principal, surety, endorser, guarantor or otherwise. Without limiting the generality of the foregoing, "Obligations" shall include: (a) such Person's liability to Lender for all balances owing to Lender in any account maintained on Lender's books under this Agreement, the other Financing Agreements or under any other agreement or arrangement now or hereafter entered into between such Person and Lender, (b) such Person's liability to Lender as maker or endorser of any promissory note or other instrument for the payment of money, (c) such Person's liability to Lender under any instrument of guaranty or indemnity, or arising under or with - 23 - 29 respect to any letter of credit, acceptance, instrument, guarantee, endorsement or undertaking which Lender may make, endorse or issue to others for the account of such Person, (d) Indebtedness owing by such Person to Lender or to present or future parents, subsidiaries, affiliates or Participants of or with Lender arising under or in connection with any of the foregoing types of agreements, instruments or transactions, and (e) all principal, interest, financing charges, facility fees, unused line fees, servicing fees, early termination and other fees, commissions and expenses payable or reimbursable to Lender, including, but not limited to, reasonable attorneys', paralegals' and accountants' fees and disbursements, chargeable to such Person and due from such Person under this Agreement, the other Financing Agreements, or under any other agreement or arrangement which was heretofore or may be now or hereafter entered into between such Person and Lender. Unless the context otherwise requires, the term "Obligations" refers to Obligations of Borrowers. 1.96 "Orderly Liquidation Value" shall mean, as to Eligible Inventory, the amount of money that could be realized in cash if such Inventory were sold within a six (6) month period in an orderly liquidation sale, as set forth in an appraisal report addressed to Lender from the Appraiser or upon which Lender is entitled to rely pursuant to written authorization from the Appraiser. 1.97 "Other Borrower Financing Agreements" shall mean all secured financing arrangements of Borrowers with existing lenders or other financing entities, other than Lender, including, without limitation, the QCC Credit Agreement and the HDPI Pennsylvania IRB Financing. 1.98 "Participant" shall mean any Person which at any time participates with Lender in respect of the Revolving Inventory Loans, the Additional Advances, the Letter of Credit Accommodations or other Obligations of Borrowers or any portion thereof. 1.99 "Person" or "person" shall mean an individual, a partnership, a corporation (including a business trust), a joint stock company, a trust, an unincorporated association, a joint venture, or other entity or a government or any agency, instrumentality or political subdivision thereof. 1.100 "Pledged Intercompany Note" shall mean the intercompany note issued to Hanover by any wholly-owned Subsidiary of Hanover formed after the date hereof to evidence such new Subsidiary's Indebtedness for intercompany loans, not to exceed $6,000,000 in the aggregate, funded by Hanover to such Subsidiary with a portion of the proceeds of the issuance of the 9.25% Notes, to be used for the purposes referred to in the first - 24 - 30 sentence of Section 6.27(b) hereof. The Pledged Intercompany Note and the proceeds thereof shall not be part of the "Collateral" under the General Security Agreements previously executed and delivered by THC and H&H. 1.101 "Prime Rate" shall mean the prime commercial interest rate from time to time publicly announced by Philadelphia National Bank, incorporated as CoreStates Bank, N.A., Philadelphia, Pennsylvania, whether or not such announced rate is the best rate available at such bank. 1.102 "Private Credit Card Purchaser" shall mean GECC, its successors and assigns, or such other successor or replacement purchaser under the Private Credit Card Agreement. 1.103 "Private Credit Card Agreement" shall mean (a) that certain Account Purchase Agreement, dated as of December 21, 1992, as amended on July 12, 1993, by and among HDPI, Brawn, GBM, Gump's, THC, Gump's Holdings and GECC, as in effect on the date hereof, and (b) any extended, renewal or replacement Private Credit Card Receivables purchase arrangement with GECC or a Private Credit Card Purchaser who replaces or succeeds GECC on terms acceptable to Lender as set forth in agreements in form and substance satisfactory to Lender. 1.104 "Private Credit Card Programs" shall mean the Hanover Shop at Home Card of HDPI and the International Male Card of Brawn, or such other private credit card issued by Borrowers and approved for inclusion in this definition by Lender, in writing, in Lender's sole discretion. 1.105 "Private Credit Card Receivables" shall mean all Accounts representing Borrowers' rights to payment for Inventory sold and delivered to customers who have purchased such goods under the Private Credit Card Programs, together with all finance charges and late fees payable therewith, and the proceeds thereof, but excluding returned, repossessed or reclaimed goods relating to such Accounts and excluding all other Inventory of Borrowers. 1.106 "Purchase Money Lien" shall mean the liens meeting the requirements in Section 6.4(d) hereof. 1.107 "QCC" shall mean Quadrant Capital Corporation, a Delaware corporation, f/k/a, Intercontinental Mining & Resources Limited, and its successors and assigns. 1.108 "QCC Credit Agreement" shall mean that certain Credit Agreement in the original principal amount of Thirty Million Dollars ($30,000,000), dated July 8, 1991, by and among HDPI, Ring, Brawn, THC, Leavitt and QCC, and instruments issued and agreements made in connection therewith, as modified by the - 25 - 31 Reimbursement Agreement and the Release and Reassignment Agreement, both dated as of May 5, 1993, as the same now exists or may hereafter be amended, supplemented, extended, renewed, restated or replaced. 1.109 "QCC-IMR Subordination Agreement" shall mean that certain Subordination Agreement dated as of May 5, 1993 delivered by QCC and IMR in favor of Lender in respect of the QCC-IMR Subordinated Obligations and other matters, as the same now exists or may hereafter be amended, supplemented, extended, restated or replaced. 1.110 "QCC-IMR Subordinated Obligations" shall mean (a) the unpaid balance of outstanding letter of credit obligations and reimbursement obligations with respect thereto, and all other obligations, liabilities or indebtedness of Borrowers or Guarantors to QCC (or its Affiliates) pursuant to or in connection with the QCC Credit Agreement and transactions thereunder, which remain outstanding on the date hereof, or which arise hereafter and (b) all obligations, liabilities or indebtedness of Borrowers or Guarantors to IMR in connection with the IMR Limited Guarantee and the IMR Pledge Agreement. 1.111 "Quadrant Group" shall mean Quadrant Group Limited, a Bahamian corporation, its successors and assigns. 1.112 "Restaurant Business Subsidiaries" shall mean, the Subsidiaries of Hanover listed on Exhibit B-3 attached hereto. 1.113 "Renewal Date" shall have the meaning set forth in Section 9.1(a) hereof. 1.114 "Responsible Officer" shall mean any one or more of the following: the President, Chief Financial Officer, Treasurer, Controller, Secretary or General Counsel of Hanover or any Borrower. 1.115 "Revolving Inventory Loans" shall mean the outstanding Obligations owed to Lender by Borrowers consisting of the secured loans and advances, heretofore, now or hereafter made by Lender to Borrowers as provided for in Section 2.1(a) hereof, on a revolving basis (involving advances, repayments and readvances), subject to the terms and conditions of this Agreement and the other Financing Agreements. 1.116 "Ring" shall mean Ring Response Ltd., an Illinois corporation, its successors and assigns. 1.117 "SEC" shall mean the United States Securities and Exchange Commission. - 26 - 32 1.118 "Second Portion" with respect to the IMR Collateral shall have the meaning set forth in Section 4.4(b) hereof. 1.119 "Skandia" shall mean Skandia Down, Inc., a Delaware corporation, its successors and assigns. 1.120 "Skandia Downsales" shall mean Skandia Downsales, Inc., a Wisconsin corporation, its successors and assigns. 1.121 "SDSA" shall mean SDSA, Inc., a California corporation, its successors and assigns. 1.122 "Specified Action" shall mean the meaning set forth in Section 9.1(g) hereof. 1.123 "Subsidiary" or "subsidiary" shall mean, as to any Person, any corporation, association or organization, active or inactive, as to which fifty percent (50%) or more of the outstanding voting stock or shares or interests shall now or hereafter be owned or controlled, directly or indirectly, by such Person or any direct or indirect Subsidiary of such Person, but excluding any such corporation, association, or organization which is itself a Mail Order Joint Venture, unless more than fifty percent (50%) of the outstanding voting stock or shares, or interests are now or hereafter owned or controlled, directly or indirectly, by such Person or any direct or indirect Subsidiary of such Person. 1.124 "Supplemental Security Agreements" shall mean (a) those certain Trademark Collateral Assignment and Security Agreements, (i) dated May 5, 1993, made by Brawn and THC, (ii) dated July 9, 1993 made by Gump's, and (iii) dated on or about the date hereof made by TCSA and Skandia, and (b) the Collateral Assignment of Trademarks (Security Agreement) dated as of May 27, 1992 between Tweeds and Lender, confirmed pursuant to a letter by Tweeds in favor of Lender dated on or about the date hereof, as the case may be, in favor of Lender, and instruments thereunder, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.125 "Tax Sharing Agreement" shall mean that certain Tax Sharing Agreement, dated as of February 1, 1987, by and among H&H, THC and HDPI, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.126 "TCSA" shall mean TCSA, Inc., a Wisconsin corporation, its successors and assigns. 1.127 "TCSA-Delaware" shall mean TCSA, Inc., a Delaware corporation, formerly known as TWD Acquisition Corp., its successors and assigns. - 27 - 33 1.128 "TCS Acquisition" shall mean the acquisition by H&H and TCSA-Delaware and its Subsidiaries of the direct mail catalog and retail business and assets of the sellers under and pursuant to the TCS Purchase Agreements, as in effect on August 26, 1993. 1.129 "TCS Factory" shall mean The Company Factory, Inc., a Wisconsin corporation, its successors and assigns. 1.130 "TCS Eligible Inventory" shall mean: (a) in the case of TCSA, all Inventory of TCSA in the merchandise categories of comforters, blankets, sheets, towels and outer garments offered for sale by TCSA in its "The Company Store" catalog, or such other catalog created by TCSA covering substantially similar merchandise which TCSA has requested Lender to include in this Inventory category, and (b) in the case of SDSA, all finished goods Inventory of SDSA and Skandia in the merchandise category of down comforters, offered for sale by SDSA through retail stores operated by Skandia or by franchisees of Skandia or through catalogs created by SDSA and/or TCSA covering substantially similar merchandise which SDSA has requested Lender to include in this Inventory category, and (c) in the case of TCSA, raw materials for such finished goods of TCSA and SDSA which are and continue to be acceptable to Lender for lending purposes and, in any event, excluding work-in-process, components which are not part of finished goods, packaging, labelling, shipping materials and supplies. 1.131 "TCS Lending Sublimit" shall have the meaning set forth in Section 2.1(e) hereof. 1.132 "TCS Office" shall mean The Company Office, Inc., a Wisconsin corporation, its successors and assigns. 1.133 "TCS Manufacturing" shall mean The Company Manufacturing, Inc., a Wisconsin corporation, its successors and assigns. 1.134 "TCS Purchase Agreements" shall mean that certain Order Confirming Sale entered on August 20, 1993 by the U.S. Bankruptcy Court for the Western District of Wisconsin in the jointly administered Chapter 11 cases involving The Company Store, Inc. and certain affiliates as debtors-in-possession (No. 92-21810-11), together with all documents, agreements and instruments delivered thereunder or in connection therewith relating to the acquisition of assets provided pursuant to said Order, including the intercompany transfers of such assets prior to the date hereof to the Subsidiaries of TCSA-Delaware, as the same now exist or may hereafter be amended, supplemented, restated or replaced. 1.135 "Term" shall have the meaning set forth in Section 9.1(a) hereof. - 28 - 34 1.136 "THC" shall mean The Hanover Companies, a Nevada corporation, its successors and assigns, including without limitation, Hanover pursuant to the reorganization of the Affiliated Borrower Group described in Exhibit K to the Existing Loan Agreement. By reason of the consummation of such reorganization, references herein and in the other Financing Agreements to THC shall, unless the context otherwise requires, mean and refer to Hanover Direct, Inc., a Delaware corporation, its successors and assigns. 1.137 "Third Party Credit Card Acknowledgments" shall mean those certain letter agreements addressed to the parties to the Third Party Credit Card Agreements setting forth such parties' acknowledgment of the security interest of Lender in the monies due and to become due, including, credits and reserves, under the Third Party Credit Card Agreements, and such parties' agreement to transfer to the blocked accounts established pursuant to Section 8.2 hereof, all monies due and other funds payable to or for the account of Borrowers under the Third Party Credit Card Agreements, as the same now exist or may hereafter be amended, supplemented, modified, renewed, restated or replaced. 1.138 "Third Party Credit Card Agreements" shall mean all agreements now or hereafter entered into by Borrowers with any Third Party Credit Card Issuer or any servicing or processing agent or any factor or financial intermediary in order to facilitate, service and manage the credit authorization, billing transfer and/or payment procedures with respect to Borrowers' sales transactions involving credit card purchases by customers using credit cards issued by any Third Party Credit Card Issuer. Such term includes, but is not limited to the following, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced: (a) the Member Agreement, dated April 13, 1993, presently by and among Litle & Company, Inc., First U.S.A. Merchant Services, Inc. (as assignee of National Processing Company, Inc. and First National Bank Louisville) and HDPI, as the same may be supplemented and amended with respect to the addition of GBM, Gump's, TCSA, SDSA and/or Tweeds; (b) the Independent and Chain Direct Marketing Establishment Agreement, dated January 29, 1991, between American Express Travel Related Services Company, Inc. and HDPI, as amended by the Direct Marketing Addendum, dated January 29, 1991, as the same may be supplemented and amended with respect to the addition of GBM, Gump's, TCSA, SDSA and/or Tweeds; (c) the Diners Club Establishment Application and Agreement, dated effective April 27, 1990, by and between HDPI and Citicorp Diners Club Inc., supplementing and replacing all prior agreements between HDPI (or its trade names) and Citicorp - 29 - 35 Diners Club Inc. covering individual catalogs of HDPI, as the same may be supplemented and amended with respect to the addition of GBM, Gump's, TCSA, SDSA and/or Tweeds; and (d) the Merchant Services Agreement, made as of October 14, 1986, by and between Discover Card Services, Inc. and HDPI, as the same may be supplemented and amended with respect to the addition of GBM, Gump's, TCSA, SDSA and/or Tweeds. 1.139 "Third Party Credit Card Issuer" shall mean an entity or organization which issues or whose members issue credit cards, including, without limitation, MasterCard and VISA bank credit cards, and American Express, Discover, Diners Club and Carte Blanche non-bank credit cards. 1.140 "Third Party Credit Card Receivables" shall mean all Accounts representing the Borrowers' rights to payment for Inventory sold and delivered to customers who have purchased such goods using a credit card issued by a Third Party Credit Card Issuer, together with the proceeds thereof, but excluding returned, repossessed or reclaimed goods relating to such Accounts and excluding other Inventory of Borrowers. 1.141 "Trade Financing Supplements" shall mean the Trade Financing Agreement Supplements to this Agreement, (i) dated as of May 5, 1993 executed and delivered by HDPI and Brawn in favor of Lender, (ii) dated July 9, 1993 executed and delivered by GBM and Gump's in favor of Lender and (iii) dated on or about the date hereof executed and delivered by each of Tweeds, TCSA and SDSA in favor of Lender, and all applications and agreements in connection therewith, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.142 "Tradename" shall have the meaning set forth in Section 6.1 hereof. 1.143 "TW Acquisitions" shall mean TW Acquisitions, Inc., a Delaware corporation, its successors and assigns. 1.144 "Tweeds Acquisition" shall mean the acquisition by TW Acquisitions of all of the issued and outstanding capital stock of Tweeds as provided under the Tweeds Purchase Agreements, as in effect on September 30, 1993. 1.145 "Tweeds Eligible Inventory" shall mean all Inventory of Tweeds in the merchandise categories of men's and women's apparel offered for sale by Tweeds in its "Tweeds" catalog or such other catalogs created by Tweeds covering substantially similar merchandise which Tweeds has requested Lender to include in this Inventory category. - 30 - 36 1.146 "Tweeds Lending Sublimit" shall have the meaning set forth in Section 2.2(f) hereof. 1.147 "Tweeds Loan Agreement" shall have the meaning set forth in the Recitals hereto. 1.148 "Tweeds Purchase Agreements" shall mean that certain Stock Purchase Agreement, dated as of September 7, 1993, as amended by Amendment No. 1 thereto dated as of September 30, 1993, among the existing stockholders of Tweeds, Tweeds, H&H and TW Acquisitions, together with the agreements and instruments to be delivered thereunder or in connection therewith, as the same now exist or may hereafter be amended, supplemented, restated or replaced. 1.149 "UCC" shall mean the Uniform Commercial Code as from time to time in effect in the State of New York. 1.150 "Union Trade Financing Arrangements" shall mean the prior financing arrangements pursuant to that certain Trade Financing Agreement in the original principal amount of Three Million Two Hundred Fifty Thousand Dollars ($3,250,000), dated as of June 11, 1990, by and between Brawn and Union Bank, and all instruments issued and agreements made in connection therewith. 1.151 "Value" shall mean, as determined by Lender, with respect to Eligible Inventory, the lower of (a) cost computed on a first-in-first-out basis in accordance with generally accepted accounting principles consistently applied (excluding, in any event, indirect costs such as purchasing, warehousing, distribution, but including incoming freight costs) or (b) market value, as determined by Lender. 1.152 "Voluntary Termination Notice" shall have the meaning given in Section 9.1(g). 1.153 "Westmark" shall mean Westmark Holdings Limited, a British Virgin Islands corporation, its successors and assigns. 1.154 "Women's Fashion Inventory" shall mean all Inventory of Borrowers offered for sale in the Premiere Editions, The Chelsea Collection, Night'N Day Intimates, Fashion Galaxy, Essence, Silhouettes, Simply Tops and Concepts catalogs of HDPI, or such other catalogs created by any Borrower covering substantially similar merchandise which such Borrower has requested Lender to include in this Inventory category, including, without limitation, moderately priced women's fashions, discount women's fashions, contemporary women's fashions, contemporary apparel for larger sized women and unique women's apparel. - 31 - 37 1.155 "York Fulfillment" shall mean York Fulfillment Company, Inc., a Pennsylvania corporation, its successors and assigns. 1.156 Accounting Terms All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles from time to time in effect, consistently applied, except as otherwise stated herein. To the extent generally accepted accounting principles require a change in accounting practices, references herein to "generally accepted accounting principles from time to time in effect, consistently applied", shall include such required changes. 1.157 Other Defined Terms The words "hereof", "herein", "hereunder", "this Agreement" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. References to "this Agreement" shall mean, unless the context otherwise requires, the Existing Loan Agreement as amended and restated hereby, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, whether or not expressly so stated. Whether or not expressly so provided herein on a separate amendment, all references to the "Loan Agreement" or the "Loan and Security Agreement" or words of similar import contained in the Supplemental Security Agreements or other Financing Agreements shall mean this Agreement and references therein to the respective parties to and borrowers under the "Loan Agreement" or the "Loan and Security Agreement" or words of similar import are each hereby amended to refer to the respective parties and Borrowers under this Agreement. 1.158 Uniform Commercial Code Definitions All terms not specifically defined herein which are defined in the UCC shall have the meanings as defined in the UCC. 1.159 Interpretation For purposes of this Agreement, unless the context otherwise requires, all other terms hereinbefore or hereinafter defined, including but not limited to those terms defined in the recitals hereto, shall have the meanings herein assigned to such terms. All references to Borrowers, Guarantors and other Persons pursuant to the definitions set forth in the recitals hereto shall include their respective successors and assigns. All references to Borrowers and Guarantors shall mean each of them, - 32 - 38 and all of them, jointly and severally, individually and collectively. All references to any term in the plural shall include the singular and all references to any term in the singular shall include the plural. SECTION 2. CREDIT FACILITY 2.1 Revolving Inventory Loans; Additional Advances (a) 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 to each Borrower, at such Borrower's request, of up to fifty percent (50%) of the Value of such Borrower's Eligible Inventory, or such greater or lesser percentages thereof as Lender shall, in its sole discretion, determine from time to time (the "Inventory Lending Formula"). Without limiting the foregoing, the Inventory Lending Formula may be adjusted downward based upon any adverse change, individually or in the aggregate, in the Orderly Liquidation Values or mix of Eligible Inventory in the respective categories of Eligible Inventory, and any such downward adjustment made for such reason(s) shall not be considered solely discretionary for purposes of Sections 1.76 and 2.6(b). (b) Additional Advances. Subject to, and upon the terms and conditions contained herein, Lender shall, from time to time, make Additional Advances to HDPI, at HDPI's request, of up to one hundred percent (100%) of the Market Value, not greater than Ten Million Dollars ($10,000,000), of the IMR Collateral then pledged to Lender pursuant to the IMR Pledge Agreement (the "Additional Advances Lending Formula"). Without limiting the foregoing, the Additional Advances outstanding at any time shall not exceed the balance of the IMR Collateral pledged to Lender less the aggregate amounts reduced or released pursuant to Section 4.4, 4.5 or 4.6 hereof or otherwise (other than interest or other income released pursuant to the IMR Pledge Agreement). (c) Borrowing Procedures. For each Revolving Inventory Loan requested by Borrowers and each Additional Advance requested by HDPI hereunder, a Responsible Officer or other authorized Person of such respective Borrower(s) shall give Lender telephonic notice of its request not later than 11:00 a.m., New York, New York time, on the Banking Day on which the disbursement is requested to be made. Lender shall not be responsible for determining whether the Person making the telephonic request purportedly on behalf of a Borrower is a Responsible Officer or other authorized Person of such Borrower. Lender may, but shall have no duty to, require borrowing requests to be made or confirmed in writing. Lender shall acknowledge it - 33 - 39 has received a borrowing request by issuing a request verification number which Borrowers shall retain in order to verify and track Borrowers' requests for Revolving Inventory Loans and Additional Advances. (d) Approval and Disbursement of Loans. Upon Lender's receipt of a borrowing request pursuant to Section 2.1(c) hereof, Lender shall determine whether the Borrower(s) making the request for a Revolving Inventory Loan or an Additional Advance is entitled to such loan, based upon and subject to all of the other terms and conditions hereof. If Lender determines that the Borrower(s) making the request is not so entitled hereunder to a requested loan, Lender shall so advise such Borrower(s) by telephonic or other notice by no later than 2:00 p.m. New York, New York time on the same Banking Day that Lender receives such borrowing request, if received by Lender on the same Banking Day prior to 11:00 a.m. New York, New York time. If such borrowing request shall have been received by Lender on a Banking Day prior to 11:00 a.m., New York, New York time, and if Lender approves a requested loan, or if Lender fails to notify such Borrower(s) by 2:00 p.m. New York, New York time that Lender declines to make the requested loan(s), as provided above, Lender shall take steps through Lender's disbursing banks to arrange, by not later than 4:00 p.m. New York, New York time, a wire or other transfer of funds (in the amount of such approved borrowing request or request for which Lender fails to timely notify Borrowers that it declines to make such loan) from Lender's disbursing bank or banks to the respective Borrower's bank account from time to time designated and approved by Lender and Borrowers for receipt of loan proceeds disbursed under this Agreement; provided, that no Event of Default or Incipient Default shall have occurred and be continuing. As to any borrowing requests received by Lender after 11:00 a.m. New York, New York time on a Banking Day, Lender shall use reasonable efforts to review, and if approved, effectuate, a disbursement by 4:00 p.m. New York, New York time on the Banking Day so received. (e) Liability of Lender. Lender shall not have any liability to Borrowers for any delay or failure on the part of any bank or banks to transfer the funds to Borrowers in accordance with the instructions of Lender, or for any delay or failure by Lender or any such bank or banks in the approval of borrowing requests, or the initiation or transfer of such funds. Notwithstanding the foregoing, if Lender shall have advised Borrower(s) that it has approved, or is deemed under Section 2.1(d) hereof to have approved, a request to make a Revolving Inventory Loan or an Additional Advance which request was timely made by such Borrower(s) as provided in Section 2.1(c) hereof, then, unless an Event of Default or Incipient Default has occurred and is continuing, if, by reason of Lender's own negligence, such Borrower(s) shall fail to receive the wire or other transfer of funds to its bank account previously designated - 34 - 40 and approved by Lender for such purposes by no later than 4:00 p.m. local time of the recipient bank, on the same Banking Day requested and approved, Lender shall reimburse such Borrower(s) for any customary and reasonable administrative service charges and overdraft interest charges, if any, actually imposed on such Borrower(s) by its bank in connection with any permitted overdrafts or dishonored instruments which would not have arisen had such wire or other transfer been received by 4:00 p.m. such local time on such Banking Day; provided, however, in no event shall Lender incur any liability to such Borrower(s) or any other Person for direct or consequential losses or damages by reason of any such failure or delay, whether or not foreseeable and whether or not the possibility of incurring such damages or losses is communicated to or otherwise known by Lender. 2.2 Lending Sublimits (a) Subject to, and upon the terms and conditions contained herein, the aggregate principal amount of Revolving Inventory Loans and Letter of Credit Accommodations made available to Brawn shall not exceed Seven Million Dollars ($7,000,000) at any one time outstanding (the "Brawn Lending Sublimit"). (b) Subject to, and upon the terms and conditions contained herein, the aggregate principal amount of Revolving Inventory Loans, Additional Advances and Letter of Credit Accommodations made available to HDPI and/or Brawn shall not exceed, in the aggregate, Forty Million Dollars ($40,000,000) at any one time outstanding ("HDPI/Brawn Lending Sublimit"). (c) Subject to, and upon the terms and conditions contained herein, the aggregate principal amount of Revolving Inventory Loans and Letter of Credit Accommodations made available to GBM shall not exceed Two Million Five Hundred Thousand Dollars ($2,500,000) at any one time outstanding ("Gump's Mail Order Sublimit"). (d) Subject to, and upon the terms and conditions contained herein, the aggregate principal amount of Revolving Inventory Loans and Letter of Credit Accommodations made available to Gump's shall not exceed Two Million Five Hundred Thousand Dollars ($2,500,000) at any one time outstanding ("Gump's Retail Sublimit"; together with the Gump's Mail Order Sublimit, the "Gump's Lending Sublimits"). (e) Subject to, and upon the terms and conditions contained herein, the aggregate principal amount of Revolving Inventory Loans and Letter of Credit Accommodations made available to TCSA and/or SDSA shall not exceed Five Million Dollars ($5,000,000) at any one time outstanding ("TCS Lending Sublimit"). - 35 - 41 (f) Subject to, and upon the terms and conditions contained herein, the aggregate principal amount of Revolving Inventory Loans and Letter of Credit Accommodations made available to Tweeds shall not exceed Two Million Five Hundred Thousand Dollars ($2,500,000) at any one time outstanding ("Tweeds Lending Sublimit"). 2.3 Letter of Credit Accommodations (a) Lender shall , from time to time, on terms and conditions acceptable to Lender, at the request of a Borrower, provide one or more of the following financial accommodations to such Borrower: (i) issue, open or cause the issuance or opening of letters of credit or purchase or other guarantees for the purchase of goods and services in the ordinary course of such Borrower's business or for any other purpose approved by Lender or provide for the amendment or extension of any of the foregoing or (ii) assist such Borrower in establishing or opening letters of credit for such purposes by indemnifying the issuer thereof or guaranteeing the payment or performance of such Borrower to such issuer in connection therewith (individually and collectively, the "Letter of Credit Accommodations"). Borrowers may select a commercial bank to issue such letters of credit from those commercial banks listed on Exhibit L attached hereto (which list is subject to change by Lender from time to time upon notice to Borrowers), with whom Lender, or an Affiliate of Lender, has from time to time made arrangements for the issuance of Letter of Credit Accommodations on terms acceptable to Lender, but Lender shall have no obligation to provide Letter of Credit Accommodations to Borrowers if any such commercial banks (or all of them) are not acceptable to Borrowers at any time. (b) Without limiting Lender's continuing discretion under Section 2.3(a) hereof, the extension of such Letter of Credit Accommodations by Lender shall be subject to the satisfaction of each of the following additional conditions precedent: (i) additional Revolving Inventory Loans pursuant to the Inventory Lending Formula and/or Additional Advances pursuant to the Additional Advances Lending Formula, subject in any case to reserves against availability established by Lender hereunder and within the Maximum Credit and within the Brawn Lending Sublimit, HDPI/Brawn Lending Sublimit and Gump's Lending Sublimits, the TCS Lending Sublimit and the Tweeds Lending Sublimit, as applicable, shall be available to the respective Borrower immediately before giving effect to the proposed issuance of the Letter of Credit Accommodation as follows: (A) if the proposed Letter of Credit Accommodation is for the purpose of purchasing Eligible Inventory, such additional availability to such Borrower must be in an amount equal to or greater than the sum of (1) fifty percent (50%) of the landed cost of such Eligible Inventory, plus (2) the freight, duty and other amounts - 36 - 42 which Lender estimates must be paid for or in connection with such Inventory upon arrival or for delivery to or within the United States; and (B) if the proposed Letter of Credit Accommodation is for any other purpose, such additional availability to such Borrower must be in an amount not less than one hundred percent (100%) of the face amount thereof; (ii) if such Letter of Credit Accommodation is for the purpose of purchasing goods, Lender shall have, upon passage of title to Borrower purchasing same, a valid and perfected first security interest in and lien upon goods being acquired in connection therewith subject to the provisions of Section 6.4 hereof; (iii) the form and content of all such Letter of Credit Accommodations shall be satisfactory to Lender and all documents, instruments, notices and statements relating thereto, if any, which Lender or the issuer may request, shall be promptly delivered to Lender; and (iv) Borrowers shall have fully complied to Lender's satisfaction with all terms and provisions hereof and of the terms and provisions of any agreements relating to the Letter of Credit Accommodations heretofore, now or hereafter entered into between Borrowers and Lender, or between Lender and/or Borrowers and any issuer, including the payment of all fees, commissions and charges set forth herein and therein. (c) Borrowers hereby agree to and do indemnify and hold harmless, Lender, and its officers, directors, employees, attorneys and agents, with respect to all loss, cost, liability or expense which Lender may suffer or incur in connection with the Letter of Credit Accommodations. Borrowers further agree that payments made or other obligations incurred by Lender in connection with Letter of Credit Accommodations are part of the Obligations of Borrowers, and shall be payable in accordance with the terms hereof and of the other Financing Agreements. Any such payments made by Lender, including, without limitation, any of the same made after termination or non-renewal of this Agreement or the other Financing Agreements with respect to Letter of Credit Accommodations provided to Borrowers prior to such termination or non-renewal, shall automatically be treated for purposes hereof as Revolving Inventory Loans and shall accrue interest at the Interest Rate then payable by Borrowers commencing on the date such payment is made by Lender. (d) The aggregate amount of Revolving Inventory Loans which may otherwise be made available to the respective Borrowers by Lender pursuant to the Inventory Lending Formulas and within the Maximum Credit and subject to the Brawn Lending Sublimit, HDPI/Brawn Lending Sublimit, the Gump's Lending Sublimits, the TCS Lending Sublimit and the Tweeds Lending Sublimit, as applicable, and/or in the case of HDPI, subject to the HDPI/Brawn Lending Sublimit, the amount of Additional Advances which may otherwise be made available to HDPI pursuant to the Additional Advances Lending Formula, shall be reduced from time to time as follows: (i) as to Letter of Credit - 37 - 43 Accommodations for the purpose of purchasing Eligible Inventory, by an amount equal to the sum of fifty percent (50%) of the value of Eligible Inventory purchased with such Letter of Credit Accommodations, plus the freight, duty and other amounts which Lender estimates must be paid for or in connection with such Inventory upon arrival or for delivery to or within the United States, and (ii) as to Letter of Credit Accommodations for any other purpose, one hundred percent (100%) of the then outstanding aggregate amount thereof and all other commitments and obligations made or incurred by Lender with respect thereto. (e) In the case of any Letter of Credit Accommodation for the purchase of Inventory, one hundred percent (100%) of the amount thereof, plus the freight, duty and other amounts which Lender estimates must be paid for or in connection with such Inventory upon arrival or for delivery to or within the United States, shall be considered as outstanding Obligations hereunder for purposes of applying the Brawn Lending Sublimit, the HDPI/Brawn Lending Sublimit, the Gump's Lending Sublimits, the TCS Lending Sublimit and the Tweeds Lending Sublimit, respectively. (f) In addition to any charges, fees or expenses charged by any bank or issuer in connection with the Letter of Credit Accommodations, Borrowers agree to pay to Lender the commissions, fees and charges set forth in the Trade Financing Supplements. (g)(1) Section 1.8 of the respective Trade Financing Supplements of HDPI and Brawn are hereby deleted and replaced, in their entirety with the following: "1.8 In addition to all other fees, charges and expenses payable under the Agreement, this Supplement and to any bank or other issuer or correspondent in connection with any Credit, we agree to pay you monthly, on the first day of each month, with respect to Credits outstanding for all or any part of the immediately preceding month, a charge at a rate equal to three (3%) percent per annum calculated upon the daily outstanding balances of the Credits outstanding during such immediately preceding month (or any part thereof). Such charge shall be calculated on the basis of a 360 day year and actual days elapsed. This charge, together with the charges, fees and expenses charged by any bank or other issuer or correspondent in connection with the Credits, may, at your option, be charged to any of our account(s) maintained by you." - 38 - 44 (2) Section 1.5 of the respective Trade Financing Supplements of HDPI and Brawn are each amended so as to replace the proviso contained therein with the following phrase: ", subject to Section 2.3(h) of the Agreement." (h) Notwithstanding anything to the contrary contained herein or in any of the other Financing Agreements, the aggregate amount of all Letter of Credit Accommodations pursuant hereto and all other commitments and obligations made or incurred by Lender pursuant hereto for the account or benefit of Borrowers in connection therewith shall not, at any one time outstanding, exceed Ten Million Dollars ($10,000,000). (i) In connection with, in addition to, and without limiting that which is otherwise set forth in this Section 2.3, each of HDPI, Brawn, GBM and Gump's has executed and delivered to Lender a Trade Financing Supplement which shall continue in effect as amended hereby, and each of TCS, SDSA and Tweeds shall, concurrently herewith, execute and deliver to Lender a Trade Financing Supplement to this Agreement, and from time to time each Borrower shall execute and deliver such applications and other agreements relating to the Letter of Credit Accommodations, in form and substance satisfactory to Lender, and, as applicable, the issuer of any Letter of Credit Accommodation. 2.4 Maximum Credit (a) The aggregate principal amount of the Revolving Inventory Loans, Additional Advances and Letter of Credit Accommodations, at any one time outstanding, shall not exceed the Maximum Credit. (b) Lender may, from time to time, in its discretion, permit the outstanding amount of any component of the Revolving Inventory Loans, Additional Advances or Letter of Credit Accommodations, or the aggregate amount of the outstanding Revolving Inventory Loans, the Additional Advances and/or Letter of Credit Accommodations to exceed the amounts available under the Inventory Lending Formulas, the Additional Advances Lending Formula or the Brawn Lending Sublimit or the HDPI/Brawn Lending Sublimit or the Gump's Lending Sublimits or the TCS Lending Sublimit or the Tweeds Lending Sublimit; provided, that, should Lender so permit any such excess(es) in any one instance such event shall not operate to limit, waive or otherwise affect any rights of Lender on any future occasions. In the event Lender so permits any such excess(es), and without limiting the right of Lender to demand payment of the Obligations of Borrowers, or any portion thereof, in accordance with any other term of this Agreement or the other Financing Agreements, Borrowers shall remain liable therefor and Borrowers shall, upon demand by - 39 - 45 Lender, which may be made at any time and from time to time, immediately repay to Lender the entire amount of any such excess(es). 2.5 Reserves (a) Without limiting any other rights or remedies of Lender hereunder or under the other Financing Agreements, all Revolving Inventory Loans, Additional Advances and Letter of Credit Accommodations made or otherwise available to Borrowers hereunder shall be subject to Lender's continuing right, in its discretion, to establish a reserve against the availability of such Revolving Inventory Loans, Additional Advances and Letter of Credit Accommodations, and to increase and decrease such reserve from time to time, if and to the extent that, in Lender's good faith belief, such reserve is necessary to protect Lender against any material liability to third parties or impairment of the Collateral or its value, or an Event of Default or Incipient Default has occurred and is continuing. (b) With respect to sales and/or use taxes, the right of Lender to establish reserves shall be limited to sales and use taxes owed or claimed plus interest and penalties, if any, thereon (i) for which a judgment, warrant or levy in favor of any taxing authority of the United States or territory or possession thereof, or of any State or political subdivision thereof, has been obtained and any enforcement proceeding, action or suit has been taken or commenced against any Borrower; or (ii) for which a lien exists by statute or at common law or which has arisen by any filing, assessment, recording or other action by any such taxing authority against any property of any Borrower and in respect of which lien any enforcement proceeding, action or suit has been taken or commenced; or (iii) for which, under generally accepted accounting principles, Borrowers should take a charge or record an accrual or reserve; or (iv) that are required to be collected (or have been collected and are required to be remitted) under the laws of any State in which any Borrower owns any Inventory or owns or leases any property, including, without limitation, the States of Pennsylvania, New Jersey, California, Texas, Virginia and Wisconsin. Nothing contained in this Section 2.5(b) shall be construed to limit the continuing right of Lender to establish reserves against availability in respect of any other matters or to limit any other rights and remedies of Lender hereunder or under the other Financing Agreements. 2.6 Fees (a) Facility Fees. HDPI and Brawn have paid to Lender a facility closing fee of Five Hundred Thousand Dollars ($500,000) in consideration of Lender's entering into the Loan and Security Agreement, dated May 5, 1993, which fee was fully earned as of May 5, 1993. HDPI, Brawn, GBM and Gump's have paid - 40 - 46 Lender a facility increase fee of $62,500 in consideration of Lender's entering into the Existing Loan Agreement, which fee was fully earned on July 9, 1993. Borrowers shall pay to Lender a facility increase fee of $93,750 in consideration of Lender's entering into this Agreement, which fee is fully earned as of the date hereof. Borrowers shall pay to Lender additional facility fees, each in the amount of $131,250, payable on May 5 in each year during the Term. Each such additional facility fee shall be fully earned and payable in advance on each such date. (b) Unused Line Fee. In addition to the unused line fees paid and payable under the Existing Loan Agreement with respect to May through September, 1993, with respect to each calendar month (or part thereof) during the Term, commencing with October, 1993, Borrowers shall pay to Lender monthly an unused line fee, fully earned and payable on the first day of each month, commencing November 1, 1993, at a rate equal to one half of one percent (.5%) per annum, calculated upon the excess, if any, of (i) Forty-Seven Million Five Hundred Thousand Dollars ($47,500,000) over (ii) the average of the daily aggregate principal balances of the outstanding Revolving Inventory Loans, Additional Advances and Letter of Credit Accommodations during the preceding month (or part thereof); provided, however, that if Lender, solely on the basis of the exercise of its discretion, reduces the Inventory Lending Formula for any calendar month (or part thereof) in the absence of an Event of Default or Incipient Default which is continuing, the amount of the unused line fee shall be calculated for such month by decreasing the base amount of Forty-Seven Million Five Hundred Thousand Dollars ($47,500,000) set forth in clause (b)(i) by a percentage thereof equal to the difference between fifty percent (50%) and the Inventory Advance Formula as so reduced solely by virtue of Lender's discretion; provided, further that the base amount set forth in clause (b)(i) above shall remain at $40,000,000 with respect to the period from October 1, 1993 through the day prior to the date hereof, and the unused line fee calculated for October 1993 and payable on November 1, 1993 shall be adjusted accordingly. If GBM and Gump's shall complete a Standalone Refinancing to the extent permitted and in compliance with all terms and conditions applicable thereto as provided under Section 9.1, each of the references to the base amount of Forty- Seven Million Five Hundred Thousand Dollars ($47,500,000) contained in this Section 2.6(b) shall, effective as of the date of consummation of the Standalone Refinancing, be deemed amended to refer to Forty-Two Million Five Hundred Thousand Dollars ($42,500,000), and the unused line fees shall be pro rated hereunder for the month in which such Standalone Refinancing is consummated based on the number of days during which the respective base amounts are in effect during the month. (c) Servicing Fee. In addition to the servicing fees paid and payable with respect to the months of May through - 41 - 47 September, 1993 under the Existing Loan Agreement, with respect to each calendar month (or part thereof) during the Term, commencing with October, 1993, Borrowers shall pay to Lender a servicing fee in the amount of Seventeen Thousand Dollars ($17,000) per calendar month, fully earned and payable in advance on November 1, 1993 and on the first day of each month (or part thereof) thereafter. (d) Fees as Obligations. The fees provided for in this Section 2.6 shall be in addition to all other amounts payable by Borrowers under this Agreement and the other Financing Agreements and shall constitute part of the Obligations of Borrowers. Such fees may, at Lender's option, be charged directly to the loan accounts of any of the Borrowers maintained by Lender. 2.7 Interest (a) Interest on all of the Revolving Inventory Loans, the Additional Advances and other non-contingent Obligations of Borrowers shall be payable by Borrowers to Lender at the Interest Rate, calculated on the basis of a year consisting of three hundred and sixty (360) days and actual days elapsed. (b) In no event shall the Interest Rate and other charges hereunder exceed the highest rate or amount permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that a court determines that Lender has received interest or other charges hereunder in excess of the highest rate or amount applicable hereto, such excess shall be deemed received on account of, and shall automatically be applied to reduce, the Obligations of Borrowers other than interest in the inverse order of maturity, and the provisions hereof shall be deemed amended to provide for the highest permissible rate or amount. If there are no Obligations of Borrowers outstanding, Lender shall refund to Borrowers such excess. (c) Subject to the foregoing, all interest charges hereunder or in connection herewith shall be (i) computed as provided herein and in the other Financing Agreements and (ii) paid monthly to Lender on the first day of each calendar month, or, at Lender's option, charged to Borrowers' loan accounts maintained by Lender as of the first day of each calendar month and deemed paid by the first amounts subsequently credited thereto. (d) With respect to each day during a given calendar month during the Term that the closing daily balance in each of the revolving loan accounts maintained by Lender for Borrowers hereunder is a credit balance, Lender shall monthly, on - 42 - 48 the first day of the next succeeding calendar month, credit the respective revolving loan accounts with an amount equal to interest on the respective credit balances therein, at a per annum rate equal to the Prime Rate minus three percent (3%) per annum. (e) Without limiting Lender's continuing right to demand payment of the Revolving Inventory Loans, the Additional Advances, the Letter of Credit Accommodations and other Obligations of Borrowers, or any portion thereof, in accordance with the terms of this Agreement, or any of the other Financing Agreements, all interest accruing hereunder during the continuance of any Event of Default, and on and after termination or non-renewal hereof, shall be payable on demand. 2.8 Conduct of Accounts; Cross-Collateralization (a) Lender may maintain one or more accounts reflecting the Revolving Inventory Loans, the Additional Advances, the Letter of Credit Accommodations, repayments of the Revolving Inventory Loans, the Additional Advances, Obligations relating to Letter of Credit Accommodations and the other Obligations of Borrowers and/or Guarantors and any of the Collateral or Guarantor Collateral contemplated under this Agreement or the other Financing Agreements as Lender shall, in its discretion, determine. All Revolving Inventory Loans and, in the case of HDPI, Additional Advances, shall be charged to a loan account in the name of the respective Borrower on Lender's books. The outstanding amount of Obligations relating to Letter of Credit Accommodations may be reflected on Lender's books as a cash loan the proceeds of which are held as cash Collateral or in such other manner as Lender shall determine. All Collateral, Guarantor Collateral or other collateral security held by or granted to Lender by Borrowers, Guarantors or any third persons shall be security for the payment and performance of any and all Obligations of Borrowers, Guarantors or such third persons to Lender, as the case may be, notwithstanding the maintenance of separate accounts for Borrowers, Guarantors or third persons or -the existence of any notes. (b) All Revolving Inventory Loans, Additional Advances, Obligations relating to Letter of Credit Accommodations, and other Obligations of Borrowers and Guarantors shall be payable to Lender at its address specified herein or at such other place in the United States as Lender may hereafter designate in writing from time to time. Lender may apply payments received or collected from Borrowers or Guarantors or for the account of Borrowers or Guarantors (including, without limitation, the proceeds of sale, collection or other realization upon any Collateral or Guarantor Collateral) to such of the Obligations of Borrowers and/or Guarantors then due, in whatever order and manner Lender, in its discretion, determines. Lender - 43 - 49 shall have the continuing and exclusive right to apply and reverse and reapply any and all such proceeds and payments to any portion of the Obligations of Borrowers and/or Guarantors then or thereafter due. Upon the request of Lender, Borrowers shall execute and deliver to Lender one or more promissory notes, in form and substance satisfactory to Lender, to further evidence the Revolving Inventory Loans, the Additional Advances, the Obligations of Borrowers with respect to the Letter of Credit Accommodations or any portion(s) thereof. (c) Subject in the case of IMR to the proviso below, if Lender is for any reason required to surrender any payment of, or proceeds of Collateral or Guarantor Collateral applied to the payment of, all or any part of the Obligations of Borrowers and/or Guarantors to any Person (including any creditor or creditors' representative of any Borrower or any Guarantor), or if any interest of Lender in any Collateral or Guarantor Collateral is set aside or avoided, whether because such payment or proceeds is invalidated, declared fraudulent as to any Person (including any creditor or creditors' representative of any Borrower or any Guarantor), set aside, determined to be void or voidable as a preference, or a diversion of trust funds, or for any other reason, or are determined to be subject to a claim for restitution, or otherwise are required to be surrendered, set aside or avoided, then the Obligations of Borrowers and/or Guarantors or any part thereof intended to be reduced, paid or satisfied, including, without limitation, any reductions in or release of the liability of IMR under the IMR Limited Guarantee which may otherwise have occurred in whole or in part, directly or indirectly, as a result of such payment or application of proceeds or the apparent interests of Lender in such Collateral and Guarantor Collateral shall be revived and reinstated, and the Guarantees, including the IMR Limited Guarantee shall be revived and reinstated and this Agreement and the Guarantees shall continue in full force and effect as if such payment or proceeds had not been received by Lender, and such reductions in or release of liability under any Guarantees, including the IMR Limited Guarantee had not occurred, and Borrowers and Guarantors shall be jointly and severally liable to pay to Lender, and shall jointly and severally indemnify Lender and hold Lender harmless for, the amount of such payment or proceeds surrendered and the value of any such Collateral or Guarantor Collateral set aside or avoided, plus any interest and other amounts paid and all costs and expenses (including reasonable attorneys' fees and disbursements incurred by Lender in connection therewith); provided, however, that in no event will any reductions in or releases of the First Portion of the IMR Collateral or the corresponding reductions in or releases of the liability of IMR under the IMR Limited Guarantee once effectuated pursuant to the terms hereof and of the IMR Limited Guarantee and IMR Pledge Agreement, be subject to revival or reinstatement as provided in this Section 2.8(c). The provisions of this Section 2.8(c) shall - 44 - 50 be and remain effective notwithstanding any contrary action which may have been taken by Lender in reliance upon such payment or proceeds, and any such contrary action so taken shall be without prejudice to Lender's rights under this Agreement and shall be deemed to have been conditioned upon such payment or proceeds having become final and indefeasible. The provisions of this Section 2.8(c) shall survive the termination of this Agreement and the other Financing Agreements. (d) At Lender's option, all principal, interest, fees, commissions, costs, expenses or other charges hereunder, under the other Financing Agreements or in connection herewith or therewith, may be charged directly to any loan account or other account of Borrowers and/or Guarantors maintained by Lender. (e) Lender shall deliver to Borrowers at the address of each Borrower set forth in Section 9.5 hereof, each calendar month, one or more statements with respect to any loan account maintained by Lender with respect to Borrowers pursuant to the provisions hereof, as of the end of each calendar month while this Agreement is in effect. Such statements of account shall be considered correct, and deemed accepted by and conclusively binding upon Borrowers and Guarantors, except to the extent Lender shall have received from Borrowers or any Guarantor written notice of all exceptions to such statement of account with specificity, within forty-five (45) days after the date of such statement. 2.9 Use of Proceeds All Revolving Inventory Loans or Additional Advances made or Letter of Credit Accommodations provided on or after the date hereof to Borrowers pursuant to the provisions hereof shall be used to purchase Inventory and for general operating, working capital and capital expenditures of Borrowers, and other proper corporate purposes of Borrowers, not otherwise prohibited by the terms hereof. SECTION 3. CONDITIONS PRECEDENT TO LOANS AND OTHER FINANCIAL ACCOMMODATIONS 3.1 Conditions to Loans The making and providing of Revolving Inventory Loans, Additional Advances and Letter of Credit Accommodations heretofore, on the date hereof or hereafter were, are and shall be subject to the satisfaction of each of the following conditions precedent (any of which may be waived, in whole or in part, only by Lender in writing): - 45 - 51 (a) IMR Collateral and Related Agreements. Lender shall have received the IMR Limited Guarantee, the IMR Pledge Agreement, the QCC-IMR Subordination Agreement and such other documentation in form and substance acceptable to Lender, as Lender may request, to effectuate the terms of the IMR Limited Guarantee and the pledge of the IMR Collateral to Lender, and IMR shall have pledged to Lender the IMR Collateral pursuant to the IMR Pledge Agreement, which shall be and remain in full force and effect in accordance with its terms. (b) Termination of Other Borrower Financing Agreements. Borrowers shall have provided evidence to Lender of the termination of all Other Borrower Financing Agreements on terms and conditions satisfactory to Lender, except for the HDPI Pennsylvania IRB Financing, the QCC Credit Agreement, the Third Party Credit Card Agreements and the Private Credit Card Agreement. In the case of the QCC Credit Agreement, all security interests in and liens upon property of Borrowers and any Guarantor held by QCC (or any Affiliate of QCC) shall have been terminated, discharged and released and to the extent that any obligations held by QCC remain outstanding or arise hereafter, they shall continue to be subordinated in right of payment to the Obligations of Borrowers and Guarantors to Lender. In addition, QCC (and each such Affiliate) and IMR shall continue to be subject to restrictions or limitations on the exercise of rights and remedies against Borrowers and Guarantors, pursuant to the QCC-IMR Subordination Agreement. (c) Satisfaction of Certain Obligations. Borrowers shall have delivered, or caused to have delivered, a certificate of the Chief Financial Officer of H&H in form and substance satisfactory to Lender certifying that (i) all obligations under the Senior Secured Increasing Rate Notes of H&H have been fully satisfied, (ii) not less than Twenty-Three Million Four Hundred Twenty-Five Thousand Dollars ($23,425,000) of the 14% Senior Subordinated Debentures of H&H have been exchanged for cash, common stock of H&H, and preferred stock of THC, and (iii) except for the aggregate net sum of not more than Four Million Eight Hundred Thousand Dollars ($4,800,000), after netting out the amounts of temporary advances and loans made by THC to Borrowers and repayments thereof, no portion of the cash payments made to satisfy, in whole or in part, the obligations referred to in clauses (i) and/or (ii) was provided by Borrowers, directly or indirectly. (d) Subordination of Certain Obligations. The Indebtedness owed by any member of the Affiliated Borrower Group to holders of the H&H or THC debt instruments described on Exhibit E attached hereto shall be subordinate in right of payment to the Obligations of such members of the Affiliated Borrower Group to Lender. In addition, H&H and THC shall have executed and delivered in favor of Lender an Intercompany - 46 - 52 Subordination Agreement subordinating, to the extent provided therein, their rights to payment of all obligations of Borrowers and Guarantors to them, to the prior indefeasible payment and satisfaction of all Obligations of Borrowers and Guarantors to Lender. (e) Delivery of Financing Agreements. Borrowers and Guarantors shall have delivered the Financing Agreements required by Lender and all instruments and documents hereunder and thereunder shall have been executed and delivered to Lender, in form and substance satisfactory to Lender, and all UCC financing statements relating and other necessary filings, if any, to the Collateral and Guarantor Collateral shall have been duly filed and recorded. (f) Replacement of HDPI Securitization Program with Private Credit Card Agreement. Borrowers shall have delivered, in form and substance satisfactory to Lender, evidence that the HDPI Securitization Program shall have been terminated and replaced with the Private Credit Card Agreement and the Private Credit Card Purchaser shall have accepted and agreed to (i) an irrevocable payment instruction issued by Borrowers party to the Private Credit Card Agreement directing the Private Credit Card Purchaser to remit to (and only to) an account designated from time to time by Lender, all monies from time to time to be remitted to Borrowers under the Private Credit Card Agreement, and (ii) the GECC Lien Clarification Agreement excluding and releasing from any liens or security interests of the Private Credit Card Purchaser, the Collateral (or such parts thereof as to which Lender shall require clarification or express exclusion and release, each in form and substance satisfactory to Lender). (g) Closing Excess Availability. HDPI and Brawn shall have an Excess Availability as of May 5, 1993 in the aggregate amount of not less than Five Million Dollars ($5,000,000). (h) Consents; Waivers; Acknowledgements. Lender shall have received, in form and substance satisfactory to Lender, all consents, waivers, acknowledgements and other agreements from third Persons which Lender may deem necessary or desirable to permit, protect and perfect its security interest in liens upon the Collateral and the Guarantor Collateral and which Lender shall have requested from Borrowers, including, but not limited to: (i) waivers by lessors, operators and mortgagees of any security interests or other claims against personal property located at their premises and agreements to grant access to Lender and the right to remain thereon to exercise all remedies with respect to any Collateral and Guarantor Collateral located on each premise, including, without limitation, the Eligible Inventory Locations and (ii) agreements from lessors and - 47 - 53 licensors of distribution equipment and computer software, granting Lender the right to use such equipment and software. (i) Opinion of Counsel. Lender shall have received, in form and substance satisfactory to Lender, one or more opinion letters of independent counsel to Borrowers, Guarantors, QCC and IMR in respect of the Financing Agreements, the Collateral and Guarantor Collateral, IMR Collateral and such other matters as Lender may reasonably request. (j) Perfection. Lender's lien on and security interests in each item of Collateral and Guarantor Collateral shall have been granted and perfected by the filing, recording or registration of documents, instruments, or financing statements in the appropriate governmental offices or by possession or such other action as is necessary to perfect each such lien or security interest, and Lender shall have received evidence satisfactory to it that all such liens and security interests are of first priority, subject only to permitted liens set forth in Section 6.4 hereof. (k) Insurance. Lender shall have received evidence of insurance required hereunder and under the other Financing Agreements, and lender's loss payable endorsements in favor of Lender with respect thereto, all in form and substance satisfactory to Lender. (l) Delivery of Pro Forma Balance Sheet. Borrowers shall have delivered to Lender a pro forma consolidated balance sheet of H&H and its Subsidiaries as of December 26, 1992 and a consolidating balance sheet of THC and its Subsidiaries as of December 26, 1992 and giving effect to the initial transactions contemplated or required under the Existing Loan Agreement. (m) Gump's Acquisition. Prior to or contemporaneously with any Revolving Inventory Loans or Letter of Credit Accommodations being requested by GBM or Gump's or by HDPI or Brawn for use in connection with the Gump's Acquisition or operations of GBM and Gump's, the Gump's Acquisition shall have been consummated in accordance with the Gump's Purchase Agreements as in effect on July 9, 1993, including without limitation, the fulfillment of (and not merely the waiver of) all of the conditions precedent to the purchases by GBM and Gump's set forth in the Gump's Purchase Agreements, and evidence thereof satisfactory to Lender shall have been delivered to Lender. (n) TCS Acquisition. Prior to or contemporaneously with any Revolving Inventory Loans or Letter of Credit Accommodations being requested by TCSA or SDSA, the TCS Acquisition shall have been consummated in accordance with the TCS Purchase Agreements as in effect on August 26, 1993 and the - 48 - 54 letter agreement dated August 26, 1993 among Lender and certain members of the Affiliated Borrower Group related to the TCS Acquisition, and evidence thereof satisfactory to Lender, shall have been delivered to Lender. (o) Tweeds Acquisition. Prior to or contemporaneously with any Revolving Inventory Loans or Letter of Credit Accommodations being requested by Tweeds, the Tweeds Acquisition shall have been consummated in accordance with the Tweeds Purchase Agreements as in effect on September 30, 1993 and the letter agreement dated September 30, 1993 among Lender and certain members of the Affiliated Borrower Group related to the Tweeds Acquisition, and evidence thereof satisfactory to Lender, shall have been delivered to Lender. 3.2 Additional and Continuing Condition Each Revolving Inventory Loan, each Additional Advance, and each Letter of Credit Accommodation to be made on the date hereof and hereafter is subject to the prior or contemporaneous satisfaction of the additional condition precedent (which may be waived, in whole or in part, only by Lender in writing) that no Event of Default or Incipient Default shall have occurred and be continuing. SECTION 4. COLLATERAL 4.1 Security Interests in Borrowers' Property As collateral security for the prompt performance, observance and payment in full of all of the Obligations of Borrowers, and, in the case of Borrowers other than TCSA and SDSA, confirming and supplementing their prior grants, Borrowers hereby grant to Lender, a continuing security interest in, and liens upon, and rights of setoff against, and Borrowers hereby pledge and assign to Lender, all now owned and hereafter acquired and arising assets and properties of Borrowers (which assets and properties, together with all other collateral security for the Obligations of Borrowers heretofore, now or hereafter granted to or otherwise held or acquired by Lender are referred to herein as the "Collateral"), including, but not limited to, the following: (i) all of the following, whether now owned or hereafter acquired or arising: (A) all Accounts, including, without limitation, all 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 - 49 - 55 thereof, now or hereafter held or received by, or in transit to, Lender from or for Borrowers, whether for safekeeping, pledge, custody, transmission, collection or otherwise, and all of Borrowers' deposits (general or special), balances, sums and credits with Lender at any time existing; (B) all right, title 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 Borrowers in and to Mail Order Joint Ventures, and other joint ventures, partnerships and other Persons; (ii) Inventory; (iii) Equipment; (iv) 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; (v) all present and future real property owned by Borrowers; 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. - 50 - 56 Notwithstanding the foregoing, the Collateral does not include the GECC Collateral. 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, and, in addition to the IMR Limited Guarantee delivered by IMR, the Guarantees by the other Guarantors and the Guarantees by Borrowers delivered or amended pursuant to the Existing Loan Agreement, each Borrower shall execute and deliver to Lender, and Borrowers shall cause Guarantors, other than IMR, to execute and deliver to Lender, amendments to their Guarantees previously delivered and/or amended pursuant to the Existing Loan Agreement, so as to include among the guaranteed "Obligations" under such Guarantees all Obligations of all of the Borrowers, in form and substance satisfactory to Lender, as provided therein (as all of such Guarantees, including the IMR Limited Guarantee, now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, individually a "Guarantee" and collectively the "Guarantees"). 4.3 Security Interests in Property of Guarantors (a) As collateral security for the prompt performance, observance and payment in full of all of the Obligations of Guarantors, other than IMR, under their respective Guarantees and otherwise, Borrowers shall cause to be delivered to Lender a general security agreement by each Guarantor, other than IMR, providing for a grant of a security interest in and pledge of all assets of such Guarantor, except (i) for any capital stock of any Non-Guarantor Subsidiary owned by Hanover, and (ii) for all now owned and hereafter acquired machinery, equipment, fixtures and real property owned by TCS Factory, TCS Office and TCSA- Delaware, in form and substance satisfactory to Lender (each, a "General Security Agreement"). As collateral security for the Obligations of IMR under the IMR Limited Guarantee, IMR shall have executed and delivered the IMR Pledge Agreement and pledged and delivered the IMR Collateral thereunder. (All of the collateral security now or hereafter granted to or held by Lender by the Guarantors pursuant to the General Security Agreements and the IMR Pledge Agreement, or otherwise, and the products and proceeds thereof, herein the "Guarantor Collateral".) (b) The General Security Agreements of Hanover, as successor to H&H and THC, are each hereby amended to permit the pledge by Hanover, in favor of the holders of the 9.25% Notes, of the intercompany note (the "Pledged Intercompany Note") issued to Hanover by any wholly-owned Subsidiary of Hanover formed after August 17, 1993 to evidence such new Subsidiary's - 51 - 57 Indebtedness for intercompany loans, not to exceed $6,000,000 in the aggregate, funded by Hanover to such Subsidiary with a portion of the proceeds of the issuance of the 9.25% Notes, to be used for the purposes referred to in the first sentence of Section 6.27(b) hereof. The Pledged Intercompany Note and the proceeds thereof shall not be part of the "Collateral" under the General Security Agreements of Hanover. 4.4 Reduction and Release of IMR Collateral Lender agrees to reduce and release the IMR Collateral in accordance with the terms of the provisions of Sections 4.4, 4.5 and 4.6 hereof, provided that at each time all or any part of the IMR Collateral would otherwise be permitted or required to be released hereunder, no Event of Default or Incipient Default has occurred and is continuing. (a) For purposes hereof, the term "First Portion" shall mean an amount of the IMR Collateral having a Market Value equal to Five Million Dollars ($5,000,000), pledged to Lender. (b) For purposes hereof, the "Second Portion" shall mean an amount of the IMR Collateral having a Market Value equal to Five Million Dollars ($5,000,000), pledged to Lender. (c) For purposes hereof, "Cumulative Cash Flow" of a Person and its Subsidiaries, shall mean, for and through the end of a given calculation period, the positive or negative amount calculated for such period as follows on a consolidated basis, as to such Person and its Subsidiaries, in accordance with generally accepted accounting principles, consistently applied, and without duplication: (i) net income after taxes actually paid; plus (ii) depreciation and amortization; minus (iii) principal payments on Indebtedness for Borrowed Money, other than daily revolving loan repayments to Lender made through application of customer remittances or other sales proceeds in the ordinary course; minus (iv) payments on capital leases; minus (v) intercompany loans made, tax-sharing payments (not already included in subsection 4.4(c)(i) hereof), dividend payments and other distributions of cash or other property (other than - 52 - 58 dividends or other distributions consisting solely of capital stock of Borrowers or Hanover, provided, that, in the case of Hanover capital stock distributed by Borrowers, such capital stock has previously been contributed to the capital of Borrowers and not acquired by purchase or other means) and equity redemption payments; minus (vi) capital expenditures actually paid. (d) For purposes hereof, "Adjusted Cumulative Cash Flow" shall mean, as of and through the end of a specified fiscal quarter (including the fourth quarter of a fiscal year) of Borrowers, the positive or negative amount of Cumulative Cash Flow of THC or Hanover and its Subsidiaries, including Borrowers, but excluding GBM, Gump's, Gump's Holdings, TCSA-Delaware and its Subsidiaries, TW Acquisitions and its Subsidiaries and Non-Guarantor Subsidiaries, except to the extent provided below, calculated for the period April 1, 1993 through the end of such specified fiscal quarter, minus two hundred percent (200%) of the aggregate amounts, if any, released from the Second Portion of the IMR Collateral pursuant to Sections 4.6(a) and 4.6(b) hereof with respect to the entire period commencing April 1, 1993 and ending on the day prior to the commencement of such fiscal quarter. 4.5 Reduction and Release of First Portion If, as of June 30, 1993, the Excess Availability, as determined by Lender as of such date, exceeds Five Million Dollars ($5,000,000) on such date (such excess above Five Million Dollars ($5,000,000), the "June 30 Excess"), Lender shall, within ten (10) days following receipt of written notice signed by Borrowers requesting a release or reduction of the IMR Collateral in accordance with this provision, which notice must be received by Lender on or before July 15, 1993, release and remit to IMR such amount of the First Portion of the IMR Collateral (up to the full amount thereof) or its proceeds as shall have a Market Value equal the amount of the June 30 Excess. 4.6 Reduction and Release of Second Portion; Additional Reduction and Release of First Portion (a) With respect to each of the first three (3) fiscal quarters in each fiscal year of Borrowers commencing with the fiscal quarter ending on or about June 30, 1993, within ten (10) days following Lender's receipt of the Form 10-Q filed with the SEC by THC or Hanover including the unaudited consolidated financial statements for or Hanover and its Subsidiaries, including Borrowers, for such quarter and the year-to-date period - 53 - 59 then ended, together with (i) a written notice signed by Borrowers requesting a release or reduction of the IMR Collateral pursuant to this provision, (ii) a certificate signed by Borrowers' chief financial officer(s) setting forth the calculations of Cumulative Cash Flow of THC or Hanover and its Subsidiaries, including Borrowers, but excluding GBM, Gump's, Gump's Holdings, TCSA-Delaware and its Subsidiaries, TW Acquisitions and its Subsidiaries and any Non-Guarantor Subsidiaries of THC or Hanover, except to the extent, if any, of any net income after taxes of any such excluded Subsidiaries that has been actually distributed as a cash dividend to THC or Hanover, by any such Subsidiaries, for such quarter and the year-to-date period then ended, and the Adjusted Cumulative Cash Flow as of and through the end of such quarter, and certifying to Lender the accuracy thereof, (iii) a certificate signed by the chief executive officer(s) or chief financial officer(s) of Borrowers certifying that no Event of Default or Incipient Default has occurred and is continuing, (iv) a certificate of the chief financial officer(s) of Borrowers comporting with the requirements of Section 6.17(a)(v) hereof, and (v) such supporting information and detail with respect to such calculations as Lender shall from time to time require, Lender shall release and remit to IMR from the Second Portion of the IMR Collateral then pledged to Lender, an amount thereof (up to the entire Second Portion then remaining), or its proceeds, as shall have a Market Value equal to the lesser of: (A) fifty percent (50%) of Adjusted Cumulative Cash Flow calculated as of and through the end of such quarter; or (B) the amount, if any, by which the Excess Availability on the last day of such quarter exceeds Two Million Five Hundred Thousand ($2,500,000). In order for a request for a release or reduction of the Second Portion of the IMR Collateral to be made hereunder, the Form 10-Q of THC or Hanover must be timely filed with the SEC (including any filing date extension, not more than five (5) days, properly availed of pursuant to Rule 12b-25 issued by the SEC, as amended from time to time), and the Form 10-Q of THC or Hanover, together with the other items referred to in clauses (i) through (iv) in this Section 4.6(a), must be received by Lender within ten (10) business days following the filing of such Form 10-Q with the SEC. (b) With respect to each fourth or other final quarter of each fiscal year of Borrowers commencing with the fourth quarter ending January 1, 1994, within ten (10) days following Lender's receipt of the Form 10-K filed with the SEC by Hanover, including the audited consolidated financial statements - 54 - 60 for Hanover and its Subsidiaries, including Borrowers, for such quarter and the fiscal year then ended, together with (i) a written notice signed by Borrowers requesting a release or reduction of the IMR Collateral pursuant to this provision, (ii) a certificate signed by Borrowers' chief financial officer(s) setting forth the calculations of Cumulative Cash Flow of THC and Hanover and their Subsidiaries, including Borrowers, but excluding GBM, Gump's, Gump's Holdings, TCSA-Delaware and its Subsidiaries, TW Acquisitions and its Subsidiaries and any Non-Guarantor Subsidiaries of THC or Hanover, except to the extent, if any, of any net income after taxes of any such excluded Subsidiaries that has been actually distributed as a cash dividend to THC or Hanover by any such Subsidiaries, for such quarter and the fiscal year then ended, and the Adjusted Cumulative Cash Flow as of and through the end of such quarter and the fiscal year then ended, and certifying to Lender the accuracy thereof, (iii) a certificate signed by the chief executive officer(s) of Borrowers certifying that no Event of Default or Incipient Default has occurred and is continuing, (iv) certificates from the independent certified public accountants of Borrowers and from the chief financial officer(s) of Borrowers comporting with the requirements of Sections 6.17(a)(iv) and 6.17(a)(v) hereof, and (v) such supporting information and detail with respect to such calculations as Lender shall from time to time require, Lender shall release and remit to IMR from the Second Portion of the IMR Collateral then pledged to Lender, an amount thereof (up to the entire Second Portion then remaining), or its proceeds, as shall have a Market Value equal to the lesser of: (A) fifty percent (50%) of Adjusted Cumulative Cash Flow calculated as of and through the end of such quarter and fiscal year; or (B) the amount, if any, by which the Excess Availability on the last day of such quarter and fiscal year exceeds Two Million Five Hundred Thousand Dollars ($2,500,000). In order for a request for a release or reduction of the Second Portion of the IMR Collateral to be made hereunder, the Form 10-K of Hanover must be timely filed with the SEC, (including any filing date extension, not more than fifteen (15) days, properly availed of pursuant to Rule 12b-25 issued by the SEC, as amended from time to time), and the Form 10-K of Hanover, together with the other items referred to in clauses (i) through (iv) of this Section 4.6(b), must be received by Lender within ten (10) business days following the filing of such Form 10-K with the SEC. - 55 - 61 (c) With respect to the end of each fiscal quarter of Borrowers ending on September 30, 1993 or thereafter, including the fourth quarter of a fiscal year, Lender shall, if requested in a written notice to Lender signed by Borrowers and received by Lender within ten (10) business days following the timely filing of THC's or Hanover's Form 10-Q or Form 10-K with the SEC (including any filing date extension, not more than five (5) and fifteen (15) days, respectively, properly availed of and granted by the SEC pursuant to Rule 12b-25 issued by the SEC, as amended from time to time), for such fiscal quarter or the fiscal year ended with the end of such quarter, release and remit to IMR from the remaining First Portion of the IMR Collateral then pledged to Lender, within ten (10) days after Lender's receipt of such written notice and any notice and other items delivered under Sections 4.6(a) or 4.6(b) hereof, an amount thereof (up to the entire First Portion then remaining), or its proceeds, having a Market Value equal to the amount, if any, by which (i) the Excess Availability determined as of the end of such fiscal quarter, minus (ii) the amount of the Second Portion to be released with respect to such quarter under Sections 4.6(a) or 4.6(b) hereof, exceeds (iii) Five Million Dollars ($5,000,000). (d) At Lender's option, and without limiting the requirements set forth above, if no audited consolidated and consolidating financial statements for Hanover and its Subsidiaries, including Borrowers, are available for a particular fiscal year of Borrowers, or if the independent certified public accountant's opinion and report on Hanover's audited consolidated financial statements delivered to Lender for any fiscal year are qualified in any respect, then no requests for reductions or releases of any portion of the IMR Collateral with respect to the quarter ending with the end of such fiscal year or with respect to subsequent quarters may be made by Borrowers, unless and until an unqualified opinion and report of independent certified public accountants acceptable to Lender with respect to the audited consolidated financial statements of Hanover and its Subsidiaries, including Borrowers, for each fiscal year of Borrowers has been received, together with the Form 10-K of Hanover, including all financial statements as filed with the SEC. (e) In addition, at Lender's option and without limiting the requirements set forth above, Lender may require, as a condition of any request for reductions or releases of any portion of the IMR Collateral, that the certificates and information required under Sections 4.6(a) and 4.6(b) hereof, as applicable, be delivered to Lender covering all periods ending on or prior to the end of the period with respect to which a reduction or release is otherwise requested and for which Lender has not previously or concurrently with the request received such certificates and information. - 56 - 62 (f) Notwithstanding anything to the contrary set forth in Sections 4.5 and 4.6 hereof, with respect to each amount of the IMR Collateral otherwise to be released by Lender under Sections 4.5 or 4.6 hereof, such amount may, at Lender's option, be reduced to that amount, if any, which would have been released had the Excess Availability component(s) of the calculations made in order to determine the amount to be released, been determined as of the time immediately preceding the remittance to IMR of the amount to be released. (g) Notwithstanding anything to the contrary contained herein or in the IMR Limited Guarantee, if an Event of Default has occurred and is continuing, Lender shall not enforce its remedies against the IMR Collateral for a period of sixty (60) calendar days (the "IMR Waiting Period") commencing from the date of the first occurrence or existence of such Event of Default; provided, however, that such IMR Waiting Period shall not be applicable or, if already commenced, shall immediately terminate upon the commencement by or against any Borrower or IMR of a case under the Bankruptcy Code or any other bankruptcy law or similar statute or statute providing for reorganization, adjustment of debts, liquidation or dissolution or the occurrence of any other Event of Default described in Section 7.1(g) hereof, in which case Lender may enforce any of its rights or exercise any of its remedies in respect of the IMR Collateral; provided, further, that nothing contained in this Section 4.6(g) shall limit, condition or impair any of Lender's other rights and remedies hereunder after the occurrence and during the continuance of an Event of Default. (h) In calculating Excess Availability for purposes of this Section 4.6, such calculations shall be made on a basis excluding Gump's, GBM, TCSA, SDSA and Tweeds. In addition, all reductions in the amount of outstanding and unpaid Obligations of Borrowers, directly or indirectly attributable to the application of the proceeds of issuance of the 9.25% Notes on an interim basis pending their disbursement or use for the purposes contemplated by the Purchase Agreement, dated on or about August 17, 1993, among THC, H&H, the other 9.25% Guarantors and the Note Purchaser (together with the instruments and agreements thereunder or related thereto, the "Note Purchase Agreement"), shall be disregarded and Excess Availability shall be computed for all purposes under this Section 4.6 and under all other provisions of this Agreement as though such reductions had not occurred, unless Lender has received (i) a written certificate signed by the Chief Financial Officers of Hanover and HDPI and/or Brawn that such proceeds shall permanently be applied and utilized for working capital of HDPI and/or Brawn (as applicable), notwithstanding any contrary provisions of the Note Purchase Agreement, and (ii) if there are any contrary provisions in the Note Purchase Agreement, the written consent of the holders of the 9.25% Notes with respect to the use of proceeds - 57 - 63 set forth in the certificate(s) referred to in clause (i) of this Section 4.6(h). (i) Until the Principal Amount of IMR's liability under and as defined in the IMR Limited Guaranty has been reduced to zero in accordance with the provisions of the IMR Limited Guaranty and this Agreement, the amount of any intercompany loans or advances of money or property directly or indirectly provided to HDPI and/or Brawn or for their benefit by GBM, Gump's, TCSA, SDSA, Tweeds or any member of the Affiliated Borrower Group, other than HDPI and Brawn, shall be deducted from Excess Availability for purposes of this Section 4.6. SECTION 5. REPRESENTATIONS AND WARRANTIES Borrowers, jointly and severally, represent and warrant to Lender, as follows, other than with respect to IMR notwithstanding that IMR is a Guarantor, (a) which representations and warranties shall survive the execution and delivery hereof, and, except those, if any, expressly limited to the date hereof, or other specified dates, are continuing representations and warranties deemed repeated on each day this Agreement is in effect, and (b) the truth and accuracy of each of which, together with the representations and warranties in the other Financing Agreements shall be a continuing condition precedent of loans and other financial accommodations hereunder and under the other Financing Agreements: 5.1 Organization (a) Each Borrower and Guarantor is a duly organized and validly existing corporation in good standing under the laws of its State or jurisdiction of incorporation, with perpetual corporate existence, and has the corporate power and authority to own its properties and to transact the business in which it is engaged or presently proposes to engage. Each Borrower and Guarantor has qualified to do business as a foreign corporation in the States and other jurisdictions listed on Exhibit A attached hereto, which constitute all States or other jurisdictions where the nature of its business or the ownership or use of property requires such qualification and failure to so qualify would have a material adverse affect on either Borrower or on the rights and interests of Lender in the Collateral or Guarantor Collateral. (b) All of the direct and indirect Subsidiaries of Westmark and Borrowers that are Guarantors are set forth on Exhibit B-1. (c) None of the Borrowers, or any of their Subsidiaries or Hanover has any direct or indirect interest in or - 58 - 64 is a party to any Mail Order Joint Venture as of the date hereof, except as set forth on Exhibit B-2 attached hereto. (d) All of the direct or indirect Restaurant Business Subsidiaries are set forth on Exhibit B-3 attached hereto. (e) As of the date hereof, there are no Non-Guarantor Subsidiaries, except for the Restaurant Business Subsidiaries and those Subsidiaries, if any, set forth on Exhibit B-4 attached hereof. (f) None of the Borrowers or Hanover has any direct or indirect Subsidiaries as of the date hereof, except as set forth on Exhibits B-1 through B-4 attached hereto. Each of HDPI, Brawn, Gump's Holdings, Hanover Holdings and TCSA-Delaware is a wholly-owned direct Subsidiary of Hanover. Each of GBM and Gump's is a wholly-owned direct Subsidiary of Gump's Holdings. TW Acquisitions is a wholly-owned direct Subsidiary of HDPI. Tweeds is a wholly-owned direct Subsidiary of TW Acquisitions. Each of TCSA, TCS Office, TCS Manufacturing, TCS Factory, SDSA, Skandia and Skandia Downsales are wholly-owned direct Subsidiaries of TCSA-Delaware. (g) As of the date hereof, Ring has less than $50,000 of assets, excluding intercompany Indebtedness owed by HDPI to Ring; and Leavitt has less than $10,000 of assets, excluding Leavitt's investment in Ring and intercompany Indebtedness owed by HDPI to Leavitt. 5.2 Corporate Power and Authority Each Borrower and Guarantor has the corporate power and authority to execute, deliver and carry out the terms of the Financing Agreements to which it is a party and all other agreements, instruments and documents delivered by Borrowers and Guarantors pursuant hereto and thereto applicable to each, and each Borrower and Guarantor has taken or caused to be taken all necessary corporate action to authorize the execution, delivery and performance of the Financing Agreements and the other agreements relating hereto to which it is a party, the present and future borrowings and other financial accommodations which may be obtained by Borrowers hereunder and thereunder, and the execution, delivery and performance of the instruments and documents delivered and to be delivered by it pursuant hereto and thereto. This Agreement and the other Financing Agreements constitute the legal, valid and binding obligations of each Borrower and Guarantor signatory thereto, enforceable in accordance with their respective terms, except (i) to the extent the availability of equitable remedies may be subject to judicial discretion and (ii) to the extent that enforcement of certain rights and remedies of Lender may be limited by provisions of the - 59 - 65 Bankruptcy Code or other laws affecting the rights of creditors generally. 5.3 Capitalization; Solvency (a) All of the outstanding shares of common stock of each Borrower 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. (b) Hanover and its Subsidiaries, including Borrowers, on a consolidated basis, have sufficient capital to carry on all businesses and transactions in which they now engage or propose to engage, are solvent and will continue to be solvent after the creation or incurrence of the Obligations and the security interests in favor of Lender, and are able to pay their debts as they mature. 5.4 Compliance with Other Agreements and Applicable Law (a) Each Borrower and Guarantor is not in default in any respect under any indenture, mortgage, deed of trust, deed to secure debt, material lease, material license agreement or other material agreement or instrument to which it is a party or by which it or any of its assets or properties may be or are bound. (b) Neither the execution nor delivery of this Agreement, the other Financing Agreements, or any of the instruments and documents to be delivered pursuant hereto or thereto, nor the consummation of the transactions herein or therein contemplated, nor compliance with the provisions hereof or thereof, violates any law or regulation or any order or decree of any court or governmental instrumentality in any respect or does or will conflict with or result in the breach of, or constitute a default in any respect under, any indenture, mortgage, deed of trust, deed to secure debt, lease or agreement or instrument to which any Borrower or any Guarantor is a party or may be bound, which violation, breach or default could have or result in a material adverse effect on or change in the assets or business of Hanover and its Subsidiaries taken as a whole, or result in the creation or imposition of any lien, charge or encumbrance upon any of the property of any Borrower or any Guarantor (except as specifically contemplated hereunder or under the other Financing Agreements) or violate any provision of the Certificates of Incorporation or By-Laws of any Borrower or any Guarantor. (c) Subject to Section 5.8 hereof as to the matters described therein, each Borrower and Guarantor has obtained all material permits, licenses, approvals, consents, - 60 - 66 orders or authorizations of any governmental regulatory authority or other governmental body or authority required for the lawful conduct of its business and is in compliance in all material respects with the requirements of all applicable laws, rules, regulations and orders of any governmental authority relating to its business (including, without limitation, those set forth in or promulgated pursuant to ERISA, the IRC, the Occupational Safety and Health Act of 1970, as amended, all Federal, State and local statutes, regulations, rules and orders relating to consumer credit (including, without limitation, as each has been amended, the Truth-in-Lending Act, the Fair Credit Billing Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act and regulations, rules and orders promulgated thereunder), the Fair Labor Standards Act of 1938, as amended, all Federal, State and local statues, regulations, rules and orders pertaining to sales of consumer goods and mail order sales (including, without limitation, the Consumer Products Safety Act of 1972, as amended, and the Federal Trade Commission Act of 1914, as amended, and all regulations, rules and orders promulgated thereunder), the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and the Resource Conservation and Recovery Act of 1976, as amended, and any similar State or local statutes and all regulations, rules and orders promulgated thereunder. 5.5 Governmental Approval No action of, or filing with, any governmental or public body or authority is required in connection with the execution, delivery and performance by Borrowers and Guarantors of this Agreement, the other Financing Agreements or any of the instruments or documents to be delivered pursuant hereto or thereto, except for filing of UCC financing statements and the recording of other instruments required to perfect security interests or liens in certain property constituting Collateral or Guarantor Collateral. 5.6 Chief Executive Offices; Collateral Locations (a) The addresses of the principal places of business and chief executive offices of each Borrower and each member of the Affiliated Borrower Group are set forth on Exhibit C attached hereto, which addresses are the mailing addresses for said principal places of business and chief executive offices. The books and records of each Borrower and each member of the Affiliated Borrower Group are located at said addresses. Subject to Section 5.6(b) hereof, as of the date hereof, the Collateral and Guarantor Collateral is located only at the addresses set forth on Exhibit C attached hereto. (b) A Borrower or Guarantor may open any new location within the continental United States, provided it (i) - 61 - 67 gives Lender thirty (30) days prior written notice of the intended opening of any such new location and (ii) executes and delivers, or causes to be executed and delivered, to Lender such mortgages, security agreements, and other agreements, documents and instruments as Lender may deem necessary or desirable to protect its interests in the Collateral or Guarantor Collateral to be located in or with respect to such location, including, without limitation, leasehold mortgages, UCC financing statements and agreements from appropriate Persons acknowledging the liens of Lender on the Collateral or Guarantor Collateral to be located in such location, waiving any lien or claim by such Person to the Collateral or Guarantor Collateral and permitting Lender access to the premises to exercise its rights and remedies and otherwise deal with the Collateral or Guarantor Collateral, as the case may be. 5.7 Priority of Liens; Title to Properties (a) The security interests and liens granted to Lender under this Agreement and the other Financing Agreements constitute valid and perfected first priority liens and security interests in and upon the Collateral and Guarantor Collateral, subject only to the liens indicated on Exhibit D attached hereto and the liens permitted under Section 6.4 hereof or permitted under the other Financing Agreements. (b) Each Borrower and Guarantor has good and marketable title to all of its properties and assets subject to no liens, mortgages, pledges, security interests, encumbrances or charges of any kind, except those in favor of Lender and those specifically permitted under the provisions of this Agreement or the other Financing Agreements. Each Borrower and Guarantor has peaceful and undisturbed possession of all of its Inventory, Equipment and such other assets as may be necessary for its business as presently conducted or proposed to be conducted and has all leases, licenses and easements necessary for the operation of its properties and business. All such leases, licenses and easements are valid and subsisting and in full force and effect. 5.8 Taxes (a) Each Borrower and Guarantor has filed, or has caused to be filed all Federal, State, county, local, foreign and other tax returns, reports and declarations which are required to be filed by it and as to which an extension has not been granted, and has paid or caused to be paid all such taxes due and payable, and has collected, deposited and remitted all taxes applicable to the conduct of its business, except, in each case, taxes the validity or applicability of which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside on its books, in the - 62 - 68 determination of Lender, or if requested by Lender, to protect Lender's security interests or liens in any Collateral or Guarantor Collateral, adequate amounts have been escrowed with or reserved against availability by Lender or other arrangements satisfactory to Lender have been made to cover all amounts which are claimed due plus interest and possible penalties thereon (subject in the case of sales and/or use taxes, to the provisions of Section 2.5(b) hereof). (b) Each Borrower, and to the extent applicable each member of the Affiliated Borrower Group, has collected, deposited and remitted all sales and/or use taxes applicable to its business required to be collected under the valid laws of the United States and each possession or territory thereof, and each State or political subdivision thereof, including any State in which any Borrower owns any Inventory or owns or leases property, including, without limitation, the States of Pennsylvania, New Jersey, California, Texas, Virginia and Wisconsin; provided, however, the representations and warranties as to sales and use taxes contained in this Section 5.8(b) shall be considered materially untrue if, but only if, the aggregate amount of such applicable sales and use taxes not collected, deposited or remitted shall in the aggregate be equal to or greater than Two Hundred Fifty Thousand Dollars ($250,000). 5.9 Litigation Except as set forth in Exhibit F attached hereto, there is no investigation by any governmental agency pending or threatened against or affecting any Borrower or any other member of the Affiliated Borrower Group or their properties or business, and there is no action, suit, proceeding or claim by any Person pending or threatened against any Borrower or any other member of the Affiliated Borrower Group or their properties or business (other than future pending or threatened litigation involving the enforcement of lease obligations by or against Hanover as successor to H&H as to leased properties not used in or related to the business of Borrowers), or against or affecting any transactions contemplated by this Agreement, the other Financing Agreements, or other instruments, agreements or documents delivered in connection herewith or therewith, which could reasonably be expected to result in a determination adverse to any Borrower or any other member of the Affiliated Borrower Group, and which, if so adversely determined with respect to any of them, would result in either (i) a fine, judgment, penalty, loss or liability, including costs and attorneys' fees, not covered by insurance, which, individually, exceeds Two Hundred Thousand Dollars ($200,000) or (ii) any material adverse change in the business, assets, liabilities or financial condition of any Borrower or of the Affiliated Borrower Group taken as a whole. - 63 - 69 5.10 Intellectual Property Each Borrower individually and the other members of the Affiliated Borrower Group taken as a whole, own or license all patents, trademarks and copyrights and holds all licenses, which are necessary for the operation of their business as presently conducted or proposed to be conducted. No product, process, method, substance, part or other material presently contemplated to be sold by or employed by Borrowers or the other members of the Affiliated Borrower Group, infringes any patent, trademark, service-mark, trade name, copyright, license or other right owned by any other Person, except as set forth on Exhibit F attached hereto and no claim or litigation is pending or threatened against or affecting any Borrower or the other members of the Affiliated Borrower Group, contesting its right to sell or use any such product, process, method, substance, part or other material. No patent, invention, device or application is pending, or, to the best of Borrowers' knowledge, proposed which would substantially reduce the projected revenues of, or otherwise materially adversely affect the business, assets, liabilities, or financial condition of any Borrower individually, or the other members of the Affiliated Borrower Group taken as a whole. 5.11 Employee Benefits (a) None of the Borrowers or any other member of the Affiliated Borrower Group, has engaged in any transaction in connection with which any Borrower or any other member of the Affiliated Borrower Group could be subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA or a tax imposed by Section 4975 of the IRC, which, individually or in the aggregate, is greater than Two Hundred Fifty Thousand Dollars ($250,000). (b) No liability to the Pension Benefit Guaranty Corporation has been or is expected by Borrowers or any other member of the Affiliated Borrower Group to be incurred with respect to any employee pension benefit plan of any Borrower or any other member of the Affiliated Borrower Group, except for insurance premiums that are required to be paid to the Pension Benefit Guaranty Corporation that are not past due. There has been no reportable event (within the meaning of Section 4043(b) of ERISA) or any other event or condition with respect to any employee pension benefit plan which presents a risk of (i) termination of any such plan by the Pension Benefit Guaranty Corporation and (ii) potential liability of any Borrower or any other member of the Affiliated Borrower Group to the Pension Benefit Guaranty Corporation in connection with such termination which in the aggregate potential liability may be greater than Two Hundred Fifty Thousand ($250,000). - 64 - 70 (c) Full payment has been made of all amounts which any Borrower or any other member of the Affiliated Borrower Group is required to have paid under the terms of each employee pension benefit plan as contributions to such plan as of the last day of the most recent fiscal year of such plan, and no accumulated funding deficiency (as defined in Section 302 of ERISA and Section 412 of the IRC), whether or not waived, exists with respect to any employee pension benefit plan. (d) The current value of all vested accrued benefits under all employee pension benefit plans of Borrowers or any other member of the Affiliated Borrower Group does not exceed the current value of the assets of such plans allocable to such vested accrued benefits. The terms "current value" and "accrued benefit" have the meanings specified in Section 3(26) and Section 3(23) of ERISA, respectively. (e) None of the Borrowers or any other member of the Affiliated Borrower Group is or has ever been obligated to contribute to any "multiemployer plan" (as such term is defined in Section 3(37) or 4001(a)(3) of ERISA or Section 414 of the IRC) that is subject to Title IV of ERISA. 5.12 Investment Company None of the Borrowers or any Guarantor is an "investment company", or an "affiliated person" or "promoter" or "principal underwriter", as such terms are defined in the Investment Company Act of 1940, as amended (15 U.S.C. Section 80a-1, et seq.). The making of the loans and provisions of the other financial accommodations hereunder by Lender, the application of the proceeds and the repayment thereof by Borrowers and/or Guarantors and the performance of the transactions contemplated herein and in the other Financing Agreements will not violate any provision of said Act, or any rule, regulation or order issued pursuant thereto. 5.13 Regulation G; Securities Exchange Act of 1934 None of the Borrowers or any Guarantor owns any "margin stock" as such term is defined in Regulation G, as amended (12 C.F.R. Part 207) of the Board. The proceeds of the borrowings and other financial accommodations made pursuant to the Existing Loan Agreement, this Agreement and the other Financing Agreements have been and will be used by Borrowers only for the purposes contemplated thereunder and hereunder. None of the proceeds have been or will be used, directly or indirectly, for the purpose of purchasing or carrying any margin stock or for the purpose of reducing or retiring any Indebtedness which was originally incurred to purchase or carry any margin stock or for any other purpose which might cause any portion of the loans and other financial accommodations under the Existing Loan Agreement or - 65 - 71 hereunder to be considered a "purpose credit" within the meaning of Regulation G of the Board, as amended. None of the Borrowers or any Guarantor will take, nor will they permit any agent acting in any of their behalves to take, any action which might cause this Agreement or the other Financing Agreements, or instruments delivered pursuant hereto or thereto, to violate any regulation of the Board or to violate the Securities Exchange Act of 1934 or any state or other securities laws, in each case as in effect on May 5, 1993 or as amended thereafter. 5.14 No Material Adverse Change There has been no material adverse change in the business, assets, liabilities or financial condition of the Affiliated Borrower Group taken as a whole from December 26, 1992; provided, that the corporate actions taken to effect the corporate reorganization consisting of changes in ownership of certain members of the Affiliated Borrower Group, other than Borrowers, as set forth on Exhibit K to the Existing Loan Agreement, shall not in and of themselves be considered a material adverse change. 5.15 Financial Statements (a) None of the financial statements, reports and other information furnished or to be furnished by Borrowers to Lender with respect to Borrowers, Guarantors or other members of the Affiliated Borrower Group contains, as of their respective dates, any untrue statement of material fact or omits to state any material fact necessary to make the information therein not misleading. Such financial statements and reports were and shall be prepared in accordance with generally accepted accounting principles, in effect on the date thereof, consistently applied, and shall fairly, completely and accurately present the financial condition and results of operations of the applicable Persons, as of the dates and for the periods indicated thereon. (b) The cash flow projections for Borrowers (together with any summaries of assumptions and projected assumptions, based on historical performance with respect thereto) furnished by Borrowers to Lender have been prepared in a manner consistent with the generally accepted accounting principles used to prepare their financial statements, and represent the reasonable, good faith opinion of Borrowers and their management as to the subject matter thereof and based on assumptions as set forth therein which Borrowers have determined to be fair and reasonable in view of current and reasonably foreseeable business conditions. 5.16 Disclosure (a) The information contained in, and the representations and warranties set forth in this Agreement, the - 66 - 72 other Financing Agreements, or in any other instrument, document, list, certificate, written statement, oral statement by a Responsible Officer, schedule or exhibit delivered or to be delivered to Lender, as contemplated in this Agreement or in the other Financing Agreements, does not contain any untrue statement of a material fact and does not omit and will not omit to state a material fact necessary in order to make the information contained herein or therein not misleading. (b) After giving effect to the transactions contemplated by this Agreement, the other Financing Agreements, and the other instruments or documents delivered in connection herewith and therewith, there does not exist and there has not occurred any condition or event which constitutes an Event of Default or Incipient Default. 5.17 Labor Disputes As of the date hereof, there is no collective bargaining agreement or other labor contract covering employees of Borrowers or any other member of the Affiliated Borrower Group. Except as set forth on Exhibit J attached hereto, as of the date hereof, no Borrower has any knowledge that any union or other labor organization is seeking to organize, or to be recognized as, a collective bargaining unit of employees of Borrowers or any other member of the Affiliated Borrower Group. As of the date hereof, there is no pending or, to the best knowledge of each Borrower, threatened strike, work stoppage, material unfair labor practice claims, or other material labor dispute against or affecting any Borrower or any other member of the Affiliated Borrower Group or any of their respective employees. 5.18 Corporate Name; Prior Transactions Borrowers and Guarantors have not, during the one (1) year period ending on the date hereof, been known by or used any other corporate or fictitious name or been a party to any merger or consolidation, or acquired all or substantially all of the assets of any Person, or acquired any material amount of their property or assets out of the ordinary course of business, except as set forth on Exhibit G attached hereto. 5.19 Accounts (a) Each Account represents a valid and legally enforceable indebtedness based upon an actual bona fide sale and delivery of goods or lease or license of customer or mailing lists or rendition of services, in each case in the ordinary course of the business of Borrowers which has been finally accepted by the Account Debtor and for which the Account Debtor is unconditionally liable to make payment of the amount stated in each invoice, customer or mailing list rental or license - 67 - 73 agreement, credit card transaction record, instrument or other document evidencing the Account in accordance with the terms thereof, without any offset, defense or counterclaim known to Borrowers, except those offsets, defenses or counterclaims, related to Accounts not in excess of the amount set forth in Section 5.19(c) hereof, disclosed in writing to Lender upon Borrowers' acquiring knowledge thereof (which disclosure need only be made by disclosing the gross amount of non-conforming Accounts). (b) To the best of Borrowers' knowledge, all statements made and all unpaid balances appearing in the invoices, customer or mailing list rental or license agreements, credit card transaction records, instruments or other documentation evidencing each Account are true and correct and are in all respects what they purport to be and all signatures and endorsements that appear thereon are genuine and all signatories and endorsers have full capacity to contract and each Account Debtor is solvent and financially able to pay in full the Account when it matures, except as disclosed in writing to Lender upon Borrowers' acquiring information to the contrary involving Accounts not in excess of the amount set forth in Section 5.19(c) hereof (which disclosure need only be made by disclosing the gross amount of non-conforming Accounts). (c) The representations and warranties as to the Accounts contained in Sections 5.19(a) and (b) hereof shall be considered materially untrue if, but only if, there are non-conforming Accounts of Borrowers, whether or not known to Borrower or disclosed to Lender, which, on an aggregate basis at any one time outstanding, shall be equal to or greater than Two Hundred Fifty Thousand Dollars ($250,000). (d) None of the transactions underlying or giving rise to any Account violates on the part of any Borrower any State, Federal or foreign laws or regulations, and all documents relating to the Accounts are legally sufficient under such laws or regulations and shall be legally enforceable in accordance with their terms, subject to the bankruptcy of the Account Debtor and judicial discretion affecting equitable remedies, and all recording, filing and other requirements of giving public notice under any applicable law have been duly satisfied, including, without limitation, the filing of any report in the States of New Jersey, Minnesota and Indiana with the New Jersey Division of Taxation, the Minnesota Department of Revenue and the Indiana Department of State Revenue, respectively. - 68 - 74 5.20 Schedule of Indebtedness (a) Exhibit H-1 attached hereto is a complete and correct list of (i) all credit agreements, notes, indentures, debt purchase agreements, purchase agreements, agreements involving aggregate deferred payment obligations for the purchase of assets in excess of Two Hundred Fifty Thousand Dollars ($250,000), capitalized leases and other investments, arrangements and agreements in effect as of the date hereof providing for or relating to extensions of credit in which Hanover or any Subsidiaries of Hanover (including Borrowers and any of their Subsidiaries) are in any manner directly or contingently liable; (ii) the maximum principal amounts of the credit and the current amount outstanding under all such agreements; and (iii) an accurate description of any security interest, lien, mortgage or other charge or encumbrance whatsoever given as security therefor. (b) Exhibit H-2 attached hereto is a complete and correct list of all (i) letters of credit made available under the QCC Credit Agreement in effect as of the date hereof pursuant to which Hanover or any Subsidiary of Hanover (including HDPI, Brawn and any of their Subsidiaries) are directly or contingently liable; (ii) the expiration date of each such letter of credit; and (iii) an accurate description of any security interest, lien, mortgage or other charge or encumbrance whatsoever given as security therefor and not released on or prior to the date hereof. (c) Exhibit H-4 attached hereto is a complete and correct list of all intercompany balances each of HDPI and Brawn owed to THC or H&H and to each other Subsidiary of THC or H&H as of May 22, 1993, all of which constitute the unpaid balances as of such date of legal, valid and binding Indebtedness incurred for fair consideration consisting of money or property or rendition of services, in each case in the amounts and owed by the Persons as indicated on such Exhibit H-4 attached hereto. 5.21 Ownership As of the date hereof: (a) Based upon a certificate of the Secretary of NAR, NAR is the direct and beneficial owner of all of the issued and outstanding voting shares of (i) Quadrant Group, which is the direct and beneficial owner of all of the issued and outstanding voting shares of QCC and (ii) IMR; (b) Based upon a certificate of the Secretary of NAR, NAR is the direct beneficial owner of all of the issued and outstanding voting shares of Westmark, which is the direct and beneficial owner of approximately fifty-four and four-tenths - 69 - 75 percent (54 4/10%) of all of the issued and outstanding voting shares of Hanover and NAR is entitled, through Westmark, to elect a majority of the members of the Board of Directors of Hanover; (c) Hanover is the direct and beneficial owner of all of the issued and outstanding shares of HDPI, Brawn, Gump's Holdings, Hanover Holdings, TCSA-Delaware, HSC, DM Advertising and Leavitt and is entitled to elect all the members of the Board of Directors of each of HDPI, Brawn, Gump's Holdings, TCSA-Delaware, HSC Leavitt and DM Advertising; and (d) HDPI is the direct and beneficial owner of all of the issued and outstanding shares of each of HDMM, Hanover List, York Fulfillment and TW Acquisitions. Brawn is the direct and beneficial owner of all of the issued and outstanding shares of HIM. TW Acquisitions is the direct and beneficial owner of all of the issued and outstanding shares of Tweeds. TCSA- Delaware is the direct and beneficial owner of all al of the issued and outstanding shares of each of TCSA, SDSA, Skandia, Skandia Downsales, TCS Factory, TCS Office and TCS Manufacturing. Leavitt is the direct and beneficial owner of all of the issued and outstanding shares of Ring. 5.22 Common Enterprise Borrowers and the other members of the Affiliated Borrower Group collectively operate as interdependent businesses and constitute a unitary business enterprise for the retail sale through direct mail marketing and stores of, among other things, men's fashions, women's fashions, home furnishings, general merchandise and giftware, down comforters, blankets, sheets, towels and outer garments, in which, among other things: (i) Borrowers effect the processing of orders and the collection and disbursement of funds by virtue of the same Private Credit Card Agreement and certain Borrowers are joint parties to Third Party Credit Card Agreements in order to facilitate administrative efficiency and cost savings; (ii) the collections of customer payments of HDPI and Brawn are remitted to and otherwise deposited into a common account, the collections of customer payments of GBM and Gump's are remitted to and otherwise deposited into a common account and, the collections of customer payments of operating subsidiaries or TCSA-Delaware are remitted to and otherwise deposited into a common account; (iii) the Borrowers and other members of the Affiliated Borrower Group share office and warehouse space, computer and accounting systems, distribution and other equipment; (iv) Borrowers operate a common telephonic answering, order taking and transmission service for the mail order business of Borrowers; (v) DM Advertising assists in the development and production of the mail order catalogs of each of Borrowers and of other promotional and advertising materials; (vi) Hanover furnishes managerial and other services on behalf of Borrowers and the - 70 - 76 other Subsidiaries of Hanover; (vii) Hanover and the Subsidiaries of Hanover file consolidated tax returns; (viii) certain Borrowers have made, and Borrowers may in the future make, intercompany loans to and borrow money from each other, and HDPI has made, and may in the future make loans to and borrows money from Hanover and the other Subsidiaries of Hanover; and (ix) Hanover and its Subsidiaries have many common officers and directors. 5.23 Subordination of Certain Obligations The payment terms and subordination provisions contained in the H&H and THC debt instruments described in Exhibit E attached hereto have not been amended, modified or revised and shall not be amended, modified or revised without the prior written consent of Lender, except for extensions of the maturity date beyond the then current Term which do not involve any increase in the principal amount outstanding greater than the amount outstanding as of May 5, 1993 as set forth on Exhibit H-1 attached hereto. SECTION 6. ADDITIONAL COVENANTS In addition to the covenants set forth in the other Financing Agreements, Borrowers hereby, jointly and severally, covenant to and agree with Lender that Borrowers shall comply with the following covenants, or cause the same to be complied with, other than with respect to IMR notwithstanding that IMR is a Guarantor, unless Lender shall otherwise consent in writing: 6.1 Tradenames Borrowers may from time to time use the tradenames listed on Exhibit G attached hereto (which, together with any new tradenames used after the date hereof are referred to collectively as the "Tradenames" and individually, as a "Tradename"). As to the respective Tradenames used by each of them, each Borrower hereby agrees that: (a) Each Tradename is a tradestyle (and not an independent corporation or other legal entity) by which such Borrower may identify and sell or lease certain of its goods or services and conduct a portion of its respective business. (b) All proceeds (including any returned merchandise) which arise from the sale or lease of goods sold under a Tradename, except to the extent indicated on Exhibit G attached hereto in respect of the Tradenames owned by the Avon Mail Order Joint Venture and the Essence Mail Order Joint Venture, shall be owned solely by the respective Borrower and shall be subject to the security interests of Lender and the other terms of this Agreement and the other Financing Agreements. - 71 - 77 (c) New Tradenames may be used by Borrowers, but only if (i) Lender is given at least thirty (30) days prior written notice of the intended use of any new Tradename and (ii) such supplemental financing statements or similar instruments Lender may request shall be executed and delivered to Lender by the respective Borrower intending to use same for filing or recording by Lender prior to the use of such new Tradename. 6.2 Subsidiaries Borrowers shall not form or acquire, and Hanover shall not form or acquire, any direct or indirect Subsidiaries without the prior written consent of Lender, other than Non-Guarantor Subsidiaries acquired or formed by Hanover and other than Mail Order Joint Ventures which are Subsidiaries of Borrowers. In the sole discretion of Lender, in the event Lender's consent is required and Lender so consents, and in the case of Mail Order Joint Ventures which are Subsidiaries of Borrowers, upon such formation or acquisition, each Borrower or Hanover, as the case may be, shall cause each such Subsidiary, so formed or acquired by it, that owns, or is contemplated to own, assets having a fair market value greater than Ten Thousand Dollars ($10,000) to execute and deliver to Lender, in form and substance satisfactory to Lender: (a) an absolute and unconditional guarantee of payment of any and all present and future Obligations of Borrowers to Lender, (b) an agreement to be bound by the terms of this Agreement as though it were an original party hereto or a General Security Agreement, as Lender may require, (c) related UCC financing statements, and (d) such other mortgages, security and other agreements, documents and instruments as Lender may require, including, but not limited to, supplements and amendments hereto and other loan agreements or instruments evidencing Indebtedness of such new Subsidiary to Lender. With respect to each direct or indirect Subsidiary of Hanover listed on Exhibit B-1 attached hereto that owns assets with a fair market value greater than Ten Thousand Dollars ($10,000), Borrowers shall cause each such Subsidiary to execute and deliver to Lender each of the items referred to in subsections (a) through (d) of this Section 6.2, unless such Subsidiary is dissolved by December 31, 1993. 6.3 Indebtedness Borrowers shall not, and shall not permit any of their respective Subsidiaries, and Hanover shall not permit any of its Subsidiaries, other than Non-Guarantor Subsidiaries, to incur, create, assume or permit to exist any Indebtedness for Borrowed Money, except: (a) the Obligations of Borrowers and any Subsidiary to Lender; - 72 - 78 (b) Indebtedness of Borrowers or such Subsidiary where payment is secured solely by liens permitted under Section 6.4 hereof; (c) Indebtedness of Borrowers to the Private Credit Card Purchaser under the Private Credit Card Agreement and Indebtedness of Borrowers to the parties to the Third Party Credit Card Agreements pursuant to the terms thereof; (d) Indebtedness of Borrowers to IMR and QCC all of which is subordinated in right of payment and as to enforcement of remedies, as provided in the QCC-IMR Subordination Agreement; (e) Indebtedness described on Exhibits H-1 through H-4 attached hereto and any successor or replacement financing with terms and evidenced by documents, instruments or agreements in form and substance acceptable to Lender in its discretion; (f) Intercompany loans or advances permitted under Section 6.5 hereof; (g) Indebtedness consisting of capital lease obligations in the aggregate amount outstanding at any one time of not greater than Five Million Dollars ($5,000,000) incurred in carrying out the Borrowers' computer systems replacement and upgrade plan; (h) Indebtedness of Borrowers or other Subsidiaries of Hanover, and guaranties thereof by Hanover, incurred for the establishment or acquisition of, and improvements to, new Eligible Inventory Locations, first leased or acquired by Borrowers after May 5, 1993, provided (i) the aggregate amount of all such Indebtedness at any one time outstanding does not exceed Fifteen Million Dollars ($15,000,000) and (ii) the principal amounts or components of debt service and/or lease payments in respect of such Indebtedness and related expenditures for improvements do not exceed One Million Dollars ($1,000,000) in the aggregate in any one fiscal year of Borrowers; and (i) Indebtedness of the 9.25% Guarantors to the holders of the 9.25% Notes as guarantors thereof, provided the 9.25% Notes and all Indebtedness evidenced thereby or related thereto, including the guarantees thereof by the 9.25% Guarantors, shall be unsecured (except for the Pledged Intercompany Note) and subordinated in right of payment to the Obligations of Hanover (as successor to THC) and of the 9.25% Guarantors upon the terms set forth in the Subordination Agreement dated on or about August 17, 1993 between Lender and the Note Purchaser and acknowledged by the Indenture Trustee (as - 73 - 79 defined therein), THC and the 9.25% Guarantors (as the same now exists or may hereafter be amended, modified, supplemented, restated or replaced, the "9.25% Subordination Agreement"); provided, that, (A) the aggregate principal amount of such Indebtedness at any time outstanding shall not exceed $20,000,000, (B) HDPI, Brawn and Hanover shall promptly furnish to the Lender such information and documents with respect thereto and as Lender may, from time to time, reasonably request, (C) the 9.25% Guarantors and Hanover shall not, directly or indirectly, (1) make any payments or prepayments in respect of principal or interest in respect of such Indebtedness, or any expenses related thereto, except as expressly permitted under the 9.25% Subordination Agreement, or (2) amend, modify, alter or change the terms of the arrangements or any agreements with respect to such Indebtedness, or (3) redeem, retire, defease, purchase or otherwise acquire any such Indebtedness, or set aside or otherwise deposit or invest any sums for such purpose, except that the 9.25% Notes may be refinanced on the same subordinated basis with Hanover as the borrower and no additional obligors within the Affiliated Borrower Group, in an amount not to exceed $20,000,000 in the aggregate for such refinancing(s) provided (x) the proceeds are used to repay the 9.25% Notes and (y) there is no increase in the rate of interest above twelve (12%) percent per annum or in the frequency of interest payments or any change in the scope or terms of subordination (which terms of subordination shall be set forth in a subordination agreement having the same terms as the 9.25% Subordination Agreement, modified as appropriate, to refer to the debt and the holders and other parties thereto, the proceeds of which are used for such refinancing) other than any changes which are not adverse to Lender, and (D) Hanover and the 9.25% Guarantors shall furnish to Lender all notices, demands or other materials in connection with such Indebtedness promptly after the receipt thereof by them or concurrently with the sending thereof by them or on their behalf, as the case may be. 6.4 Limitation on Liens Each Borrower shall not, and shall not permit any of its respective Subsidiaries, and Hanover shall not permit any of its Subsidiaries, other than Non-Guarantor Subsidiaries, to, create, incur, assume, or permit to exist any mortgage, pledge, security interest, lien, encumbrance, defect in title or restriction upon the use of its respective real or personal properties, whether now owned or hereafter acquired, except: (a) the liens, encumbrances, or security interests in favor of Lender; (b) tax, mechanics and other non-consensual statutory liens arising in the ordinary course of Borrowers' or such Subsidiary's business to the extent: (i) such liens secure - 74 - 80 Indebtedness which is not overdue or (ii) until foreclosure or similar proceedings shall have been commenced, such liens secure Indebtedness relating to claims or liabilities which are (A) fully insured and being defended at the sole cost and expense and at the sole risk of the insurer or (B) being contested in good faith by appropriate proceedings available to each Borrower and are adequately escrowed for or reserved against loan availability by Lender (subject in the case of reserves established for sales and/or use taxes to the provisions of Section 2.5(b) hereof), or as otherwise provided for under arrangements satisfactory to Lender; (c) liens arising in connection with worker's compensation, unemployment insurance, surety, insurance or financial responsibility, appeal and release bonds, in each case limited to securities pledged as collateral for any of the foregoing; (d) liens or security interests constituting purchase money liens or security interests upon specific fixed assets acquired, or liens or security interests existing on any such fixed assets at the time of acquisition thereof and including capital leases; provided, that: (i) no such purchase money lien or security interest (or capital lease, as the case may be) with respect to specific fixed assets shall extend to or cover any other property other than the specific fixed assets so acquired, or acquired subject to such lien or security interest (or lease), or accessions thereto and the proceeds thereof; (ii) such lien or security interest only secures the obligation to pay the purchase price of such specific fixed assets (or the obligations under the capital lease); (iii) the principal amount secured thereby shall not exceed one hundred (100%) percent of the cost of the fixed assets so acquired; and (iv) no Event of Default or Incipient Default shall have occurred and be continuing; (e) liens of the Private Credit Card Purchaser on the GECC Collateral; (f) liens or rights of set off against credit balances, but not liens on or rights of set off against other property of Borrowers, arising under the Third Party Credit Card Agreements; (g) liens on equipment or leasehold improvements securing the Indebtedness under the capital lease obligations and - 75 - 81 incurred for leasehold establishment and improvements as permitted by Section 6.3(g) and (h) hereof; and (h) the liens or security interests granted by Tweeds in favor of R.R. Donnelley & Sons Company ("Donnelley & Sons") and R.R. Donnelley Receivables, Inc. ("DRI") in all of the personal property of Tweeds to secure the Indebtedness of Tweeds to Donnelley & Sons and DRI evidenced by the Installment Note dated as of March 29, 1993, by Tweeds in favor of DRI in the original principal amount of $2,850,801.85 (as in effect on the date thereof) and subject to the Subordination and Intercreditor Agreement, dated as of March 29, 1993, among Lender, Donnelley & Sons and DRI; provided, that, by no later than December 31, 1993, all such liens and security interests granted by Tweeds in favor of Donnelley & Sons and DRI shall be, and all such Indebtedness satisfied, in each case by the issuance of HDI common stock to Donnelley & Sons and/or DRI in accordance with the agreement among HDI, Donnelley & Sons and/or DRI entered into in connection with the Tweeds Acquisition. 6.5 Loans; Investments; Guarantees; Etc. Borrowers shall not, and shall not permit any of their respective Subsidiaries, and Hanover shall not permit any of its Subsidiaries, other than Non-Guarantor Subsidiaries, to, directly or indirectly, make any loans or advance money or property to any Person, or invest in (by capital contribution, dividend or otherwise) or purchase or repurchase the stock or Indebtedness or all or a substantial part of the assets or properties of any Person, or guarantee, assume, endorse, or otherwise become responsible for (directly or indirectly) or pay the Indebtedness, performance, obligations, stock or dividends of any person or agree to do any of the foregoing, except: (a) the Guarantees of the Obligations of Borrowers in favor of Lender; (b) Provided no Event of Default or Incipient Default has occurred and is continuing: (i) short-term loans or advances of money by one Borrower to another Borrower in the ordinary course of business, or by a Borrower to any other Subsidiary of Hanover, other than to a Non-Guarantor Subsidiary, in the ordinary course of business; (ii) repayment by Borrowers to Hanover of valid intercompany Indebtedness described on Exhibit H-4 attached hereto: (A) in the aggregate amount during Borrowers' fiscal year ending on or about - 76 - 82 December 31, 1993 not to exceed Five Million Two Hundred Thousand Dollars ($5,200,000) solely to be used by THC or Hanover to pay (x) dividends, sinking fund payments or redemption payments required under the terms and conditions existing as of May 5, 1993 of the THC 7.5% Cumulative Convertible Preferred Stock, and the THC Class B 8% Cumulative Preferred Stock or the preferred stock of Hanover issued in conversion thereof having the same terms issued pursuant to the reorganization described on Exhibit K to the Existing Loan Agreement; and (y) interest on the H&H 7 1/2% Convertible Subordinated Debentures according to their terms existing as of May 5, 1993; (B) [Intentionally Deleted] (C) in the aggregate amount during Borrowers' fiscal year ending on or about December 31, 1994 not to exceed Six Million Fifty Thousand Dollars ($6,050,000), solely to be used by Hanover to pay (x) dividends, sinking fund payments or redemption payments required under the terms and conditions existing as of May 5, 1993 of the THC 7.5% Cumulative Convertible Preferred Stock and the THC Class B 8% Cumulative Preferred Stock or the preferred stock of Hanover issued in conversion thereof having the same terms issued pursuant to the reorganization described on Exhibit K to the Existing Loan Agreement, and (y) interest on the H&H 7 1/2% Convertible Subordinated Debentures according to their terms existing as of May 5, 1993; (D) in the aggregate amount during Borrowers' fiscal year ending on or about December 31, 1995 not to exceed Four Million Three Hundred Thousand Dollars ($4,300,000), solely to be used by Hanover to pay (x) dividends, sinking fund payments or redemption payments required under the terms and conditions existing as of May 5, 1993 of the THC 7.5% Cumulative Convertible Preferred Stock and the THC Class B 8% Cumulative Preferred Stock or the preferred stock of Hanover issued in conversion thereof having the same terms issued pursuant to the reorganization described on Exhibit K to the Existing Loan Agreement, and (y) interest on - 77 - 83 the H&H 7 1/2% Convertible Subordinated Debentures according to their terms existing as of May 5, 1993; and (E) in the aggregate amount necessary to pay, and so used by Hanover to pay, a portion of the regularly scheduled payments of interest under the 9.25% Notes, but not to exceed such interest upon $14,000,000 in principal amount of the 9.25% Notes, or up to $14,000,000 in principal at scheduled maturity when due under the 9.25% Notes, or in the amount necessary to pay the out-of-pocket expenses of the Note Purchaser and the Indenture Trustee in respect of the 9.25% Notes, in each case according to the terms of the 9.25% Notes as in effect as of August 17, 1993 and provided that such payments are permitted to be made and received under the terms of the 9.25% Subordination Agreement. (iii) repayment by Borrowers to Hanover of intercompany loans, not to exceed $6,000,000 in principal amount, plus interest thereon, made by THC to Borrowers with such amount of the proceeds of issuance of the 9.25% Notes remaining after the prepayment, discharge or defeasance of all Indebtedness under the then outstanding Amended 8% Senior Subordinated Notes of THC and the 14% Senior Subordinated Debentures of H&H, which intercompany loans were initially used by Borrowers for working capital; provided that such repayments are used by Hanover as provided in Section 6.27 hereof, or, if so required by paragraph 6 of the 9.25% Notes, to effect any required prepayment, not to exceed $6,000,000 in principal amount, plus interest thereon, of the 9.25% Notes. (c) the endorsement of instruments for collection or deposit in the ordinary course of business; (d) investments in any new Mail Order Joint Venture that is formed in accordance with Section 6.2 hereof or, if not a Subsidiary of a Borrower, is permitted under Section 6.26 hereof; (e) the guarantee by any of the Borrowers in favor of American Express Travel Related Services Company,. Inc., a Third Party Credit Card Issuer, of any Indebtedness of any of the other Borrowers arising under the Independent and Chain Establishment Agreement dated January 29, 1991, among Borrowers and American Express Travel Related Services Company, Inc. with respect to rights of chargeback or setoff or otherwise, subject nevertheless to the rights of Lender under the Third Party Credit - 78 - 84 Card Acknowledgments to which such Third Party Credit Card Issuer (or its Affiliates) is a party; and (f) investments in the following instruments, which shall be pledged and delivered to Lender upon Lender's request, (i) marketable obligations issued or guaranteed by the United States of America or an instrumentality or agency thereof, maturing not more than one (1) year after the date of acquisition thereof, (ii) certificates of deposit or other obligations maturing not more than one (1) year after the date of acquisition thereof issued by any bank or trust company organized under the laws of and located in the United States of America or any State thereof and having capital, surplus and undivided profits of at least One Hundred Million Dollars ($100,000,000), and (iii) open market commercial paper with a maturity not in excess of two hundred seventy (270) days from the date of acquisition thereof which have the highest credit rating by either Standard & Poor's Corporation or Moody's Investors Service, Inc. 6.6 Transactions with Affiliates Borrowers shall not, and shall not permit any of their respective Subsidiaries, and Hanover shall not permit any of its Subsidiaries, other than Non-Guarantor Subsidiaries, to, directly or indirectly: (a) purchase, acquire or lease any property from, or sell, transfer or lease any property to, any shareholder, officer, director, agent, employee or Affiliate, except on prices or terms no less favorable than would have been obtained in an arm's length transaction with a non-Affiliated Person, unless such transaction is permitted by another provision of this Section 6.6 or Section 6.5 hereof, but in no event shall any such transaction be engaged in by Borrowers or other members of the Affiliated Borrower Group with a Non-Guarantor Subsidiary without Lender's prior written consent in each instance; or (b) make any payment of management fees, tax sharing payments, dividends, distributions (other than its own capital stock), or the principal amount of or interest on any Indebtedness owing to any Affiliate, except (i) with respect to any entire fiscal year of Borrowers for which a consolidated Federal income tax return is filed by H&H or Hanover that includes Borrowers and a positive consolidated tax liability is due, as calculated and shown in the consolidated federal income tax return as filed by H&H or Hanover, as the case may be, each Borrower may pay to H&H or Hanover, as the case may be, an amount, not to exceed the lesser of (x) such Borrower's allocable share of the consolidated Federal income tax liability for each such year and (y) the accrued and unpaid liability of such Borrower to H&H or Hanover - 79 - 85 arising under the Tax Sharing Agreement in respect of the prior use by such Borrower of H&H's or Hanover's net operating losses to reduce the amount of Federal income tax liability otherwise payable for any prior fiscal year of such Borrower had its Federal income tax liability for such year been computed on a separate Federal income tax return instead of a consolidated Federal income tax return with H&H or Hanover, as the case may be; provided, that, such Borrower is required to make each such payment to H&H or Hanover pursuant to the Tax Sharing Agreement; (ii) repayment of intercompany loans and advances permitted under Section 6.5 hereof and repayment by GBM, Gump's and/or Gump's Holdings to H&H or Hanover of up to $400,000 advanced by H&H to GBM, Gump's and/or Gump's Holdings for expenses incurred in connection with the Gump's Acquisition. (iii) management fees to NAR or an Affiliate of NAR in the aggregate amount of not greater than Seven Hundred Fifty Thousand Dollars ($750,000) in each of calendar years 1993, 1994 and 1995; (iv) customary and reasonable directors' fees to directors of Borrowers or Hanover, in the same amounts as are paid to its non-Affiliate directors; (v) payments of legal expenses incurred by H&H, THC or Hanover on behalf of Borrowers, not to exceed Two Hundred Fifty Thousand Dollars ($250,000) in any one fiscal year of Borrowers, plus additional amounts for, respectively, the settlement of the litigation described as Shapiro v. H&H on Exhibit F hereto of not more than Sixty-Five Thousand Dollars ($65,000) and of the litigation described as Clay v. BOA on Exhibit F hereto of not more than One Hundred Seventy-Five Thousand Dollars ($175,000); and (vi) payments made by one Borrower to another Borrower to reconcile the payments posted in due course to the respective Accounts of such Borrower and other receipts with the application of daily collections and receipts to the respective loan accounts of Borrowers hereunder; provided, however, in each case under clauses (i) through (v) of Section 6.6(b) hereof that no Event of Default or Incipient Default has occurred and is continuing; or (c) declare or pay any dividend on account of any share of any class of capital stock of Borrowers or any Subsidiary of Hanover, or any other Person, now or hereafter outstanding, or set aside or otherwise deposit or invest any sum for such purpose, or redeem, retire, defease, purchase, repurchase or otherwise acquire for value any share of any class of capital stock of Borrowers or any Subsidiary of Hanover (or - 80 - 86 set aside, pay into a sinking fund or otherwise deposit or invest any sum for such purpose) for any consideration other than its own capital stock or apply or set apart any sum, or make any other distribution (by reduction of capital or otherwise) in respect of any such shares or agree to do any of the foregoing, except that dividends may be declared and paid by Hanover on any preferred stock of THC issued or outstanding on May 5, 1993 in accordance with its terms as of May 5, 1993 or under the preferred stock of Hanover having the same terms issued in conversion thereof pursuant to the reorganization described in Exhibit K to the Existing Loan Agreement, in each case out of legally available funds therefor, and provided no Event of Default or Incipient Default has occurred and is continuing. 6.7 Maintenance of Existence Each Borrower and each Guarantor shall at all times preserve, renew and keep in full force and effect its corporate existence and rights and franchises with respect thereto and each Borrower and each Guarantor shall maintain in full force and effect all permits, licenses, trademarks, tradenames, approvals, authorizations, leases and contracts necessary to carry on the business as presently or proposed to be conducted, provided that (i) any Guarantor, other than Hanover, may be dissolved at such time as it ceases to conduct business and owns less than Ten Thousand Dollars ($10,000) of assets, (ii) the assets of Leavitt and Ring shall be liquidated into THC within one hundred twenty (120) days after May 5, 1993, and (iii) in connection with the reorganization of certain members of the Affiliated Borrower Group effected as described on Exhibit K attached to the Existing Loan Agreement, Borrowers shall deliver and cause to be delivered to Lender such additional documents and instruments pursuant to Section 6.20 hereof as Lender shall request in connection with such reorganization. None of the Borrowers or any Guarantor shall engage, directly or indirectly, in any line of business other than the business in which it is engaged on the date hereof. 6.8 Sale and Leasebacks None of the Borrowers shall enter into, and Hanover shall not permit any of its Subsidiaries to enter into, any arrangement, directly or indirectly, with any Person whereby such Borrower or Subsidiary shall sell or transfer any property, real or personal, whether now owned or hereafter acquired, and thereafter rent or lease such property which it intends to use for substantially the same purpose or purposes as the property being sold or transferred, unless such sale and leaseback relates to real property first acquired and occupied after May 5, 1993 and such Borrower delivers to Lender all applicable mortgagee and landlord waivers, access and use agreements, in the form of Exhibit I attached hereof. - 81 - 87 6.9 Sale of Assets, Consolidation, Merger, Dissolution, Etc. None of the Borrowers, or any of their respective Subsidiaries or Mail Order Joint Ventures or any Subsidiary of Hanover shall, directly or indirectly, merge into or with or consolidate with any other Person or permit any other Person to merge into or with or consolidate with Borrowers, any of their respective Subsidiaries or Mail Order Joint Ventures or any Subsidiary of Hanover, or sell, assign, lease, transfer, abandon or otherwise dispose of any stock or Indebtedness of Borrowers, any of their respective Subsidiaries or Mail Order Joint Ventures or of any Subsidiary of Hanover to any other Person, or any of their property or assets to any other Person (other than sales of Inventory in the ordinary course of business and sales of Equipment as permitted under Section 6.12 hereof and except as permitted under Sections 6.21 and 6.23 hereof) or wind up, liquidate or dissolve or agree to do any of the foregoing; provided, however, that (i) the foregoing shall not restrict transactions otherwise permitted by the terms of Section 6.5(b) or 6.6(b) hereof, as applicable, and (ii) any Subsidiary of Borrowers which is a Guarantor, shall be dissolved at such time as it ceases to actively conduct business and owns less than Ten Thousand Dollars ($10,000) of assets. 6.10 Compliance with Laws, Regulations, Etc. Each Borrower and each member of the Affiliated Borrower Group shall at all times comply in all material respects with all applicable provisions of laws, rules, regulations, licenses, permits, approvals and orders and duly observe all requirements, of any foreign, Federal, State or local governmental authority, including, without limitation, ERISA, the IRC, the Occupational Safety and Health Act of 1970, as amended, the Fair Labor Standards Act of 1938, as amended, all Federal, State and local statutes, regulations, rules and orders relating to consumer credit (including, without limitation, as each has been or may be amended the Truth-in-Lending Act, the Fair Credit Billing Act, the Equal Credit Opportunity Act and the Fair Credit Reporting Act and the regulations, rules and orders promulgated thereunder), all Federal, State and local statutes, rules and orders relating to sale of consumer goods and mail order sales (including, without limitation, the Consumer Product Safety Act of 1972, as amended, and the Federal Trade Commission Act of 1914, as amended, and the rules, regulations and orders promulgated thereunder) and all other statutes, rules, regulations, orders, permits and stipulations relating to environmental pollution and employee health and safety, including, without limitation, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and the Resource Conservation and Recovery Act of 1976, as amended, and any similar State or local statutes with respect thereto, and the - 82 - 88 regulations, rules and orders promulgated thereunder, subject, in the case of any such law relating to the payment or collection and remittance of sales and/or use taxes, to the provisions of Sections 5.8(b) and 2.5(b) hereof, which shall control with respect to such matters in lieu of this Section 6.10. 6.11 Payment of Taxes and Claims Borrowers shall duly pay and discharge all taxes, assessments, contributions and governmental charges upon or against them or their properties or assets, except for taxes which are being contested in good faith by appropriate proceedings and with respect to which reserves have been set aside in accordance with generally accepted accounting principles consistently applied, in the determination of Lender, or if requested by Lender to protect Lender's security interests or liens in any Collateral or Guarantor Collateral, adequate amounts have been escrowed with or reserved against by Lender or other arrangements satisfactory to Lender are made to cover all amounts which are claimed due plus interest and possible penalties thereon; provided, however, that with respect to sales and/or use taxes the provisions of Sections 5.8(b) and 2.5(b) hereof shall control with respect to such matters in lieu of this Section 6.11 hereof. Borrowers shall be liable for any tax or penalty imposed upon any transaction under this Agreement or any of the other Financing Agreements or giving rise to any Collateral or Guarantor Collateral or which Lender may be required to withhold or pay for any reason and Borrowers shall indemnify and hold Lender harmless with respect thereto, and shall repay to Lender on demand the amount thereof, and, until paid by Borrowers, such amount shall be added and deemed part of the Obligations, provided, that, nothing contained herein shall be construed to require Borrowers to pay any income tax attributable to the income of Lender in respect of any compensation charged or paid hereunder to Lender. 6.12 Properties in Good Condition (a) Each Borrower and Guarantor shall keep its properties in good repair, working order and condition (reasonable wear and tear excepted) and, from time to time, make all needful and proper repairs, renewals, replacements, additions and improvements thereto, so that the business carried on may be properly and advantageously conducted at all times in accordance with prudent business management. The Inventory and the Equipment of each Borrower and Guarantor shall be used in its business and not for personal, family, household or farming use. (b) All of the Inventory of each Borrower is and shall be held for sale in the ordinary course of such Borrower's mail order and retail business and is and shall be fit for such purposes. Borrowers shall not sell or otherwise dispose of any - 83 - 89 Inventory except for mail order and retail sales in the ordinary course of business and except for sales of outdated and surplus Inventory in the absence of an Event of Default or Incipient Default which is continuing that comply with the provisions of Section 6.21 hereof. Borrowers shall maintain all Inventory according to a computerized perpetual inventory accounting system. Borrowers shall keep the Inventory in good and marketable condition, at their own expense. Borrowers shall not, without the prior written notice to Lender, acquire or accept any Inventory on consignment or approval. Borrowers shall conduct a physical count of the Inventory of Borrowers, at their expense, at least annually prior to an Event of Default and at least twice a year during the continuance of an Event of Default, and shall promptly supply Lender with a copy of each such count. Borrowers shall not, without the prior written consent of Lender, sell any Inventory on a bill-and-hold, guaranteed sale, sale and return, sale on approval, or other repurchase or return basis, except for Borrowers' existing return policies for their mail order sales and retail store sales, in each case in the ordinary course of business and prior to an Event of Default. (c) The Equipment of each Borrower, other than any Equipment constituting fixtures as of the date hereof, is now and shall remain personal property and Borrowers shall not permit any material part of such Equipment to be or become a part of or affixed to real property without (i) prior written notice to Lender and the written consent of Lender and (ii) first making all arrangements, and delivering or causing to be delivered to Lender, such agreements and other documentation requested by Lender for the protection and preservation of its security interests and liens, in form and substance satisfactory to Lender. (d) Borrowers shall not, without Lender's prior written consent, sell, lease as a lessor, or otherwise dispose of any part of their Equipment that has a fair market value greater than Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate for all such transactions in any fiscal year of Borrowers. In the event any such Equipment is sold, transferred or otherwise disposed of with Lender's prior written consent or as permitted hereunder without such consent and: (i) such sale, transfer or disposition is effected without replacement of such Equipment, or such Equipment is replaced by Equipment leased by Borrowers, or by Equipment purchased by Borrowers subject to a Purchase Money Lien, then Borrowers shall deliver all of the cash proceeds of any such sale, transfer or disposition to Lender, which proceeds shall be (A) applied to the repayment of the Obligations of Borrowers as applicable, in such order and manner as Lender shall determine or (B) retained by Lender as cash Collateral; or (ii) such sale, transfer or disposition is made in connection with the purchase by Borrowers of replacement Equipment, then Borrowers shall use the proceeds of such sale, - 84 - 90 transfer or disposition to finance the purchase by Borrowers of replacement Equipment and shall deliver to Lender written evidence of the use of the proceeds for such purchase. All replacement Equipment purchased by Borrowers shall be free and clear of all liens, claims and encumbrances, except as otherwise permitted hereunder. (e) Borrowers assume and shall indemnify Lender from and against all responsibility and liability arising from or relating to the use, sale or other disposition of their respective Inventory and Equipment. 6.13 Insurance Borrowers and Guarantors shall at all times maintain, with financially sound and reputable insurers, insurance with respect to the Collateral and Guarantor Collateral, insuring the same and their business against loss or damage of the kind and in the amounts customarily insured against by corporations of established reputation engaged in the same or similar business and similarly situated, and Borrowers and Guarantors shall maintain public liability insurance against claims for personal injury, death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by them and occurring in connection with the use (or otherwise) of any products manufactured or sold by them, worker's compensation insurance, and business interruption insurance. Said policies of insurance shall be satisfactory to Lender as to form, amount and insurer. Borrowers and Guarantors shall furnish certificates, policies or endorsements to Lender as proof of such insurance, and, if they fail to do so, Lender is authorized, but not required, to obtain such insurance at the expense of Borrowers and Guarantors. All policies shall provide for at least thirty (30) days prior written notice to Lender of any cancellation or reduction of coverage. Lender, and its designees, are hereby irrevocably appointed to act as attorney-in-fact for Borrowers and Guarantors in obtaining, and at any time during the continuance of an Event of Default, adjusting, settling, amending and canceling such insurance. Borrowers and each Guarantor shall obtain non-contributory lender's loss payable endorsements to all insurance policies in form and substance satisfactory to Lender specifying that the proceeds of such insurance shall be payable to Lender and further specifying that Lender shall be paid regardless of any act or omission by Borrowers and/or any Guarantor. At its option, Lender may apply any insurance proceeds received by Lender at any time to the cost of repairs or replacement of Collateral and/or to payment of the Obligations of Borrowers and/or any Guarantor, whether or not then due, in any order and in such manner as Lender, in its discretion, may determine. Lender may retain such proceeds as cash Collateral for the Obligations. - 85 - 91 6.14 Appraisals Borrowers shall, at Borrowers' expense and after Lender's request, deliver to Lender at least one (1) time during each calendar year during the Term, and upon the request of Lender, one (1) more time during each such calendar year, or permit Lender, with the same frequency, to obtain, written reports or appraisals by the Appraiser of any or all of the Collateral, in form, scope and methodology acceptable to Lender, and including, but not limited to, a report as to the Orderly Liquidation Value of the Inventory of Borrowers; provided, however, that if an Event of Default or Incipient Default shall have occurred and be continuing, Borrowers shall, at Borrowers' expense, deliver to Lender, at Lender's request, additional and more frequent written reports or appraisals by the Appraiser of any or all of the Collateral, including, but not limited to, reports as to the Orderly Liquidation Value of the Inventory of Borrowers or such other reports in such form, scope and methodology acceptable to Lender. 6.15 Compliance with ERISA None of the Borrowers or any other member of the Affiliated Borrower Group shall, with respect to all "employee pension benefit plans" maintained by Borrowers or any other member of the Affiliated Borrower Group: (a) (i) terminate any of such employee pension benefit plans so as to incur any liability to the Pension Benefit Guaranty Corporation established pursuant to ERISA, (ii) allow or suffer to exist any prohibited transaction involving any of such employee pension benefit plans or any trust created thereunder which would subject Borrowers or any member of the Affiliated Borrower Group to a tax or penalty or other liability on prohibited transactions imposed under Section 4975 of the IRC or under ERISA, (iii) fail to pay to any such employee pension benefit plan any contribution which it is obligated to pay under the terms of such plan, (iv) allow or suffer to exist any accumulated funding deficiency, whether or not waived, with respect to any such employee pension benefit plan, (v) allow or suffer to exist any occurrence of a reportable event or any other event or condition which presents a material risk of termination by the Pension Benefit Guaranty Corporation of any such employee pension benefit plan that is a single employer plan, which termination could result in any liability to the Pension Benefit Guaranty Corporation, or (vi) incur any withdrawal liability with respect to any multiemployer plan which is not fully bonded; except only, in the case of any of the foregoing, if the resulting liability or potential liability of Borrowers or other member(s) of the Affiliated Borrower Group, would not, individually or in the aggregate, exceed Two Hundred Fifty Thousand Dollars ($250,000). - 86 - 92 (b) As used in this Section 6.15, the terms "employee pension benefit plan," "employee benefit plan", "single employer plan", "multiemployer plan", "accumulated funding deficiency" and "reportable event" shall have the respective meanings assigned to them in ERISA, and the term "prohibited transaction" shall have the meaning assigned to it in Section 4975 of the IRC or under ERISA. 6.16 Notice of Default Promptly upon any Responsible Officer becoming aware of the existence of any condition or event which constitutes an Event of Default or Incipient Default, Borrowers shall give Lender written notice thereof specifying the nature of such condition or event. 6.17 Financial Statements and Other Information (a) Borrowers shall promptly furnish to Lender all such financial information regarding each Borrower and each member of the Affiliated Borrower Group as Lender shall reasonably request, and notify the auditors and accountants of Borrowers and each member of the Affiliated Borrower Group that Lender is authorized to obtain such information directly from them. Without limiting the foregoing, Borrowers shall furnish to Lender, in such detail as Lender shall request, the following: (i) As soon as available, but in any event not later than ninety (90) days after the close of each fiscal year, consolidated audited balance sheets, and statements of income and expense, cash flows and stockholders' equity for Hanover and its Subsidiaries for such fiscal year, and the accompanying notes thereto, setting forth in each case, in comparative form, figures for the previous fiscal year, all in reasonable detail, fairly presenting the financial position and the results of operations of Hanover and its Subsidiaries, as at the date thereof and for the fiscal year then ended, and prepared in accordance with generally accepted accounting principles, consistently applied. Such statements shall be examined in accordance with generally accepted auditing standards by and accompanied by an unqualified report and opinion thereon by one of the following independent certified public accountants selected by Hanover: Arthur Andersen & Co.; Coopers and Lybrand; Ernst & Young; Deloitte & Touche; KPMG Peat Marwick; or Price Waterhouse & Co. (ii) As soon as available, but in any event not later than forty-five (45) days after the close of each fiscal quarter, the consolidated unaudited balance sheet of H&H and its Subsidiaries and the consolidated and consolidating unaudited balance sheets of THC and its Subsidiaries as at the end of such quarter, consolidated unaudited statements of income and expense and changes in financial position of H&H and its - 87 - 93 Subsidiaries and consolidated and consolidating unaudited statements of income and expense and changes in financial position for THC and its Subsidiaries for such quarter and for the period from the beginning of the fiscal year to the end of such quarter, together with the accompanying notes thereto, if any, all in reasonable detail, fairly presenting the financial position and results of operation of H&H and its Subsidiaries and THC and its Subsidiaries as at the date thereof and for such periods, prepared in accordance with generally accepted accounting principles, consistently applied. Commencing with the fiscal quarter ending on or about September 25, 1993, the foregoing financial statements shall be prepared for Hanover and its Subsidiaries in lieu of H&H and THC and their Subsidiaries. The foregoing financial statements shall be certified to comply with this Section by the chief financial officer(s) of H&H, THC and Borrowers, or of Hanover and Borrowers, as the case may be, subject to normal year-end adjustments. (iii) (A) As soon as available, but in any event not later than (x) thirty (30) days after the end of each fiscal month (other than the January fiscal month, in which case not later than forty-five (45) days after the end of such fiscal month), the consolidated unaudited balance sheet of H&H and its Subsidiaries as at the end of such month, (y) forty-five (45) days after the end of each fiscal month, the consolidated unaudited balance sheet of THC and its Subsidiaries as at the end of such month, and (z) sixty (60) days after the end of each fiscal month, the consolidating unaudited balance sheets of THC and its Subsidiaries as at the end of such month. Commencing with the fiscal month ending on or about September 25, 1993, the foregoing financial statements shall be prepared for Hanover and its Subsidiaries in lieu of H&H and THC and their Subsidiaries. (B) As soon as available, but in any event not later than thirty (30) days after the end of each fiscal month (other than the January fiscal month, in which case not later than ninety (90) days after the end of such fiscal month, and other than the March, June and September fiscal months, in which case not later than forty-five (45) days after the end of such fiscal months), the consolidated unaudited statements of income and expense of H&H and its Subsidiaries and the consolidated unaudited statements of income and expense for THC and its Subsidiaries for such month and for the period from the beginning of the fiscal year to the end of such month. Commencing with the fiscal month ending on or about September 25, 1993, the foregoing financial statements shall be prepared for Hanover and its Subsidiaries in lieu of H&H and THC and their Subsidiaries. All such statements in Sections 6.17(a)(iii)(A) and (B) hereof shall be in reasonable detail, fairly presenting the financial position and results of operation of H&H and its Subsidiaries or - 88 - 94 THC and its Subsidiaries or Hanover and its Subsidiaries, as the case may be, as at the dates thereof and for such periods, and prepared in accordance with generally accepted accounting principles consistently applied. All such statements in Sections 6.17(a)(iii)(A) and (B) shall be certified to comply with this Section by the chief financial officer(s) of H&H, THC and Borrowers, or of Hanover and Borrowers, as the case may be, subject to normal year-end adjustments. (iv) With each of the audited financial statements delivered pursuant to Section 6.17(a)(i) above, a certificate of the independent certified public accountants who examined such statements to the effect that they have reviewed and are familiar with the Financing Agreements and that, in examining such financial statements, they did not become aware of any fact or condition which then constituted an Event of Default or Incipient Default, except for those, if any, described in reasonable detail in such certificate. (v) Simultaneously with the delivery of each of the annual audited and quarterly and monthly unaudited financial statements as set forth herein, Lender shall receive a certificate of the chief financial officer of Borrowers: (A) setting forth in reasonable detail the calculations required to establish that Borrowers were in compliance with the covenants set forth in Sections 6.18 and 6.19 hereof during the period covered in such financial statements; and (B) stating that, except as explained in reasonable detail in such certificate, (1) all of the representations, warranties and covenants of Borrowers contained in this Agreement and the other Financing Agreements are correct and complete as at the date of such certificate and (2) no Event of Default then exists or existed during the period covered by such financial statements. If such certificate discloses that a representation or warranty is not correct or complete, or that a covenant has not been complied with, or that an Event of Default existed or exists, such certificate shall set forth what action Borrowers have taken or propose to take with respect thereto (but without prejudice to Lender's rights to declare an Event of Default immediately with respect thereto and/or exercise any of its rights and remedies hereunder or otherwise with respect thereto). At such time, Borrowers shall also provide a narrative describing and analyzing in reasonable detail all material trends, changes and developments in each and all financial statements. (vi) Promptly after delivery thereof, any management letters and reports by such independent certified - 89 - 95 public accountants to H&H, THC, Hanover and their Subsidiaries and Mail Order Joint Ventures. (vii) Reports on sales, including: (A) Weekly reports of sales, indicating for each Borrower gross sales, returns, allowances and net sales; (B) Monthly reports of sales for each category of Inventory of each Borrower, i.e., General Merchandise Inventory, Home Furnishings Inventory, Men's Fashion Inventory and Women's Fashion Inventory, Gump's Eligible Inventory, TSC Eligible Inventory and Tweeds Eligible Inventory, indicating for such Inventory category, the sales for each catalog of each Borrower and of each retail store of Borrowers; and (C) Quarterly reports of sales and operating profits for that quarter with a comparison to the immediately preceding quarter for each category of Inventory of each Borrower, i.e., General Merchandise Inventory, Home Furnishings Inventory, Men's Fashion, Inventory, Women's Fashion Inventory, Gump's Eligible Inventory, TSC Eligible Inventory and Tweeds Eligible Inventory, indicating for such Inventory category, the sales for each catalog of each Borrower and each retail store of Borrowers. (viii) Reports on Inventory, including: (A) Weekly reports as to Inventory, indicating the aggregate Value of each category of Inventory of each Borrower, i.e., General Merchandise Inventory, Home Furnishing Inventory, Men's Fashion Inventory, Women's Fashion Inventory and Gump's Eligible Inventory (showing catalog and retail store Inventory of GBM and Gump's separately), TSC Eligible Inventory (showing catalog and retail store Inventory of TCSA and SDSA separately) and Tweeds Eligible Inventory; (B) Monthly reports as to Inventory, including each category of Inventory of each Borrower, i.e., General Merchandise Inventory, Home Furnishing Inventory, Men's Fashion Inventory, Women's Fashion Inventory, Gump's Eligible Inventory, TCS Eligible Inventory, Tweeds Eligible Inventory and each catalog of each Borrower and each retail store of Borrowers on a perpetual basis by Value; (C) Monthly reports in respect of each catalog of each Borrower in respect of unfilled orders in the aggregate, indicating the number of days that orders have not been filled for each catalog of each Borrower; and (D) Weekly reports as to Inventory by Borrowers indicating items of Inventory in transit to Borrowers - 90 - 96 grouped according to the documentary letter of credit and/or bill of lading number. (ix) Monthly reports on sales and use tax collections, deposits and payments, including a written analysis prepared by Borrowers in respect of monthly sales and use tax accruals and, if requested by Lender, copies of sales and use tax return, filed by Borrowers. (x) Monthly reports on Accounts, including aggregate outstanding amounts, prepayments, accruals and returns and other credits. (xi) Any other financial and other information regarding the Collateral or Guarantor Collateral as Lender may reasonably request from time to time. (xii) As soon as available, but in any event not later than five (5) days after receipt by Borrowers, any statements, reports, notices or documents furnished to Borrowers by the Private Credit Card Purchaser or the parties to any of the Third Party Credit Card Agreements, including any Third Party Credit Card Issuer or servicing agent or purchaser or financial intermediary, together with such additional information as shall be sufficient to enable Lender to monitor the transactions pursuant to the Private Credit Card Agreement and the Third Party Credit Card Agreements. (b) Borrowers shall promptly notify Lender in writing when any Responsible Officer becomes aware that any investigation, action, suit, proceeding or claim involving a potential loss or liability to any Borrower or any other member of the Affiliated Borrower Group in excess of Two Hundred Fifty Thousand Dollars ($250,000), which exposure is not covered by insurance. (c) Borrowers and each Guarantor shall promptly provide Lender with any material information, notices, requests or reports filed with, or furnished to, or received from any governmental or regulatory authority, including all Forms 10- K, 10-Q and 8-K, and proxy materials and other disclosure materials filed with the SEC, or furnished to the shareholders of Borrowers and/or Guarantors. (d) In addition to and not by way of limiting the other provisions of this Section 6.17, Borrowers and each Guarantor will promptly provide Lender with such budgets, forecasts, projections, business plans, cash flows and other information respecting the business operations and financial or other condition of Borrowers and Guarantors, including information about Borrowers' arrangements with trade creditors and such - 91 - 97 trade creditors' support for the coming seasons, as Lender may, from time to time, request. (e) Lender is authorized to deliver a copy of any financial statement or any other information relating to the business, operations or financial condition of Borrowers and any member of the Affiliated Borrower Group, which may be furnished to it hereunder or otherwise, to any court, regulatory body or agency having jurisdiction over Lender or to any other person which shall, or shall have any right or obligation to, succeed to all or any part of Lender's interests in any of the Obligations, this Agreement, the other Financing Agreements, or the Collateral or Guarantor Collateral, including, without limitation, any Participant. (f) Each Borrower and each Guarantor hereby irrevocably authorizes and directs all accountants, auditors and other third parties (but excluding Borrower's and Guarantor's attorneys) to deliver to Lender at Borrowers' expense, copies of the financial statements, papers related thereto or other accounting records of any nature in their possession and to disclose to Lender any information they may have regarding the business affairs and financial condition of Borrowers and each other member of the Affiliated Borrower Group. Lender shall obtain the applicable Borrower's or Guarantor's prior written consent before making any request pursuant to this Section 6.17(f), which consent such Borrower or Guarantor shall not unreasonably withhold or delay. 6.18 Consolidated Working Capital (a) Hanover and HDPI, respectively, shall, as at the end of each fiscal month, maintain Consolidated Working Capital (i) calculated on a consolidated basis for Hanover and its Subsidiaries, including Borrowers (but excluding Non-Guarantor Subsidiaries), of not less than Thirty-One Million Five Hundred Thousand Dollars ($31,500,000) and (ii) calculated on a consolidated basis for HDPI and its Subsidiaries of not less than Thirty One Million Eight Hundred Dollars ($31,800,000). (b) Notwithstanding Section 6.18(a), with respect to each fiscal month of Hanover ending before April 1, 1994, the current assets and current liabilities of Gump's Holdings, GBM and Gump's shall be excluded from the calculation of any Consolidated Working Capital under such Section. 6.19 Consolidated Net Worth (a) Hanover and HDPI, respectively, shall, as at the end of each fiscal month, maintain Consolidated Net Worth (i) calculated on a consolidated basis for Hanover and its Subsidiaries, including Borrowers (but excluding Non-Guarantor - 92 - 98 Subsidiaries), of at least Thirteen Million Dollars ($13,000,000) and (ii) calculated on a consolidated basis for HDPI and its Subsidiaries of not less than negative Forty-Three Million Nine Hundred Thousand Dollars (-$43,900,000). (b) Notwithstanding Section 6.19(a), with respect to each fiscal month of Hanover ending before April 1, 1994, the assets and liabilities of Gump's Holdings, GBM and Gump's shall be excluded from the calculation of Consolidated Net Worth under such Section. 6.20 Further Assurances Each Borrower and Guarantor has executed or shall execute and deliver to Lender such of the other Financing Agreements to which it is a party and financing statements pursuant to the UCC, in form and substance satisfactory to Lender. Borrowers and each Guarantor shall, at their expense, at any time or times duly execute and deliver, or shall cause to be duly executed and delivered, such further agreements, instruments and documents, including, without limitation, additional security agreements, mortgages, deeds of trust, deeds to secure debt, collateral assignments, pledge agreements, Uniform Commercial Code financing statements or amendments or continuations thereof, landlord's or mortgagee's waivers of liens and consents to the exercise by Lender of all the rights and remedies hereunder, under any of the other Financing Agreements or applicable law with respect to the Collateral and/or Guarantor Collateral, and do or cause to be done such further acts as may be necessary or proper in Lender's opinion to evidence, perfect, maintain and enforce the security interest and the priority thereof in the Collateral and Guarantor Collateral and to otherwise effectuate the provisions or purposes of this Agreement or any of the other Financing Agreements. Where permitted by law, Borrowers and each Guarantor hereby authorize Lender to execute and file one or more Uniform Commercial Code financing statements signed only by Lender. Upon the request of Lender, at any time and from time to time, Borrowers and each Guarantor shall, at their cost and expense, do, make, execute, deliver and record, register or file financing statements, mortgages, deeds of trust, deeds to secure debt, and other instruments, acts, pledges, assignments and transfers (or cause the same to be done) and will deliver to Lender such instruments evidencing items of Collateral or Guarantor Collateral as may be requested by any of them. 6.21 Sales of Outdated and Surplus Inventory (a) Borrowers may sell, transfer or dispose of outdated and surplus Inventory to jobbers or other third parties only to the extent that any one transaction or series of related transactions does not involve Inventory having an aggregate original cost to Borrowers of greater than Four Million Dollars - 93 - 99 ($4,000,000); provided, that (i) Borrowers remit, or cause to be remitted, to Lender all the proceeds of such sales; (ii) Borrowers account for all such sales separately in the weekly Inventory reports provided to Lender; (iii) Borrowers provide to Lender written notice within five (5) calendar days after each such sale; and (iv) no Event of Default or Incipient Default has occurred and is continuing. (b) In the event that any sale by Borrowers referred to in Section 6.21(a) hereof could result in the Excess Availability falling below One Dollar ($1.00), Borrowers shall notify Lender in writing at least five (5) business days prior to the consummation of such sale. 6.22 Maintenance and Delivery of Customer Lists Borrowers shall create and maintain all Customer Lists in industry standard formats stored on industry standard electronic data storage media and accessible using industry standard hardware and software. Customer Lists shall be updated and delivered to the storage and escrow agent under the Customer List Escrow Agreement, not less frequently than monthly, on or before the tenth (10th) day of each month. Receipt of the delivery of such updated Customer Lists shall be acknowledged in writing by the storage and escrow agent and a copy of each receipt delivered to Lender on or before such tenth (10th) day of each month. Lender shall have the access to and the right to inspect the Customer Lists in Borrowers' possession or in the possession of the storage and escrow agent, at any time during normal business hours. Upon and at any time after the occurrence and during the continuance of an Event of Default or Incipient Default, Lender shall have the right to direct the storage and escrow agent to deliver the Customer Lists in its possession to Lender and Lender shall have the right to require Borrowers to deliver all Customer Lists and periodic updates thereof directly to Lender, without, in any case, limiting Lender's other rights and remedies hereunder or under the other Financing Agreements. 6.23 Rental or License of Customer Lists Borrowers are and shall be the sole owners of all Customer Lists used in Borrowers' business. No portion of the Customer Lists shall be sold, leased, licensed or otherwise disposed of by Borrowers, except, that so long as no Event of Default or Incipient Default has occurred and is continuing, Borrowers may, in the ordinary course of business in accordance with past practices, enter into non-exclusive rental agreements or license agreements permitting the use of Borrowers' mailing and customer lists; provided, that (a) such agreements do not impair the value, salability or disposability of the Customer Lists as a whole; and (b) all proceeds of such rentals or licensing by Borrowers are remitted to Lender hereunder. In addition, prior - 94 - 100 to an Event of Default or Incipient Default that has occurred and is continuing, Borrowers may sell outright to non-Affiliates such portions of the Customer Lists having a fair market value aggregating not more than Two Hundred Fifty Thousand Dollars ($250,000) in any one fiscal year for all such sales to non-Affiliates; provided, that all proceeds of such sale are remitted to Lender hereunder. 6.24 No Termination or Amendment of Credit Card Agreements Borrowers shall not, without Lender's prior written consent, terminate or not renew any of the Credit Card Agreements, unless replacement agreements satisfactory to Lender are entered into by Borrowers. Borrowers shall not, without Lender's prior written consent, enter into any amendment or supplement to the Credit Card Agreements which could in any manner adversely affect the Collateral, the Obligations or the rights and interests of Lender hereunder or under the other Financing Agreements. 6.25 Obligations to be Senior Indebtedness Notwithstanding anything to the contrary in this Agreement, the Indebtedness, if any, of Borrowers, Guarantors or any other direct or indirect Subsidiary of Hanover in respect of any debt instruments of H&H or THC described on Exhibit E attached hereto shall be subordinated in right of payment to the Obligations of Borrowers and Guarantors to Lender, and the Obligations of Borrowers and Guarantors to Lender shall at all times be deemed senior in right of payment to all such Indebtedness. 6.26 Mail Order Joint Ventures Borrowers may directly or through a Subsidiary of Borrowers establish or continue to own an interest in a Mail Order Joint Venture that is not a Subsidiary of Borrowers, only to the extent that: (a) the aggregate amount of capital, investments, equity, loans, payments or assets of any kind contributed, directly or indirectly, by Borrowers and its Subsidiaries to all Mail Order Joint Ventures shall not exceed Five Million Dollars ($5,000,000) for the period from May 5, 1993 through the end of calendar year 1993, and shall not exceed Ten Million Dollars ($10,000,000) for the period from May 5, 1993 through the end of the Term, except that the foregoing limitations shall not apply to sales of Inventory in the ordinary course of business by Borrowers directly or through a Subsidiary of Borrowers to any Mail Order Joint Venture under arrangements satisfactory to Lender such that timely payment to Borrowers is made on normal trade terms, in cash, of the cost of such Inventory; provided, that in the case of Eligible Inventory so sold (but not in the case of such sales of Inventory which are not Eligible - 95 - 101 Inventory), Borrowers shall receive and deposit each such payment to the blocked accounts provided for in Section 8.2 hereof. (b) Borrowers shall and shall cause each Subsidiary of Borrowers owning an interest in such Mail Order Joint Venture to (i) grant a security interest in and to, and pledge and assign to Lender, its interest in or to such Mail Order Joint Venture; (ii) obtain and deliver to Lender any necessary consents by the Mail Order Joint Venture or other Persons to the security interest, pledge and assignment under clause (i); (iii) obtain an acknowledgment from the Mail Order Joint Venture and each Person having an interest therein waiving and releasing Lender from any liability for any proceeds of Inventory or other assets owned by the Mail Order Joint Venture commingled with or deposited to any of the blocked accounts maintained by Lender hereunder or otherwise received by Lender; (iv) provide Lender written notice thirty (30) days prior to the formation of each Mail Order Joint Venture; and (v) agree in favor of Lender not to cause or permit such Mail Order Joint Venture or any Person having an interest therein to encumber any assets of the Mail Order Joint Venture, (all of the foregoing in clauses (i) through (v) shall be evidenced by documents, instruments and/or agreements in form and substance satisfactory to Lender). Borrowers shall at all times maintain all Inventory or other assets of each Mail Order Joint Venture segregated and not commingled with any of Borrowers' Inventory or other assets. Notwithstanding the foregoing, the requirements of clauses (iii), (iv) and (v) shall not apply to the Avon Joint Venture and the requirements of clauses (iii) and (iv) shall not apply to the Essence Joint Venture. (c) In the event a Mail Order Joint Venture is able to obtain financing for its operations from a non- Affiliated lender on a completely stand alone basis, i.e., not involving any investment (other than as permitted herein), guarantee or other direct or indirect financial or credit support or enhancement by Borrowers or any other member of the Affiliated Borrower Group or any Non-Guarantor Subsidiary, then, provided Lender has been given and has not exercised a thirty (30) day right of first refusal to elect to provide such financing itself to such Mail Order Joint Venture on the same economic terms as set forth in any bona fide financing commitment, proposal or offer solicited or received by such Mail Order Joint Venture and upon such other terms satisfactory to Lender, and provided no Event of Default or Incipient Default has occurred and is continuing, Lender shall release the Mail Order Joint Venture from the restriction on liens set forth in subsection 6.26(b)(v) hereof to the extent required by the non-Affiliated lender providing such stand alone financing. - 96 - 102 6.27 9.25% Notes (a) The proceeds of issuance of the 9.25% Notes shall be used first to prepay, discharge or defease all Indebtedness under the outstanding Amended 8% Senior Subordinated Notes due 1994 of THC and the 14% Senior Subordinated Debentures due 1997 of H&H. Any other use of such proceeds of issuance of the 9.25% Notes, other than as set forth in this Section 6.27(a) hereof, shall be subject to the prior written consent of Lender. Once cash in the amounts sufficient to prepay, discharge or defease the Amended 8% Senior Subordinated Notes of THC and the 14% Senior Subordinated Debentures of H&H is deposited with the appropriate indenture trustee in respect of such debt securities, the cash so deposited and the liabilities under the Amended 8% Senior Subordinated Notes of THC and the 14% Senior Subordinated Debentures of H&H in the amount of the cash so deposited, will be excluded from the calculations required by the financial covenants under Sections 6.18 and 6.19 of this Agreement. (b) Hanover has advised Lender that it intends, directly or through a newly-formed Subsidiary of Hanover, to use up to $6,000,000 of the proceeds of the issuance of the 9.25% Notes for the establishment or acquisition of, and improvements to, new Eligible Inventory Locations, first leased or acquired by Borrowers after May 5, 1993, and that, with respect to Indebtedness of Hanover or any such Subsidiary of Hanover in connection with the 9.25% Notes and such use, including intercompany Indebtedness, Hanover will and will cause such Subsidiary to comply with the provisions of clauses (i) and (ii) of the proviso contained in Section 6.3(h) of this Agreement. Any other use of the proceeds of issuance of the 9.25% Notes, other than as set forth in Section 6.27(a) and (b) hereof, shall be subject to the prior written consent of Lender. (c) Anything contained in this Agreement to the contrary notwithstanding, if any existing or future member of the Affiliated Borrower Group shall at any time guarantee, assume or otherwise become liable for all or any part of the obligations under the 9.25% Notes, such member shall execute and deliver to Lender all of the instruments and documents required under Section 6.2 hereunder and shall be treated as a Guarantor hereunder. (d) Anything set forth in the 9.25% Subordination Agreement to the contrary notwithstanding, Lender shall not cure any default or event of default claimed to exist by the "Junior Creditor" under the 9.25% Notes or the other "Junior Creditor Agreements" (as such quoted terms are defined in the 9.25% Subordination Agreement), without the prior written consent of Hanover if and so long as the claimed default or event of default is being contested in good faith by appropriate proceedings by Hanover or any other obligor against whom a claim is made by - 97 - 103 reason of such claimed default or event of default, Lender has been notified in writing of such contest, adequate reserves have been set aside on the books of Hanover or such other obligor, as appropriate, in accordance with generally accepted accounting principles consistently applied and no judgment or other enforcement action against any property of any member of the Affiliated Borrower Group has been or is about to be obtained, enforced or taken. SECTION 7. EVENTS OF DEFAULT AND REMEDIES 7.1 Events of Default The occurrence of any one or more of the following events shall constitute an "Event of Default" hereunder: (a) Any Borrower shall fail to pay to Lender when due any amounts owing to Lender under any Obligation; or (b) Any Borrower shall breach any of the terms, covenants, conditions or provisions of this Agreement, any supplement hereto or any other agreement between Lender and Borrowers, including any of the other Financing Agreements or any other default or Event of Default occurs or exists under any of the foregoing; or (c) Any of the Guarantors or other endorser or other Person liable on the Obligations of Borrowers shall terminate or breach any of the terms, covenants, conditions or provisions of any guarantee, endorsement or other agreement of such Person with, or in favor of, Lender; or (d) Any representation, warranty or statement of fact made to Lender at any time by any Borrower or any Guarantor or on behalf of any Borrower or any Guarantor is false or misleading in any material respect; or (e) Any Borrower, any Guarantor (other than IMR) or any other Person at any time liable on or in respect of the Obligations shall default in the payment of an amount greater than Two Hundred Fifty Thousand Dollars ($250,000), individually or in the aggregate, at any time due or any Indebtedness at any time owing to any Person other than Lender or in the performance of any other terms or covenants or any evidence of same or other agreement relating thereto or securing same, or with respect to any material contract, lease (other than leases under which H&H is the sole obligor relating to property not used in the business of Borrowers), license or other obligation owed to any Person other than Lender, which default continues for more than the applicable cure period, if any, with respect thereto, but in no - 98 - 104 event more than thirty (30) days after the occurrence of any such default; or (f) The aggregate amount outstanding at any one time under the Third Party Credit Card Agreements collectively owed to Borrowers and not paid after the date such payment is due shall exceed Five Million Dollars ($5,000,000); or reserves or any other mechanism effecting a reduction of the amount actually paid to Borrowers pursuant to any such Third Party Credit Card Agreement have been implemented or imposed after the date hereof in an amount exceeding One Hundred Thousand Dollars ($100,000) in the aggregate; or Borrowers shall default in the performance of their obligations under any of the Credit Card Agreements; or any of the Credit Card Agreements shall be terminated or not renewed; or the Private Credit Card Purchaser shall suspend or cease purchasing Private Credit Card Receivables; or any party to the Third Party Credit Card Agreements shall cease purchasing and/or processing transactions involving Third Party Credit Card Receivables; or (g) Any Borrower or any of Hanover, IMR or any other Guarantor having assets in excess of Two Hundred Fifty Thousand Dollars ($250,000), shall become insolvent, fail to meet its debts as they mature, call a meeting of creditors or have a creditors' committee appointed, make an assignment for the benefit of creditors, commence or have commenced against it any action or proceeding for relief under the Bankruptcy Code or any other bankruptcy law or similar statute or statutes providing for reorganization, adjustment of debts, liquidation or dissolution (except in the case of any such action or proceeding commenced against any Borrower, Hanover, IMR or any other Guarantor having assets in excess of Two Hundred Fifty Thousand Dollars ($250,000), such action or proceeding is dismissed within thirty (30) days from the date such action or proceeding was commenced, unless such Borrower, Hanover or IMR against whom such action was brought shall acquiesce to the relief sought or such relief sought is sooner granted; provided, however, that during such thirty (30) day period Lender shall have no obligation to make or provide any Revolving Inventory Loans, Additional Advances or Letter of Credit Accommodations), or if any Borrower or Hanover, IMR or any other Guarantor having assets in excess of Two Hundred Fifty Thousand Dollars ($250,000) suspends or discontinues doing business for any reason, (other than as permitted in Section 6.7 hereof), or if a receiver, custodian or trustee of any kind is appointed for any Borrower or Hanover, IMR or any other Guarantor having assets in excess of Two Hundred Fifty Thousand Dollars ($250,000) or any of their respective properties; or (h) One (1) or more judgments, decrees or orders for the payment of damages in an amount greater than Two Hundred Fifty Thousand Dollars ($250,000) in the aggregate at any time shall be issued by one or more courts, governmental agencies, - 99 - 105 administrative tribunals or other bodies having jurisdiction against any Borrower, Hanover, IMR or any other Guarantor with assets greater than Two Hundred Fifty Thousand Dollars ($250,000) and a stay of execution thereof shall not be procured within thirty (30) days after the date of entry thereof, or such judgment(s), decree(s) or order(s) shall not be fully bonded within such period of thirty (30) days, unless sooner enforced; or (i) If there shall be a material adverse change in the business, assets, liabilities or condition of the Affiliated Borrower Group, taken as a whole, after December 26, 1992; or (j) NAR shall cease, directly or through its Subsidiaries, to be the direct or indirect beneficial owner of a sufficient number of issued and outstanding shares of capital stock of Hanover and its Subsidiaries on a fully diluted basis, to elect a majority of the members of the respective Boards of Directors of Hanover and each member of the Affiliated Borrower Group; provided, however, that the existence or occurrence of any one or more of the foregoing conditions or events with respect to one or both of GBM or Gump's other than an intentional default, shall not be deemed an Event of Default hereunder with respect to any Borrower or Guarantor other than GBM, Gump's and Gump's Holdings (whether or not only one of GBM or Gump's is the subject of such condition or event) (A) in the case of any such event or condition capable of being cured by the payment of money, if the same shall be cured within five (5) business days after the first occurrence of such event or first existence of any such condition, without any notice from Lender being required, or, if not so capable of being cured, (B) if within five (5) days after the first occurrence of such event or first existence of such condition, without any notice from Lender being required, all non-contingent Obligations determined by Lender to be outstanding in respect of Revolving Inventory Loans and Letter of Credit Accommodations to GBM and Gump's (whether or not only one of GBM or Gump's is the subject of the occurrence or condition giving rise to the application of this clause (B)) are fully and indefeasibly paid to Lender, and cash Collateral is delivered to Lender, or a clean irrevocable letter of credit is issued in Lender's favor by a bank acceptable to Lender in its discretion and having documentary and other terms acceptable to Lender in its discretion, in order to secure and provide for payment in full of all contingent Obligations of GBM and Gump's to Lender, all such payments and the cash Collateral or letter of credit required under this Clause (B), to be funded either from loan availability of HDPI and/or Brawn hereunder or, if there is insufficient availability, then from sources outside of, and without liability to the funding source on the part of, any - 100 - 106 member of the Affiliated Borrower Group; provided further, that while any such event or condition is continuing and, thereafter, if clause (B) shall have been availed of, no further Revolving Inventory Loans or Letter of Credit Accommodations shall be made available to GBM or Gump's, except in Lender's sole and absolute discretion. In addition to the foregoing provisos, the existence or occurrence of any one or more of the foregoing conditions or events with respect to TCS Factory, by reason of or related to its failure to pay Indebtedness owed to the mortgagees of its premises, as to which Indebtedness no other member of the Affiliated Borrower Group is liable, shall not be deemed an Event of Default hereunder with respect to any Borrower or Guarantor other than to the extent necessary to permit Lender to exercise its rights of access to and use of the premises and equipment of TCS Factory and its Affiliates to protect Lender's interests in Collateral. 7.2 Remedies Subject in the case of IMR to the provisions of Section 7.2(j): (a) Without limiting Lender's rights to demand payment sooner as provided in this Agreement, upon or at any time after the occurrence or existence of any one or more of such Events of Default, upon termination of this Agreement or any of the other Financing Agreements, or if this Agreement and the other Financing Agreements are not renewed, in addition to any other rights Lender may have under the Financing Agreements or otherwise: (i) Lender may, at any time thereafter, at its option, without presentment for payment, demand, notice of dishonor or notice of protest or any other or further notice, all of which are hereby expressly waived by Borrowers and Guarantors, declare any or all of the Obligations of Borrowers and/or Guarantors to be immediately due and payable, together with interest at the highest rate of interest hereunder until fully and indefeasibly paid; (ii) each Participant, to the fullest extent permitted by applicable law, shall have the right to (A) set off against the Obligations of Borrowers and Guarantors any and all deposits (whether general or special, time or demand, provisional or final), credits, balances, accounts, monies or other assets which are the property of Borrowers or any Guarantor and held by such Participant or owed by such Participant to Borrowers or any Guarantor and (B) remit the same to Lender for application to the Obligations of Borrowers and/or Guarantors; (iii) without further notice to Borrowers or Guarantors, Lender may appropriate, set off and apply to the payment of any or all of the Obligations of Borrowers and/or - 101 - 107 Guarantors, any or all Collateral, in such manner as Lender shall determine, enforce payment of any Collateral and/or Guarantor Collateral, settle, compromise or release in whole or in part, any amounts owing on the Collateral and/or Guarantor Collateral, make allowances and adjustments with respect thereto, issue credits in Lender's or Borrowers' name, sell, assign and deliver the Collateral and/or Guarantor Collateral (or any part thereof), at public or private sale, at broker's board, for cash, upon credit or otherwise, at Lender's option and discretion, and Lender may bid or become purchaser at any such sale, if public, free from any right of redemption which is hereby expressly waived; (iv) without limiting the generality of the foregoing, Lender is hereby authorized at any time and from time to time, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other Indebtedness at any time owing by any Lender or any Affiliate of Lender to or for the credit or the account of Borrowers or any Guarantor against any and all of the Obligations of Borrowers and/or Guarantors, whether or not then due and payable; and (v) Lender shall have the right, without notice to Borrowers or any Guarantor (except as otherwise expressly provided herein), at any time and from time to time in its discretion, with or without judicial process or the aid or assistance of others and without cost to Lender (A) to enter upon any premises on or in which any of the Inventory or Equipment of Borrowers and/or Guarantors may be located and, without resistance or interference by Borrowers or any Guarantor, take possession of such Inventory or Equipment; (B) to sell, foreclose or otherwise dispose of any part or all of such Inventory or Equipment on or in any premises of Borrowers, any Guarantor or premises of any other party; (C) to require Borrowers and/or Guarantors, at their expense, to assemble and make available to Lender any part or all of such Inventory or Equipment at any place and time designated by Lender; and (D) to remove any or all of such Inventory or Equipment from any premises on or in which the same may be located, for the purpose of effecting the sale, foreclosure or other disposition thereof or for any other purpose. (b) Lender shall have all of the rights and remedies of a secured party under the UCC or applicable law of any other State in which any Collateral or Guarantor Collateral may be situated, in addition to all of the rights and remedies set forth in this Agreement and the other Financing Agreements, and in any instrument or document referred to herein or therein, and/or under any other applicable law relating to this Agreement, the other Financing Agreements, the Obligations of Borrowers and/or Guarantors, the Collateral or the Guarantor Collateral. - 102 - 108 (c) Each Borrower and Guarantor agrees that in any case where the giving of notice of sale or other disposition of Collateral and/or Guarantor Collateral is required by law, the giving of ten (10) days notice to such Borrower or Guarantor by Lender at their addresses set forth below, designating the place and time of any public sale or of the time after which any private sale or other intended disposition of the Collateral and/or Guarantor Collateral, as the case may be, is to be made, shall be deemed to be reasonable notice thereof and each Borrower and Guarantor waives any other notice with respect thereto. (d) The net cash proceeds resulting from the exercise of any of the foregoing rights or remedies shall be applied by Lender to the payment of the Obligations of Borrowers and/or Guarantors in such order as Lender may elect, and Borrowers and Guarantors shall remain liable to Lender for any deficiency. Without limiting the generality of the foregoing, if Lender enters into any credit transaction, directly or indirectly, in connection with the disposition of any Collateral and/or Guarantor Collateral, Lender shall have the option, at any time, in its discretion, to reduce the Obligations of Borrowers and/or Guarantors by the principal amount of such credit transaction or to defer the reduction thereof until actual receipt by Lender of cash or other immediately available funds in connection therewith. (e) In the event Lender institutes an action to recover any Collateral and/or Guarantor Collateral or seeks recovery of any Collateral and/or Guarantor Collateral by way of prejudgment remedy or otherwise, Borrowers and Guarantors hereby irrevocably waive (i) the posting of any bond, surety or security with respect thereto which might otherwise be required, (ii) any demand for possession prior to the commencement of any suit or action to recover the Collateral and/or Guarantor Collateral, and (iii) any requirement that Lender retain possession and not dispose of any Collateral or Guarantor Collateral until after trial or final judgment. (f) Lender may, at its option, cure any default by Borrowers under any agreement, law, regulation, permit, license or approval with, or issued or promulgated by, any Person, which constitutes an Event of Default or Incipient Default hereunder or under any of the other Financing Agreements, or pay or bond on appeal any judgment entered against Borrowers (irrespective of the amount of said judgment or the time elapsed since entry thereof), and charge each Borrower's loan account therefor, such amounts to be repayable by Borrowers on demand, together with interest thereon at the highest rate of interest hereunder; provided, however, Lender shall be under no obligation to effect such cure, payment or bonding and shall not, by making any payment for Borrowers' account, be deemed to have assumed any obligation or liability of Borrowers. - 103 - 109 (g) The enumeration of the foregoing rights and remedies is not intended to be exclusive, and such rights and remedies are in addition to and not by way of limitation of any other rights or remedies Lender may have under the other Financing Agreements, the UCC or other applicable law. Lender shall have the right to determine which rights and remedies, and in which order any of the same, are to be exercised, and to determine which Collateral or Guarantor Collateral is to be proceeded against and in which order, and the exercise of any right or remedy shall not preclude the exercise of any others, all of which shall be cumulative. (h) No act, failure or delay by Lender shall constitute a waiver of any of the rights and remedies of Lender. No single or partial waiver by Lender of any provision of this Agreement or any of the other Financing Agreements, or breach or default thereunder, or of any right or remedy which Lender may have, shall operate as a waiver of any other provision, breach, default, right or remedy or of the same provision, breach, default, right or remedy on a future occasion. (i) Each Borrower and Guarantor waives presentment, notice of dishonor, protest and notice of protest of all instruments included in or evidencing any of the Obligations of Borrowers and/or Guarantors or the Collateral or Guarantor Collateral and any and all notices or demands whatsoever (except as expressly provided herein). Lender may, at all times, proceed directly against any of the Borrowers or any of the Guarantors to enforce payment of the Obligations of Borrowers and/or Guarantors and shall not be required to take any action of any kind to preserve, collect or protect any rights in the Collateral or Guarantor Collateral. (j) Notwithstanding anything to the contrary contained in this Section 7.2, references in this Section 7.2 to "Guarantor" shall not, for purposes of this Agreement, include IMR and references in this Section 7.2 to Guarantor Collateral shall not include the IMR Collateral. All rights and remedies of Lender and the Participants against IMR and the IMR Collateral in respect of an Event of Default shall be as set forth in and subject to the terms of Section 4.6(g) hereof, the IMR Limited Guarantee, the IMR Pledge Agreement and as otherwise provided by law. SECTION 8. COLLECTION AND ADMINISTRATION 8.1 Receipts (a) Borrowers shall, at their expense and on behalf of Lender, receive, as the property of Lender and in trust for Lender, all proceeds from the sale of Borrowers' Inventory, in whatever form, including, without limitation, all cash, - 104 - 110 checks, credit or debit card transaction records, and all forms of retail store receipts (other than daily receipts of Brawn retail stores located in California used to fund the ordinary course of business operations of such retail stores of Brawn), as well as all other proceeds of Collateral, and Borrowers shall not commingle such proceeds with Borrowers' own funds. Borrowers shall on the day received deposit all such proceeds into blocked or other deposit accounts according to the provisions set forth below for the collection and transfer of proceeds to Lender. All proceeds of Collateral when received by Lender at such place as Lender may designate from time to time shall be credited to the loan accounts of Borrowers immediately upon Lender's receipt at its designated bank account for such purposes of federal funds wire transfers and one (1) business day for all other remittances, in each instance conditional upon final payment to Lender. (b) Unless Borrowers shall, in fact, identify, at the time of receipt by Lender, the amounts of proceeds of Inventory or Accounts received by Lender which arise from sales of Inventory and collection of Accounts of each Borrower, in view of the impracticality and difficulty of identifying at the time of receipt the respective Borrower's Accounts or other Collateral to which proceeds relate, including, but not limited to, combined payments received under the Credit Card Agreements, Lender shall be entitled to apply such proceeds to the respective loan accounts of Borrowers based on the relative percentages of sales of Inventory made by the Borrowers during the week ending immediately preceding the week of receipt, as reported by Borrowers to Lender. Borrowers shall on a monthly basis reconcile such application of proceeds with the posting of payment to the proper Accounts and receipts, and adjust between themselves by intercompany transfers for any excess application of proceeds to the loan account of one or another Borrower as permitted in Section 6.6(b) hereof; provided, however, that Lender shall not be required to adjust its loan accounts nor shall Lender be required to provide funds for such intercompany transfers, other than on the terms and subject to the conditions set forth herein. 8.2 Depository Accounts; Blocked Accounts; Customer Prepayment Accounts (a) Borrowers shall, in a manner satisfactory to Lender from time to time, enter into deposit account arrangements and merchant payment arrangements with respect to all sales of Inventory, including sales at Borrowers' retail stores, such that all proceeds of the sale of Borrowers' Inventory in every form, subject to the sale and transfer of credit card transaction records pursuant to the Credit Card Agreements to the extent permitted hereunder, and all amounts payable upon Accounts, letters of credit, banker's acceptances and all other proceeds of Collateral, shall be deposited into a blocked account under the - 105 - 111 control of Lender or deposited into deposit accounts approved by Lender with respect to which irrevocable instructions from Borrowers have been accepted by the depository bank to transfer all collected funds to a blocked account under the control of Lender. In connection therewith Borrowers shall execute and shall cause the depository bank(s) to execute or accept such irrevocable instructions, blocked account and other agreements as Lender in its discretion shall specify. (b) Without limiting any of the rights of Lender or obligations of Borrowers under this Section 8, Borrowers shall also establish separate deposit accounts subject to the lien and security interest of Lender, according to such agreements with the depository bank as Lender shall require, into which Borrowers shall deposit checks, gift certificate receipts, deposits and other customer prepayments in any other form representing customer prepayments, including prepayments for merchandise ordered but not yet delivered or received. Nothing set forth herein shall impair any right which Borrowers would otherwise have under applicable law to utilize amounts deposited in such accounts for expenditures, investments or other purposes in the ordinary course of business of Borrowers. Any balances remaining in such accounts on the last business day of each week, representing amounts of prior prepayments earned by performance or otherwise, shall be transferred to Borrowers' blocked account for transfer thereafter to Lender for credit to the respective loan accounts of each Borrower in accordance with Section 8.1 hereof. 8.3 Right of Inspection; Access Lender and its representatives shall at any time have free access to and right of inspection of the Collateral and Guarantor Collateral and have full access to and the right to examine and make copies of Borrowers' and each Guarantor's (other than IMR's) books and records, to confirm and verify all purchases and sales of Borrowers' Inventory and proceeds thereof including Accounts, to perform general audits and to do whatever else Lender deems necessary to protect the interests of Lender. Without limiting any of Lender's rights under this Section 8.3 or elsewhere herein or in the other Financing Agreements, upon and after the occurrence of an Event of Default that is continuing, Lender may, if Lender reasonably believes such action is necessary to preserve the books and records or to protect or effect Lender's rights and remedies with respect thereto, remove from the premises of Borrowers or Guarantors (other than IMR) any books and records and Lender may, without cost or expense to it, use such of Borrowers' or any of the Guarantors' (other than IMR's) personnel, supplies, computer equipment (to the extent permitted by the lessor thereof, as to leased computer equipment or software) and space at their places of business as may be reasonably necessary for the handling of proceeds from the sale - 106 - 112 of Borrowers' Inventory or other proceeds of any Collateral or Guarantor Collateral. 8.4 Specific Powers (a) Each Borrower and Guarantor hereby constitutes Lender, and its designees, as its attorney-in-fact, at Borrowers' and Guarantors' own cost and expense, to exercise at any time all or any of the following powers which, being coupled with an interest, shall be irrevocable until all Obligations of Borrowers and Guarantors have been paid in full: (i) to receive, take, endorse, assign, deliver, accept and deposit, in the name of Lender, or such Borrower or Guarantor, as the case may be, any and all checks, notes, drafts, remittances and other instruments and documents relating to any Collateral and Guarantor Collateral as the case may be; (ii) after the occurrence and upon and during the continuance of an Event of Default or Incipient Default, to receive, open and dispose of all mail addressed to such Borrower or Guarantor, as the case may be, and to notify postal authorities to change the address for delivery thereof to such address as Lender may designate; (iii) to transmit to Account Debtors obligated in respect of any Collateral notice of Lender's interest therein and to request from such Account Debtors at any time, in the name of Lender, or such Borrower or Guarantor, as the case may be, or that of Lender's or designee, information concerning the Accounts that are part of any Collateral and the amounts owing thereon; (iv) after the occurrence and upon and during the continuance of an Event of Default or Incipient Default, to notify Account Debtors obligated in respect of the Collateral to make payment directly to Lender; (v) after the occurrence and upon and during the continuance of an Event of Default or Incipient Default, to take or bring, in the name of Lender, or such Borrower or Guarantor, as the case may be, all steps, actions, suits or proceedings deemed by Lender necessary or desirable to effect collection of the Collateral and Guarantor Collateral; and (vi) to execute in such Borrower's or such Guarantor's name and on its behalf any UCC financing statements or amendments thereto. Each Borrower and Guarantor hereby releases Lender, and its officers, employees, attorneys, agents and designees, from any liability arising from any act or acts under this Agreement or in furtherance thereof, whether of omission or commission, and whether based upon any error of judgment or mistake of law or fact, other than for Lender's own gross negligence or wilful misconduct. (b) Notwithstanding anything to the contrary contained in this Section 8.4, references in this Section 8.4 to Guarantor shall not, for purposes of this Agreement, include IMR and references in this Section 8.4 to Guarantor Collateral shall not, for purposes of this Agreement, include the IMR Collateral. All rights and remedies of Lender and the Participants against IMR and the IMR Collateral in respect of an Event of Default - 107 - 113 shall be as set forth in the IMR Limited Guarantee, the IMR Pledge Agreement and as otherwise provided by law, subject to the terms of Section 4.6(g) hereof. SECTION 9. EFFECTIVE DATE; TERMINATION; COSTS; MISCELLANEOUS 9.1 Term (a) The Existing Loan Agreement and the other Financing Agreements became effective as of May 5, 1993 and this Agreement shall continue in full force and effect for a term ending on May 5, 1996 (the "Renewal Date"), and from year-to-year thereafter, unless sooner terminated pursuant to the terms hereof. (Such initial term together with all extensions and renewals thereof, the "Term".) (b) Lender may, or all Borrowers (but not less than all Borrowers) may, terminate this Agreement and the other Financing Agreements effective on the Renewal Date or on the anniversary of the Renewal Date in any year by giving to the other parties at least sixty (60) days prior written notice; provided, that, this Agreement and all other Financing Agreements must be terminated simultaneously. (c) In addition, Lender shall have the right to terminate this Agreement and the other Financing Agreements immediately at any time after the occurrence and during the continuance of an Event of Default. Lender shall have no obligation to make additional loans or provide additional credit accommodations hereunder at any time after and during the continuance of an Event of Default or Incipient Default. (d) Upon the effective date of termination of the Financing Agreements, Borrowers shall pay to Lender in full, by wire transfer in federal funds to such bank account of Lender as Lender may, in its discretion, designate in writing to Borrowers for such purpose, all outstanding and unpaid non-contingent Obligations of Borrowers (including, but not limited to the Revolving Inventory Loans and Additional Advances and all interest, fees (including the Early Termination Fees, if any, provided herein), charges, expenses and other amounts provided for hereunder, under the other Financing Agreements or otherwise) and shall furnish cash Collateral to Lender, or a clean irrevocable letter of credit issued in Lender's favor by a bank acceptable to Lender in its discretion and having documentary requirements and other terms acceptable to Lender in its discretion, in order to secure and provide for payment in full of all contingent Obligations, including all undrawn amounts available pursuant to previously issued and outstanding Letter of Credit Accommodations, and all other contingent Obligations. Interest at the Interest Rate shall be due until and including the next business day, if the amounts so paid by Borrowers to the - 108 - 114 bank account designated by Lender are received in such bank account later than 12:00 noon, New York, New York time. (e) No termination of the Financing Agreements shall relieve or discharge Borrowers or any Guarantor of their respective duties, obligations and covenants under the Financing Agreements until all Obligations of Borrowers and Guarantors have been fully indefeasibly paid and discharged, and following such termination, Lender's continuing security interests in the Collateral and Guarantor Collateral shall remain in effect until all such Obligations have been fully indefeasibly paid and discharged. At Borrowers' written request, following termination of this Agreement as provided herein, and after all Obligations have been fully and indefeasibly paid and discharged, Lender shall execute and deliver to Borrowers and Guarantors any and all documents and instruments reasonably required to terminate all liens and security interests granted to Lender pursuant hereto and pursuant to the other Financing Agreements, all at Borrowers' and Guarantors' expense; provided, however, that, following termination of this Agreement as provided herein, upon Lender's receipt of full and final payment in immediately available funds of all unpaid non-contingent Obligations and Borrower's compliance with Section 9.1(d) as to all contingent Obligations, Lender shall notify the depository bank(s) with which blocked accounts have been established under Section 8 hereof, that Lender has relinquished its control over such blocked accounts and that such banks may follow the instructions of Borrowers with respect to the disposition of funds thereafter received in or deposited to such previously blocked accounts. (f) If Lender terminates this Agreement or the other Financing Agreements after the occurrence and during the continuance of an Event of Default or at the request of Borrowers prior to the Termination Date, in view of the impracticality and extreme difficulty of ascertaining actual damages, and by mutual agreement of the parties as to a reasonable calculation of Lender's lost profits as a result thereof, Borrowers hereby agree to pay to Lender, upon the effective date of such termination, a fee (the "Early Termination Fee") in an amount equal to: (i) five percent (5%) of the Maximum Credit, if such termination is effective on or prior to May 5, 1994; (ii) one percent (1%) of the Maximum Credit, if such termination is effective after May 5, 1994, but on or prior to May 5, 1995; or (iii) one-half of one percent (.5%) of the Maximum Credit, if such termination is effective after May 5, 1995 but prior to May 5, 1996. - 109 - 115 The Early Termination Fee shall be presumed to be the amount of damages sustained by said early termination and each Borrower and Guarantor agrees that it is reasonable under the circumstances currently existing. The Early Termination Fee provided for in this Section 9.1 shall be deemed included in the Obligations of Borrowers. (g) Notwithstanding the foregoing provisions of this Section 9.1, the Early Termination Fee otherwise payable by Borrowers to Lender in connection with the termination of this Agreement upon Borrowers' written request shall not be payable if such termination is effected and all of the Obligations of Borrowers are fully and indefeasibly paid and satisfied within ninety (90) days following Lender's receipt of written notice from Borrowers ("Voluntary Termination Notice") requesting voluntary termination of this Agreement by reason of the occurrence, not more than sixty (60) days prior to Lender's receipt of the Voluntary Termination Notice, of a Specified Action (as defined below); provided, however, that at the time of any such Specified Action (i) no Event of Default or Incipient Default had occurred and was continuing, and (ii) the Excess Availability, after adding back, for these purposes only, the aggregate amount of principal payments on direct Indebtedness for Borrowed Money of H&H (determined as if the reorganization described in Exhibit K to the Existing Loan Agreement had not occurred) subtracted under Section 1.35(ii)(D) hereof, was at least One Dollar ($1.00); provided, further, that Borrowers have obtained replacement financing upon termination under this Section 9.1(g) from an asset-based lender on terms affording Borrowers an aggregate amount of loans, advances and other financial accommodations greater by at least One Million Dollars ($1,000,000) than the aggregate amount of loans, advances and other financial accommodations available under the Credit Facility, based on the same items of Collateral and Guarantor Collateral as under the Credit Facility, after giving effect to the reduced Inventory Lending Formula. For purposes hereof, the term "Specified Action" shall mean the reduction by Lender of the Inventory Advance Formula to a percentage less than fifty percent (50%) based on the exercise of its discretionary rights to do so at any time and from time to time. (h) Notwithstanding the foregoing provisions of this Section 9.1, if Borrowers shall propose to Lender, in writing, the terms of a Standalone Refinancing for GBM and Gump's acceptable to Borrowers, and Lender and Borrowers shall fail to agree within sixty (60) days following Lender's receipt of such proposal on such terms or any other terms under which Lender would, if at all, agree to provide such Standalone Refinancing (it being understood that Lender shall be under no obligation to accept any proposed Standalone Refinancing or terms thereof not fully acceptable to Lender in its sole discretion), then GBM and Gump's shall be free, within the sixty (60) day period following the expiration of the initial sixty (60) day period, to - 110 - 116 consummate a Standalone Refinancing with another lender, upon payment to Lender of all of the amounts referred to in Section 9.1(i) below in the definition of Standalone Refinancing, and, in addition thereto, payment of an Early Termination Fee to Lender in an amount equal to: (A) $250,000 if such Standalone Refinancing is consummated on or prior to July 9, 1994; (B) $50,000 if such Standalone Refinancing is consummated after July 9, 1994, but on or prior to July 9, 1995; or (C) $25,000 if such Standalone Refinancing is consummated after July 9, 1995, but prior to May 5, 1996, or, if the Term is extended or renewed beyond May 5, 1996, prior to July 9, 1996. (i) As used in this Agreement, "Standalone Refinancing" shall mean, as to GBM and Gump's, a refinancing of the Obligations of both GBM and Gump's to Lender and/or other Indebtedness of GBM, Gump's and/or other members of the Affiliated Borrower Group as provided below (whether such refinancing is provided by Lender or another lender) such that: (A) all non-contingent Obligations of GBM and Gump's to Lender determined by Lender to be outstanding in respect of Revolving Inventory Loans and Letter of Credit Accommodations to GBM and Gump's are fully and indefeasibly paid to Lender; (B) cash collateral is delivered to Lender or a clean irrevocable letter of credit is issued in Lender's favor by a bank acceptable to Lender in its discretion and having documentary and other terms acceptable to Lender in its discretion, in order to secure and provide for payment in full of all contingent Obligations of GBM and Gump's to Lender; (C) all Indebtedness for cash or property lent or advanced or Inventory sold to GBM or Gump's by HDPI, Brawn, TCSA, SDSA or Tweeds or, to the extent funded directly or indirectly with the loans hereunder to HDPI, Brawn, TCSA, SDSA or Tweeds by other members of the Affiliated Borrower Group, shall be fully and indefeasibly repaid and paid by GBM and Gump's; (D) the Credit Card Agreements shall not include, or shall be amended to eliminate, all cross- collateralization, guarantees, joint obligations or other credit support provided to the Private Credit Card Purchaser or any Third Party Credit Card Issuer - 111 - 117 or any servicer or processing agent or any factor or financial intermediary by any other Borrower or other member of the Affiliated Borrower Group with respect to obligations of GBM and Gump's to such Persons, or provided to any such Persons by GBM or Gump's with respect to obligations of any other Borrower or other member of the Affiliated Borrower Group to such Persons; and (E) after giving effect to the terms of such refinancing and the transactions required under clauses (A), (B), (C) and (D) above, and any related transactions, GBM and Gump's would and do, in fact, qualify as Non- Guarantor Subsidiaries hereunder as of the consummation of such refinancing and thereafter. 9.2 Expenses and Additional Fees (a) Borrowers and Guarantors shall pay to Lender on demand all costs and expenses that Lender pays or incurs in connection with the negotiation, preparation, consummation, administration, enforcement, and termination of this Agreement and the other Financing Agreements, including, without limitation: (i) reasonable attorneys' and paralegals' fees and disbursements of counsel to Lender and any Participant; (ii) costs and expenses (including reasonable attorneys' and paralegals' fees and disbursements) for any amendment, supplement, waiver, consent, or subsequent closing in connection with the Financing Agreements and the transactions contemplated thereby; (iii) costs and expenses of lien and title searches and title insurance including, without limitation title insurance premiums; (iv) taxes, fees and other charges for recording any agreements or documents with the United States Office of Patents and Trademarks, The United States Office of Copyrights or any other governmental authority, and the filing of UCC financing statements and continuations, and other actions to perfect, protect, and continue the security interests and liens of Lender in the Collateral and/or Guarantor Collateral; (v) sums paid or incurred to take any action required of Borrowers and/or any Guarantors under the Financing Agreements that Borrowers and/or any Guarantors fail to pay or take; (vi) costs of appraisals, environmental audits, inspections, and verifications of the Collateral and/or Guarantor Collateral, including, without limitation, travel and lodging, plus a per diem charge at a rate of Five Hundred Dollars ($500) per person for periodic field examinations of the Collateral and/or Guarantor Collateral and Borrowers' and/or any Guarantor's operations by Lender, or its agents; (vii) costs and expenses of forwarding loan proceeds, collecting checks and other items of payment, and establishing and maintaining blocked accounts including, without limitation, wire transfer fees and check dishonor fees; (viii) costs and expenses of preserving and protecting the Collateral and/or Guarantor Collateral; and (ix) costs and expenses (including - 112 - 118 reasonable attorneys' and paralegals' fees and disbursements) paid or incurred to obtain payment of the Obligations of Borrowers and/or Guarantors, enforce the security interests and liens of Lender, sell or otherwise realize upon the Collateral and/or Guarantor Collateral, and otherwise enforce the provisions of this Agreement and the other Financing Agreements (including, without limitation, premiums on bonds and undertakings, fees of marshals, sheriffs, custodians, auctioneers and others, travel expenses and all court costs and collection charges), or to defend any claims made or threatened against Lender arising out of the transactions contemplated hereby (including, without limitation, preparations for and consultations concerning any such matters); provided, however, IMR shall be responsible only for those such costs and expenses under and in connection with the IMR Guarantee, the IMR Collateral and the IMR Pledge Agreement. The foregoing shall not be construed to limit any other provisions of the Financing Agreements regarding costs and expenses to be paid by Borrowers and/or Guarantors. (b) All sums provided for in this Section 9.2 shall be part of the Obligations of Borrowers and Guarantors, shall be payable on demand, and shall accrue interest after demand for payment thereof at the highest rate of interest then payable hereunder. Lender is hereby irrevocably authorized to charge any amounts payable hereunder directly to any of the account(s) maintained by Lender with respect to Borrowers and/or any Guarantors; provided, however, only such amounts as are payable under or in connection with the IMR Limited Guarantee, the IMR Collateral and the IMR Pledge Agreement may be charged to the custodial account established by Lender pursuant to the IMR Pledge Agreement. 9.3 Survival of Agreement All agreements, representations and warranties contained herein or made in writing by the parties hereto in connection with the transactions contemplated hereby shall survive the execution and delivery of this Agreement, the other Financing Agreements and the consummation of the transactions contemplated herein or therein regardless of any investigation made by or on behalf of Lender. 9.4 No Waiver; Remedies Cumulative No failure to exercise, and no delay in exercising on the part of Lender of, any right, power or privilege under this Agreement or under any of the other Financing Agreements or other documents referred to herein or therein shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or thereunder preclude any other or further exercise thereof or the exercise of any other right, power and privilege. No notice to or demand on Borrowers or any Guarantor not required hereunder or any of the other Financing - 113 - 119 Agreements shall entitle Borrowers or Guarantors to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of Lender to any other or further action in any circumstances without notice or demand. The rights and remedies of Lender under this Agreement, the other Financing Agreements and any other present and future agreements between or among Lender, Borrowers and Guarantors, as the case may be, are cumulative and not exclusive of any rights or remedies provided by law or under any of the Financing Agreements or such other agreements and all such rights and remedies may be exercised successively or concurrently in whatever order and manner Lender shall elect. 9.5 Notices All notices, requests and demands to or upon the respective parties hereto shall be in writing and shall be deemed to have been duly given or made: if by hand, immediately upon delivery; if by telex, telecopier or telegram, immediately upon sending; if by express mail or any other overnight delivery service, one (1) day after dispatch; and if by registered or certified mail, return receipt requested, five (5) days after mailing. All notices, requests and demands upon the parties are to be given to the following addresses and telecopier numbers (or to such other address or telecopier number as any party may designate by notice in accordance with this Section): If to HDPI: Hanover Direct Pennsylvania, Inc. 1500 Harbor Boulevard Weehawken, New Jersey 07087 Attention: Michael P. Sherman, Esq. Telecopier: 201-319-3468 If to any other Borrower: c/o Hanover Direct Pennsylvania, Inc. 1500 Harbor Boulevard Weehawken, New Jersey 07087 Attention: Michael P. Sherman, Esq. Telecopier: 201-319-3468 If to any Guarantor: c/o Hanover Direct, Inc. (other than IMR) 1500 Harbor Boulevard Weehawken, New Jersey 07087 Attention: Michael P. Sherman, Esq. Telecopier: 201-319-3468 If to Lender: Congress Financial Corporation 1133 Avenue of the Americas New York, New York 10036 Attention: Mr. Mark Fagnani Telecopier: 212-545-4555 - 114 - 120 9.6 Entire Agreement This Agreement, the other Financing Agreements, any supplements 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. Without limiting the foregoing, the letter agreement dated May 5, 1993 among Lender, Brawn, HDPI and H&H concerning the Gump's Acquisition is superseded by the terms hereof. 9.7 Amendments and Waivers Neither this Agreement, nor any of the other Financing Agreements or any other instrument or document referred to herein or therein may be changed, waived, discharged or terminated orally, except by an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. 9.8 Applicable Law This Agreement and the other Financing Agreements and all other documents referred to herein or therein are being executed and delivered in New York, New York and together with all transactions and the obligations and rights thereunder, shall be governed by, construed and interpreted in accordance with the laws of the State of New York. 9.9 Successors and Assigns This Agreement, the other Financing Agreements and any other document referred to herein or therein shall be binding upon Borrowers and Guarantors and their respective successors or assigns and inure to the benefit of and be enforceable by Lender and its successors and assigns. None of the Borrowers or any Guarantor may assign its respective rights under this Agreement, the other Financing Agreements and any other document referred to herein or therein without the prior written consent of Lender. Lender may assign its rights and delegate its obligations under this Agreement and the other Financing Agreements and further may assign, or sell participations in, all or any part of the Revolving Inventory Loans, Additional Advances and Letter of Credit Accommodations or any other interest herein, in which event, the assignee or participant shall have, to the extent of such assignment or participation, the same rights and benefits as it would have if it were the Lender hereunder, except as otherwise provided by the terms of such assignment or participation. Lender may furnish any information concerning Borrowers or Guarantors in the possession of Lender from time to time to - 115 - 121 assignees and Participants (including prospective assignees and Participants). 9.10 Severability If any provision of this Agreement or the other Financing Agreements is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Agreement or the other Financing Agreements as a whole but this Agreement or the particular Financing Agreement, as the case may be, shall be construed as though it did not contain the particular provision or provisions held to be invalid or unenforceable and the rights and obligations of the parties shall be construed and enforced only to such extent as shall be permitted by law. 9.11 Headings The headings used herein are for convenience only and do not constitute matters to be considered in interpreting this Agreement. 9.12 Security Interests of Participants If a Participant shall at any time participate with Lender in the Credit Facility or any portion thereof, Borrowers and Guarantors hereby grant to such Participant and Lender and such Participant shall have and is hereby given, a continuing lien on and security interest in any money, securities and other property of Borrowers and Guarantors in the custody or possession of the Participant, including the right of setoff, to the extent of the Participant's participation in the Obligations of Borrowers and Guarantors and such Participant shall be deemed to have the same right of setoff to the extent of its participation in the Obligations, as it would have if it were a direct lender; provided, however, that in the case of IMR, IMR shall only be required to grant to such Participant a security interest in, a continuing lien on, and right of setoff against the IMR Collateral to the same extent granted to Lender in the IMR Pledge Agreement and in and against no other assets or properties of IMR. 9.13 WAIVER OF JURY TRIAL THE PARTIES HERETO HEREBY WAIVE TRIAL BY JURY IN ANY ACTION OR PROCEEDING OF ANY KIND WITH RESPECT TO, IN CONNECTION WITH, OR ARISING OUT OF THIS AGREEMENT, THE OTHER FINANCING AGREEMENTS, THE OBLIGATIONS OF BORROWERS AND GUARANTORS, THE COLLATERAL, THE GUARANTOR COLLATERAL, OR ANY INSTRUMENT, DOCUMENT OR GUARANTY DELIVERED PURSUANT HERETO OR TO ANY OF THE FOREGOING, OR THE VALIDITY, PROTECTION, INTERPRETATION, ADMINISTRATION, COLLECTION OR ENFORCEMENT HEREOF OR THEREOF, OR ANY OTHER CLAIM OR DISPUTE HEREUNDER OR THEREUNDER. - 116 - 122 9.14 Waiver of Counterclaims; Jurisdiction; Service of Process Each Borrower and Guarantor hereby waives all rights of setoff and rights to impose counterclaims (other than compulsory counterclaims) in the event of any litigation with respect to any matter connected with this Agreement, the other Financing Agreements, the Obligations of Borrowers and Guarantors, the Collateral, the Guarantor Collateral or any transaction between the parties hereto, and irrevocably consents and submits to the non-exclusive jurisdiction of the Supreme Court of the State of New York in New York County, and of the United States District Court for the Southern District of New York and the courts of any State in which any of the Collateral and/or Guarantor Collateral is located and of any Federal Court located in such States in connection with any action, proceeding or claim arising out of or relating to this Agreement, the other Financing Agreements, the Obligations of Borrowers and Guarantors, the Collateral, the Guarantor Collateral or any document, instrument or guaranty delivered pursuant hereto or to any of the foregoing. In any such litigation, each Borrower and Guarantor waives personal service of any summons, complaint or other process and agrees that the service thereof may be made by certified or registered mail, return receipt requested, directed to it at its chief executive office set forth herein, or designated in writing pursuant to this Agreement, or in any other manner permitted by the rules of said Courts. Within thirty (30) days after such mailing, Borrowers and any Guarantor named in any such summons, complaint or other process shall appear to answer such summons, complaint or other process, failing which Borrowers and such Guarantors shall be deemed in default and judgment may be entered by Lender against Borrowers and/or such Guarantors for the amount of the claim and other relief requested therein. 9.15 Counterparts This Agreement may be executed in any number of counterparts, and by Lender and Borrowers and any of the Guarantors in separate counterparts, each of which shall be an original, but all of which shall together constitute one and the same agreement. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed and delivered by their duly authorized officers as of the day and year first above written. CONGRESS FINANCIAL CORPORATION By:_________________________ Title:______________________ [SIGNATURES CONTINUE ON FOLLOWING PAGE] - 117 - 123 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER DIRECT PENNSYLVANIA, INC. By:_________________________ Title:______________________ BRAWN OF CALIFORNIA, INC. By:_________________________ Title:______________________ GUMP'S BY MAIL, INC. By:_________________________ Title:______________________ GUMP'S CORP. By:_________________________ Title:______________________ TCSA, INC., a Wisconsin corporation By:_________________________ Title:______________________ SDSA, INC. By:_________________________ Title:______________________ TWEEDS, INC. By:_________________________ Title:______________________ - 118 - 124 By their signatures below, the undersigned Guarantors acknowledge and agree to be bound by the applicable provisions of this Agreement: HANOVER DIRECT, INC., a Delaware corporation By:____________________________ Title:_________________________ RING RESPONSE LTD. By:____________________________ Title:_________________________ LEAVITT ADVERTISING AGENCY, INC. By:____________________________ Title:_________________________ D.M. ADVERTISING, INC. By:____________________________ Title:_________________________ HANOVER SYNDICATION CORP. By:____________________________ Title:_________________________ HANOVER DIRECT MAIL MARKETING, INC. By:____________________________ Title:_________________________ [SIGNATURES CONTINUE ON FOLLOWING PAGE] - 119 - 125 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER LIST MANAGEMENT, INC. By:____________________________ Title:_________________________ YORK FULFILLMENT COMPANY, INC. By:____________________________ Title:_________________________ H.I.M. INC. By:____________________________ Title:_________________________ GUMP'S HOLDINGS, INC. By:____________________________ Title:_________________________ TCSA, INC., a Delaware corporation By:____________________________ Title:_________________________ THE COMPANY OFFICE, INC. By:____________________________ Title:_________________________ [SIGNATURES CONTINUE ON FOLLOWING PAGE] - 120 - 126 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] THE COMPANY MANUFACTURING, INC. By:____________________________ Title:_________________________ THE COMPANY FACTORY, INC. By:____________________________ Title:_________________________ SKANDIA DOWN, INC. By:____________________________ Title:_________________________ SKANDIA DOWNSALES, INC. By:____________________________ Title:_________________________ TW ACQUISITIONS, INC. By:____________________________ Title:_________________________ HANOVER HOLDINGS, INC. By:____________________________ Title:_________________________ - 121 - 127 EXHIBIT A JURISDICTIONS OF QUALIFICATION - 122 - 128 EXHIBIT B-1 EXISTING SUBSIDIARIES - 123 - 129 EXHIBIT B-2 EXISTING MAIL ORDER JOINT VENTURES - 124 - 130 EXHIBIT B-3 EXISTING RESTAURANT BUSINESS SUBSIDIARIES - 125 - 131 EXHIBIT C PRINCIPAL PLACES OF BUSINESS, CHIEF EXECUTIVE OFFICES AND LOCATIONS OF COLLATERAL - 126 - 132 EXHIBIT D EXISTING LIENS - 127 - 133 EXHIBIT E LIST OF H&H AND THC DEBT INSTRUMENTS - 128 - 134 EXHIBIT F PENDING LITIGATION - 129 - 135 EXHIBIT G TRADENAMES - 130 - 136 EXHIBIT H-1 EXISTING INDEBTEDNESS OTHER THAN LETTERS OF CREDIT - 131 - 137 EXHIBIT H-2 EXISTING LETTERS OF CREDIT UNDER QCC CREDIT AGREEMENT - 132 - 138 EXHIBIT H-3 [Intentionally Deleted] - 133 - 139 EXHIBIT H-4 EXISTING INTERCOMPANY INDEBTEDNESS - 134 - 140 EXHIBIT I FORM OF MORTGAGEE/LANDLORD WAIVER, ACCESS AND USE AGREEMENT - 135 - 141 EXHIBIT J LIST OF LABOR DISPUTES - 136 - 142 EXHIBIT K [INTENTIONALLY OMITTED] - 137 - 143 EXHIBIT L LETTER OF CREDIT ACCOMMODATION ISSUER BANKS BANK Philadelphia National Bank (and Affiliated Banks) Israel Discount Bank of New York PNC International Bank Credit Suisse Bank Union Bank Citibank N.A. Atlantic Bank La Salle Bank Chemical Bank Banco Popular de Puerto Rico Bank of America International Bank Leumi Trust Company of New York Fidelity Bank Provident Bank American National Bank - 138 - 144 as of December 31, 1993 TO: The Borrowers and Guarantors signing below: Re: First Amendment to Second Amended and Restated Loan and Security Agreement dated as of October 27, 1993 Gentlemen: Reference is made to the Second Amended and Restated Loan and Security Agreement dated as of October 27, 1993 among Congress Financial Corporation, Hanover Direct Pennsylvania, Inc., Brawn of California, Inc., Gump's By Mail, Inc., Gump's Corp., TCSA, Inc., a Wisconsin corporation, SDSA, Inc. and Tweeds, Inc. (as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the "Loan Agreement"). Unless otherwise defined herein, capitalized terms used herein shall have the meanings ascribed to such terms in the Loan Agreement. The parties hereto hereby agree to amend the Loan Agreement, effective as of the date hereof, by deleting Section 6.4(h) of the Loan Agreement in its entirety and the following substituted therefor: "(h) the liens or security interests granted by Tweeds in favor of R.R. Donnelley & sons Company ("Donnelley & Sons") and R.R. Donnelley Receivables, Inc. ("DRI") in all of the personal property of Tweeds to secure the Indebtedness of Tweeds to Donnelley & Sons and DRI evidenced by the Installment Note dated as of March 29, 1993, by Tweeds in favor of DRI in the original principal amount of $2,850,801.85 (as in effect on the date thereof) and subject to the Subordination and Intercreditor Agreement, dated as of March 29, 1993, among Lender, Donnelley & Sons and DRI; provided, that, by no later than January 31, 1994, all such liens and security interests granted by Tweeds in favor of Donnelley & Sons and DRI shall be released, and all such Indebtedness satisfied, in each case by the issuance of HDI common stock to Donnelley & Sons and/or DRI in accordance with the agreement among HDI, Donnelley & Sons and/or DRI entered into in connection with the Tweeds Acquisition." Except as set forth herein, the Loan Agreement and the other 145 Financing Agreements shall remain in full force and effect. If the foregoing correctly states our agreement, kindly execute this letter or a counterpart hereof in the spaces provided below. Very truly yours, CONGRESS FINANCIAL CORPORATION By:___________________________ Title:________________________ AGREED AND ACCEPTED: HANOVER DIRECT PENNSYLVANIA, INC. BRAWN OF CALIFORNIA, INC. GUMP'S BY MAIL, INC. GUMP'S CORP. TCSA, INC. (a Wisconsin corporation) SDSA, INC. TWEEDS, INC. By:___________________________ Title:________________________ HANOVER DIRECT, INC. By:___________________________ Title:________________________ RING RESPONSE LTD. LEAVITT ADVERTISING AGENCY, INC. D.M. ADVERTISING, INC. HANOVER SYNDICATION CORP. HANOVER DIRECT MAIL MARKETING, INC. HANOVER LIST MANAGEMENT INC. YORK FULFILLMENT COMPANY H.I.M. INC. GUMP'S HOLDINGS, INC. TCSA, INC. (a Delaware corporation) THE COMPANY OFFICE, INC. THE COMPANY MANUFACTURING, INC. THE COMPANY FACTORY, INC. SKANDIA DOWN, INC. SKANDIA DOWNSALES, INC. TW ACQUISITIONS INC. HANOVER HOLDINGS, INC. By:___________________________ Title:________________________ [SIGNATURES CONTINUED ON NEXT PAGE] - 2 - 146 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] INTERCONTINENTAL MINING & RESOURCES, INCORPORATED By:___________________________ Title:________________________ - 3 - 147 February 25, 1994 Congress Financial Corporation 1133 Avenue of the Americas New York, New York 10036 Re: Second Amendment to Second Amended and Restated Loan and Security Agreement, dated as of October 27, 1993 Gentlemen: Reference is made to the Second Amended and Restated Loan and Security Agreement, dated as of October 27, 1993, among Congress Financial Corporation, Hanover Direct Pennsylvania, Inc., Brawn of California, Inc., Gump's By Mail, Inc., Gump's Corp., TCSA, a Wisconsin corporation, SDSA, Inc. and Tweeds, Inc., as amended by the First Amendment to Second Amended and Restated Loan and Security Agreement, dated as of December 31, 1993 (as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the "Loan Agreement"). Unless otherwise defined herein, capitalized terms used herein shall have the respective meanings set forth in the Loan Agreement. Hanover Holdings, Inc., a wholly-owned subsidiary of Hanover ("Hanover Holdings"), is about to make an equity investment in and/or loans to Boston Publishing Company, Inc., a Massachusetts corporation ("Boston Publishing"). In addition, Hanover Finance Corporation, a newly formed wholly-owned Delaware Subsidiary of HDPI ("Hanover Finance") intends to enter into financing arrangements with Boston Publishing pursuant to which Hanover Finance may make secured loans and advances to Boston Publishing. In connection with the purchase by Hanover Holdings of an equity investment in and/or the making of loans to Boston Publishing, the formation of Hanover Finance as a wholly-owned Subsidiary of HDPI and the financing arrangements which Hanover Finance intends to enter into with Boston Publishing, Borrowers and Guarantors have requested Lender's agreement to certain amendments to the Loan Agreement, all as set forth herein. Borrowers and Guarantors have further requested an increase to $15,000,000 of the sublimit applicable to Letter of Credit Accommodations. 148 Lender is willing to so amend the Loan Agreement, on the terms and conditions and to the extent set forth below. 1. Definitions. (a) Amendments to Definitions. (i) All references to the term "Additional Advances" in the Loan Agreement shall be deemed, and each such reference is hereby amended, to mean, individually and collectively, the IMR Collateral Advances and the Boston Publishing Collateral Advances. (ii) All references to the term "Additional Advances Lending Formula" in the Loan Agreement shall be deemed, and each such reference is hereby amended to mean, individually and collectively, the IMR Collateral Lending Formula and the Boston Publishing Lending Formula. (b) Additional Definitions. As used herein, the following terms shall have the respective meanings given to them below and the Financing Agreements shall be deemed, and are hereby amended, to include, in addition and not in limitation of the existing definitions, each of the following definitions: (i) "Boston Publishing" shall mean Boston Publishing Company, Inc., a Massachusetts corporation, and its successors and assigns. (ii) "Boston Publishing Collateral Advances" shall mean the Additional Advances to HDPI from time to time made available by Lender to HDPI pursuant to the Boston Publishing Lending Formula. (iii) "Boston Publishing Financing Agreements" shall mean the Loan and Security Agreement dated as of February 25, 1994 between Hanover Finance and Boston Publishing, the Promissory Note made by Boston Publishing in favor of Hanover Finance and the other "Financing Agreements" referred to therein or delivered thereunder or in connection therewith, as the same may now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, in each case, in form and substance satisfactory to Lender. (iv) "Boston Publishing Lending Formula" shall have the meaning set forth in Section 2.1(b) of the Loan Agreement as amended by this Second Amendment. (v) "Eligible Boston Publishing Collateral" shall mean, at any time, all non-retail store inventory of finished goods owned by Boston Publishing, whether now owned or hereafter acquired, which (i) would be considered by Lender to be Eligible Inventory under the Loan Agreement if such inventory -2- 149 were owned by HDPI, as determined by Lender according to the standards of eligibility from time to time fixed and revised by Lender for purposes of the Loan Agreement; (ii) is located at an "Eligible Inventory Location" as determined under the Boston Publishing Financing Agreements, except that all landlord's and mortgagee's waiver and access agreements and warehouse notification and acknowledgments shall be executed by such third parties expressly in favor of Lender in addition to Hanover Finance; and (iii) is subject to a first priority security interest in favor of Hanover Finance subject only to such liens and encumbrances as would be permitted under the terms of the Loan Agreement if such inventory were owned by HDPI, which security interest, together with all present and future "Obligations" (as defined in the Boston Publishing Financing Agreements) secured thereby, and all other rights and remedies of Hanover Finance under the Boston Publishing Financing Agreements (but not any obligations or liabilities of Hanover Finance), have been pledged and assigned to Lender by Hanover Finance to secure all present and future obligations, liabilities and indebtedness of Hanover Finance to Lender. (vi) "Hanover Finance" shall mean Hanover Finance Corporation, a Delaware corporation and a wholly-owned subsidiary of HDPI, and its successors and assigns. (vii) "Hanover Holdings" shall mean Hanover Holdings, Inc., a Delaware corporation and a wholly-owned subsidiary of Hanover, and its successors and assigns. (viii) "IMR Collateral Advances" shall mean the Additional Advances from time to time made available by Lender to HDPI pursuant to the IMR Collateral Lending Formula. (ix) "IMR Collateral Lending Formula" shall have the meaning set forth in Section 2.1(b) of the Loan Agreement as amended by this Second Amendment. (x) "Loan Value" shall mean, for purposes of Lender's determination of Boston Publishing Collateral Advances available at any time under the Boston Publishing Lending Formula, the lesser of (i) forty-five (45%) percent of the Value of Eligible Boston Publishing Inventory as determined by Lender, or (ii) the outstanding principal balance of loans made by Hanover Finance to Boston Publishing pursuant to the Boston Publishing Financing Agreements and secured by Eligible Boston Publishing Inventory, as evidenced to Lender's satisfaction. The percentage advance rate set forth in clause (i) is subject to Lender's satisfactory review of an Orderly Liquidation Value appraisal report from the Appraiser and Lender's right to make downward adjustments of such percentage based on any adverse change, individually or in the aggregate, in the Orderly Liquidation Values or mix of Eligible Boston Publishing Collateral in any categories thereof, and any such downward -3- 150 adjustment made for such reason(s) shall not be considered solely discretionary for purposes of Sections 1.76 and 2.6(b) of the Loan Agreement. If a material Event of Default has occurred and is continuing under the Boston Publishing Financing Agreements (determined without regard to any waiver, amendment or consent given or entered into thereunder by Hanover Finance without Lender's prior written consent) or Hanover Finance has ceased making loans thereunder by reason of any event of default, incipient default, termination, non-renewal or otherwise, the Loan Value may, at Lender's option, be reduced to zero or such other amount as Lender shall determine. 2. Additional Advances. Section 2.1(b) of the Loan Agreement is hereby deleted in its entirety and the following substituted therefor: "(b) Subject to, and upon the terms and conditions contained herein, Lender shall, from time to time, make Additional Advances to HDPI, at HDPI's request (i) of up to one hundred percent (100%) of the Market Value, not greater than Ten Million Dollars ($10,000,000), of the IMR Collateral then pledged to Lender pursuant to the IMR Pledge Agreement (the "IMR Collateral Lending Formula"), plus (ii) up to the lesser of (A) Five Hundred Thousand Dollars ($500,000), or (B) the Loan Value of the Eligible Boston Publishing Collateral (the "Boston Publishing Lending Formula"). Without limiting the foregoing, the IMR Collateral Additional Advances outstanding at any time shall not exceed the balance of the IMR Collateral pledged to Lender, less the aggregate amounts reduced or released pursuant to Sections 4.4, 4.5 or 4.6 hereof or otherwise (other than interest or any income released pursuant to the IMR Pledge Agreement)." 3. Letter of Credit Accommodations. Section 2.3(h) of the Loan Agreement is hereby amended by replacing the reference to "Ten Million Dollars ($10,000,000)" with "Fifteen Million Dollars ($15,000,000)". 4. Amended Exhibits to the Loan Agreement. (a) Exhibit C attached to the Loan Agreement is hereby replaced in its entirety with Amended Exhibit C in the form annexed hereto. (b) Exhibit B-1 to the Loan Agreement is hereby replaced in its entirety with Amended Exhibit B-1 in the form annexed hereto. (c) Exhibit B-2 to Loan Agreement is hereby replaced in its entirety with Amended Exhibit B-2 in the form annexed hereto. -4- 151 5. Treatment as Mail Order Joint Venture. Boston Publishing will be considered a Mail Order Joint Venture for purposes of the Loan Agreement, including Section 6.26 thereof. Without limiting the foregoing, all loans by Hanover Finance to Boston Publishing shall be aggregated and subject to the limitations for loans, investments and other specified transactions with all Mail Order Joint Ventures, as provided in Section 6.26(a) of the Loan Agreement. 6. Permitted Loans and Investments. Section 6.5 of the Loan Agreement is hereby amended by deleting the word "and" appearing at the end of subsection (e) thereof, replacing the period at the end of subsection (f) thereof with a semicolon, and by adding at the end of Section 6.5 the following: "(g) Provided no Event of Default or Incipient Default has occurred and is continuing, and subject to the limitations set forth in Section 6.26(a), loans or advances of money by HDPI to Hanover Finance in an amount not to exceed $3,000,000 in the aggregate at any one time outstanding, provided, that (A) Hanover Finance simultaneously lends such funds directly to Boston Publishing pursuant to the Boston Publishing Financing Agreements, and (B) the Boston Publishing Financing Agreements, together with the "Obligations" of Boston Publishing to Hanover Finance thereunder and all security interests, liens and other rights and remedies of Hanover Finance thereunder (but not any obligations or liabilities of Hanover Finance) have been pledged and assigned to Lender to secure all present and future obligations, liabilities and indebtedness of Hanover Finance to Lender; and (h) Provided no Event of Default or Incipient Default has occurred and is continuing, loans or advances of money by HDPI to Hanover Holdings in an amount not to exceed $1,250,000 in the aggregate at any one time outstanding, provided, that (A) Hanover Holdings simultaneously lends such funds directly to or uses such funds to make equity investments directly in Boston Publishing, (B) all indebtedness of Boston Publishing to Hanover Holdings and all notes and other instruments evidencing the same, all security interests, liens and other rights and remedies of Hanover Holdings thereunder (but not any obligations or liabilities of Hanover Holdings) and all equity interests of Hanover Holdings in Boston Publishing and rights to acquire any such equity interests, have, if so requested by Lender, been pledged and assigned to Lender to secure all present and future obligations, liabilities and indebtedness of Hanover Holdings to Lender, and (C) the aggregate amount of such loans by HDPS to Hanover Holdings shall be considered a loan or investment in Boston Publishing for purposes of the limitations on loans, investments and other specified -5- 152 transactions with Boston Publishing, notwithstanding that Hanover Holdings is not a Subsidiary of Borrower." 7. Representations, Warranties and Covenants. In addition to the continuing representations, warranties and covenants heretofore or hereafter made by Borrowers and Guarantors to Lender, pursuant to the Financing Agreements, Borrowers and Guarantors hereby 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 and shall be deemed incorporated into and made a part of the Financing Agreements): (a) No Event of Default exists on the date of this Amendment (after giving effect to the amendments to the Loan Agreement made by this Amendment). (b) This Amendment has been duly executed and delivered by Borrowers and Guarantors and is in full force and effect as of the date hereof and the agreements and obligations of Borrowers and Guarantors contained herein constitute the legal, valid and binding obligations of Borrowers and Guarantors enforceable against Borrowers and Guarantors in accordance with its terms. 8. Conditions Precedent to Effectiveness of this Amendment. As conditions precedent to the effectiveness of this Second Amendment, Borrowers and Guarantors, as applicable, shall cause the following documents and instruments to be executed and delivered to Lender: (a) Hanover Finance shall execute and deliver to Lender the documents and instruments required by Lender pursuant to Section 6.2 of the Loan Agreement; (b) Hanover Holdings shall deliver to Lender true and complete copies of all of the agreements, documents and instruments evidencing the equity investment and/or loans by Hanover Holdings in and to Boston Publishing, and all other arrangements between any member of the Affiliated Borrower Group and Boston Publishing, which shall be in form and substance satisfactory to Lender; (c) Hanover Finance shall deliver to Lender, true and complete copies of all of the Boston Publishing Financing Agreements, which shall be in form and substance satisfactory to Lender; (d) Hanover Finance shall deliver to Lender the original executed Promissory Note, as executed and delivered by Boston Publishing to the order of Hanover Finance pursuant to the Boston Publishing Financing Agreements, duly endorsed to the -6- 153 order of Lender, as part of the Guarantor Collateral under the Loan Agreement; and (e) an original of this Amendment, duly authorized, executed and delivered by Borrowers and Guarantors. 9. Conditions Precedent to Boston Publishing Collateral Advances. Each of the following is an additional condition precedent to Lender making the initial and any subsequent Boston Publishing Collateral Advances: (a) Hanover Finance shall have delivered evidence of the filing of UCC-1 financing statements in all applicable jurisdictions and proper filing offices thereof naming Boston Publishing, as debtor, Hanover Finance, as secured party, and Lender, as assignee, describing the collateral granted under the Boston Publishing Financing Agreements and, in any event, including as part of the collateral described therein, all present and future inventory of Boston Publishing and the products and proceeds thereof, and otherwise in form and substance satisfactory to Lender; (b) Hanover Finance shall have delivered to Lender a Guarantee and Waiver, a General Security Agreement, a Confirmatory Assignment Agreement with respect to the Boston Publishing Financing Agreements and related matters and UCC-1 financing statements with respect to the foregoing, in form and substance satisfactory to Lender, each duly authorized, executed and delivered by Hanover Finance; (c) Lender shall have received, in form and substance satisfactory to Lender, all consents, waivers, acknowledgements and other agreements from third Persons which Lender may deem necessary or desirable to permit, protect and perfect its security interest in liens upon the Guarantor Collateral granted by Hanover Finance, including, but not limited to, a Landlord/Mortgagee Waiver with respect to each Eligible Boston Publishing Collateral location; (d) Lender shall have received from Boston Publishing a duly executed Acknowledgement of Assignment and Waiver, in form and substance satisfactory to Lender; and (e) if Lender shall so require, Lender shall have conducted an initial field examination of Boston Publishing, its assets and operations and/or Lender shall have received an initial appraisal report by the Appraiser with respect to the Orderly Liquidation Value of each category of inventory of Boston Publishing. 10. Further Assurances. Borrowers and Guarantors shall execute and deliver such additional documents and take such -7- 154 additional action as may be requested by Lender to effectuate the provisions and purposes of this Amendment. 11. Effect of this Agreement. This Amendment contains the entire agreement of the parties with respect to the subject matter hereof and supersedes all correspondence, memoranda, communications, discussions or negotiations with respect thereto. No Incipient Defaults or Events of Defaults and no rights or remedies of Congress have been or are being waived hereby (except for the waiver expressly set forth in paragraph 7 above) and no changes or modifications to the Financing Agreements have been or are being made or are intended hereby, except as expressly set forth herein, and in all other respects the Financing Agreements are hereby specifically ratified, restated and confirmed by all parties hereto as of the date hereof. In the event that any term or provision of this Amendment conflicts with any term or provision of the Financing Agreements, the term or provision of this Amendment shall control. 12. Counterparts. This Amendment may be executed and delivered in any number of counterparts, and by Lender and Borrowers and any of the Guarantors in separate counterparts, each of which shall be an original, but all of which shall together constitute one and the same agreement. If the foregoing correctly states our agreement, kindly execute this letter or a counterpart hereof in the spaces provided below. Very truly yours, HANOVER DIRECT PENNSYLVANIA, INC. BRAWN OF CALIFORNIA, INC. GUMP'S BY MAIL, INC. GUMP'S CORP. TCSA, INC., a Wisconsin corporation SDSA, INC. TWEEDS, INC. By:_________________________ Title:______________________ AGREED AND ACCEPTED: CONGRESS FINANCIAL CORPORATION By:___________________________ Title:________________________ [SIGNATURES CONTINUED ON FOLLOWING PAGE] -11- 155 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER DIRECT, INC. By:____________________________ Title:_________________________ RING RESPONSE LTD. LEAVITT ADVERTISING AGENCY, INC. D.M. ADVERTISING, INC. HANOVER SYNDICATION CORP. HANOVER DIRECT MAIL MARKETING, INC. HANOVER LIST MANAGEMENT, INC. YORK FULFILLMENT COMPANY, INC. H.I.M. INC. GUMP'S HOLDINGS, INC. TCSA, INC., a Delaware corporation THE COMPANY OFFICE, INC. THE COMPANY MANUFACTURING, INC. THE COMPANY FACTORY, INC. SKANDIA DOWN, INC. SKANDIA DOWNSALES, INC. TW ACQUISITIONS, INC. HANOVER HOLDINGS, INC. By:____________________________ Title:_________________________ HANOVER FINANCE CORPORATION By:____________________________ Title:_________________________ -9- EX-10.15 7 AMENDMENT NO. 1 TO SHERMAN EMPLOYMENT AGREEMENT 1 Exhibit 10.15 AMENDMENT NO. 1 TO EXECUTIVE EMPLOYMENT AGREEMENT AMENDMENT NO. 1 TO EXECUTIVE EMPLOYMENT AGREEMENT, dated June 18, 1993 (this "Agreement"), by and between THE HORN & HARDART COMPANY, a Nevada corporation, with offices at 1500 Harbor Boulevard, Weehawken, New Jersey 07087 (the "Company"), and MICHAEL P. SHERMAN, residing at 15 Tamarack Road, Edison, New Jersey 08820 (the "Executive"). W I T N E S S E T H: WHEREAS, the Company and the Executive have entered into an Executive Employment Agreement, dated October 14, 1991 (the "Employment Agreement"); and WHEREAS, the Company and the Executive desire to amend the Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. Term. The Employment Agreement shall be renewed, effective as of the date hereof, for the period from the date hereof and ending September 30, 1994 as follows: Paragraph 2 of the Employment Agreement is hereby amended to change the date therein to September 30, 1994. 2. Termination of Executive's Employment. The Employment Agreement shall be amended, effective as of the date hereof, as follows: Paragraph 8(g) of the Employment Agreement is hereby deleted and there shall be substituted in lieu thereof the following: (g) Notwithstanding anything to the contrary in this Paragraph 8: (i) The Company shall notify the Executive, not less than ninety (90) days prior to the expiration of the Agreement, as to whether or not the Company intends to enter into good faith negotiations with the Executive for the extension of the Agreement. The Agreement shall be automatically extended for additional one (1)-year periods if the Company shall fail to notify the Executive within such time-period of its intent to enter into or refrain from entering into 2 negotiations with the Executive for the extension of the Agreement; provided, however, that the General Counsel of the Company shall have advised the Chief Executive Officer of the Company in writing at least one hundred four (104) days prior to the expiration of the Agreement of the provisions of this Paragraph 8(g)(i). (ii) If the Agreement is not extended by mutual agreement on or before the last day of the Term, then the Executive shall be paid on such date a lump sum severance payment in an amount equal to the product of one month's salary as then in effect multiplied by the number of years and portions thereof (in the case of any partial year, a pro rata portion of one month's salary) of service by the Executive at the Company; provided, however, that the number of years and portions thereof shall be limited to include no more than two (2) more years from October 3, 1993 (the "Severance Payment"). In addition, if the Executive's employment is terminated during the Term by the Company without Cause or by the Executive with Good Reason, the Executive shall be paid the Severance Payment on the effective date of such termination. Any such Severance Payment shall be in addition to any other rights the Executive may have under the Agreement. 3. Right to Put Shares. The Employment Agreement shall be amended, effective as of the date hereof, as follows: Paragraph 11 of the Employment Agreement is hereby deleted in its entirety. 4. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of New York applicable to contracts executed in and to be performed solely within such state. 5. Guaranty. By its execution of this Agreement, Hanover unconditionally guaranties performance by the Company of its obligations under this Agreement. 6. Miscellaneous. (a) Successors and Assigns. This Agreement shall inure to the benefit of, and be binding upon, the Company and any corporation with which the Company merges or consolidates or to which the Company sells all or substantially all of its assets, and upon the Executive and his executors, administrators, heirs and legal representatives. -2- 3 (b) Headings. All headings in this Agreement are for convenience only and are not intended to affect the meaning of any provision hereof. (c) Counterparts. This Agreement may be executed in two counterparts with the same effect as if the signatures to all such counterparts were upon the same instrument, and all such counterparts shall constitute but one instrument. IN WITNESS WHEREOF, the Executive has executed this Agreement and the Company has caused this Agreement to be executed by a duly authorized officer and to become effective as of the day and year first above written. THE HORN & HARDART COMPANY By:/s/ Jack E. Rosenfeld ------------------------------ Name: Jack E. Rosenfeld Title: President /s/ Michael P. Sherman --------------------------------- Michael P. Sherman THE HANOVER COMPANIES By:/s/ Jack E. Rosenfeld ------------------------------ Name: Jack E. Rosenfeld Title: President -3- EX-10.18 8 AMENDMENT NO. 1 TO GARTEN EMPLOYMENT AGREEMENT 1 Exhibit 10.18 AMENDMENT NO. 1 TO EXECUTIVE EMPLOYMENT AGREEMENT AMENDMENT NO. 1 TO EXECUTIVE EMPLOYMENT AGREEMENT, dated June 18, 1993 (this "Agreement"), by and between THE HORN & HARDART COMPANY, a Nevada corporation, with offices at 1500 Harbor Boulevard, Weehawken, New Jersey 07087 (the "Company"), and WAYNE GARTEN, residing at 747 Iris Court, Yorktown Heights, New York 10598 (the "Executive"). W I T N E S S E T H: WHEREAS, the Company and the Executive have entered into an Executive Employment Agreement, dated October 14, 1991 (the "Employment Agreement"); and WHEREAS, the Company and the Executive desire to amend the Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. Term. The Employment Agreement shall be renewed, effective as of the date hereof, for the period from the date hereof and ending September 30, 1994 as follows: Paragraph 2 of the Employment Agreement is hereby amended to change the date therein to September 30, 1994. 2. Termination of Executive's Employment. The Employment Agreement shall be amended, effective as of the date hereof, as follows: Paragraph 8(g) of the Employment Agreement is hereby deleted and there shall be substituted in lieu thereof the following: (g) Notwithstanding anything to the contrary in this Paragraph 8: (i) The Company shall notify the Executive, not less than ninety (90) days prior to the expiration of the Agreement, as to whether or not the Company intends to enter into good faith negotiations with the Executive for the extension of the Agreement. The Agreement shall be automatically extended for additional one (1)-year periods if the Company shall fail to notify the Executive within such time-period of its intent to enter into or refrain from entering into 2 negotiations with the Executive for the extension of the Agreement; provided, however, that the General Counsel of the Company shall have advised the Chief Executive Officer of the Company in writing at least one hundred four (104) days prior to the expiration of the Agreement of the provisions of this Paragraph 8(g)(i). (ii) If the Agreement is not extended by mutual agreement on or before the last day of the Term, then the Executive shall be paid on such date a lump sum severance payment in an amount equal to the product of one month's salary as then in effect multiplied by the number of years and portions thereof (in the case of any partial year, a pro rata portion of one month's salary) of service by the Executive at the Company; provided, however, that the number of years and portions thereof shall be limited to include no more than two (2) more years from October 3, 1993 (the "Severance Payment"). In addition, if the Executive's employment is terminated during the Term by the Company without Cause or by the Executive with Good Reason, the Executive shall be paid the Severance Payment on the effective date of such termination. Any such Severance Payment shall be in addition to any other rights the Executive may have under the Agreement. 3. Right to Put Shares. The Employment Agreement shall be amended, effective as of the date hereof, as follows: Paragraph 11 of the Employment Agreement is hereby deleted in its entirety. 4. Governing Law. This Agreement shall be construed in accordance with and governed by the laws of the State of New York applicable to contracts executed in and to be performed solely within such state. 5. Guaranty. By its execution of this Agreement, Hanover unconditionally guaranties performance by the Company of its obligations under this Agreement. 6. Miscellaneous. (a) Successors and Assigns. This Agreement shall inure to the benefit of, and be binding upon, the Company and any corporation with which the Company merges or consolidates or to which the Company sells all or substantially all of its assets, and upon the Executive and his executors, administrators, heirs and legal representatives. -2- 3 (b) Headings. All headings in this Agreement are for convenience only and are not intended to affect the meaning of any provision hereof. (c) Counterparts. This Agreement may be executed in two counterparts with the same effect as if the signatures to all such counterparts were upon the same instrument, and all such counterparts shall constitute but one instrument. IN WITNESS WHEREOF, the Executive has executed this Agreement and the Company has caused this Agreement to be executed by a duly authorized officer and to become effective as of the day and year first above written. THE HORN & HARDART COMPANY By:/s/ Jack E. Rosenfeld ------------------------------ Name: Jack E. Rosenfeld Title: President /s/ Wayne Garten --------------------------------- Wayne Garten THE HANOVER COMPANIES By:/s/ Jack E. Rosenfeld ------------------------------ Name: Jack E. Rosenfeld Title: President -3- EX-10.22 9 HANOVER DIRECT, INC. SAVINGS PLAN 1 Exhibit 10.22 HANOVER DIRECT SAVINGS AND RETIREMENT PLAN AMENDED AND RESTATED AS OF JANUARY 1, 1989 2 HANOVER DIRECT SAVINGS AND RETIREMENT PLAN AMENDED AND RESTATED AS OF JANUARY 1, 1989 WHEREAS, The Horn & Hardart Company, a predecessor employer to Hanover Direct, Inc. (hereinafter sometimes referred to as the "Company"), has previously adopted the Horn & Hardart Company Savings Plan (hereinafter referred to as the "Plan"), effective as of April 1, 1983, which is to continue to be funded through the medium of a Trust Fund; and WHEREAS, the Company desires to rename and amend and restate the Plan in order to comply with the Tax Reform Act of 1986, the Omnibus Reconciliation Acts of 1986 and 1987, the Revenue Act of 1987, the Technical and Miscellaneous Revenue Act of 1988 and the Omnibus Reconciliation Act of 1989; NOW, THEREFORE, the Company hereby renames, amends and restates the Plan, effective January 1, 1989, unless otherwise indicated, with such Plan to be known as the Hanover Direct Savings and Retirement Plan as follows: 3 TABLE OF CONTENTS ARTICLE PAGE - ------- ---- I DEFINITIONS 1 II PARTICIPATION AND ENTRY DATE 17 III CONTRIBUTIONS 19 IV ADMINISTRATION OF FUNDS 39 V RETIREMENT BENEFITS 46 VI DEATH BENEFITS 49 VII VESTING AND SEPARATION FROM SERVICE 52 VIII WITHDRAWALS AND LOANS 55 IX ADMINISTRATION 60 X AMENDMENT, TERMINATION AND MERGERS 64 XI MISCELLANEOUS PROVISIONS 69 XII TOP-HEAVY PROVISIONS 73 4 ARTICLE I DEFINITIONS 1.01 "Account" shall mean with respect to a Participant all of the various accounts maintained to define such Participant's proportionate interest in the Trust Fund as follows: (a) A "Salary Deferral Contribution Account" shall be maintained for each Participant which includes the Salary Deferral Contributions made on behalf of the Participant, and the appreciation or depreciation of the investments allocated to that Account and the income earned on such investments. (b) An "After-Tax Contribution Account" shall be maintained for each Participant which includes the Participant's After-Tax Contributions, and the appreciation or depreciation of the investments allocated to that Account and the income earned on such investments. (c) A "Matching Employer Contribution Account" shall be maintained for each Participant which reflects the Matching Employer Contributions allocated to the Participant and the appreciation or depreciation of the investments allocated to that Account and the income earned on such investments. (d) A "Discretionary Employer Contribution Account" shall be maintained for each Participant which reflects the Discretionary Employer Contributions allocated to the Participant and the appreciation or depreciation of the investments allocated to that Account and the income earned on such investments. (e) A "Rollover Contribution Account" shall be maintained for each Participant which reflects any rollover contribution made in accordance with Section 3.12 and the 1 5 appreciation or depreciation of the investments allocated to that Account and the income earned on such investments. 1.02 "Affiliated Organization" shall mean (i) any corporation on or after the date it becomes a member of a controlled group of corporations which includes the Company, as determined under the provisions of Section 414(b) of the Code, (ii) any trade or business, whether or not incorporated, on or after it comes under common control with the Company, as determined under Section 414(c) of the Code, (iii) any organization which is an affiliated service organization within the meaning of Section 414(m) of the Code, and (iv) any other entity required to be aggregated pursuant to regulations under Section 414(o) of the Code. 1.03 "Age" or "age" shall mean the chronological age attained by the Participant at his most recent birthday or as of such other date of reference as set forth in this Plan. 1.04 "Board of Directors" shall mean the board of directors of the Company. 1.05 "Break-in-Service" shall mean a Plan Year during which an Employee has not completed more than five hundred (500) Hours of Service. 1.06 "Code" means the Internal Revenue Code of 1986 as the same presently exists, and as it may hereafter be amended or clarified by regulations, rulings, notices or other publications of the Internal Revenue Service having legal effect. 2 6 1.07 "Compensation" shall mean, for any applicable period, the W-2 earnings of a Participant including bonuses, overtime, commissions and any Salary Deferral Contribution made on behalf of the Participant under this Plan, and any contributions made by salary reduction to a plan established in accordance with Section 125 or 129 of the Code. Compensation shall exclude premiums paid to a life insurance plan of the Company for additional coverage above $50,000, the value of Company car or commutation allowances, reimbursements for expenses and any other fringe benefits. For any Plan Year commencing after December 31, 1988, Compensation shall not exceed $200,000, or such other maximum amount as set forth under Section 401(a)(17) of the Code, adjusted at the same time and in the same manner as under Section 415(d) of the Code, except that the dollar increase in effect on January 1 of any calendar year is effective for Plan Years beginning in such calendar year and the first adjustment to the $200,000 limitation is effected on January 1, 1990. If Compensation is determined over a Plan Year that contains fewer than 12 calendar months, the annual compensation limit is an amount equal to the annual compensation limit for the calendar year in which the compensation period begins multiplied by the ratio obtained by dividing the number of full months in the period by 12. In addition to other applicable limitations set forth in the Plan, and notwithstanding any other provision of the Plan to the contrary, for Plan Years beginning on or after January 1, 1994, the annual Compensation of each Employee taken into account under the Plan shall not exceed the OBRA '93 annual Compensation limit. The OBRA '93 annual Compensation limit is $150,000, as adjusted by the Commissioner for increases in the cost of living in accordance with section 401(a)(17)(B) of the Internal Revenue Code. The cost-of-living adjustment in effect for a calendar year applies to any period, not exceeding 12 months, over which compensation is determined (determination period) beginning in such calendar year. If a determination period 3 7 consists of fewer than 12 months, the OBRA '93 annual compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is 12. For Plan Years beginning on or after January 1, 1994, any reference in this Plan to the limitation under section 401(a)(17) of the Code shall mean the OBRA '93 annual compensation limit set forth in this provision. If Compensation for any prior determination period is taken into account in determining an employee's benefits accruing in the current Plan Year, the Compensation for that prior determination period is subject to the OBRA '93 annual compensation limit in effect for that prior determination period. For this purpose, for determination periods beginning before the first day of the first Plan Year beginning on or after January 1, 1994, the OBRA '93 annual compensation limit is $150,000. In determining the Compensation of a Participant for purposes of this limitation, the rules of Section 414(q)(6) of the Code shall apply, except in applying such rules, the term "family" shall include only the spouse of the Participant and any lineal descendants of the Participant who have not attained age 19 before the close of the Plan Year. 1.08 "Contribution" shall mean any or all of the various types of contributions made under the Plan by Participants or the Employer, as described below: (a) "Salary Deferral Contribution" shall mean that portion of the Contribution made to the Plan on behalf of a Participant by his Employer through a salary reduction agreement, as described under Section 3.01. 4 8 (b) "After-Tax Contribution" shall mean that portion of a Participant's Contribution to the Plan which he elects to make independent of a salary reduction agreement, as described under Section 3.02. (c) "Matching Employer Contribution" shall mean a Contribution made by an Employer as described under Section 3.04, based on a Participant's Salary Deferral Contribution (including any Salary Deferral Contributions recharacterized as After-Tax Contributions pursuant to Section 3.06). (d) "Discretionary Employer Contribution" shall mean a Contribution made by an Employer which is unrelated to any Participant Contributions, as described under Section 3.05. (e) "Qualified Non-elective Contribution" shall mean a Contribution made by an Employer (other than those listed above) in order that the Plan will satisfy the requirements of Section 3.06 for a Plan Year. The allocation may be made to all Active Participants who are not Highly-Paid Employees or, with respect to satisfaction of the ADP test, only to those Active Participants who have made Salary Deferral Contributions for a Plan Year and who are not Highly-Paid Employees. Such Contributions shall be treated as Salary Deferral Contributions for all purposes under the Plan. 1.09 "Contribution Percentage" shall mean the percentage determined by dividing (i) the sum of the Salary Deferral Contribution, After-Tax Contribution, Matching Employer Contribution and any Qualified Non-elective Contribution used to satisfy the non-discrimination requirements of Section 3.06 or any combination of such Contributions, whichever is applicable, made by or on behalf of a Participant for the applicable period by (ii) his compensation as 5 9 defined under Code Section 414(s). 'ADP' shall sometimes be used herein to refer to the average Contribution Percentage with respect to Salary Deferral Contributions or amounts treated as Salary Deferral Contributions. 'ACP' shall sometimes be used herein to refer to the average Contribution Percentage with respect to Matching Employer Contributions and After-Tax Contributions, if applicable. 1.10 "Date of Employment" shall mean the first date on which an Employee is credited with an Hour of Service for the Employer. 1.11 "Disability" shall mean a physical or mental condition of such severity and probable prolonged duration as to cause the Participant to be unable to continue his duties as an Employee. The existence of any Disability shall be determined by a physician chosen by the Plan Administrator, based on medical evidence of a physical or mental impairment that can be expected to last more than 12 months or result in death, or on other uniform and non-discriminatory criteria as established by the Plan Administrator. Notwithstanding the foregoing, eligibility for Social Security Disability benefits or for long term disability benefits under an insured plan sponsored by the Employer shall be deemed conclusive proof of disability. 1.12 "Effective Date" of this Plan shall mean April 1, 1983. The effective date of this amended and restated Plan is January 1, 1989. 6 10 1.13 "Eligible Employee" shall mean an Employee who has completed one (1) Year of Service and attained age twenty-one (21). Notwithstanding the foregoing, the term "Eligible Employee" shall not include any person whose terms and conditions of employment are determined by collective bargaining with a third party and with respect to whom inclusion in this Plan has not been provided for in the collective bargaining agreement setting forth those terms and conditions of employment, nor shall the term "Eligible Employee" include any independent contractor or a leased employee. 1.14 "Employee" shall mean any employee of the Employer or an Affiliated Organization, including a leased employee as defined under Section 414(n) of the Code. The term "leased employee" means any person (other than an employee of the recipient organization) who pursuant to an agreement between the recipient organization and any other person ("leasing organization") has performed services for the recipient organization (including related persons determined in accordance with Section 414(n)(6) of the Code) on a substantially full-time basis for at least one (1) year, and such services are of a type historically performed by employees in the business field of the recipient organization. Contributions or benefits provided a leased employee by the leasing organization which are attributable to services performed for the recipient employer shall be treated as provided by the recipient employer. A leased employee shall not be considered an employee of the recipient organization if: (i) such employee is covered by a money purchase pension plan providing immediate participation, full and immediate vesting and a nonintegrated employer contribution rate of at least ten (10%) percent of compensation (as defined in Section 415(c)(3) of the Code, but 7 11 including amounts contributed by the employer pursuant to a salary reduction agreement which are excludable from the employee's gross income under Section 125, Section 402(a)(8), Section 401(h) or Section 403(b) of the Code). Also, the leased employees must not constitute more than twenty percent (20%) of the recipient organization's non-highly compensated workforce. 1.15 "Employer" shall mean Hanover Direct, Inc. (hereinafter sometimes referred to as the "Company"), its predecessor, The Horn & Hardart Company, and the Company's subsidiaries and affiliates and any successor entities thereto which adopt this Plan. Such adopting Employers shall be set forth in Appendix A attached at the end of this document. 1.16 "Entry Date" shall mean every January 1st, April 1st, July 1st and October 1st during which the Plan remains in effect. 1.17 "ERISA" means the Employee Retirement Income Security Act of 1974 (P.L. 93-406), including all amendments thereto. 1.18 "Fund" or "Trust Fund" shall mean all of the assets of the Plan held by the Trustees (or any nominees thereof) at any time under the Trust Agreement. 1.19 "Highly-Paid Employee" shall mean any Employee who during the current or preceding Plan Year (`determination year' and `look back year', respectively): 8 12 (a) was at any time a 5% owner of the Employer or an Affiliated Organization; or (b) received compensation for such Plan Year in excess of $75,000 or such higher amount as provided under Section 414(q) of the Code, as adjusted at the same time and in the same manner as under Section 415(d) of the Code; or (c) received compensation for such Plan Year in excess of $50,000 or such higher amount as provided under Section 414(q) of the Code, as adjusted at the same time and in the same manner as under Section 415(d) of the Code, provided such compensation exceeded that of 80% of all Employees for the applicable Plan Year; or (d) was at any time an officer of the Employer or an Affiliated Organization, and received compensation for such Plan Year in excess of $45,000, as adjusted at the same time and in the same manner as under Section 415(d) of the Code (or, if higher, 50% of the amount in effect under Section 415(b)(1)(A) of the Code for such Plan Year). For each Plan Year for which a determination in accordance with the above paragraph is being made, any individual not described in sub-paragraph (b), (c) or (d) for the preceding Plan Year (without regard to this paragraph) shall not be treated as described in sub-paragraph (b), (c) or (d) for the current Plan Year unless such individual is among the one-hundred (100) highest paid Employees for the current Plan Year. In no event shall the number of officers taken into account under sub-paragraph (d) exceed the lesser of (i) fifty (50), and (ii) the greater of (A) three or (B) 10% of the total Employees. Furthermore, if no officer of the Employer or an Affiliated Organization is 9 13 described in sub-paragraph (d) for a Plan Year, then the highest paid officer shall be treated as described in sub-paragraph (d) for such Plan Year. The term "Highly-Paid Employee" shall include any highly paid former employee who separated from service (or was deemed to have separated) prior to the determination year, performs no service for the Employer during the determination year, and was a Highly-Paid Employee for either the separation year or any determination year ending on or after the Employee's 55th birthday. If an Employee is, during a determination year or look-back year, a family member of either a five percent (5%) owner who is an active or former Employee or a Highly-Paid Employee who is one of the ten (10) most highly compensated Employees ranked on the basis of Compensation paid by the Employer during such year, then the family member and the five percent (5%) owner or top-ten Highly-Paid Employee shall be aggregated. In such case, the family member and five percent (5%) owner or top-ten Highly-Paid Employee shall be treated as a single Employee receiving compensation and plan contributions or benefits equal to the sum of such compensation and contributions or benefits of the family member and five percent owner or top-ten Highly-Paid Employee. For purposes of this Section, family member includes the spouse, lineal ascendants and descendants of the Employee or former Employee and the spouses of such lineal ascendants and descendants. The determination of who is a Highly-Paid Employee, including the determinations of the number and identity of Employees in the top-paid group, the top one hundred (100) Employees, the number of Employees treated as officers and the compensation that is considered, will be made in accordance with Section 414(q) of the Code. In determining the 10 14 identity of Highly-Paid Employees for a determination year, the Company may make the calendar year election provided for in Answer 14(b) of Treasury Reg. section 1.414(q)-IT. 1.20 "Hour of Service" shall mean the following: (a) An Hour of Service is each hour for which an Employee is paid, or entitled to payment, for the performance of duties for the Employer or an Affiliated Organization during the Plan Year. (b) An Hour of Service is each hour for which an Employee is paid, or entitled to payment, (either directly or indirectly), by the Employer or an Affiliated Organization on account of a period of time during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), lay-off, jury duty, military duty or leave of absence. Notwithstanding the preceding sentence: (i) No more than 501 Hours of Service shall be credited under this paragraph (b) to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single Plan Year) except as the following provisions may result in a credit of more than 501 Hours of Service: (1) If an Employee receives full pay during any authorized leave of absence, and he returns to work after such absence, he shall be credited with an Hour of Service for each hour for which he was paid. 11 15 (2) If an Employee is on a paid sick leave, he shall receive an Hour of Service for each hour that he would have normally worked during such leave. (3) If an Employee is absent in military service, and he retained re-employment rights under the law, and he completed requirements under the law as to re-employment and was re-employed, he shall be credited with an Hour of Service for each hour that he would have normally worked had he not entered military service solely for purposes of determining his vested rights; and (4) If an Employee transfers to an employment status which is ineligible to participate in this Plan, he will continue to be credited with Hours of Service as described above, for purposes of determining his vested rights. However, he will receive no Hours of Service for purposes of determining his right to receive a Contribution to his Account after the date of his change in employment status. ( ii) An hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed, is not required to be credited to the Employee if such payment is made or due under a plan maintained solely for the purpose of complying with applicable workers compensation, unemployment compensation or disability insurance laws; and 12 16 (iii) Hours of Service are not required to be credited for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. (c) An hour worked at overtime or premium pay will count as only one Hour of Service under the Plan. (d) An Hour of Service is each hour for which back pay, irrespective of mitigation of damages, is either awarded to or agreed to by the Employer. The same Hours of Service shall not be credited both under Paragraph (a) or paragraph (b), as the case may be, and under this paragraph (d). Crediting of Hours of Service for each pay awarded shall be subject to the limitations set forth in paragraphs (a), (b) and (c). (e) An Hour of Service shall also be credited for reasons other than the performance of duties in accordance with Department of Labor Regulations, Section 2530.200b-2(b). Further, the computation periods used for purposes of crediting Hours of Service shall be in accordance with Department of Labor Regulations, Section 2530.200b-2(c). If an Employer does not maintain hourly records with respect to any Employee, such Employee shall be credited with forty-five (45) Hours of Service for each week in which he is entitled to be credited with an Hour of Service. 1.21 "Named Fiduciary" shall mean the Employer, the Trustees and the Plan Administrator. Each named Fiduciary shall have only those particular powers, duties, responsibilities and obligations as are specifically given him under the Plan and/or the Trust Agreement. 13 17 1.22 "Normal Retirement Date" shall mean the date on which the Participant has attained Age 65. 1.23 "Participant" shall mean any person who is eligible to receive benefits under the Plan. The term "Participant" shall include an Active Participant (each Eligible Employee who has satisfied the participation requirements of Section 2.01 as of an applicable Entry Date or who has made a Rollover Contribution), Terminated Vested Participants (former Employees who are entitled at some future date to the distribution of benefits from this Plan), and Inactive Participants (former Participants who are not Terminated Vested Participants and who continue to be employed in a non-covered class by an Employer or by an Affiliated Organization). 1.24 "Plan" shall mean the Hanover Direct Savings and Retirement Plan as set forth herein, and as the same may from time to time hereafter be amended. 1.25 "Plan Administrator" or "Administrator" shall mean the Employer, or the persons or committee named as such pursuant to the provisions of Article IX hereof. 1.26 "Plan Year" shall mean a twelve (12) month period beginning on January 1st and ending on each December 31st. 14 18 1.27 "Reduced Compensation" shall mean Compensation reduced by any Salary Deferral Contributions made by the Participant and also reduced by any contributions made by salary reduction to a plan established in accordance with Sections 125 or 129 of the Code. 1.28 "Trust Agreement" shall mean the Hanover Direct Savings and Retirement Trust Agreement as the same presently exists and as it may from time to time hereafter be amended. 1.29 "Trustees" shall mean the party or parties so designated pursuant to the Trust Agreement. 1.30 "Valuation Date" shall mean the last day of each quarter during the Plan Year and any other date as of which the Plan Administrator elects to make a valuation of Plan Accounts. 1.31 "Wage Base" shall mean the amount of compensation with respect to which old age and survivors insurance benefits would be provided for a Participant under the Social Security Act, as in effect for the calendar year in which the Plan Year commences. 1.32 "Year of Service" shall mean a Plan Year in which an Employee has at least one thousand (1,000) Hours of Service. In addition, solely for purposes of determining whether an Employee is eligible to become a Participant after his initial year of employment under Section 2.01, a Year of Service shall be credited to an Employee who has at least one thousand (1,000) 15 19 Hours of Service during the initial twelve (12) month period commencing with such Employee's Date of Employment. All Years of Service shall be counted regardless of whether or not such years are continuous, subject to Appendix A attached at the end of this document. 16 20 ARTICLE II PARTICIPATION AND ENTRY DATE 2.01 Initial Eligibility. Each Eligible Employee who is a Participant immediately prior to the effective date of this amended and restated Plan shall continue to participate as of such effective date. Each other Employee shall be eligible to become a Participant on the Entry Date coincident with or next following the date he first becomes an Eligible Employee. 2.02 Plan Participation. Each Employee who is eligible to participate in accordance with Section 2.01 shall complete such forms and provide such data as are reasonably required by the Plan Administrator as a precondition to Plan participation. In order to receive a Salary Deferral Contribution, a Participant must enter into a salary reduction agreement to be effective as of an Entry Date, electing to reduce his salary by an amount equal to his Salary Deferral Contribution. A Participant's Salary Deferral Contribution for any Plan Year shall not exceed the lesser of (i) 10% of his Compensation for the Plan Year or portion of such Plan Year during which he was an Active Participant, subject to the limitations set forth in Article III, and (ii) $7,627, or such higher maximum contribution for a taxable year as may be permitted under Section 402(g) of the Code. The Plan Administrator shall determine the minimum and/or maximum permitted salary reduction. Any maximum permitted salary reduction may apply to all Participants or solely to those Participants who are Highly-Paid Employees. Participants shall make separate 17 21 elections with respect to Salary Deferral and After-Tax Contributions, and the election of either type of contribution shall not, in any way, be contingent upon any other election made under the Plan. By becoming a Participant, an Employee shall for all purposes be deemed conclusively to have assented to the provisions of the Plan, the corresponding Trust Agreement and to all amendments to such instruments. 2.03 Re-employment. In the event an Employee terminates employment, and is reemployed, he shall be eligible to be admitted or readmitted as an Active Participant on the date of his reemployment or, if later, the Entry Date coincident with or next following the date he becomes an Eligible Employee. 2.04 Change in Status. In the event that a person who has been an Employee in an employment status not eligible for participation in this Plan subsequently becomes eligible by reason of a change in status, he shall be eligible to become a Participant on the Entry Date coincident with or next following the date on which he becomes an Eligible Employee. 18 22 ARTICLE III CONTRIBUTIONS 3.01 Salary Deferral Contributions. The Employer will make a Salary Deferral Contribution to the Plan for each Active Participant who has entered into a salary reduction agreement, in accordance with Section 2.02, as determined by such salary reduction agreement. In addition, for any Plan Year, an Employer may elect to make a Qualified Non-elective Contribution (including a qualified matching Contribution) allocable only to those Participants who are not Highly-Paid Employees, in order that the Plan will satisfy requirements of Section 3.06 for such Plan Year. Any Contribution made in accordance with the preceding sentence shall be allocated among applicable Participants in proportion to the ratios of each such Participant's Compensation or, with respect to satisfaction of the ADP test, only to those Participants who have made Salary Deferral Contributions (under the same allocation procedure used for Matching Employer Contributions or pro-rata). Matching Employer Contributions used to satisfy the test described under Section 3.06 must comply with the Regulations under Code Section 1.401(k)-1(b)(3). "Excess Elective Deferrals" shall mean any Salary Deferral Contributions which exceed the dollar limitation under Code Section 402(g). Such Excess Elective Deferrals shall be treated as annual additions under the Plan unless they are distributed in accordance with this Article. A Participant may assign to this Plan any Excess Elective Deferrals made during a taxable year of the Participant by providing fifteen (15) days written notification to the 19 23 Administrator of the amount of the Excess Elective Deferrals to be assigned to this Plan. Such notice shall be provided no later than the first March 1st following the close of the individual's tax year. Excess Elective Deferrals with respect to the combination of Excess Elective Deferrals and deferrals under another plan of deferred compensation of an Employer or an Affiliated Organization may automatically be returned to the Participant. Notwithstanding any other provision of the Plan, Excess Elective Deferrals, plus any income and minus any loss allocable thereto, shall be distributed no later than April 15th to any Participant to whose Account Excess Elective Deferrals were assigned for the preceding year and who claims Excess Elective Deferrals for such taxable year. Excess Elective Deferrals shall be adjusted for any income or loss. The income or loss allocable to Excess Elective Deferrals is the income or loss allocable to the Participant's Account for the taxable year multiplied by a fraction, the numerator of which is such Participant's Excess Elective Deferrals for the year and the denominator of which is the Participant's Salary Deferral Contribution Account without regard to any income or loss occurring during such taxable year. 3.02 After-Tax Contributions. Participants may elect to make After-Tax Contributions to the Trust for each Plan Year in amounts not less than one percent (1%) of Compensation, nor more than ten percent (10%) of Compensation for such Plan Year. 20 24 3.03 Method of Contribution. Salary Deferral and After-Tax Contributions may be made by periodic payroll deductions or on such other basis as shall be determined from time to time by the Plan Administrator. Nothing contained herein shall preclude the Plan Administrator from not allowing Salary Deferral or After-Tax Contributions to be made by any Participant in accordance with Section 3.06 or from limiting the number of payroll periods in a Plan Year during which such Contributions are permitted. A Participant may elect an increase or decrease in his Salary Deferral Contribution or After-Tax Contributions, provided that written notice of such change (including amendment of a salary reduction agreement, if applicable) is submitted to the Plan Administrator at least fifteen (15) days in advance of the effective date, which date shall be the first day of a calendar quarter. A Participant may cease Contributions as of any payroll period upon fifteen (15) days written notice in advance of the last day of such payroll period. No contributions may be made by or on behalf of any Participant during any period that he is receiving long term disability benefits, worker's compensation benefits or while the Participant is on a leave of absence for which no Compensation is being paid from the Employer. 3.04 Matching Employer Contributions. An Employer may elect, in its sole discretion, to make Matching Employer Contributions for a Plan Year for each Active Participant on whose behalf Salary Deferral Contributions have been made during the Plan Year. 21 25 For any Plan Year, the Matching Employer Contributions (including any forfeitures reallocated in accordance with Section 3.07) shall be allocated to the Accounts of such Active Participants for the Plan Year in the same proportion as the amount of Salary Deferral Contributions (not in excess of six percent (6.0%) of the Participant's Compensation) for each such Active Participant for such Plan Year bears to the total Salary Deferral Contribution (as so limited) for all such Active Participants for such Plan Year. 3.05 Discretionary Employer Contributions. For any Plan Year, an Employer may elect, in its sole discretion, to make an additional Discretionary Employer Contribution to the Plan. If a Discretionary Employer Contribution is made, then it shall be allocated as of the last day of the Plan Year to the Account of each Active Participant who (i) retired at or after age 65, retired due to a Disability or died during such Plan Year or (ii) (a) had at least 1,000 Hours of Service during such Plan Year and (b) is actively employed as of the last day of such Plan Year, including any such Participant who did not make Salary Deferral Contributions for such Plan Year. An individual who is terminated prior to the last day of a Plan Year, but who is receiving severance pay as of such date, shall not be deemed to be actively employed as of the last day of a Plan Year. The amount allocated to each such Participant shall be an amount chosen by the Company to be allocated under (a) below. If any Discretionary Employer Contribution remains, such amount shall be allocated in accordance with (b) below. (a) An amount shall be allocated equal to a percentage of each such Participant's Compensation earned while a Participant for such Plan Year, plus the same 22 26 percentage of the excess of (i) such Participant's Compensation earned while a Participant for the Plan Year above (ii) the Wage Base for such Plan Year. However, the percentage of Compensation used for allocations above the Wage Base shall not exceed 5.7% (or such other percentage which equals the maximum percentage permitted under Code Section 401(1)). (b) Any remaining Discretionary Employer Contribution shall be allocated to each such Participant in proportion to the ratio that each such Participant's Compensation earned while a Participant bears to such eligible Compensation of all eligible Participants for the Plan Year. 3.06 Non-Discrimination Test. For any Plan Year, the average Contribution Percentage for Highly-Paid Employees determined based on Salary Deferral Contributions (ADP) and separately based on the sum of After-Tax Contributions and any Matching Employer Contributions (ACP) shall not exceed the greater of: (a) 1.25 multiplied by the average Contribution Percentage for all Eligible Employees who are not Highly-Paid Employees; or (b) the lesser of ( i) twice the average Contribution Percentage for all Eligible Employees who are not Highly-Paid Employees; and (ii) the average Contribution Percentage for all Eligible Employees who are not Highly-Paid Employees, plus two percent (2%). 23 27 If the limitation described under subsection (b) above is applied with respect to Salary Deferral Contributions, it shall not be applied with respect to the sum of After-Tax Contributions and Matching Employer Contributions, and vice-versa, except as otherwise permitted under the following Definitions and Special Rules Section describing the multiple use test. For purposes of this Section, an Excess Contribution shall mean the excess of a Highly-Paid Employee's Salary Deferral Contribution (or amounts treated as Salary Deferral Contributions) over the maximum amount of such Contributions as provided under the above test. For purposes of this Section, Excess Aggregate Contributions shall mean the excess of the aggregate amount of After-Tax Contributions and Matching Employer Contributions which were made on behalf of Highly-Paid Employees for any Plan Year, over the maximum amount of such Contributions as provided under the above test. The Excess Contributions or Excess Aggregate Contributions, whichever is applicable, shall be allocated by reducing the actual Contribution Percentage of the Highly-Paid Employee with the highest actual Contribution Percentage. Such Contribution Percentage shall be reduced until the Highly-Paid Employee with the highest actual Contribution Percentage is equal to that of the Highly-Paid Employee with the next highest actual Contribution Percentage or until the above test is passed. This process shall be repeated until the test is passed and such leveling method shall determine the amount of Excess Contributions attributable to each Highly-Paid Employee. The Excess Aggregate Contribution amount shall be determined after any Salary Deferral Contributions are recharacterized as After-Tax Contributions. 24 28 DEFINITIONS AND SPECIAL RULES: "Aggregate Limit" shall mean the sum of (i) 125 percent of the greater of the ADP of the Non-Highly-Paid Employees for the Plan Year or the ACP of Non-Highly-Paid Employees under the Plan subject to Code Section 401(m) for the Plan Year beginning with or within the Plan Year of the cash or deferred arrangement (`CODA') and (ii) the lesser of 200% or two plus the lesser of such ADP or ACP. `Lesser' is substituted for `greater' in (i) above and `greater' is substituted for `lesser' after `two plus the' in (ii) if it would result in a larger Aggregate Limit. A multiple use method may be used in order to satisfy the non-discrimination test if one or more Highly-Paid Employees participate in both a CODA and a plan maintained by the Employer subject to the ACP test. If the sum of the ADP and ACP of those Highly-Paid Employees subject to either or both tests exceeds the Aggregate Limit, then the ACP of those Highly-Paid Employees who also participate in a CODA will be reduced (beginning with such Highly-Paid Employee whose ACP is the highest) so that the limit is not exceeded. The amount by which each Highly-Paid Employee's Contribution Percentage amount is reduced shall be treated as an Excess Aggregate Contribution. The ADP and ACP of the Highly-Paid Employees are determined after any corrections required to meet the ADP and ACP tests. Multiple use does not occur if both the ADP and ACP of the Highly-Paid Employees does not exceed 1.25 multiplied by the ADP and ACP of the Non-Highly Paid Employees. Effective prior to the first Plan Year beginning after December 31, 1991, the Plan Administrator shall also have discretionary authority to restructure the Plan and satisfy the above test based on specific common attributes among Employees. 25 29 For purposes of determining the Contribution Percentage test, After-Tax Contributions are considered to have been made in the Plan Year in which contributed to the trust. Salary Deferral Contributions, Matching Employer Contributions and Qualified Non- elective Contributions will be considered made for a Plan Year only if made no later than the end of the twelve-month period beginning on the day after the close of the Plan Year. The Employer shall maintain records sufficient to demonstrate satisfaction of the above tests and the amount of Qualified Non-elective Contributions, including qualified matching Contributions, if applicable, used in the test. The determination and treatment of the Contribution Percentage of any Participant shall satisfy such other requirements as may be prescribed by the Secretary of the Treasury. A Participant may treat his Excess Contributions under Section 3.01 as an amount distributed to the Participant and then contributed by such Participant to the Plan. Such recharacterized amounts will remain nonforfeitable and subject to the same distribution requirements as Salary Deferral Contributions. Amounts may not be recharacterized by a Highly-Paid Employee to the extent that such amount, in combination with other After-Tax Contributions made by that Employee, would exceed any stated limit under the Plan on After-Tax Contributions. Recharacterization must occur no later than two and one-half months after the last day of the Plan Year in which such Excess Contributions arose and is deemed to occur no earlier than the date the last Highly-Paid Employee is informed in writing of the amount recharacterized and the consequences thereof. Recharacterized amounts will be taxable to the Participant for the Participant's tax year in which the Participant would have received them in cash. 26 30 If a Highly-Paid Employee is subject to the family aggregation rules of the Code, the combined actual Contribution Percentage (based on Salary Deferral Contributions and separately based on After-Tax Contributions and Matching Employer Contributions) for the family group shall be treated as one Highly-Paid Employee. The combined actual Contribution Percentage shall be determined as the combined actual Contribution Percentage of all eligible family members. The Excess Contributions or Excess Aggregate Contributions for the family members shall be allocated in proportion to the ratio of such Contributions for each family member. Any distribution or forfeiture of Excess Contributions or Excess Aggregate Contributions for any Plan Year shall be made based on the respective portions of such amounts attributable to each Highly-Paid Employee. Excess Contributions or Excess Aggregate Contributions shall be adjusted for any income or loss. The income or loss allocable to such Contributions is the income or loss allocable to the Participant's Account for the Plan Year multiplied by a fraction, the numerator of which is such Participant's Excess Contributions or Excess Aggregate Contributions for the year and the denominator is the Participant's Account attributable to satisfaction of ADP and ACP test (as applicable) without regard to any income or loss occurring during such Plan Year. Notwithstanding the preceding paragraph, any other reasonable method for computing the income allocable to Excess Contributions or Excess Aggregate Contributions may be used, provided that the method is non-discriminatory, is used consistently for all Participants and for all corrective distributions under the Plan for the Plan Year, and is used by the Plan for allocating income to Participants' Accounts. 27 31 Excess Contributions and Excess Aggregate Contributions shall be forfeited, or if not forfeitable, distributed from the Participant's various Accounts in proportion to the ratio of such Participant's applicable Accounts. Excess Contributions shall be distributed from the Participant's Qualified Non-elective Contribution Account only to the extent that such Excess Contributions exceed the balance in the Participant's Salary Deferral Account and Matching Contribution Account. Forfeitures of Excess Aggregate Contributions shall be applied to reduce Employer Contributions in accordance with Section 3.07. Excess Contributions or Excess Aggregate Contributions, plus any income and minus any loss allocable thereto, shall be forfeited, or if not forfeitable, distributed no later than the last day of each Plan Year to Participants to whose Accounts such Contributions were allocated for the preceding Plan Year. If such excess amounts are distributed more than 2 1/2 months after the last day of the Plan Year in which such excess amounts arose, a ten percent (10%) excise tax will be imposed on the Employer maintaining the Plan with respect to such amounts to the extent required by law. In the event that this Plan satisfies the requirements of Sections 401(k), 401(m), 401(a)(4), or 410(b) of the Code only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such Sections of the Code only if aggregated with this Plan, then this Section 3.06 shall be applied by determining the Contribution Percentage of Employees as if all such plans were a single plan. For Plan Years beginning after December 31, 1989, plans may be aggregated in order to satisfy section 401(k) or 401(m) of the Code only if they have the same Plan Year. 28 32 The ADP for any Participant who is a Highly-Paid Employee for the Plan Year and who is eligible to have Salary Deferral Contributions (or amounts treated as Salary Deferral Contributions for purposes of the ADP test) allocated to his or her accounts under two or more arrangements described in Section 401(k) of the Code that are maintained by the Employer, shall be determined as if such Contributions were made under a single arrangement. If a Highly-Paid Employee participates in two or more cash or deferred arrangements that have different Plan Years, all cash or deferred arrangements ending with or within the same calendar year shall be treated as a single arrangement. In the event that any provisions of this Section 3.06 are no longer required or applicable for qualification of the Plan under the Code, then any applicable provisions of this Section 3.06 shall thereupon be void. 3.07 Forfeitures. As of the end of each Plan Year, any forfeitures occurring during such Plan Year resulting from an Employee's termination of employment and election to receive a distribution prior to being one hundred percent (100%) vested in accordance with Section 7.01 shall first be applied to restore the previously forfeited accounts, if applicable, of former Terminated Vested Participants who have been re-employed. If a Participant elects to defer his distribution the resulting forfeiture (subject to Section 7.03) shall occur after a one year Break-in-Service. Any remaining portion of the total forfeiture not applied in accordance with the preceding paragraph shall be used to reduce a Matching Employer Contribution and shall be allocated to remaining Active Participants in the same manner as provided under Section 3.04. 29 33 Should a Participant who is 0% vested in his Matching Employer Contribution and Discretionary Employer Contribution Accounts under Section 7.01 terminate employment, he shall cease to be a Participant (unless reemployed) and the resulting forfeiture of his Matching and Discretionary Employer Contribution Accounts shall be deemed a full distribution of such Accounts. If a terminated Participant who was 0% vested in his Matching Employer Contribution and Discretionary Employer Contribution Accounts and was deemed to have received a distribution is subsequently reemployed by the Employer prior to the occurrence of five consecutive one year Breaks-in-Service after the date of his termination of employment, any amount forfeited shall be reinstated to his Account. 3.08 Maximum Contributions. Notwithstanding the above, the total amount of Salary Deferral Contributions, Matching Employer Contributions and Discretionary Employer Contributions for any Plan Year shall not exceed an amount equal to fifteen percent (15%) of the total Reduced Compensation of all Participants for such Plan Year. The excess, if any, of fifteen (15%) percent of the total Compensation of all Participants earned in any year commencing before January 1, 1987 above the actual aggregate Employer Contributions for such years may be added to the total contribution provided the Plan was then in effect. 30 34 3.09 Time of Payment. Matching Employer Contributions and Discretionary Employer Contributions may be made at any time on or before the date required for deduction of such Contributions on the Employer's Federal income tax return. 3.10 Annual Additions Limitation. Notwithstanding the above provisions of this Article, in no event shall the annual additions to a Participant's Account exceed the maximum amount permitted under Section 415 of the Code, and all provisions of such Section are hereby incorporated in the Plan by reference. The term "limitation year", as defined under the Code, shall mean the Plan Year. The term Defined Contribution Fraction shall mean a fraction, the numerator of which is the sum of the annual additions to the Participant's Account under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior limitation years (including the annual additions attributable to the Participant's nondeductible employee contributions to all defined benefit plans maintained by the Employer, whether or not terminated, and the annual additions attributable to all welfare benefits funds, as defined in Section 419(e) of the Code, and individual medical accounts, as defined in Section 415(1)(2) of the Code, maintained by the Employer), and the denominator of which is the sum of the maximum aggregate amounts for the current and all prior limitation years of service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The maximum aggregate amount in any limitation year is the lesser of 125 percent 31 35 of the dollar limitation determined under Sections 415(b) and (d) of the Code in effect under Section 415(c)(1)(A) of the Code or 35 percent of the Participant's compensation for such year. If the Employee was a participant as of the end of the first day of the first limitation year beginning after December 31, 1986, in one or more defined contribution plans maintained by the Employer which were in existence on May 5, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the defined benefit fraction would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last limitation year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the plan made after May 5, 1986, but using the Code Section 415 limitation applicable to the first limitation year beginning on or after January 1, 1987. The annual addition for any limitation year beginning before January 1, 1987, shall not be recomputed to treat all employee contributions as annual additions. The term "Defined Benefit Fraction" shall mean a fraction, the numerator of which is the sum of the Participant's projected annual benefits under all the defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of 125 percent of the dollar limitation determined for the limitation year under Sections 415(b) and (d) of the Code or 140 percent of the highest average compensation, including any adjustments under Section 415(b) of the Code. 32 36 Notwithstanding the above, if the Participant was a participant as of the first day of the first limitation year beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 5, 1986, the denominator of this fraction will not be less than 125 percent of the sum of the annual benefits under such plans which the participant had accrued as of the close of the last limitation year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of section 415 for all limitation years beginning before January 1, 1987. As soon as administratively feasible after the end of the limitation year, the maximum permissible amount for the limitation year will be determined on the basis of the Participant's actual compensation for the limitation year. If due to the maximum permitted above or as a result of the allocation of forfeitures there is an excess amount, the excess will be disposed of in the following order: (1) Any After-Tax Contributions, to the extent they would reduce the excess amount, will be returned to the Participant; (2a) If an excess amount still exists, and the Participant is covered by the Plan at the end of the limitation year, the excess amount in the Participant's Account will be used to reduce Employer Contributions (including any allocation of forfeitures) for such Participant in the next limitation year, and each succeeding limitation year if necessary; or (2b) If an excess amount still exists, and the Participant is not covered by the Plan at the end of a limitation year, the excess amount will be held unallocated in a suspense account. 33 37 The suspense account will be applied to reduce future Employer Contributions for all remaining Participants in the next limitation year, and each succeeding limitation year if necessary. If a suspense account is in existence at any time during a limitation year pursuant to this Section, such account will not receive an allocation of the trust's investment gains and losses. If a suspense account is in existence at any time during a particular limitation year, all amounts in the suspense account must be allocated and reallocated to Participant's Accounts before any Employer or any employee contributions may be made to the Plan for that limitation year. Excess amounts may not be distributed to Participants or former Participants, except as provided below. Notwithstanding the method for disposing of excess amounts as indicated above, in the case where a reasonable error is made so that the limitations of Section 415 are violated, the Plan may distribute Salary Deferral Contributions (within the meaning of Section 402(g)(3) of the Code) to the extent that the distribution would reduce the excess amounts in the Participant's Account. These amounts are disregarded for purposes of the ADP and ACP tests. 3.11 Return of Contribution. Except as provided in Section 3.10 and paragraphs (a), (b), (c), (d), (e) and (f) of this Section, and notwithstanding any other provision of this Plan or of the Trust Agreement, the Employer irrevocably divests itself of any interest or reversion whatsoever in any sums contributed by it to the Trust Fund, and it shall be impossible for any portion of the Trust Fund to be used for, or diverted to, any purpose other than for the exclusive benefit of Participants or their Beneficiaries. 34 38 (a) If a contribution by the Employer is conditioned upon initial qualification of the Plan or any amendment thereto under Section 401 of the Code, and the Plan or any amendment thereto under Section 401 of the Code, and the Plan or amendment does not so qualify, the contribution shall be returned to the Employer within one year of the date of denial of such qualification or of the failure to qualify. (b) If a contribution made by the Employer is based upon a good faith mistake of fact, the contribution shall be returned to the Employer within one year after the payment of the contribution. (c) If a contribution which is intended to be deductible for Federal income tax purposes is determined to not be deductible and part or all of the deduction is disallowed, the contribution, to the extent disallowed, shall be returned to the Employer within one year after the disallowance of the deduction. (d) Earnings attributable to any mistaken or non-deductible contribution may not be returned to the Employer, but losses attributable thereto must reduce the amount to be so returned. (e) If the withdrawal of the amount attributable to the mistaken or nondeductible contribution would cause the balance of the individual Account of any Participant to be reduced to less than the balance which would have been in the Account had the mistaken or nondeductible amount not been contributed, then the amount to be returned to the Employer must be limited so as to avoid such reduction. In the case of a reversion due to initial disqualification of the Plan, the entire assets of the Plan attributable to Employer contributions may be returned to the Employer. 35 39 (f) A contribution may be returned to the Employer or an Employee, whichever is applicable, in order to satisfy the requirements of Section 3.06. 3.12 Rollover Contributions. (a) Direct Inter-Plan Transfers. Any Employee (including Employees who are not yet Eligible Employees) may, no less than 15 days following written notification to the Plan Administrator of such action, direct the appropriate funding agency of any qualified retirement plan of the Employer, a former employer, or of an Individual Retirement Account (IRA) which was established solely as a repository for a distribution from a qualified plan of a former employer (provided the Employee certifies that he made no contributions to such IRA) to distribute directly to the Trustee such Participant's entire interest in the distributing plan or IRA, exclusive of any after-tax contributions made by the Participant as an employee or participant thereunder, provided that the transferor plan or IRA is not subject to the requirements of Section 401(a)(11) of the Code. Any amount presented by a Participant to the Trustees within sixty (60) days of the receipt shall be treated, upon receipt by the Trustee, as having been received directly from the appropriate officer or fiduciary of the distributing plan or IRA. (b) Cash Transfers. Only cash may be transferred in accordance with paragraph (a) of this Section. Property other than cash cannot be transferred. (c) Investment of Rollover Contribution Accounts. Rollover Contribution Accounts shall be invested as provided under Section 4.01 of the Plan. (d) Direct Rollovers. This paragraph applies to distributions made on or after January 1, 1993. Notwithstanding any provision of the Plan to the contrary that would otherwise 36 40 limit a distributee's election under this paragraph, a distributee may elect, at the time and in the manner prescribed by the Plan Administrator, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the distributee in a direct rollover. Such distribution may commence less than 30 days after the notice required under section 1.411(a)-1(k) of the Income Tax Regulations is given, provided that (i) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (ii) the Participant, after receiving the notice, affirmatively elects a distribution. For purposes of this Section, the following definitions shall apply: Eligible rollover distribution: An eligible rollover distribution is any distribution of all or any portion of the balance to the credit of the distributee, except that an eligible rollover distribution does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the distributee and the distributee's designated beneficiary, or for a specified period of ten years or more; any distribution to the extent such distribution is required under section 401(a)(9) of the Code; and the portion of any distribution that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities). Eligible retirement plan: An eligible retirement plan is an individual retirement account described in section 408(a) of the Code, an individual retirement annuity described in section 408(b) of the code, an annuity plan described in section 403(a) of the Code, or a 37 41 qualified trust described in section 401(a) of the Code, that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to the surviving spouse, an eligible retirement plan is an individual retirement account or individual retirement annuity. Distributee: A distributee includes an employee or former employee. In addition, the employee's or former employee's surviving spouse and the employee's or former employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. Direct rollover: A direct rollover is a payment by the plan to the eligible retirement plan specified by the distributee. 38 42 ARTICLE IV ADMINISTRATION OF FUNDS 4.01 Investment of Funds. Participant Accounts will be invested by the Plan Trustee, in accordance with Participant directions as described below and in Section 4.02 and 4.03, in such investment funds as may be offered under the Plan from time to time. The available investment alternatives may include any or all of the alternatives described below: (a) Common or capital stocks, bonds, convertible debentures or preferred stocks, money market investments and other short term corporate and government investments and fixed debt obligations of corporations and of the Federal, state and local government, or any pooled or mutual fund invested in such instruments. (b) One or more guaranteed interest funds which shall be invested under a contract (or contracts) with a bank, or an insurance company licensed in the state in which an office of the Employer is domiciled and whereby terms of such contract guarantee both the repayment of principal and the payment of interest at a pre-determined minimum rate for a fixed period of time. Any such contract is subject to approval of the Plan Administrator and may be renewed or discontinued in its discretion. Should such contract be discontinued and should the Plan Administrator not enter into or instruct the Trustee to enter into a successor contract providing similar guarantees as to principal and 39 43 interest, then any Participant whose Account was invested under the contract shall be given the opportunity to make a new investment election. (c) Any other managed fund which the Plan Administrator deems appropriate for investment of plan assets. (d) A fund invested in shares of common stock of the Company. Any dividends received on such shares shall be reinvested in this fund. Contributions designated for the fund, or dividends paid on shares held in the fund, shall be temporarily invested in a short-term investment fund while the Trustee awaits the opportunity to purchase additional shares. The shares of common stock of the Company from time to time required to be acquired for the purposes of this Plan shall be acquired by the Trustees by purchase in the open market at prevailing prices, or, if directed by the Company, by contribution in kind or by purchase privately from the Company or any other person at a price per share equal to the closing market price per share at which the shares of common stock of the Company were sold on the last business day preceding the day of the purchase; it being understood that shares purchased from the Company may be either treasury shares or authorized but unissued shares, if the Company shall make such shares available for that purpose. The Plan Administrator may, in its discretion, discontinue the use of any investment alternatives maintained under the Plan, without obligation to substitute new alternatives, provided that Participants with Accounts invested in a discontinued investment alternative are given an 40 44 opportunity to make an election to transfer the affected portion of their Accounts to another investment alternative permitted under the Plan. 4.02 Investment Elections. Each Participant shall, by written instructions to the Plan Administrator, designate in which investment alternative or combination of alternatives his Contributions shall be invested; provided, however, that the portion invested in any alternative which he elects shall be 5% or any multiple thereof, or such other percentage as designated by the Plan Administrator, subject to the maximum of 100%. Each Participant shall, upon request, be furnished with written confirmation of such instructions. 4.03 Change of Elections. Changes in investment elections shall (subject to Section 4.04) be permitted effective as of the first day of any quarter in each calendar year or such other period as specified by the Plan Administrator, in the manner described below: (a) Any Participant may, by written request filed with the Plan Administrator by a specified number of days prior to the effective date of the change, or under any other method as prescribed by the Plan Administrator, alter his election with respect to the investment of his future contributions. (b) Any Participant may, by written request filed with the Plan Administrator by a specified number of days prior to the effective date of the change, or under any other method as prescribed by the Plan Administrator, alter his election with respect to the investment 41 45 alternatives in which his prior contributions have been invested and may direct the Trustee to transfer all or any portion of the balance in his Account to any investment alternative or combination of alternatives. 4.04 Restrictions on Changes. The Plan Administrator may, in its sole discretion, establish restrictions, limitations or prohibitions with respect to changes in investment elections, or transfers, permitted under the Plan. Any such restrictions, limitations or prohibitions which may apply to elections related to, or transfers among, any or all investment funds maintained under the Plan, shall be communicated in advance of their applicability to Plan Participants, and shall apply in a non-discriminatory manner to all Participants in similar circumstances. 4.05 Allocation of Contributions. As of each Valuation Date, the Plan Administrator shall allocate the Salary Deferral Contributions, Matching Employer Contributions, Discretionary Employer Contributions and After-Tax Contributions to the Account of each Participant. 4.06 Valuation of Assets. As of each Valuation Date, the assets of the Trust shall be valued at fair market value and any gains or losses shall be allocated to the same investment alternatives in which they arose. 42 46 4.07 Voting of Shares. Before each annual or special meeting of shareholders of the Company, the Company shall cause the Trustee to send to each Participant whose Account is invested in common stock of the Company, a copy of the proxy solicitation material therefor, together with a form providing confidential instructions to the Trustee on how to vote the shares of Company stock held within the Participant's Account. Upon receipt of such instructions in conformance with said proxy solicitation material, the Trustee shall vote the shares of Company stock as instructed. Instructions received from individual Participants by the Trustee shall be held in strictest confidence and shall not be divulged or released to any person, including officers or Employees of an Employer. The Trustees shall vote the shares of the Company stock for which no instructions have been received in the same proportion as the shares for which instructions have been received. 4.08 Tender Offer Procedure. In the event an offer is received by the Trustee (including, but not limited to, a tender offer or exchange offer) to purchase any shares of Company stock held by the Trustee in the Trust, the Company shall cause the Trustee to send to each Participant whose Account is invested in Company stock such information as will be distributed to shareholders of the Company in connection with such offer, and to notify each Participant in writing of the number of shares of Company stock which are then credited to such Participant's Account. The Trustee shall provide to each Participant a form requesting confidential directions as to the manner in which the Trustee is to respond to the offer with respect to shares of Company stock allocated 43 47 to such Participant's Account. Upon timely receipt of such directions, the Trustee shall respond as directed with respect to the tender or exchange of such shares. Instructions received from individual Participants by the Trustee shall be held in the strictest confidence and shall not be divulged or released to any person, including officers or Employees of an Employer. The Trustee shall not tender or exchange shares of Company stock allocated to a Participant's Account for which the Trustee has not received directions from the Participant. A Participant who has directed the Trustee to tender or exchange shares of Company stock allocated to such Participant's Account may, at any time prior to the offer withdrawal date, direct the Trustee to withdraw such shares from the offer prior to the withdrawal deadline, in which case the Trustee shall carry out such directive. In the event that shares of Company stock held in a Participant's Account are tendered or exchanged pursuant to this Section 4.08, the proceeds received upon the acceptance of such tender or exchange shall be credited to such Participant's Account, and shall be invested in the manner determined by the Company or as otherwise provided in the Plan. 4.09 ERISA Section 404(c) Plan. The Plan is intended to constitute a plan described in Section 404(c) of ERISA and shall be administered in accordance with such intent. Beginning with the Plan Year commencing January 1, 1994, the Plan shall be administered in compliance with Department of Labor Regulations Section 2550.440c-1. 44 48 4.10 Confidentiality. Information relating to the purchase, holding, and sale of Company stock in a Participant's Account and the exercise of voting, tender, and similar rights with respect to such stock by Participants and their beneficiaries shall be maintained in accordance with such procedures as the Administrator shall establish designed to safeguard the confidentiality of such information, except to the extent necessary to comply with Federal laws or state laws not preempted by ERISA. 4.11 Fiduciary Designation. Effective for Plan Years commencing on or after January 1, 1994, the Administrator is designated as the Plan fiduciary responsible for ensuring that the procedures implemented pursuant to Section 4.10 are sufficient to safeguard the confidentiality of information described in that Section, that such procedures are being followed, and that an independent fiduciary is appointed to carry out activities which the Administrator determines involve a potential for undue influence by any Employer upon Participants and beneficiaries with regard to the direct or indirect exercise of shareholder rights with respect to Company stock. 45 49 ARTICLE V RETIREMENT BENEFITS 5.01 Normal Retirement Benefit. A Normal Retirement Benefit shall be payable with respect to any Participant retiring at his Normal Retirement Date, and shall be equal to the Participant's Account as of the Valuation Date coincident with or next following the Participant's Normal Retirement Date. Payment shall commence no later than sixty (60) days following the last day of the Plan Year in which the Participant's Normal Retirement Date occurs. 5.02 Deferred Retirement Benefit. A Deferred Retirement Benefit shall be payable with respect to any Participant retiring after his Normal Retirement Date and shall be equal to the Participant's Account as of the Valuation Date coincident with or immediately following the Participant's actual retirement. Any Contribution to such Participant's Account after he has attained age 70 1/2 shall be taken into consideration in determining the minimum distribution requirements of Section 5.04. 5.03 Disability Retirement Benefit. A Disability Retirement Benefit shall be payable with respect to any Participant who has suffered a Disability and who retires from service of the Employer by reason of such Disability, and shall be equal to the Participant's Account as of the Valuation Date coincident 46 50 with or next following the date of the Participant's termination due to Disability. Such a Participant may also elect to be paid in accordance with the provisions of Section 7.02. 5.04 Payment of Benefits. Any benefit under this Article shall be made in a lump sum payment no later than sixty days following the close of the Plan Year in which the Participant's retirement occurs. If, after a Participant terminates employment, the total value of his vested Account is less than $3,500, the Administrator may direct the Trustee to cash-out the Participant's benefit in a single lump sum after any Valuation Date coincident with or following the date of his or her termination of employment, without any requirement for such Participant's consent. For Active Participants, benefit payments as mandated by Code Section 401(a)(9) shall not commence later than the April 1st following the calendar year in which the Participant attains age 70 1/2 or such later date as permitted under the Code, unless the Participant was (i) over age 70 1/2 before January 1, 1988 and was not a 5% owner of the Employer during the Plan Year ending within the calendar year in which the Participant attained age 66 1/2, or any subsequent year, or (ii) the Participant made a designation under Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act of 1982, in which event benefit payments may commence after the April 1st following the calendar year in which the Participant reaches age 70 1/2, but as soon after the Participant terminates employment as is practical. All distributions required under this Section shall be determined and made in accordance with the Proposed or, if applicable, Final Regulations under Code Section 401(a)(9), 47 51 including the minimum distribution incidental benefit requirement of Section 1.401(a)(9)-2 of the Proposed or Final Regulations. 5.05 Additional Allocations on Retirement. Any allocation for a Participant, made as of a Valuation Date subsequent to the date of his retirement shall be paid to such Participant, or his beneficiary, as soon after such Valuation Date as is practical. 5.06 Crediting of Investment Earnings. Investment earnings shall be credited to a Participant's Account through the Valuation Date coincident with or preceding the date that distribution of the Account is made. No earnings shall be credited after such Valuation Date. 5.07 Company Stock. A Participant may elect to have the portion, if any, of his vested Account attributable to a fund invested in common stock of the Company distributed all in cash or all in kind. In the case of an in-kind distribution, the value of fractional shares shall be paid in cash. 48 52 ARTICLE VI DEATH BENEFITS 6.01 Death Benefits. In the event of the death of an Active Participant or of a Terminated Vested Participant who has not yet received payment of his Account, the Account shall be paid to his Beneficiary in a single lump sum. Any payment under this Section shall be paid as soon as practicable at the Beneficiary's election and no later than five (5) years after the Participant's death. The distribution shall be equal to the Participant's Account as of the Valuation Date coincident with or immediately preceding the date of payment. 6.02 Additional Allocations on Death. Any allocation for a Participant, made as of a Valuation Date subsequent to the date of his death, shall be paid to such Participant's Beneficiary as soon after such Valuation Date as is practical. 6.03 Beneficiary Designation. "Beneficiary" shall mean the person or persons named to receive any death benefits which may become payable under the Plan, and shall include any contingent beneficiary. If a Participant has a qualified spouse, then such spouse shall automatically be the Beneficiary eligible to receive the Account of the Participant pursuant to the Participant's death, unless the Participant names an alternate Beneficiary, and the qualified spouse consents in 49 53 writing to the Participant's naming of an alternate Beneficiary, which consent must acknowledge the effect of such designation and be witnessed by a representative of the Plan Administrator, or attested to by a notary public. For purposes of this paragraph, a qualified spouse is a spouse to whom the Participant is married at the date of death and to whom the Participant has been married for at least one year. Each Participant shall have the right by written notice to the Plan Administrator, in the form prescribed by the Plan Administrator, to designate, and from time to time to change the designation of, one or more Beneficiaries and contingent beneficiaries to receive any benefit which may become payable under the Plan pursuant to his death, provided his qualified spouse, if any, consents to the designation of an alternate Beneficiary as set forth in the preceding sentence. A qualified spouse may also expressly permit a Participant to subsequently change an alternative beneficiary designation without any further spousal consent. If it is established to the satisfaction of a Plan representative that there is no qualified spouse or that such spouse cannot be located, an alternative beneficiary designation will be deemed a proper election without any spousal consent. Any consent by a qualified spouse obtained under this provision (or establishment that the consent of a qualified spouse may not be obtained) shall be effective only with respect to such spouse. A consent that permits designations by the Participant without any requirement of further consent by the qualified spouse must acknowledge that such spouse has the right to limit consent to a specific beneficiary, and a specific form of benefit where applicable, and that the spouse voluntarily elects to relinquish either or both of such rights. A revocation of a prior beneficiary designation may be made by a Participant without the consent of the qualified spouse 50 54 at any time before the commencement of benefits. The number of revocations shall not be limited. In the event that a Participant who does not have a qualified spouse as described above fails to designate a Beneficiary to receive a benefit under the Plan that becomes payable pursuant to his death, or in the event that the Participant is pre-deceased by all automatic or designated primary and contingent beneficiaries, the death benefit shall be payable to the Participant's estate. 51 55 ARTICLE VII VESTING AND SEPARATION FROM SERVICE 7.01 Vesting of Accounts. A Participant shall at all times be fully (100%) vested in his Salary Deferral Contribution Account, After-Tax Contribution Account, Rollover Contribution Account and in any restoration contributions made pursuant to Section 7.03. A Participant shall be vested in his Matching Employer Contribution Account and his Discretionary Employer Contribution Account based on his Years of Service in accordance with the following table:
Years of Service Vesting Percentage ---------------- ------------------ Less than 2 0% 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 or more 100%
Notwithstanding the foregoing, an Active Participant shall be 100% vested in his Account at his Normal Retirement Date, the date of his retirement due to Disability or the date of his death. 7.02 Payment of Benefits. An Active Participant who is vested in his Account and terminates employment prior to his Normal Retirement Date shall be deemed a Terminated Vested Participant. Payment 52 56 of his vested Account shall be made in a single lump sum no later than sixty (60) days following the Valuation Date coincident with or next following the Participant's Normal Retirement Date. However, any such Participant may elect that payment of his vested Account be made as of the Valuation Date coincident with or following the date of his termination of employment, provided that he makes such election on or before the applicable Valuation Date. A Terminated Vested Participant's Account shall continue to be credited with investment earnings through the last Valuation Date coincident with or immediately preceding the date that payment of the Account is made. No earnings shall be credited after such Valuation Date. The failure of a Participant to make such an election shall be deemed to be an election to defer commencement of benefits. If, after a Participant terminates employment, the total value of his vested Account is less than $3,500, the Administrator may direct the Trustee to cash-out the Participant's benefit in a single lump sum after the Valuation Date coincident with or following the date of his or her termination of employment, without any requirement for such Participant's consent. 7.03 Re-employment After Distribution and Restoration Contributions. Any former Participant who once again qualifies as an Active Participant and who has received a distribution of any portion of his vested Account attributable to his prior participation in this Plan may restore to the Trustee the full amount of the distribution he previously received which was derived from Employer Contributions. In order to reinstate his full Matching or Discretionary Employer Contribution Account, a reemployed Participant must repay the full amount of the distribution from such Accounts prior to the earlier of (i) the fifth 53 57 anniversary of the date such participant is reemployed or (ii) five consecutive one year Breaks-in-Service after the date of distribution. Any Participant who fails to make his restoration contribution within such time period shall waive his right to the portion of his Account which was not vested when he received his distribution. 54 58 ARTICLE VIII WITHDRAWALS AND LOANS 8.01 Withdrawals While Employed. In-service withdrawals shall be made upon 15 days written notice in the following order: (a) A Participant may withdraw all or any portion of his After-Tax Contribution Account. Such withdrawal shall come first from After-Tax Contributions made prior to January 1, 1987. Next, such withdrawal shall be allocated proportionately between the Participant's After-Tax Contributions made after December 31, 1986 and the investment earnings on such contributions. A Participant may then withdraw the investment earnings on his After-Tax Contributions made prior to January 1, 1987. (b) A Participant may withdraw any portion of his Rollover Contribution Account upon attainment of age 59 1/2 or in the event of a financial hardship as described below. (c) A Participant may withdraw his Salary Deferral Contribution Account for any reason after he has attained Age 59 1/2 and prior to Age 59 1/2 solely in the event of a financial hardship, and solely to the extent required to satisfy the hardship. The amount that may be distributed due to a hardship may include the amount necessary to pay income taxes or penalties resulting from the distribution. Such hardship must be an immediate and heavy financial need of the Participant where such Participant lacks other available resources. Expenses in connection with a death in a Participant's immediate family would constitute such an immediate and heavy financial need and the following conditions would automatically be 55 59 deemed an immediate and heavy financial need: ( i) expenses for medical care as described under Code Section 213(d) incurred by the Participant, his spouse or his dependents or expenses necessary to obtain such medical care; ( ii) costs directly related to the purchase of a primary residence (excluding mortgage payments); (iii) payment of tuition or related educational fees for the next twelve months of post-secondary education for the Employee, his spouse or his dependents; ( iv) payment to prevent eviction of the Participant from a primary residence or foreclosure of mortgage on his primary residence; and ( v) any other occurrence as authorized by the IRS through Regulations, Rulings, Notices and other documents of general applicability. A Participant must submit a written certification on the form prescribed by the Plan Administrator that the hardship distribution is necessary to satisfy an immediate and heavy financial need. The written certification must indicate that the need cannot reasonably be relieved through reimbursement or compensation by insurance or otherwise, by liquidation of the employee's assets, by cessation of Salary Deferral Contributions or After Tax Contributions (if applicable) under the Plan or by other distributions or nontaxable loans from plans maintained by the Employer or any other employer, or by borrowing from commercial sources on reasonable commercial terms in an amount sufficient to satisfy the need. The Employer must 56 60 not have actual knowledge to the contrary that the need cannot reasonably be relieved as described above. A Participant may not withdraw any investment earnings included in his Salary Deferral Contribution Account which wereaccumulated after December 31, 1988, or any Qualified Non-elective Contributions (including investment earnings), unless he has attained Age 59 1/2. A Participant may not withdraw any portion of his Matching Employer Contribution Account or Discretionary Employer Contribution Account for any reason prior to his retirement or other termination of employment. In no event will any hardship withdrawal of Salary Deferral Contributions be granted until any applicable distributions and loans have been taken from this Plan and from all other qualified retirement plans of the Employer. 8.02 Loans. (a) Loans to Active Participants from their Accounts in amounts of not less than $500 shall be allowed upon 15 days written notice. No more than one Plan loan may be outstanding to each Participant at any time. (b) No Participant shall, under any circumstances, be entitled to loans in excess of the lesser of (i) 50% of his vested Account as of the Valuation Date coincident with or immediately preceding the date on which the loan is made, and (ii) $50,000 less the highest outstanding loan balance over the 12-month period immediately preceding the issuance of the 57 61 loan. For purposes of this paragraph, all outstanding loans to a Participant under this Plan or any other qualified retirement plan of the Employer shall be aggregated. (c) Any loan to a Participant shall be evidenced by the Participant's promissory note and secured by the pledge of the Participant's Account in the Trust Fund and by the pledge of such further collateral as the Trustee deems necessary or desirable to assure repayment of the borrowed amount and all interest payable thereon in accordance with the terms of the loan. (d) Interest shall be charged at an annual rate equal to the prime interest rate in effect as of the date the loan is processed, plus one percent (1%). The rate may be revised from time to time, but no more frequently than quarterly. The Administrator shall have sole discretion in determining the interest rate, and its decision shall be final and binding. Principal repayments and interest payments shall be credited to the Account of the Participant to whom the loan was made. (e) Loans shall be for such term as the Participant elects, except that loans shall not be for a period in excess of five (5) years unless they are made for the purposes of purchasing the primary residence of the Participant. In no event shall a loan be for a period in excess of thirty (30) years or such longer period of time as established by the Administrator to be used on a uniform and non-discriminatory basis. (f) Loans shall be repaid in approximately level installments made no less frequently than quarterly. The Plan Administrator may require that loans be repaid by payroll deduction or any other convenient manner. The manner and frequency of payment shall be determined by the Plan Administrator. 58 62 (g) If not repaid in full, the unpaid portion of any outstanding loans (including interest thereon) shall be deducted at retirement, death, disability or other termination of employment from any benefit to which a Participant (or his beneficiary) is entitled under this Plan, and any other security pledge shall be sold as soon as is practicable after such default by the Trustee at private or public sale. The proceeds of such sale shall be applied first to pay the expenses of conducting the sale, including reasonable attorney's fees, and then to pay any sums due from the borrower to the Trust Fund, with such payment to be applied first to accrued interest and then to principal. The Participant shall remain liable for any deficiency, and any surplus remaining shall be paid to the Participant. (h) If a required periodic payment is not made within 90 days of the date it was due, this shall be deemed a default and foreclosure on the note and attachment of security will not occur until a distributable event occurs in the Plan. 59 63 ARTICLE IX ADMINISTRATION 9.01 Plan Administrator. The Plan shall be administered by the Employer in accordance with its provisions and for purposes of such Plan administration the Employer is hereby deemed to be Plan Administrator within the meaning of ERISA. All aspects of Plan administration shall be the responsibility of the Plan Administrator except those specifically delegated to the Trustees or other parties in accordance with provisions of the Plan or Trust Agreement. 9.02 Administrative Procedures. The Administrator shall have discretionary authority based on a reasonable interpretation of the Plan to determine the eligibility for benefits and the benefits payable under the Plan, and shall have discretionary authority to construe all terms of the Plan, including uncertain terms, to determine questions of fact and law arising under the Plan and make such rules as may be necessary for the administration of the Plan. Any determination by the Plan Administrator shall be given deference in the event it is subject to judicial review, and shall be overturned only if it is arbitrary and capricious or an abuse of discretion. The Administrator may require Participants to apply in writing for benefits hereunder and to furnish satisfactory evidence of their date of birth and such other information as may from time to time be deemed necessary. 60 64 The Plan Administrator shall appoint the Trustees, Investment Managers, or any other professional advisors as the Administrator, in is sole discretion, deems necessary or appropriate. 9.03 Other Plan Administrator. Anything to the contrary notwithstanding, the Employer may appoint a committee or an individual or individuals, whether or not employed by the Employer, to carry out any of the duties of the Plan Administrator. Such duties may include, but are not limited to, determining the eligibility of any Employee for any benefits and the amount of such benefits under the Plan, maintaining custody of all documents and elections made by an Employee, directing the investment of any payment made by an Employer within any limits which may be imposed by the Employer, and retaining suitable agents and advisors. Any committee or individual shall be considered an agent of the Employer with respect to the Plan and shall be indemnified by the Employer against any and all claims, losses, damages, expenses and liabilities arising from any action or failure to act, except when the same is determined to be due to the gross negligence or willful misconduct of such individual or a member of a committee. 9.04 Claims Procedures. (a) If any claim of a Participant or Beneficiary (hereinafter referred to as "Claimant") is partially or totally denied, the Plan Administrator shall advise the Claimant in writing of the method of computation of his benefit, if any, and the specific reason for the denial. This written notice will be provided to the Claimant within a reasonable period of time 61 65 (generally within 90 days) after the Administrator's receipt of the claim. The Administrator shall also furnish the Claimant at that time with: ( i) a specific reference to pertinent Plan provisions, ( ii) a description of any additional material or information necessary for the Claimant to perfect his claim, if possible, and an explanation of why such material or information is needed, and (iii) an explanation of the Plan's claim review procedure. If a notice of denial of the claim, or a request for additional time to process the claim due to special circumstances, is not furnished to the Claimant within the 90-day period, the claim shall be deemed denied. The Claimant may then proceed to the review stage described in the following paragraphs. (b) The Claimant shall, if he desires further review, file a written request for reconsideration with the Administrator. This written request must be filed no later than 60 days after receipt of the information stated in (a) above. (c) So long as the Claimant's request for review is pending (including the 60 day period in (b) above), the Claimant or his duly authorized representative may review pertinent Plan documents and may submit issues and comments in writing to the Administrator. (d) A final and binding decision shall be made by the Administrator within 60 days of the filing by the Claimant of his request for reconsideration, provided, however, that if the Administrator, in its discretion, determines that a hearing with the Claimant or his 62 66 representative present is necessary or desirable, this period shall be extended an additional 60 days. (e) The Administrator's decision shall be conveyed to the Claimant in writing and shall include specific reasons for the decision, written in a manner calculated to be understood by the Claimant, with specific references to the pertinent Plan provisions on which the decision is based. 9.05 Expenses. Expenses of the Plan shall be paid from the Trust Fund unless the Employer elects to pay such expenses. 63 67 ARTICLE X AMENDMENT, TERMINATION AND MERGERS 10.01 Amendment. The provisions of this Plan may be amended at any time and from time to time by the Employer, provided, however, that: (a) no amendment shall increase the duties or liabilities of the Plan Administrator or of the Trustee without the consent of such party; (b) no amendment shall deprive any Participant or beneficiary of a deceased Participant of any of the benefits to which he is entitled under this Plan with respect to contributions previously made, nor shall any amendment decrease the balance in any Participant's Account. For purposes of this paragraph, a plan amendment which has the effect of decreasing the balance of a Participant's Account or eliminating an optional form of benefit with respect to benefits attributable to service before the amendment shall be treated as reducing an accrued benefit; (c) no amendment shall provide for the use of funds or assets held to provide benefits under this Plan other than for the benefit of Employees and their beneficiaries or provide that funds may revert to the Employer except as permitted by law; and (d) no amendment may change the vesting schedule with respect to any Participant, unless each Participant with three or more Years of Service is permitted to elect to have the vesting schedule which was in effect before the amendment used to determine his vested 64 68 benefit. The period during which the election may be made shall commence with the date the amendment is adopted or deemed to be made and shall end on the latest of: (1) 60 days after the amendment is adopted; (2) 60 days after the amendment becomes effective; or (3) 60 days after the Participant is issued written notice of the amendment by the Employer or Plan Administrator. In the case of an Employee who is a Participant as of the later of the date such amendment is adopted or the date it becomes effective, the nonforfeitable percentage (determined as of such date) of such Employee's right to his Employer-derived accrued benefit will not be less than his percentage computed under the Plan without regard to such amendment. Each amendment shall be approved by the Board of Directors by resolution and shall be filed with the Trustee. 10.02 Plan Termination. (a) Right Reserved. While it is the Employer's intention to continue the Plan indefinitely the right is, nevertheless, reserved to terminate the Plan in whole or in part. Termination or partial termination of the Plan shall result in full and immediate vesting of each affected Participant in his entire Account, and there shall not thereafter be any forfeitures with respect to any Participant for any reason. Notwithstanding any other provision of this Plan, complete or partial termination of the Plan shall not be conditioned solely upon any resolution or other action of the Company, the Board of Directors or any other party. 65 69 (b) Effect on Retired Persons, etc. Termination of the Plan shall have no effect upon payment of benefits due to former Participants, their beneficiaries and their estates. The Trustee shall retain sufficient assets to complete any such payments due and shall have the right, upon direction by the Employer, to make such payments as of the effective date of the Plan termination. (c) Effect on Remaining Participants, etc. The Employer shall instruct the Trustees either (i) to continue to manage and administer the assets of the Trust for the benefit of the Participants and their beneficiaries pursuant to the terms and provisions of the Trust Agreement, or (ii) to pay over to each Participant (and vested former Participant) the value of his vested account, and to thereupon dissolve the Trust. Upon termination of this Plan, if the Employer or any Affiliated Organization does not maintain a successor plan, the Participant's Account may, without the Participant's consent, be distributed to the Participant. However, if any entity within the same controlled group as the Employer maintains a successor plan then the Participant's Account will be transferred, without the Participant's consent, to the other plan. For purposes of this Section 10.02(c), a successor plan is any other defined contribution plan (other than an employee stock ownership plan as defined in Section 4975(e)(7) of the Code or a simplified employee pension as defined in Section 408(k) of the Code) maintained by the Employer or any Affiliated Organization unless fewer than two percent of the Active Participants as of the time of the Plan's termination are or were eligible under such defined contribution plan at any time during the 24-month period beginning 12 months before the time of the termination. 66 70 10.03 Permanent Discontinuance of Employer Contributions. While it is the Employer's intention to make substantial and recurrent contributions to the Trust Fund pursuant to the provisions of this Plan, the right is, nevertheless, reserved to at any time permanently discontinue Employer contributions. Such permanent discontinuance shall be established by resolution of the Board of Directors and shall have the effect of a termination of the Plan, except that the Trustee shall not have authority to dissolve the Trust Fund except upon adoption of a further resolution by the Board of Directors to the effect that the Plan is terminated and upon receipt from the Employer of instructions to dissolve the Trust Fund pursuant to Section 10.02(c) hereof. 10.04 Suspension of Employer Contributions. The Employer shall have the right at any time, and from time to time, to suspend Employer contributions to the Trust Fund pursuant to this Plan. Such suspension shall have no effect on the operation of the Plan unless the Board of Directors determines by resolution that such suspension shall be permanent. A permanent discontinuance of contributions will be deemed to have occurred as of the date of such resolution or such earlier date as is therein specified. 10.05 Mergers and Consolidations of Plans. In the event of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each Participant shall have a benefit in the surviving or transferee plan (determined as if such plan were then terminated immediately after such merger, etc.) that is 67 71 equal to or greater than the benefit he would have been entitled to receive immediately before such merger, etc., in the Plan in which he was then a Participant (had such Plan been terminated at that time). For the purposes hereof, former Participants and beneficiaries shall be considered Participants. 68 72 ARTICLE XI MISCELLANEOUS PROVISIONS 11.01 Non-Alienation of Benefits. None of the payments, benefits or rights of any Participant or beneficiary shall be subject to any claim of any creditor, and in particular, to the fullest extent permitted by law, all such payments, benefits and rights shall be free from attachment, garnishment, trustee's process, or any other legal or equitable process available to any creditor of such Participant or beneficiary. Notwithstanding the foregoing, the Plan Administrator shall assign or recognize an alternate payee with respect to all or a portion of a Participant's benefit, as may be required in accordance with a Qualified Domestic Relations Order, as such term is defined and as such action by the Plan Administrator may be required under Section 414 of the Code and regulations issued pursuant thereto. The Administrator shall develop such guidelines and procedures as it deems appropriate to determine, in accordance with Section 414 of the Code, and regulations issued pursuant thereto, whether, and in what manner, to comply with any document it receives which is intended to be a Qualified Domestic Relations Order. No Participant or beneficiary shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments which he may expect to receive, contingently or otherwise, under this Plan, except the right to designate a beneficiary or beneficiaries as hereinbefore provided. 69 73 11.02 No Contract of Employment. Neither the establishment of the Plan, nor any modification thereof, nor the creation of any fund, trust or account, nor the payment of any benefits shall be construed as giving any Participant or Employee, or any person whomsoever, the right to be retained in the service of the Employer, and all Participants and other Employees shall remain subject to discharge to the same extent as if the Plan had never been adopted. 11.03 Severability of Provisions. If any provision of this Plan shall be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and this Plan shall be construed and enforced as if such provisions had not been included. 11.04 Heirs, Assigns and Personal Representatives. This Plan shall be binding upon the heirs, executors, administrators, successors and assigns of the parties, including each Participant and beneficiary, present and future. 11.05 Headings and Captions. The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan, and shall not be employed in the construction of the Plan. 70 74 11.06 Gender and Number. Except where otherwise clearly indicated by context, the masculine and the neuter shall include the feminine and the neuter, the singular shall include the plural, and vice-versa. 11.07 Funding Policy. The Plan Administrator, in consultation with the Employer, shall establish and communicate to the Trustees a funding policy consistent with the objectives of this Plan and of the corresponding Trust. Such policy shall reflect due regard for the emerging liquidity needs of the Trust. Such funding policy shall also state the general investment objectives of the Trust and the philosophy upon which maintenance of the Plan is based. 11.08 Title to Assets. No Participant or beneficiary shall have any right to, or interest in, any assets of the Trust Fund upon termination of his employment or otherwise, except as provided from time to time under this Plan, and then only to the extent of the benefits payable under the Plan to such Participant out of the assets of the Trust Fund. All payments of benefits as provided for in this Plan shall be made from the assets of the Trust Fund, and neither the Employer nor any other person shall be liable therefor in any manner. 11.09 Payment to Minors, etc. Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of receipting therefor shall be deemed paid when paid to such person's 71 75 guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payment shall fully discharge the Trustees, the Plan Administrator, the Employer and all other parties with respect thereto. 11.10 Situs. This Plan shall, to the extent not pre-empted by ERISA or other Federal law, be construed according to the laws of the state where the principal office of the Company is domiciled, where such state statutes may be applicable to an employee benefit plan. 72 76 ARTICLE XII TOP-HEAVY PROVISIONS 12.01 Top-Heavy Plan. For any Plan Year commencing in 1984 or thereafter, the Plan shall be a Top-Heavy Plan, as such term is defined under Section 416 of the Internal Revenue Code, if the Value of Accumulated Benefits for Key Employees under all Aggregated Plans exceeds 60% of the Value of Accumulated Benefits for all Group Participants under all Aggregated Plans, determined as of the Determination Date immediately preceding such Plan Year. If the Plan is a Top-Heavy Plan for a Plan Year and, as of the Determination Date immediately preceding such Plan Year, the Value of Accumulated Benefits for Key Employees under all Aggregated Plans exceeds 90% of the Value of Accumulated Benefits for all Group Participants under all Aggregated Plans, then the Plan shall be a Super Top-Heavy Plan for such Plan Year. For such purposes, the terms "Key Employees" and "Group Participants" shall include all persons who are or were Key Employees or Group Participants during the Plan Year ending on such Determination Date or during any of the four (4) immediately preceding Plan Years. The value of Accounts and the present value of accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the 12-month period ending on the Determination Date, except as provided in Section 416 of the Code for the first and second plan years of a defined benefit plan. The Accounts and accrued benefits of a Participant (1) who is not a Key Employee but who was a Key Employee in a prior year, or (2) who has not been credited with at least one Hour of Service with any Employer maintaining the 73 77 Plan at any time during the 5-year period ending on the Determination Date will be disregarded. The calculation of the top-heavy ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Section 416 of the Code. Deductible employee contributions will not be taken into account for purposes of computing the top-heavy ratio. When aggregating plans the value of Accounts and accrued benefits will be calculated with reference to the determination dates that fall within the same calendar year. The accrued benefit of a participant other than a Key Employee shall be determined under (a) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the Employer, or (b) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Section 411(b)(1)(c) of the Code. For purposes of this Article, the following definitions shall apply in addition to those set forth in Article I: "Affiliated Employer Group" shall mean the Employer and each other employer which must be aggregated with the Employer for purposes of Sections 414(b), 414(c) or 414(m) of the Code. "Aggregated Plans" shall mean (i) all plans of the Employer or an Affiliated Employer Group which are required to be aggregated with the Plan, and (ii) all plans of the Employer or an Affiliated Employer Group which are permitted to be aggregated with the Plan and which the Plan Administrator elects to aggregate with the Plan, for purposes of determining whether the Plan is a Top-Heavy Plan. A plan shall be required to be aggregated with the Plan if such plan includes as a participant a Key Employee (and the beneficiary of such employee) 74 78 or if such plan enables any plan of the Employer or of a member of the Affiliated Employer Group in which a Key Employee participates to qualify under Section 401(a)(4) or Section 410 of the Code. A plan of the Employer or the Affiliated Employer Group shall be permitted to be aggregated with the Plan if such plan satisfies the requirements of Sections 401(a)(4) and 410 of the Code, when considered together with the Plan and all plans which are required to be aggregated with the Plan. No plan shall be aggregated with the Plan unless it is a qualified plan under Section 401 of the Code. The required aggregation group shall include plans terminated within the five year period ending on the Determination Date. "Annual compensation" shall mean compensation as defined in Section 415(c)(3) of the Code but including amounts contributed by the Employer pursuant to a salary reduction agreement which are excludable from the Employee's gross income under Section 125, Section 402(a)(8), Section 402(h) or Section 403(b) of the Code. "Determination Date" shall mean the date as of which it is determined whether a plan is a Top-Heavy Plan or Super Top-Heavy Plan for the Plan Year immediately following such Determination Date. The Determination Date for the Plan shall be: (a) in the case of a defined benefit plan, the date as of which the actuarial valuation of the Plan, as used for determination of minimum funding standards under Section 412 of the Code, is performed; and (b) in the case of a defined contribution plan, the last day of the Plan Year. "Group Participant" shall mean anyone who is or was a participant in any plan included in the Aggregated Plans during the Plan Year which includes the Determination Date or any of the four (4) immediately preceding Plan Years, and who received compensation from 75 79 an Employer during the five (5) year period ending on the Determination Date. Any beneficiary of a Group Participant who has received, or is expected to receive, a benefit from a plan included in the Aggregated Plans shall be considered a Group Participant solely for purposes of determining whether the Plan is a Top-Heavy Plan or Super Top-Heavy Plan. "Key Employee" shall mean any employee or former employee of the Employer or of an Affiliated Employer Group who during the Plan Year which includes the Determination Date, or during any of the four (4) Plan Years immediately preceding such Plan Year, was: (a) an officer of the Employer whose compensation is at least $45,000 (or such higher amount as is permitted in accordance with the Code); or (b) a five percent (5%) owner of the Employer; or (c) a one percent (1%) owner of the Employer whose total annual compensation from the Affiliated Employer Group exceeds $150,000; or (d) an employee whose compensation equals or exceeds $30,000 (or such higher amount as may be defined under Section 415(c)(1)(A) of the Code), and whose ownership interest in the Affiliated Employer Group is among the ten largest. In no event shall a partner of an unincorporated employer be considered an officer under paragraph(a) above. Further, the number of officers counted under (a) above as of any Determination Date shall not exceed the lesser of: (1) the greater of (i) ten percent (10%) of the total number of employees of the Affiliated Employer Group, and (ii) three (3); and (2) fifty (50). 76 80 If the application of the preceding paragraph results in a reduction in the number of officers to be included as Key Employees, then individuals who are officers shall be eliminated from the group of Key Employees beginning with the individual who had the lowest one-year compensation in the five (5) year period including the Plan Year which includes the Determination Date, and the four (4) immediately preceding Plan Years, and eliminating each individual with the next higher one-year compensation in such period, until the maximum number of officers remain in the Key Employee group. In addition, the beneficiary of a Key Employee shall be deemed to be a Key Employee. "Non-Key Employee" shall mean an Employee who is not a Key Employee. An Employee who was a Key Employee in a previous Plan Year but who is no longer a Key Employee in the current Plan Year, shall not be considered a Non-Key Employee for the current Plan Year. "Value of Accumulated Benefits" shall mean (a) in the case of a Group Participant or beneficiary covered under a defined benefit plan, the sum of (i) the present value of the accrued pension benefit (as such term is defined under the applicable plan) of the Group Participant or beneficiary determined as of the Determination Date using reasonable actuarial assumptions as to interest and mortality, and taking into account any non-proportional subsidies in accordance with regulations issued by the Secretary of the Treasury; plus 77 81 (ii) the sum of any amounts distributed to the Group Participant and his beneficiary during the plan year ending on the Determination Date and during the four (4) immediately preceding plan years. (b) in the case of a Group Participant or beneficiary covered under a defined contribution plan, the sum of the accounts of the Group Participant or beneficiary under the plan as of the plan's Determination Date derived from: (1) employee contributions credited to such accounts and investment earnings thereon; and (2) employer contributions credited to such accounts and investment earnings thereon; and (3) rollover contributions made prior to January 1, 1984, and investment earnings thereon; and (4) any contributions which would have been credited to such accounts on or before the Determination Date, but which were waived as provided under the Code and resulted in a funding deficiency; and (5) any amount distributed from the accounts described in (1) through (4) above during the Plan Year ending on the Determination Date, and the four (4) immediately preceding Plan Years. If the Plan is determined to be a Top-Heavy Plan or Super Top-Heavy Plan as of any Determination Date, then it shall be subject to the rules set forth in the remainder of this 78 82 Article for the Plan Year next following such Determination Date. If, as of a subsequent Determination Date, the Plan is determined to no longer be a Top-Heavy Plan or Super Top-Heavy Plan, then the rules set forth in the remainder of this Article shall no longer apply, except where expressly indicated otherwise. Notwithstanding the foregoing, if the Plan changes from being a Super Top-Heavy Plan to a Top-Heavy Plan, the rules applicable to a Top-Heavy Plan shall apply. "Year of Super Top-Heavy Service" shall mean a Year of Service of a Participant which commenced in a Plan Year during which the Plan was a Super Top-Heavy Plan. "Year of Top-Heavy Service" shall mean a Year of Service of a Participant which commenced in a Plan Year during which the Plan was a Top-Heavy Plan. 12.02 Minimum Contributions or Benefits. For any Plan Year in which the Plan is a Top-Heavy Plan the minimum rate of contributions and forfeitures allocated to the account of any Participant shall be the lesser of: ( i) The highest rate of employer contributions and forfeitures (determined as a percentage of compensation as defined under Section 415 of the Code) allocated to the account of any Key Employee; and (ii) 3% of such compensation. Notwithstanding the above paragraph, if a Participant is also a participant in another defined contribution plan of the Affiliated Employer Group, all or a portion of the minimum allocation described above may be provided under such other plan and the minimum 79 83 allocation provided under this Plan shall be eliminated or reduced accordingly. If the Employee is a Participant in one or more defined benefit plans of the Affiliated Employer Group, all or a portion of the minimum required benefits or allocations under Section 416 of the Code may be provided under such plans as set forth in regulations issued by the Secretary of the Treasury, and the minimum allocation provided in the preceding paragraph shall be eliminated or reduced accordingly. Employer contributions resulting from a salary reduction election by an Employee shall not be counted toward meeting the minimum required allocations under this Section. Matching Employer Contributions may be used to satisfy the minimum required allocations under this Section, if such contributions are not counted under the ACP test described in Section 3.06. Participants who are Non-Key Employees and who are not separated from service as of the last day of the Plan Year, and who have (1) failed to complete 1000 Hours of Service (or the equivalent), (2) declined to make mandatory contributions to the Plan, or (3) been excluded from the Plan because such individual's compensation is less than a stated amount, are considered Participants solely for purposes of this Section. The minimum allocation required [to the extent required to be nonforfeitable under Section 416(b)] may not be forfeited under Section 411(a)(3)(B) or 411 (a)(3)(D). 12.03 Adjustment to Maximum Benefits. If the Plan is a Top-Heavy Plan for any Plan Year, then the maximum benefit which can be provided under Section 3.10 shall be determined by substituting "1.00" for "1.25" in the applicable fractions. However, if the Plan is not a Super Top-Heavy Plan for such Plan 80 84 Year, than the preceding sentence shall not apply provided that "4%" (or such higher rate as is required by Internal Revenue Service Regulations) is substituted for "3%" in the first paragraph of Section 12.02. 12.04 Minimum Vesting If the Plan is determined to be a Top-Heavy Plan for any Plan Year, then an Active Participant's vested interest in his Account determined as of the first day of such Plan Year, and determined as of any future date while the Plan continues to be a Top- Heavy Plan, shall be no less than as determined under the following Table: Years of Service Vesting Percentage ---------------- ------------------ Less than 2 years None 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% If the Plan subsequently is determined to no longer be a Top-Heavy Plan, then the above minimum vesting schedule shall not apply to any portion of a Participant's Account which is accrued after the first day of the first Plan Year in which the Plan is no longer a Top-Heavy Plan, provided that the Account for any Participant with three (3) or more Years of Service as the first date as of which the Plan is no longer a Top-Heavy Plan shall continue to be vested in accordance with a schedule not less than the minimum vesting schedule applicable during the period that the Plan was a Top-Heavy Plan. 81 85 The minimum vesting schedule applies to all benefits within the meaning of Section 411(a)(7) of the Code except those attributable to employee contributions, including benefits accrued before the effective date of section 416 and benefits accrued before the Plan became top-heavy. 12.05 Discontinuance of Article. In the event that the provisions of this Article are no longer required to qualify the Plan under the Code, then this Article XII shall thereupon be void without the necessity of further amendment of the Plan. 82 86 IN WITNESS WHEREOF, and as evidence of the adoption of the foregoing, the Company has caused this instrument to be executed by a duly authorized officer as of this day of , 199 . HANOVER DIRECT, INC. By: ____________________________________ ____________________________________ Title 83 EX-10.26 10 FORM OF SUPPLEMENTAL RETIREMENT PLAN 1 Exhibit 10.26 HANOVER DIRECT, INC. SUPPLEMENTAL RETIREMENT PLAN 2 HANOVER DIRECT, INC. SUPPLEMENTAL RETIREMENT PLAN INTRODUCTION The Hanover Direct, Inc. Supplemental Retirement Plan, previously adopted as The Horn & Hardart Company Supplemental Retirement Plan, which was effective January 1, 1989, is hereby amended and restated in its entirety, effective as of October 1, 1993, to read as follows: ARTICLE I DEFINITIONS As used in this Plan, the following terms shall have the meanings set forth below, unless the context clearly requires otherwise: 1.01 ACCOUNT shall mean the accumulated Annual Earned Accruals and Matching Earned Accruals determined for the Designated Executive, including any investment earnings. Any active employee who participated in the Horn & Hardart Company Supplemental Retirement Plan in effect prior to October 1, 1993 shall have his Account under this Plan credited with the value of his Contribution 3 Account (as defined under such prior plan) as of September 30, 1993. 1.02 AFFILIATE shall mean any entity (whether or not incorporated) which controls, is controlled by, or under common control with the Company. 1.03 BOARD shall mean the Board of Directors of the Company. 1.04 BREAK-IN-SERVICE shall mean any Plan Year during which a Participant has not completed more than five hundred (500) Hours of Service. 1.05 CODE shall mean the Internal Revenue Code of 1986, as amended from time to time. Reference to a specific provision of the Code shall include such provision, any valid regulation or ruling promulgated thereunder and any comparable provision of future law that amends, supplements or supersedes such provision. 1.06 COMPANY shall mean Hanover Direct, Inc. and any successor thereto by merger, consolidation or otherwise. 1.07 COMPENSATION shall mean the fixed salary or base pay which is paid or made available to a Designated Executive during a Plan year for his personal services actually rendered to the Company or any Affiliate, but shall not include any amounts paid as cost-of-living supplements, bonuses, overtime payments, expense reimbursements, golden parachutes, stock options, other contractual stock payments, severance payments, or any incentive or other compensation predicated or computed as a percentage of, or as a commission on, sales. Any contributions made by a salary reduction election (in accordance with Code Sections 401(k), 125 or 129) and 2 4 which would have otherwise reduced a fixed salary or base pay shall be counted as Compensation under the Plan. 1.08 DESIGNATED EXECUTIVE shall mean any employee whose Compensation exceeds $70,000 and becomes eligible to become a Participant in the Plan as prescribed in Article II. In addition, any active employee, who participated in the Plan in effect prior to this Plan and who is not otherwise eligible for this Plan, shall become a Designated Executive and continue to have any existing Account held under the Plan credited with interest under Section 3.03, but shall have no earned accruals credited under Sections 3.01 and 3.02. In no event, however, shall an employee be eligible to become a Designated Executive unless he is employed at one of the following Affiliates or such other Affiliate who adopts this Plan from time to time, with the approval of the board: ------------------------------ ------------------------------ ------------------------------ ------------------------------ 1.09 DISABILITY shall mean a physical or mental condition of such severity and probable prolonged duration as to cause the Participant to be unable to continue his duties as an Employee. The existence of any Disability shall be determined by a physician chosen by the Benefits Committee, based on medical evidence of a physical or mental impairment that can be expected to last more than 12 months or result in death, or on other uniform and non- 3 5 discriminatory criteria as established by the Benefits Committee. Notwithstanding the foregoing, eligibility for Social Security Disability benefits or for long term disability benefits under an insured plan sponsored by the Company shall be deemed conclusive proof of disability. 1.10 NORMAL RETIREMENT DATE shall mean the first day of the month following the date a Designated Executive attains his sixty-fifth (65th) birthday. 1.11 BENEFITS COMMITTEE shall mean the Committee appointed to administer the Plan, as provided in Section 4.0l. 1.12 PARTICIPANT shall mean a Designated Executive who has met the requirements of Section 2.01. 1.13 PLAN shall mean the Hanover Direct, Inc. Supplemental Retirement Plan, as amended from time to time. 1.14 PLAN YEAR shall mean the calendar year. 1.15 SALARY DEFERRAL ELECTION shall mean the percentage reduction in Compensation (not to exceed 4%) elected by a Designated Executive which will be credited in accordance with Section 3.01. 1.16 SCHEDULED PAYMENT DATES shall mean the date(s) 45 days following a Valuation Date. 1.17 VALUATION DATE shall mean the last day of the Plan Year and any other date(s) as of which the Benefits Committee, in its sole discretion, elects to value the Account of a Designated Executive. 4 6 1.18 YEAR OF SERVICE shall mean a Plan Year in which an Employee has at least one thousand (1,000) hours of service. Solely for purposes of determining whether a Designated Executive is eligible to become a participant after his initial year of employment under Section 2.01, a Year of Service shall be credited to a Designated Executive who has at least one thousand (1,000) hours of service during the initial twelve (12) month period commencing with such Designated Executive's date of employment. In addition, solely for purposes of determining vesting under Section 3.04, Years of Service shall be counted from a Designated Executive's date of participation as determined under Section 2.01. 5 7 ARTICLE II PARTICIPATION 2.01 DESIGNATION OF PARTICIPANTS A Designated Executive shall commence participation under this Plan as of the January 1st coincident with or next following attainment of age 21 and the completion of one Year of Service. 2.02 MODIFICATION OF REQUIREMENTS The Benefits Committee, in its sole discretion, reserves the right to change the requirements to become a participant under Section 2.01 at any time. 6 8 ARTICLE III BENEFIT DETERMINATIONS AND DISTRIBUTIONS 3.01 ANNUAL EARNED ACCRUALS A Designated Executive shall have earned accruals credited to his Account for each Plan Year on the same frequency as payroll deductions have been taken, provided the Designated Executive is employed at a rate such that he will work at least 1,000 hours during the Plan Year. A Designated Executive shall have an Annual Earned Accrual credited to his Account in accordance with the terms set forth below: (a) The Annual Earned Accrual credited to the Designated Executive's Account for each Plan Year shall be equal to his Salary Deferral Election multiplied by his Compensation for such Plan Year. (b) Termination of Employment - Notwithstanding the foregoing, if a Designated Executive terminates employment for any reason during a Plan Year, he shall receive an Annual Earned Accrual for that Plan Year, based on his Compensation while employed for the Plan Year. 3.02 MATCHING EARNED ACCRUALS The Company shall make a contribution called a Matching Earned Accrual contribution on behalf of each Designated Executive in the same amount and on the same frequency as Annual Earned Accruals are credited to his account. In no event, however, shall the Matching Earned Accrual credited to a Designated Executive exceed 4% of Compensation earned during the Plan Year. 7 9 3.03 INTEREST On any Valuation Date during each Plan Year, an interest amount will be credited to each Designated Executive's Account equal to that Account's proportionate share of the investment return of all Accounts held under the Plan. 3.04 VESTING IN ACCOUNTS A Designated Executive shall be 100% vested in his Annual Earned Accruals at all times. In addition, a Designated Executive shall be 100% vested in the value of his Matching Earned Accruals when he attains his Normal Retirement Date, or if his employment terminates due to death or Disability (as defined in Section 1.08). Otherwise, he shall be vested in his Matching Earned Accruals (even if his participation in the Plan has been discontinued) in accordance with the following table: Percentage Years of Service Vested ---------------- ---------- less than 2 0% 2 but less than 3 20% 3 but less than 4 40% 4 but less than 5 60% 5 but less than 6 80% 6 or more 100% Any Designated Executive who was a participant in the Plan in effect prior to this Plan shall also be entitled to credit for Years of Service for such period and will be entitled to the greater of the vesting percentage determined under the prior plan for each participant as of September 30, 1993 or the vesting percentage determined under this Plan at retirement or other 8 10 termination of employment. The vested percentage of a Designated Executive's Account will not increase after the date as of which he terminates employment. Solely for purposes of determining vesting under the Plan, Years of Service shall be determined from the date a Designated Executive first became a Participant under the Plan. 3.05 DISTRIBUTIONS The vested Account of a Designated Executive will be distributed on the first Scheduled Payment Date following the Valuation Date coincident with or next following his retirement or other termination of employment. The distribution will be made in a full lump sum payment of the vested Account balance of the Designated Executive. 3.06 DEATH BENEFITS If a Designated Executive dies, his named beneficiary shall receive his vested Account as of the Valuation Date coincident with or next following his death distributed in accordance with Section 3.05. If, at the time of the Designated Executive's death, there is no named beneficiary, then the Designated Executive's estate shall be paid the benefits otherwise due to the named beneficiary. 3.07 VALUATION OF ACCOUNT As of each Valuation Date, each Designated Executive's Account shall be updated with all earned accruals and interest for such Plan Year based on Sections 3.01, 3.02, and 3.03. Each Designated Executive shall receive a statement of his Account within ninety (90) days of such Valuation Date. 9 11 ARTICLE 4 ADMINISTRATION 4.01 APPOINTMENT OF COMMITTEE The Plan shall be administered by the Benefits Committee appointed by the Board. 4.02 POWERS AND AUTHORITY OF COMMITTEE Whenever the Plan provides authority to the Board or its designated representative, the Benefits Committee may be, but is not required to be, the designated representative. Otherwise, the Benefits Committee shall have the power and full discretionary authority to interpret and construe this Plan, to determine all questions arising under this Plan, to correct any defect or supply any omission or reconcile any inconsistency in this Plan in such manner and to such extent as it shall deem necessary or appropriate to effectuate the purpose and intent of this Plan, to adopt and amend from time to time such by-laws and rules and regulations as are necessary of the administration of this Plan which are not inconsistent with the terms and provisions of this Plan, and to determine all questions of eligibility, status and rights of Designated Executives and their beneficiaries hereunder. 4.03 QUORUM AND VOTING; PROCEDURES A majority of the members of the Benefits Committee at the time in office shall constitute a quorum for the transaction of business. The Benefits Committee may act by vote or consent of the majority of its members then in office and may establish its own procedures. The Benefits Committee may authorize any one or more of its members to sign and 10 12 deliver any instrument, certificate or other paper or document on its behalf. The Benefits Committee may appoint from its members such subcommittees (of one or more such members), with such powers, as it shall determine. 4.04 CLAIMS PROCEDURE The Benefits Committee shall establish a claims procedure and shall afford a reasonable opportunity to any Designated Executive or named beneficiary whose claim for benefits has been denied for a full and fair review of the decision denying such claims. 4.05 LIABILITY LIMITED AND INDEMNIFICATION Except as otherwise provided by law, no person who is a member of the Benefits Committee or who is a stockholder, employee, officer, or director of the Company or any affiliate shall incur any liability whatsoever on account of any matter connected with or related to the Plan or the administration of the Plan, unless such person shall have acted in bad faith or have willfully neglected his duties in respect to the Plan; and as a condition precedent to his participation in the Plan or the receipt of benefits thereunder, or both, such liability, if any, is expressly waived and released by each Designated Executive and named beneficiary, such waiver and release to be conclusively evidenced by any act or participation in or the acceptance of benefits under this Plan. The Company shall indemnify and hold each such person harmless against any and all loss, liability, claim, damage, cost and expense which may arise by reason of, or be based upon, any matter connected with or related to the Plan or the administration of the Plan (including, but not 11 13 limited to, any and all expenses whatsoever reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or in settlement of any such claim whatsoever) to the fullest extent permitted under the Certificate of Incorporation and By-Laws of the Company. 12 14 ARTICLE 5 AMENDMENT AND TERMINATION The Company may amend, terminate or suspend this Plan at any time or from time to time by a resolution of the Board; provided, however, that no amendment or termination of the Plan shall deprive any Designated Executive or named beneficiary of any of the benefits to which any is entitled under this Plan by reason of the Designated Executive's prior Years of Service, death, disability or other termination of employment. If the Plan is terminated or contribution accruals are permanently suspended, the vesting schedule set forth in Section 3.04 shall continue to apply to each Designated Executive, unless the Board, in its sole discretion, elects to fully vest a particular Designated Executive. If the Plan terminates within two years of a change in ownership of the Company, all Designated Executives will become fully vested. 13 15 ARTICLE 6 MISCELLANEOUS 6.01 SOURCE OF PAYMENTS The Company shall establish and maintain records which incorporate the crediting of earned accruals and interest under this Plan; provided, that the Company is advised by tax counsel that the maintenance of such records will not result in taxation of income to a Designated Executive or a named beneficiary prior to payment of benefits to any such person. 6.02 NO EMPLOYMENT CONTRACT This Plan shall not be construed as creating any contract of employment between the Company or any Affiliate and the Designated Executive. The Company and all affiliates shall have the same control over their employees as though this Plan had never been executed. 6.03 FORFEITURE Notwithstanding any other provision of this Plan, neither a Designated Executive nor his named beneficiary shall be entitled to receive any benefits under the Plan if the Designated Executive's employment is terminated because of (a) his willful misconduct in connection with the performance of his duties to the Company or any Affiliate, including, but without limiting the generality of the foregoing, misappropriation of funds or property of the Company or any Affiliate, securing or attempting to secure personally any profit in connection with any transaction entered into on behalf of the Company or any Affiliate, or committing the Company or any Affiliate to any transaction adverse 14 16 to their respective interests except as a result of an honest error in judgment, or (b) his conviction for a felony. 6.04 NO ASSIGNMENT The interest in this Plan of a Designated Executive or named beneficiary shall not be subject to assignment or transfer or otherwise be alienable either by voluntary or involuntary acts of such person, or by operation of law, nor shall it be subject to attachment, execution, garnishment, sequestration or other seizure under any legal, equitable or other process. If any Designated Executive or named beneficiary shall attempt to or shall alienate, sell, transfer, pledge or otherwise encumber any amount to which he is or might become entitled, or if by reason of the insolvency of any such person or the issuance of any garnishment, writ of execution or other court process, or other event happening at any time any amount otherwise payable hereunder to such person should devolve upon anyone other than him or would not be enjoyed by him, the Benefits Committee shall terminate such interest, but may, in its absolute discretion, hold or apply it to or for the benefit of such Participant, the spouse, children or other dependents of such person, in such manner as the Benefits Committee may deem proper. 6.05 INCAPACITY In the event that the Benefits Committee determines that a Designated Executive or named beneficiary is unable to care for his affairs due to illness or accident, any payment due to such individual under this Plan may be made to his duly appointed legal representative. The Benefits Committee may, in its discretion, make such payments to a child, parent or spouse 15 17 of such individual, or to any other person with whom he resides or who is charged with his care. The Benefits Committee shall make such payment according to such instructions, which shall be in writing and witnessed by a notary public, as the Designed Executive or named beneficiary had delivered to it prior to becoming unable to care for his affairs due to illness or accident. Any payment made according to the provisions of this Section shall be a complete discharge of the liability of the Company under this Plan. 6.06 TAX WITHHOLDING Benefit payments hereunder shall be subject to withholding, to the extent required (as advised by tax counsel) by applicable tax or other laws. 6.07 SEPARABILITY If any provision of this Plan is held invalid or unenforceable, to the extent necessary to effectuate the purposes of this Plan, its invalidity or unenforceability shall not affect any other provisions of the Plan and the Plan shall be construed and enforced as if such provisions had not been included therein. 6.08 BINDING EFFECT This Plan shall be binding upon and shall inure to the benefit of the successors and assigns of the Company and shall be binding upon the Designated Executive and shall inure to his benefit and that of his named beneficiary. 6.09 GENDER AND NUMBER The masculine pronoun whenever used herein shall include the feminine pronoun and the singular number shall include the plural number and vice versa unless the context clearly requires otherwise. 16 18 6.10 GOVERNING LAW The Plan shall be construed in accordance with the laws of the State of Delaware, where it is made and where it shall be enforced, except to the extent such laws have been superseded by Federal law. IN WITNESS WHEREOF, Hanover Direct, Inc. has caused this instrument to be executed by its duly appointed officers this day of , 1993. ----------------- - -------------------- HANOVER DIRECT, INC. BY ------------------------------- ATTEST - --------------------------- 17 EX-21.1 11 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT COMPANY INCORPORATION Brawn of California, Inc. California The Company Manufacturing, Inc. Wisconsin Company Store Holdings, Inc. Delaware Gump's By Mail, Inc. Delaware Gump's Corporation California Hanover Direct Pennsylvania, Inc. Pennsylvania Hanover Direct Virginia Inc. Delaware Hanover Holdings Inc. Delaware Hanover Ventures, Inc. Pennsylvania Henre, Inc. Delaware Scandia Down Corporation Delaware Tweeds, Inc. Delaware EX-23.1 12 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 Exhibit 23.1 ------------ CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into The Horn & Hardart Company's (predecessor to Hanover Direct, Inc.) previously filed Registration Statement File Nos. 33-66394, 33-58760, 33-58756, and 33-58758. ARTHUR ANDERSEN & CO. New York, New York March 9, 1994 -----END PRIVACY-ENHANCED MESSAGE-----