-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QvA9GtWqj5VjectsUO/QOxgM7JzVkfjKvkpaV3R/h068Czaoe+iuMFC6usyg/zRN Yl+QS7N34i6y/tcIaO9u+A== 0000950123-96-001448.txt : 19960401 0000950123-96-001448.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950123-96-001448 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19951230 FILED AS OF DATE: 19960329 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANOVER DIRECT INC CENTRAL INDEX KEY: 0000320333 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 138053260 STATE OF INCORPORATION: NV FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-08056 FILM NUMBER: 96541520 BUSINESS ADDRESS: STREET 1: 1500 HARBOR BLVD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 BUSINESS PHONE: 2018653800 MAIL ADDRESS: STREET 1: 1500 HARBOR BLVD CITY: WEEHAWKEN STATE: NJ ZIP: 07087 FORMER COMPANY: FORMER CONFORMED NAME: HORN & HARDART CO /NV/ DATE OF NAME CHANGE: 19920703 10-K405 1 HANOVER DIRECT 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 December 30, 1995 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. X --- As of March 21, 1996 the aggregate market value of the voting stock held by non-affiliates of the registrant was $52 million (based on the closing price of the Common Stock on the American Stock Exchange on March 21, 1996). As of March 21, 1996 the registrant had 93,516,651 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The Company's definite proxy statement is incorporated into items 10,11,12 and 13 of Part III of this 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 markets via a portfolio of branded specialty catalogs offering home fashions, general merchandise and apparel. The Company's home fashion catalogs include Domestications(R), a leading specialty home textile catalog, and The Company Store(R), an upscale direct marketer of down comforters and other down and related products for the home. The Company also markets Gump's(R), a leading upscale catalog of exclusive gifts, which opened its new retail store in downtown San Francisco in March 1995. The Company also markets via catalogs in the kitchenware market with Colonial Garden Kitchens(R), a specialty catalog featuring work saving and lifestyle enhancing items for the kitchen and home, and Kitchen & Home(R), an upscale kitchen and home product catalog. The Company's apparel catalogs include Tweeds(R), the European inspired women's fashion catalog, and International Male(R), offering unique men's fashions with an international flair. In 1995, the Company acquired Improvements(R), a leading do-it-yourself home improvement catalog featuring home aid accessories, the remaining interest in The Safety Zone(R), a direct marketer of safety, prevention and protection products, and Austad's(R), a direct marketer of golf equipment, related apparel and accessories. The Company, in connection with its venture with Sears, Roebuck and Co. ("Sears"), mails several versions of its catalogs to the more than 20 million mail order and credit card customers of Sears. During 1995, the Company mailed approximately 370 million catalogs. The Company maintains a proprietary customer list currently containing approximately 18 million names of customers (down from 19 million names in 1994) who have made purchases from at least one of the Company's catalogs within the past 36 months. Over 7 million of the names on the list represent customers who have made purchases from at least one of the Company's catalogs within the last 12 months. The Company is incorporated in Delaware with its principal executive office at 1500 Harbor Boulevard, Weehawken, New Jersey 07087. The Company's telephone number is (201) 863-7300. NAR Group Limited, a British Virgin Islands corporation (together with its affiliates, "NAR"), owns approximately 53% of the Company's common stock. NAR, a private investment holding company, is a joint venture between the family of Alan G. Quasha, a Director and the Chairman of the Board of the Company, and Compagnie Financiere Richemont A.G., a Swiss public company engaged in luxury goods, tobacco and other businesses. The Company is a successor in interest to The Horn & Hardart Company, a restaurant company founded in 1911, and Hanover House Industries, Inc., founded in 1934. 2 3 THE COMPANY'S CATALOGS Each of the Company's specialty catalogs targets distinct market segments offering a focused assortment of merchandise designed to meet the needs and preferences of its target customers. Through market research and ongoing testing of new products and concepts, each catalog determines its own merchandise strategy, including the appropriate price points, mailing plans and presentation of its products. The Company is continuing its development of exclusive or private label products for a number of its catalogs, including Domestications, Tweeds, Austad's and The Company Store, to further enhance the brand identity of the catalogs. The Company's specialty catalogs typically range in size from 32 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 season with variations in format and content. Each catalog employs the services of an outside creative agency or has its own creative staff which is responsible for the design, layout, copy, feel and theme of the book. Generally, the initial sourcing of new merchandise for a catalog begins two to six months before the catalog is mailed. The Company's operations are divided into two groups, Non-Apparel and Apparel. Revenues and the percent of total revenues for 1994 and 1995 for each group are set forth below; all revenues are net of returns:
1995 1995 1994 1994 Percent of Percent of Revenues Total Revenues Revenues Total Revenues ------------ -------------- ------------ -------------- (in thousands) (in thousands) NON- APPAREL $593,978 79% $599,333 78% APPAREL 155,789 21% 169,551 22% -------- --- -------- -- TOTAL COMPANY $749,767 100% $768,884 100% ======== === ======== ===
As a result of significant losses incurred in 1995 and the future prospects for these catalogs, the Company discontinued six catalogs which generated revenues of $66.0 million and $21.8 million in 1995, and $77.7 million and $40.2 million in 1994 for the Non-Apparel and Apparel groups, respectively. These catalogs lost $10.1 million and $9.9 million in 1995 and $1.3 million and $3.4 million in 1994 for the Non-Apparel and Apparel groups, respectively. 3 4 Non-Apparel Catalogs Domestications is a leading specialty home textile catalog and a fashion decorating source book for today's value-oriented and style-conscious consumer. Domestications features sheets, towels, comforters, tablecloths, draperies and other items for the home, and offers coordinated decorating ideas for the home at value prices. Domestications is also mailed to Sears customers under the name Show Place. The Company Store is an upscale direct marketer of down comforters and other down and related products for the home. The Company Store also features designer brand name sheets, towels and other bedding accessories. Colonial Garden Kitchens features work saving and lifestyle enhancing items for the kitchen and home. Colonial Garden Kitchens is also mailed to Sears customers under the name Great Kitchens. Kitchen & Home features upscale kitchen and home products. Gump's is the well-known San Francisco retailer and a leading upscale catalog marketer of exclusive gifts, specialized housewares and other unique items. In March 1995, the Company completed construction and moved to its new store located in a landmark building in downtown San Francisco. Improvements, acquired in January 1995, is a leading do-it-yourself home improvement catalog featuring home improvement accessories. Improvements is also mailed to Sears customers under the name Sears Improvements. The Safety Zone, the remaining interest in which was acquired in February 1995, is a direct marketer of safety, protection and prevention products. Austad's, acquired in May 1995, is a direct marketer of golf equipment and related apparel and accessories. Apparel Catalogs Tweeds is a European inspired women's fashion catalog featuring relaxed, cosmopolitan fashions uniquely designed by its in-house staff. Silhouettes is a women's fashion catalog featuring every day, workout, special occasion and career fashions for larger sized women. International Male is an authority for unique men's fashion with an international flair. Undergear is a leader in activewear, workout wear and fashion underwear for men. 4 5 In 1995, the Company discontinued six catalogs, One 212(R), Simply Tops(R), Essence By Mail, Hanover House(R), Mature Wisdom(R) and Tapestry(R). SEARS In January 1994, the Company entered into a licensing agreement with the direct marketing subsidiary of Sears to produce specialty catalogs for the more than 20 million mail order and credit card customers of Sears. The catalogs currently being mailed under the program are based on existing Company catalogs and contain a title page with the Sears name and logo. The specialty catalogs include: Show Place, based on the Domestications catalog, Great Kitchens, based on the Colonial Garden Kitchens catalog, and Sears Improvements, based on the Improvements catalog. From time to time, the Company and Sears will add or delete catalogs to its offerings. In 1995, Beautiful Style, based on Silhouettes, and Right Touch, based on Tapestry, were discontinued. The Sears agreement has an initial three-year term and continues thereafter unless terminated by either party on various grounds, including the Company's failure to meet various operational performance standards. Profits and losses from this licensing agreement are shared between the parties on an equal basis. The Company also issued to Sears a performance warrant to purchase up to 7 million shares of the Company's Common Stock in 1999, at an exercise price of $10.57 per share, subject to certain revenue and profit thresholds. In fiscal 1995, the Company generated revenues of $81 million and operating income of $3 million from this venture. MARKETING AND DATABASE MANAGEMENT The Company maintains one of the largest proprietary customer lists in the industry currently containing approximately 18 million names of customers (down from 19 million names in 1994) who have purchased from one of the Company's catalogs within the past 36 months. The list contains name, gender, residence and historical transaction data. This database is selectively enhanced with demographic, socioeconomic, lifestyle and purchase behavior overlays from other sources. The Company utilizes proprietary modeling and sophisticated segmentation analysis, on a catalog by catalog basis, to devise catalog marketing and circulation strategies that are intended to maximize customer contribution by catalog. This analysis is the basis for the Company's determination of which of the Company's catalogs will be mailed and how frequently to a particular customer, as well as the promotional incentive content of the catalog(s) such customer receives. The primary source of new customers for the Company's catalogs is lists rented from other mailers and compilers. Prior to mailing to these non-proprietary lists, the lists are edited using statistical segmentation tools to enhance their probable performance. Other sources of new customers include space advertisements and promotional inserts in outbound merchandise packages. 5 6 TELEMARKETING The Company receives approximately 80% of its orders through its toll-free telephone service which offers customer access seven days per week, 24 hours per day. The Company has created a telephone network to link its three primary telemarketing facilities in Hanover, Pennsylvania, Roanoke, Virginia and LaCrosse, Wisconsin. The Company's telemarketing facilities utilize state-of-the-art telephone switching equipment which enables the Company to route calls between telemarketing centers and thus provide prompt customer service. A satellite telemarketing center is also located in San Diego, California. The Company handled approximately 18 million telephone order calls in 1995. The Company trains its telemarketing service representatives to be courteous, efficient and knowledgeable about the Company's products. Telemarketing service representatives generally receive 40 hours of training in selling products, services, systems and communication skills through simulated as well as actual phone calls. A substantial portion of the evaluation of telemarketing service representatives' performance is based on how well the representative meets customer service standards. While primarily trained with product knowledge to serve customers of one or more specific catalogs, telemarketing service representatives also receive cross-training that enables them to take overflow calls from other catalogs. The Company utilizes customer surveys as an important measure of customer satisfaction. DISTRIBUTION The Company operates four distribution centers in three principal locations: two in Roanoke, Virginia for home fashions and apparel, one in Hanover, Pennsylvania for general merchandise including giftware and other hardgoods, and one in LaCrosse, Wisconsin for home fashions. The Company's facilities processed approximately 14 million packages in 1995. The Company's plan to maximize efficiencies in merchandise handling and distribution by consolidating its warehouse and fulfillment centers. In 1995, the Company completed construction of its 530,000 square foot facility site in Roanoke which completed the consolidation of all of Domestications' warehouse and fulfillment operations from several locations into one facility. The Company also concluded the consolidation of its apparel catalogs in 1995 into the Company's Roanoke apparel facility. The consolidation of the fulfillment operations of Gump's from DeSoto, Texas and Improvements' from Cleveland, Ohio to other Company facilities, was also completed in 1995. The relocation of Austad's fulfillment operations from Sioux Falls, South Dakota to other Company facilities will be completed by early 1996. In 1995, the Company incurred operating inefficiencies in the new facilities and operating expenses related to maintaining duplicate facilities. The Company mails its catalogs through the United States Postal Service ("USPS") utilizing pre-sort, bulk mail and other discounts. Most of the Company's packages are shipped through the USPS. In January 1995, the USPS increased postage rates by approximately 14% to 6 7 18%. Overall, catalog mailing and package shipping costs approximated 18% of the Company's net revenues in 1995. The Company obtains rate discounts from the USPS by automatically weighing each parcel and sorting and trucking packages to a number of USPS drop points throughout the country. Some packages are shipped using a consolidator for less frequently used drop points. The Company utilizes the United Parcel Service, Federal Express and other delivery services. PURCHASING The Company's large sales volume permits it to achieve a variety of purchasing efficiencies, including the ability to obtain prices and terms that are more favorable than those available to smaller companies. 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 telephone telemarketing costs (both inbound and outbound calls) are typically contracted for a three-year period. The Company generally 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. For 1995, paper costs approximated 8% of the Company's net revenues. MANAGEMENT INFORMATION SYSTEMS The Company is continuing to upgrade its management information systems by implementing new integrated software and migrating from a centralized mainframe to mid-range mini-computers. The migration of the Company's business applications to mid-range mini-computers is an important part of the Company's overall systems plan which defines the mid and long-term systems and computing strategy for the Company. The Company is continuing to modify and install, on a catalog by catalog basis, these new integrated systems for use in managing all phases of the Company's operations. These systems have been designed to meet the Company's requirements as a high volume publisher of multiple catalogs. The new software system is an on-line, real-time system which includes order processing, fulfillment, inventory management, list management and reporting. The software, where implemented, provides the Company with a flexible system that offers data manipulation and in-depth reporting capabilities. The new management information systems are designed to permit the Company to achieve substantial improvements in the way its financial, merchandising, inventory, telemarketing, fulfillment and accounting functions are performed. Until the new system is installed Company-wide, the Company will not achieve the full benefits of the new system. Two catalogs were brought on-line in 1994. The Company brought eight additional 7 8 catalogs on-line in 1995, and expects to bring the remaining catalogs on-line in 1996. As of December 30, 1995, the Company invested approximately $16 million in such systems. The Company currently estimates that the total cost to install and implement the new systems will be approximately $19 million. CREDIT MANAGEMENT Several of the Company's catalogs, including Domestications, International Male and Gump's, offer their own credit cards. The Company also offers, for use with almost all catalogs, the use of the Hanover Shop At Home credit card. The Company has a five year $75 million credit facility with General Electric Credit Corporation ("GECC") expiring in the year 2000, which provides for the sale and servicing of accounts receivable originating from the Company's revolving credit cards. GECC's servicing responsibilities include credit processing, collections, billing/payment processing, reporting and credit card issuance. 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, making purchasing adjustments as necessary and by promotional sales. Additionally, the Company sells excess inventory in its special sale catalogs, its outlet stores and to jobbers. Due in part to the transition to new management information systems, the Company is currently operating with different systems which increases the difficulty of optimizing inventory levels. The Company acquires products for resale in its catalogs from numerous domestic and foreign vendors. No single source supplied more than 5% of the Company's products in 1995. 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. RECENT ACQUISITIONS Improvements. In January 1995, the Company acquired substantially all of the assets of Leichtung, Inc., the publisher of Improvements, a leading do-it-yourself home improvement catalog, for a total cash purchase price of approximately $12 million and the assumption of certain liabilities. Also included in the purchase were the assets of Leichtung Workshops, a woodworking and hobby catalog, which the Company is currently negotiating to sell. The Safety Zone. In February 1995, the Company acquired the remaining 80% of the outstanding common stock it did not already own of Aegis Safety Holdings, Inc., a direct marketer of safety, prevention and protection products through The Safety Zone catalog. The purchase 8 9 price was approximately $6.3 million, stated value, of the Company's Series B Convertible Additional Preferred Stock. Austad's. In May 1995, the Company acquired 67.5% of the outstanding common stock of Austad Holdings, Inc. ("AHI"), a direct marketer of golf equipment and related apparel and accessories, for a purchase price of $1.8 million in cash. The Company lent $2.2 million to The Austad Company ("TAC"), a wholly owned subsidiary of AHI, which bears interest at the rate of 10% per annum, is due by May 2000 and subordinated to certain of AHI's existing bank indebtedness. The Company also provided a $.4 million loan to TAC which bears interest at a fluctuating rate and is secured by a second mortgage on TAC's office and warehouse. In February 1996, David Austad and certain family members surrendered to AHI their AHI shares, amounting to 32.5% of the outstanding shares, and paid approximately $1.2 million (subject to certain post-closing adjustments) in exchange for all the outstanding shares of AGS, Inc. ("AGS"), a South Dakota corporation newly formed by TAC to hold the existing retail assets and liabilities of TAC. As a result of the reorganization, AHI became a wholly owned subsidiary of the Company. AGS will operate the four existing retail stores acquired from TAC, located in Illinois, Minnesota and South Dakota, as Austad's stores under license from AHI. The license grants Mr. Austad exclusive retail rights to the Austad's name in 37 states and Canada. AHI retains all direct marketing and other rights. For further information with respect to "Recent Acquisitions", see Note 2 of Notes to Consolidated Financial Statements. FINANCING In November 1995, the Company obtained a new $75 million secured credit facility from Congress Financial Corporation ("Congress") to replace its former $80 million credit facility with another lender. The Congress facility provides for a three-year revolving line of credit of up to $65 million and two-year term loans aggregating $10 million. The revolving facility carries an interest rate of 1.25% above prime and the term loan carries an interest rate of 1.5% above prime. The facility is secured by all of the assets of the Company. For further information with respect to "Financing", see Note 7 of Notes to Consolidated Financial Statements. EMPLOYEES The Company currently employs approximately 2,200 persons on a full time basis and approximately 1,300 persons on a part time basis. Approximately 150 employees at one of the Company's subsidiaries are represented by a union. The Company believes its relations with its employees are good. 9 10 SEASONALITY The Company has experienced substantially increased sales in the fourth quarter of each year as compared to the first three quarters, due in part to the Company mailing more catalogs in the second part of the year and decreasing apparel sales as a percentage of total sales. COMPETITION The mail order catalog business is highly competitive. The Company believes that the principal basis upon which it competes are quality, value, service, product offerings, catalog design, convenience and efficiency. The Company's catalogs compete with other mail order catalogs, both specialty and general, and retail stores, including department stores, specialty stores and discount stores. Competitors also exist in each of the Company's catalog specialty areas of women's apparel, home fashions, general merchandise, and men's apparel. A number of the Company's competitors have substantially greater financial, distribution and marketing resources than the Company. TRADEMARKS Each of the Company's catalogs has its own federally registered trademark. The Company also owns numerous trademarks, copyrights and service marks on its logos, products and catalog offerings. The Company has also protected various trademarks internationally. The Company vigorously protects such marks and believes there is substantial goodwill associated with them. Show Place and Great Kitchens are trademarks of Sears. GOVERNMENT REGULATION The Company is subject to Federal Trade Commission regulations governing its advertising and trade practices, Consumer Product Safety Commission and Food and Drug Administration regulations governing the safety of the products it sells in its catalogs and other regulations relating to the sale of merchandise to its customers. The Company is also subject to the Department of Treasury-Customs regulations with respect to any goods it directly imports. The imposition of a sales and use tax collection obligation on out-of-state catalog companies in states to which they ship products was the subject of a case decided in 1994 by the United States Supreme Court. While the Court reaffirmed an earlier decision that allowed direct marketers to make sales into states where they do not have a physical presence without collecting sales taxes with respect to such sales, the Court further noted that Congress has the power to change this law. The Company believes that it collects sales tax in all jurisdictions where it is currently required to do so. 10 11 ITEM 2. PROPERTIES The Company's corporate headquarters are located in a modern 85,000-square-foot facility in Weehawken, New Jersey. The facility houses merchandising and marketing personnel, catalog production personnel and corporate and administrative offices. The Weehawken facility is leased for a 15-year term expiring in 2005. The Company operates four warehouses and fulfillment facilities in three principal locations: two in Roanoke, Virginia for home fashions and apparel, one in Hanover, Pennsylvania for general merchandise, including giftware and other hardgoods, and one in LaCrosse, Wisconsin for upscale home fashions. In Roanoke, the Company owns a newly completed 530,000 square-foot home fashions distribution center. The facility became operational in the second half of 1995 and handles all of Domestications' fulfillment processing. Also in Roanoke, the Company leases a 175,000 square- foot apparel distribution and telemarketing center from a partnership in which it owns a 50% interest. In Hanover, the Company owns a distribution center of approximately 265,000 square feet and leases a telemarketing and administrative office facility of 123,000 square feet and a warehouse facility of 433,000 square feet. Renewal terms on the telemarketing center extend through 2009. The warehouse lease expires November 30, 1996 with two short term renewal periods. In LaCrosse, Wisconsin, the Company also owns a 150,000 square-foot home fashions manufacturing and assembly facility and a 58,000 square-foot telemarketing and customer service facility, and leases a warehouse and fulfillment center of 185,000 square feet under a short-term lease. In addition to these principal facilities, the Company leases administrative facilities for men's apparel in San Diego, California. The San Diego facility also serves as a telemarketing and customer service facility. The Company's principal retail operations consist of the Gump's retail store, which occupies approximately 30,000 square feet in a building in downtown San Francisco, California. The Gump's facility, which is leased pursuant to a 15-year lease, also includes approximately 15,000 square feet of administrative offices for retail and mail order functions. The Company also operates and leases 7 other retail and outlet stores at various locations. The Company leases or owns premises in Cleveland, Ohio, Sioux Falls, South Dakota and Edgewater, New Jersey as part of its discontinued operations or consolidated facilities plan. The Company is actively seeking to sub-lease or sell, as applicable, all such properties. 11 12 The following chart provides certain information concerning each of the Company's principal properties:
APPROXIMATE LOCATION(A) STATUS SQUARE FOOTAGE Warehouse and Fulfillment Centers: Roanoke, VA Owned 530,000 Roanoke, VA Leased 175,000(b) Hanover, PA Leased 433,000 Hanover, PA Leased/Owned(c) 265,000 LaCrosse, WI Leased 185,000 Corporate and Administrative Offices: Weehawken, NJ Leased 85,000 San Diego, CA Leased 30,000(d) San Francisco, CA Leased 15,000(e) Telemarketing and Customer Service: Roanoke, VA Leased 175,000(e) Hanover, PA Leased 123,000 LaCrosse, WI Owned 58,000 San Diego, CA Leased 30,000(d) Retail Stores: San Francisco, CA Leased 30,000(d) San Diego, CA Leased 3,800 West Hollywood, CA Leased 3,600 Tysons Corner, VA Leased 1,700 Manufacturing and Assembly: LaCrosse, WI Owned 150,000
12 13 (a) Does not include the Sioux Falls, South Dakota (closed 1996), Cleveland, Ohio (closed 1995 ), Beachwood, Ohio (closed in 1996), or Edgewater, New Jersey (closed in 1995), in conjunction with the consolidation of the Company's warehouse facilities. (b) Telemarketing and warehouse/fulfillment functions are all located and performed at the one facility. Square footage stated represents the entire facility. (c) The building is owned by the Company and the property is subject to a ground lease. (d) Telemarketing and corporate/administrative functions are all located and performed at the one facility. Square footage stated represents the entire facility. (e) Retail and office space are all located at the one facility. Square footage stated represents allocations to corporate/administrative and retail and retail storage space. 13 14 ITEM 3. LEGAL PROCEEDINGS The Company is involved in various routine lawsuits of a nature which is deemed customary and incidental to its businesses. In the opinion of management, the ultimate disposition of such actions will not have a material adverse effect on the Company's financial position or results of operations. On or about September 2, 1994, a complaint was filed in the United States District Court for the District of New Jersey by Veronica Zucker, an individual who allegedly purchased shares of Common Stock of the Company in the public offering completed on April 7, 1994, against the Company, all of its directors, certain of its officers, Sun Life Insurance Company of America, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Alex. Brown & Sons, Incorporated. The complaint, which purports to be filed on behalf of a class of all persons who purchased the Common Stock of the Company in the public offering or thereafter through and including August 14, 1994, seeks to recover monetary damages the class has allegedly suffered as a result of certain alleged false and materially misleading statements contained in the Company's public offering prospectus dated March 30, 1994. In lieu of an answer, defendants filed a motion to dismiss the complaint in its entirety for failure to state a claim upon which relief can be granted. On May 23, 1995, the United States District Court for the District of New Jersey dismissed the plaintiff's claim, with prejudice, for failure to state a claim upon which relief could be granted. On June 22, 1995, plaintiff filed a notice of appeal of the May 23, 1995 decision to the United States Court of Appeal for the Third Circuit. The appeal was submitted on the briefs on March 11, 1996. On March 26, 1996, the Court rendered its decision affirming the District Court's decision. 14 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 15 16 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 1994 First Quarter $7 7/8 $6 Second Quarter 7 1/8 3 15/16 Third Quarter 4 15/16 3 3/4 Fourth Quarter 4 3/8 3 3/8 1995 First Quarter $3 5/8 $2 1/2 Second Quarter 3 1/16 2 5/16 Third Quarter 2 13/16 1 15/16 Fourth Quarter 2 1/16 1 1/2
The Company is restricted from paying dividends on its Common Stock or from acquiring its capital stock by certain debt covenants contained in agreements to which the Company is a party. As of March 21, 1996, there were approximately 4,826 holders of record of Common Stock. 16 17 ITEM 6. SELECTED FINANCIAL DATA The following table presents selected financial data for each of the years indicated:
1991 1992 1993 1994 1995 ------------ ------------ ------------ ------------ ------------- INCOME STATEMENT DATA: (in thousands, except share and per share data) REVENUES ..................................... $ 623,650 $ 586,562 $ 642,511 $ 768,884 $ 749,767 Depreciation and amortization ................ 3,887 2,681 3,279 6,157 9,020 Operating (loss) income ...................... (26,078) 14,402 19,076 15,975 (22,619) Interest expense, net ........................ 18,341 13,135 2,757 2,813 4,531 Income (loss) from continuing operations .................................. (51,081) 1,048 17,337 14,838 (28,153) (Loss) from discontinued operations .......... (21,119) -- -- -- -- ------------ ------------ ------------ ------------ ------------ Income (loss) before extraordinary items and cumulative effect of accounting change for income taxes .......... (72,200) 1,048 17,337 14,838 (28,153) Extraordinary items .......................... 6,915 9,201 -- -- (1,837) Cumulative effect of accounting change for income taxes ..................... -- 10,000 -- -- -- ------------ ------------ ------------ ------------ ------------ NET INCOME (LOSS) ............................ (65,285) 20,249 17,337 14,838 (29,990) Preferred stock dividends .................... (466) (3,197) (4,093) (135) (240) ------------ ------------ ------------ ------------ ------------ Net income (loss) applicable to common shareholders ......................... ($ 65,751) $ 17,052 $ 13,244 $ 14,703 ($ 30,230) ============ ============ ============ ============ ============ Per Share: Income (loss) from continuing operations ................................. ($ 3.16) ($ .06) $ .17 $ .16 ($ .30) (Loss) from discontinued operations ......... (1.30) -- -- -- -- ------------ ------------ ------------ ------------ ------------ Income (loss) before extraordinary items ....................................... (4.46) (.06) .17 .16 (.30) Extraordinary items .......................... .43 .24 -- -- (.02) Cumulative effect of accounting change for income taxes ..................... -- .26 -- -- -- ------------ ------------ ------------ ------------ ------------ Net (loss) income ............................ ($ 4.03) $ .44 $ .17 $ .16 ($ .32) ============ ============ ============ ============ ============ Weighted average number of shares outstanding: Primary ...................................... 16,287,723 38,467,015 75,625,330 93,285,190 93,029,816 ============ ============ ============ ============ ============ Fully diluted ................................ 16,287,723 38,467,015 77,064,131 93,285,190 93,029,816 ============ ============ ============ ============ ============ BALANCE SHEET DATA (END OF PERIOD): Working capital (deficit) .................... ($ 37,636) $ 31,566 $ 25,180 $ 58,501 $ 28,774 Total assets ................................. 162,800 134,352 188,838 262,246 279,009 Total debt ................................... 127,918 43,362 36,160 37,915 62,802 Preferred stock of subsidiary ................ 35,247 32,842 -- -- -- Shareholders' (deficit) equity ............... (113,632) (19,758) 45,868 109,725 87,210
There were no cash dividends declared on the Common Stock in any of the periods. See Notes to Consolidated Financial Statements. 17 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth, for the fiscal years indicated, the percentage relationship to revenues of certain items in the Company's Consolidated Statements of Income:
Fiscal Year -------------------------------------------- 1993 1994 1995 ---------- ---------- --------- Revenues 100.0% 100.0% 100.0% Cost of sales and operating expenses.......................... 63.4 62.9 64.5 Provision for catalog and facility closings................... - - 1.4 Selling expenses.............................................. 24.6 25.7 27.4 General and administrative expenses........................... 8.5 8.5 8.5 Depreciation and amortization................................. .5 .8 1.2 Income (loss) from operations................................. 3.0 2.1 (3.0) Interest expense, net ........................................ .4 .4 .6 Other income (expense)........................................ .1 (.2) - Net income (loss)............................................. 2.7% 1.9% (4.0%)
RESULTS OF OPERATIONS 1995 COMPARED WITH 1994 Net Income (loss). The Company reported a net loss before extraordinary items of $28.2 million or $(.30) per share for the year ended December 30, 1995 compared to net income of $14.8 million or $.16 per share in 1994. Including the effect of the extraordinary loss of $1.8 million for the early extinguishment of debt, the Company reported a net loss of $30 million or $(.32) per share for the year ended December 30, 1995. Per share amounts are expressed after deducting preferred dividends of $.2 million in 1995 and $.1 million in 1994. The weighted average number of shares outstanding was 93,029,816 for the year ended December 30, 1995 compared to 93,285,190 in 1994. The net loss in 1995 was primarily the result of the cumulative impact of the significant increase in postage and paper prices and weak consumer demand. As a result of these factors, the Company discontinued six poorly performing catalogs in 1995 which have incurred substantial losses which the Company believed could not overcome these obstacles. Including a provision for the costs associated with discontinuing these catalogs of $8.6 million, these catalogs lost $20 million in 1995 compared to $4.7 million in the prior year. In addition, the Company also incurred costs, aggregating $2.7 million, in connection with the consolidation of facilities into its new Roanoke, VA fulfillment center. These costs included operating expenses related to maintaining duplicate facilities, start-up problems, operating down-time and inefficiencies in the new facility. Due to these cost pressures, the Company implemented a cost reduction program in 1995 whereby the Company instituted a salary freeze, reduced its workforce by approximately 10%, closed 5 facilities and reduced other administrative and overhead expenses. In connection with this program, the Company incurred non-recurring costs of $1.5 million and one-time severance and employee separation expenses of $2.0 million. Revenues. Revenues decreased 2.5% in 1995 to $750 million from $769 million in 1994. Revenues of continuing catalogs increased approximately 2% from $651 million in 1994 to $662 million in 1995, which was offset by a 26% decline to $88 million in revenues from discontinued catalogs. The Company circulated 370 million catalogs in 1995, a 2% reduction from the prior year. 18 19 Non-Apparel continuing catalog revenues increased 1% to $528 million, due to a 14% increase in revenues from the Company's venture with Sears to $81 million and $68 million of revenues from the 1995 acquisitions of Improvements, Safety Zone and Austad's which offset revenue reductions in the other Non-Apparel catalogs, principally Domestications and Colonial Garden Kitchens. Domestications revenues were down 28% as improved customer response rates partially offset a decline in the average order and a 31% reduction in circulation. Revenues from discontinued catalogs decreased $11.7 million from $77.7 million in 1994 to $66 million in 1995. The Company discontinued the Mature Wisdom catalog in mid-1995 and the Tapestry and Hanover House catalogs in the fourth quarter of 1995. Apparel continuing catalog revenues increased $5 million, or approximately 4%, from $129 million in 1994 to $134 million in 1995, as all continuing catalogs, International Male, Undergear, Silhouettes and Tweeds reported higher sales than the prior year. Revenues from discontinued Apparel catalogs declined 46% from $40 million in 1994 to $22 million in 1995, including the effect of discontinuing Essence by Mail, One 212 and Simply Tops. Operating Costs and Expenses. Cost of sales and operating expenses as a percentage of revenues increased from 62.9% in 1994 to 64.5% in 1995. This increase is primarily attributable to lower overall product margins due to greater promotional expenses as a result of the generally weak consumer demand and the impact of markdowns for the discontinued catalogs. In addition, fulfillment costs were higher in 1995 due to the start up of the new facility in Roanoke and higher outbound freight expenses of approximately $7 million or 15% as a result of the increase in USPS rates. During 1995, the Company recorded a Provision for Catalog and Facility Closings totalling $10.1 million. The provision for the discontinuance of six of the Company's catalogs of $8.6 million primarily consisted of incremental inventory mark-downs in excess of normal seasonal mark-downs and severance expenses. The $1.5 million provision for facility closings consisted primarily of moving expenses, lease termination fees and severance expenses, substantially all of which were paid in 1995. No such charges were recorded in 1994. Selling expenses increased from 25.7% of revenues in 1994 to 27.4% of revenues for the current year, primarily due to a 43% increase in average paper costs and a 15% increase in the average cost of mailing a catalog which more than offset the 2.0% reduction in catalog circulation and higher customer response rates. As a result of these price increases, the Company incurred approximately $18.0 million of higher costs to prepare and deliver its catalogs in 1995. General and administrative expenses declined $1.1 million or 2% in 1995 although they remained constant as a percentage of revenues at 8.5% in both years. Excluding the impact of one-time severance expenses of $2.0 million, these expenses declined as a percentage of sales to 8.3% due to the Company's cost reduction program instituted in early 1995. This reduction was partially offset by higher bad debt expenses, reflecting increased losses on major credit cards and the Company's private label credit card. Depreciation and amortization increased $2.8 million from $6.2 million in 1994 to $9.0 million in 1995. The increase was attributable to new amortization charges associated with the Roanoke, Virginia fulfillment facility, the management information system, the new Gump's retail store and the goodwill and mailing lists associated with the 1995 acquisitions. Income (Loss) from Operations. Income from operations declined from $16.0 million in 1994 to a loss of $22.6 million in 1995. Losses from discontinued catalogs increased from $4.7 million in 1994 to $20 million in 1995. 19 20 Non-Apparel income from operations decreased from $20.5 million in 1994 to a loss of $7.8 million in 1995. The most significant contributor to the decrease in profitability was Domestications, which in addition to being significantly impacted by the higher postage and paper costs also incurred additional costs in connection with the move of its operations into the new Roanoke facility. These costs included start-up costs, down time due to equipment problems, temporary labor costs, higher shipping , damages and replacement costs. Additionally, Domestications' product margin was adversely impacted by product mix changes, increased promotional activities and higher obsolescence charges. The loss from discontinued Non-Apparel catalogs increased from $1.3 million in 1994 to $10.1 million in 1995. Profitability from the Sears venture increased by $.1 million to $3 million in 1995 and the 1995 acquisitions contributed income of $2.5 million. The Company Store and Gump's also had higher operating profits in 1995 compared to 1994. Apparel results of operations declined $7.7 million from a loss of $.5 million in 1994 to a loss of $8.2 million in 1995. This decrease is mainly attributable to the discontinued Apparel catalogs whose losses increased $6.5 million from $3.4 million in 1994 to $9.9 million in 1995. Mens Apparel operating income increased 35% to $2.6 million which offset lower earnings at Tweeds and an operating loss at Silhouettes, where credit problems in the fourth quarter of 1995 contributed to its loss. Interest Income(Expense). Interest expense increased approximately $1.5 million from $3.5 million in 1994 to $5.0 million in 1995. This increase was due to higher average borrowings outstanding under the Company's revolving credit facility in 1995 as well as an increase in the basis point of approximately 3% in the Company's borrowing rate which is attributable to the Company's deteriorating financial performance in 1995. Interest income declined by $.2 million to $.5 million in 1995 because the Company had less cash available for investment. Other Income (Expense). Other expenses in 1994 totaled a net $1.8 million while there were no similar expenses in 1995. The loss in 1994 was comprised of $2.5 million in charges due to losses on certain investments offset by other income of $.7 million. Income Taxes. The Company did not record a Federal income tax provision in 1995 based on the current year net operating loss. The Federal income tax provision of $5.9 million in 1994 was offset by the utilization of net operating loss carry forwards. The Company's state tax provision was $1.0 million and $.9 million in 1995 and 1994, respectively. Shareholders' Equity. The number of shares of Common Stock outstanding increased by 714,928 in 1995 due to shares issued in connection with the Company's equity and incentive plans, the exchange of the 6% Series A Convertible Preferred Stock and other activities. At December 30, 1995 there were 93,452,768 shares of Common Stock outstanding compared to 92,737,840 shares of Common Stock outstanding at December 31, 1994. 1994 COMPARED WITH 1993 Net Income. The Company reported net income of $14.8 million or $.16 per share for the year ended December 31, 1994, compared to net income of $17.3 million or $.17 per share for the same period in 1993. Per share amounts are expressed after deducting preferred dividends of $.1 million in 1994 and $4.1 million in 1993. The weighted average number of shares outstanding increased approximately 21% to 93,285,190 shares for the year ended December 31, 1994, compared to 77,064,131 shares for the same period in 1993, primarily due to the public offering and the conversion of certain preferred stocks. 20 21 Revenues. Revenues increased $126 million, or 20%, from $643 million in 1993 to $769 million in 1994. This significant increase in revenues was primarily a result of an increase of $48 million from the Company's venture with Sears and increased revenues of $88 million from Gump's, The Company Store and Tweeds which were acquired in the second half of 1993 ("1993 acquisitions"). Revenues from catalogs discontinued in 1993 were $20 million in 1993 and $1 million in 1994. Revenues were negatively impacted in 1994 by an increase in customer returns from approximately 13.1% of shipped sales in 1993 to 14.9% of shipped sales in 1994. The increased returns were generated by new product categories and the Company implemented measures that reduced the rate of returns in the second half of 1994. Non-Apparel continuing catalog revenues increased $122 million, or 26%, from $477 million in 1993 to $599 million in 1994. The Company's venture with Sears generated increased Non-Apparel revenues of $46 million from 1993 to 1994, while revenues generated by Gump's and The Company Store increased $57 million from 1993 to 1994. The remainder of the Non-Apparel revenue increase was primarily due to increased revenues related to Domestications, and the new Kitchen & Home catalog. Revenues from discontinued catalogs were $7 million and $.2 million in 1993 and 1994, respectively. Apparel continuing catalog revenues increased $23 million, or approximately 16%, from $146 million in 1993 to $169 million in 1994. This increase was primarily due to a $31 million increase in the revenues of Tweeds which was acquired in the fourth quarter of 1993. Women's Apparel continuing catalog revenues increased 6% which is mainly attributable to Silhouettes and One 212, while Men's Apparel revenues decreased 16% as the group discontinued an under performing catalog in 1993 thus focusing on its profitable segments. Revenues from discontinued apparel catalogs were $13 million and $.5 million in 1993 and 1994, respectively. Operating Costs and Expenses. Cost of sales and operating expenses as a percentage of revenues decreased from 63.4% in 1993 to 62.9% in 1994. The decrease was primarily attributable to higher overall profit margins and lower fulfillment costs, as partially offset by higher delivery costs in 1994 based on sales mix. Selling expenses increased from 24.6% of revenues for the year ended January 1, 1994 to 25.7% of revenues for the year ended December 31, 1994 as the Company increased catalog circulation 17% in an effort to increase the number of active customers on its mailing lists in anticipation of the 1995 postal rate increase. The response to this prospecting program was less than anticipated which resulted in higher selling expense. Overall demand from the new customer acquisition program was soft principally in the Non-Apparel catalogs, particularly in Domestications, where prospecting was heaviest. The Company mailed approximately 377 million catalogs in 1994. General and administrative expenses remained flat as a percentage of revenues at 8.5% in both years. General and administrative expenses increased $10.0 million or 18.1% from 1993 to 1994 due primarily to the 1993 acquisitions. Depreciation and amortization increased $2.9 million from $3.3 million in 1993 to $6.2 million in 1994. The increase was attributable to a full year of charges for goodwill, mailing lists and depreciation associated with the 1993 acquisitions of Gump's, The Company Store and Tweeds. Income from Operations. Income from operations decreased from $19.1 million in 1993, or 3.0% of revenues, to $16.0 million in 1994, or 2.1% of revenues. Losses from discontinued catalogs were $3.9 million in 1993 compared to $.1 million in 1994. 21 22 Non-Apparel income from operations decreased $5.7 million from $25.9 million in 1993 to $20.2 million in 1994. This decrease was mainly due to the previously-mentioned lower response rates to the Company's customer acquisition program. Non-Apparel income from operations was also impacted by a loss of $2.1 million in 1994 compared to break even results in 1993 related to the Gump's retail operations due to the temporary relocation of its retail store prior to the move to its new location in March 1995. Apparel income from operations increased $3.1 million from a $3.6 million loss in 1993 to a $.5 million loss in 1994. The Men's Apparel income from operations increased $3.3 million from a loss of $1.4 million in 1993 to income of $1.9 million in 1994 as a result of overhead reductions and increased response rates. The Women's Apparel income from operations increased $1.0 million excluding losses of $.5 million and $1.6 million in 1993 and 1994, respectively, from the start-up of a new catalog. Apparel income from operations for discontinued catalogs was a loss of $4.3 million in 1993 and income of $.2 million in 1994. The Company's venture with Sears generated $1.4 million of income from operations in 1993 versus $2.9 million in 1994. Interest Income (Expense). Interest expense decreased approximately $1.4 million from $4.9 million in 1993 to $3.5 million in 1994. This decrease was the result of the Company using the proceeds of the public offering to pay down its revolving line of credit in April 1994, thus reducing borrowing requirements throughout the remainder of 1994. In addition, the Company experienced lower interest rates upon entering into a new credit agreement in October 1994. The Company's long-term debt increased $2.5 million from 1993 to 1994. Interest income decreased $1.5 million from $2.2 million in 1993 to $.7 million in 1994, due to interest income related to a Federal income tax refund received in 1993. Other Income (Expense). Other income decreased $2.7 million from income of $.9 million in 1993 to a loss of $1.8 million in 1994. The income of $.9 million in 1993 represents a settlement of a claim in bankruptcy. The loss in 1994 was comprised of $2.5 million of charges due to losses on investments and advances as partially offset by other income of $.7 million. Income Taxes. The Company recorded a Federal income tax benefit of $4.4 million in 1994 based on its estimate of the amount of net operating loss carryfowards ("NOLs") that can be utilized in the future. Federal income tax provisions of $5.9 million and $4.2 million, respectively, were offset by the utilization of NOLs in 1993 and 1994. The Company's state tax provision was $.5 million and $.9 million in 1993 and 1994, respectively. Shareholders' Equity. The number of shares of Common Stock outstanding increased by 9,804,663 in 1994 due to: i) 8,045,296 shares issued in connection with the Public Offering, ii) 1,309,207 shares issued in connection with a cashless exchange upon the exercise of certain warrants and iii) 450,160 shares issued in connection with the Company's equity and incentive plans, the exchange of the 6% Series A Convertible Preferred Stock (the "6% Preferred Stock") and other activities. At December 31, 1994, there were 92,737,840 shares of Common Stock outstanding compared to 82,933,177 shares of Common Stock outstanding at January 1, 1994. The dividends of $.1 million in 1994 represent dividend requirements on the 6% Preferred Stock issued in September 1993 while the dividends of $4.1 million in 1993 represent dividend requirements on the 7.5% Preferred Stock and the Class B Preferred Stock, both of which were converted into Common Stock in the fourth quarter of 1993. 22 23 LIQUIDITY AND CAPITAL RESOURCES The Company had $24.1 million and $2.7 million in cash and cash equivalents at December 31, 1994 and December 30, 1995 respectively. Working capital and the current ratio were $58.5 million and 1.51 to 1 at December 31, 1994 versus $28.8 million and 1.22 to 1 at December 30, 1995. The primary sources of cash in 1995 were the $20.7 million of proceeds from the issuance of long-term debt and $8.7 million due to a reduction in inventories. Cash was used primarily to fund: (i) the Company's 1995 operating loss, (ii) $13.7 million of capital expenditures, (iii) $13.0 million for the purchase of businesses, (iv) $8.7 million for the reduction of accounts payable, and (v) $3.6 million for payments of long-term debt and debt issuance costs. As a result of the operating losses incurred in 1995, the Company's financial condition deteriorated which reduced its working capital position and resulted in an increase in long-term debt. In addition, as a result of these operating losses, the Company was not in compliance at various times during 1995 with certain financial covenants that had been contained in its $80 million credit facility that it had entered into in 1994 ("Credit Facility"). The Company obtained waivers for these covenant violations, but was required to agree to more restrictive terms with respect to availability (reduced to $55 million), financial covenants and a higher interest rate. The disclosure of these covenant violations in the Company's 1995 interim financial statements, coupled with a very difficult year for retailers with numerous Chapter 11 filings occurring, caused a tightening of vendor credit in the fourth quarter of 1995. This resulted in higher backorder levels and increased fulfillment costs which negatively impacted the Company's operating results in that quarter, even though credit restrictions eased when the Company closed its new three year $75 million credit facility with Congress Financial Corp. ("Congress Facility") on November 15, 1995. The Company had determined that it was necessary to replace the original Credit Facility because the terms of the proposed amendment were too restrictive. Although the Congress Facility is secured by all of the Company's assets, it provides the Company with greater liquidity and less restrictive financial covenants, and was competitive in terms of cost with the proposed amendment. At the time the Company closed the Congress Facility, the Company believed that the facility would provide the Company with adequate capital to fund its operations. The Company had made this determination based upon the relaxing of the trade credit restrictions, the accompanying increased flow of merchandise, and expectations for its fourth quarter operating results it had at that time. In early 1996, after several additional retail companies filed Chapter 11, the Company again began to experience tightening of vendor credit. Despite this, backorder levels have increased only marginally, and the Company has managed to receive merchandise shipments in most cases on a timely basis and in sufficient quantities to satisfy its customer demand. However, it has had to utilize more working capital to accomplish this than had previously been anticipated, due to a tightening in trade terms. In addition, when the final results of 1995 became known to the Company, it concluded that such results would have a further negative impact on the Company's ability to conduct business on normal trade terms. Therefore, the Company decided that it was necessary to obtain an equity infusion which would: (i) restore the Company's equity base that had deteriorated due to the operating loss in 1995, (ii) reduce long-term debt, and (iii) provide the Company with additional liquidity. As a result, the Company announced that it would conduct a $40 million rights offering after the first quarter to be underwritten by NAR, the Company's largest shareholder. The Company will utilize $14 million of the net proceeds to repay its 9.25% Senior Subordinated Notes due 1998. At such time, the Company will record an extraordinary expense related to the early extinguishment of debt, representing the write-off of the unamortized debt issuance costs of approximately $1.4 million. The balance of the proceeds will be used for general corporate purposes, including the repayment of outstanding revolver indebtedness under the Congress Facility. 23 24 The announcement of this rights offering has eased vendor/creditor concerns about the Company's viability, and the Company believes that upon the conclusion of the rights offering, the Company will return to normal trade terms with all suppliers and will be able to obtain sufficient merchandise on a timely basis to satisfy customer demand, as well as have adequate capital to support its operations. 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. Infrastructure Investments. In early 1995, the Company completed the construction of a new fulfillment facility on a 53 acre site in Roanoke, Virginia to support the Domestications catalog. The total cost of the facility was $18.3 million. The Company began partial shipping and receiving activities in the first quarter of 1995 and the facility was fully operational in September 1995. The Company experienced operating inefficiencies and start-up problems in conjunction with bringing this facility into service. The Company's operating margins were negatively impacted by approximately $2.7 million of costs in 1995. The Company believes it will continue to experience inefficiencies in early 1996. However, the Company has taken and is taking actions which it believes will lead to more efficient operations. The Company also completed the construction and opened its new Gump's retail store in San Francisco in March 1995. The total cost of the construction was $7.8 million, of which $1.7 million was spent in 1995. The Company continued its management information systems up-grade in 1995. The new system, which began operation in two of the Company's catalogs in 1994, was operational in ten catalogs at the end of 1995. The Company expects to complete the roll-out of the system to the remaining catalogs in 1996. The Company will incur higher MIS costs in 1996 due to the completion of the transition to the new system. As of December 30, 1995, the Company had incurred costs of approximately $15.9 million as part of this plan, including $6.8 million in 1995. Such costs included hardware and software costs aggregating $10.3 million and internal costs of $5.6 million related to production of this new system that have been capitalized. The Company began to amortize these costs over 5 years in 1995. The Company's level of capital spending will be reduced in 1996 and will focus on the completion of the systems project. Effects of Inflation and Cost Increases. The Company normally experiences increased costs of sales and operating expenses as a result of the general rate of inflation in the economy. Operating margins are generally maintained through internal cost reductions and operating efficiencies and then through selective price increases where market conditions permit. The Company's inventory is mailorder merchandise which undergoes sufficiently high turnover so that the costs of goods sold approximates replacement cost. Because sales are not dependent upon a particular supplier or product brand, the Company can adjust product mix to mitigate the effects of inflation on its overall merchandise base. Paper and Postage. The Company mails its catalogs and ships most of its merchandise through the United States Postal Service ("USPS"), with catalog mailing and product shipment expenses representing approximately 18% of revenues in 1995. In January 1995, the USPS increased postage rates by approximately 14% to 18%. The Company also experienced record price increases in 1995 for the paper that is used in the production of its catalogs as the paper industry announced a series of significant price increases that increased the Company's average cost for paper by over 43% from 1994. Paper costs represented approximately 8% of revenues in 1995. These cost increases which totaled $25 million, and the duplicate costs associated with the consolidation of the distribution facilities and the transition to the new system discussed earlier, adversely impacted the Company's margins and earnings in 1995. In 1996, the USPS announced a reclassification of postal rates that will become effective on July 1, 1996. It is anticipated that this will favorably impact the Company's postage expenses by approximately 2% - 3% on an annualized basis. Paper prices may continue at current levels during 1996. 24 25 Cautionary Statements. The following statements constitute forward looking statements which involve risks and uncertainties: - "...the Company believes that upon the conclusion of the rights offering, the Company will return to normal trade terms with all suppliers and will be able to obtain sufficient merchandise on a timely basis to satisfy customer demand, as well as have adequate capital to support its operations." - "...the Company has taken and is taking actions which it believes will lead to more efficient operations." - "In 1996, the USPS announced a reclassification of postal rates that will become effective on July 1, 1996. It is anticipated that this will favorably impact the Company's postage expenses by approximately 2%-3% on an annualized basis. Paper prices may continue at current levels during 1996." The following are important factors, among others, that could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company. - a general deterioration in the economic conditions in the United States leading to increased competitive activity including a business failure; a business failure of a substantial size company in the retail industry, a reduction in consumer spending generally or specifically with reference to the types of merchandise that the Company offers in its catalogs; - an increase in the failure rate of consumer indebtedness generally; an increase in credit sales by the Company accompanied by an increase in its bad debt experience with respect to consumer debt; - a delay in the implementation of the actions to be taken by the Company to increase the efficiency of operations; rapid increases and decreases in the volume of merchandise that passes through the Company's warehouse facilities; - and a delay or reversal in the implementation of postal rate increase or an increase in paper costs; 25 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Hanover Direct, Inc.: We have audited the accompanying consolidated balance sheets of Hanover Direct, Inc. (a Delaware corporation) (successor to The Horn & Hardart Company, see Note 1 to the Consolidated Financial Statements) and subsidiaries as of December 30, 1995 and December 31, 1994, and the related consolidated statements of income, shareholders' (deficit) equity and cash flows for each of the three fiscal years in the period ended December 30, 1995. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hanover Direct, Inc. and subsidiaries as of December 30, 1995 and December 31, 1994, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 30, 1995 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statement schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP February 26, 1996 (except with respect to the matters discussed in Note 14, as to which the date is March 7, 1996) 26 27 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 31, 1994 and December 30, 1995
DECEMBER 31, DECEMBER 30, 1994 1995 ----------- ------------ (IN THOUSANDS) ASSETS Current Assets: Cash and cash equivalents ........................ $ 24,053 $ 2,682 Accounts receivable, net of allowance for doubtful accounts of $2,730 in 1994 and $2,597 in 1995 .... 25,247 30,176 Inventories ...................................... 83,653 79,281 Prepaid catalog costs ............................ 33,725 37,118 Deferred tax asset, net .......................... 3,200 3,300 Other current assets ............................. 2,658 6,170 --------- --------- Total Current Assets ..................... 172,536 158,727 --------- --------- Property and Equipment, at cost Land ............................................ 1,917 4,811 Buildings and building improvements ............. 7,994 19,353 Leasehold improvements .......................... 6,807 14,001 Furniture, fixtures and equipment ............... 24,103 39,508 Construction in progress ........................ 21,358 5,479 --------- --------- 62,179 83,152 Accumulated depreciation and amortization ....... (19,708) (26,090) --------- --------- Property and Equipment, net .............. 42,471 57,062 --------- --------- Goodwill .......................................... 19,026 36,586 Deferred tax asset, net ........................... 11,800 11,700 Other assets ...................................... 16,413 14,934 --------- --------- Total Assets ............................. $ 262,246 $ 279,009 ========= =========
See Notes to Consolidated Financial Statements. 27 28 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) As of December 31, 1994 and December 30, 1995
DECEMBER 31, DECEMBER 30, 1994 1995 ------------ ------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt and capital lease obligations $ 812 $ 3,546 Accounts payable 89,366 93,291 Accrued liabilities 20,215 25,969 Customer prepayments and credits 3,642 7,147 --------- --------- Total Current Liabilities 114,035 129,953 --------- --------- Noncurrent Liabilities: Long-term debt 35,907 57,283 Capital lease obligations 1,196 1,973 Other 1,383 2,590 --------- --------- Total Noncurrent Liabilities 38,486 61,846 --------- --------- Total Liabilities 152,521 191,799 --------- --------- Shareholders' Equity: 6% Series A Convertible Additional Preferred Stock, $10 stated value, authorized 5,000,000 shares; issued 156,600 shares in 1994 and 78,300 shares in 1995 1,589 795 Series B Convertible Additional Preferred Stock, $.01 par value, authorized and issued 634,900 shares in 1995 -- 5,558 Common Stock, $.66 2/3 par value, authorized 150,000,000 shares; issued 92,978,234 shares in 1994 and 93,693,162 shares in 1995 61,985 62,461 Capital in excess of par value 253,210 255,390 Accumulated deficit (201,102) (231,332) --------- --------- 115,682 92,872 Less: Treasury stock, at cost (1,157,061 shares in 1994 and 1995) (3,345) (3,345) Notes receivable from sale of Common Stock (1,912) (2,023) Deferred compensation (700) (294) --------- --------- Total Shareholders' Equity 109,725 87,210 --------- --------- Total Liabilities and Shareholders' Equity $ 262,246 $ 279,009 ========= =========
See Notes to Consolidated Financial Statements. 28 29 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) For the years ended January 1, 1994, December 31, 1994 and December 30, 1995
1993 1994 1995 --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) REVENUES $ 642,511 $ 768,884 $ 749,767 --------- --------- --------- Operating costs and expenses: Cost of sales and operating expenses 407,087 484,059 483,493 Provision for catalog and facility closings -- -- 10,143 Selling expenses 157,811 197,436 205,618 General and administrative expenses 55,258 65,257 64,112 Depreciation and amortization 3,279 6,157 9,020 --------- --------- --------- 623,435 752,909 772,386 --------- --------- --------- INCOME (LOSS) FROM OPERATIONS 19,076 15,975 (22,619) Interest expense (4,925) (3,544) (5,050) Interest income 2,168 731 519 Other income (expense) 888 (1,833) -- --------- --------- --------- Income (loss) before income taxes 17,207 11,329 (27,150) Income tax provision (benefit) (130) (3,509) 1,003 --------- --------- --------- Income (loss) before extraordinary item 17,337 14,838 (28,153) Extraordinary item -- -- (1,837) --------- --------- --------- NET INCOME (LOSS) 17,337 14,838 (29,990) Preferred stock dividends (4,093) (135) (240) --------- --------- --------- Net income (loss) applicable to Common Shareholders $ 13,244 $ 14,703 ($ 30,230) ========= ========= ========= Net income (loss) per share: Income (loss) before extraordinary item $ 0.17 $ 0.16 ($ .30) Extraordinary item -- -- (.02) --------- --------- --------- NET INCOME (LOSS) PER SHARE $ 0.17 $ 0.16 ($ .32) ========= ========= =========
See Notes to Consolidated Financial Statements. 29 30 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended January 1, 1994, December 31, 1994 and December 30, 1995
1993 1994 1995 ---------- ---------- ---------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) .................................. $ 17,337 $ 14,838 ($29,990) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization including deferred fees................................... 4,122 6,499 9,419 Provision for catalog and facility closings ..... -- -- 10,143 Extraordinary item - early extinguishment of debt -- -- 1,837 Provision for losses on notes receivable and marketable securities .......................... -- 2,121 -- Deferred transaction costs ...................... -- (837) -- Deferred taxes .................................. (631) (4,369) -- Other, net ...................................... (33) 43 76 Changes in assets and liabilities, net of effects of acquired businesses and dispositions of assets: Accounts receivable, net ........................ 8,907 (6,204) (1,713) Inventories ..................................... (12,081) (3,424) 8,679 Prepaid catalog costs ........................... (5,305) (8,154) 206 Other current assets ............................ 282 (1,220) (3,131) Accounts payable ................................ 24,530 10,518 (8,671) Accrued liabilities ............................. (10,650) 185 (1,583) Dividend payable ................................ 886 -- -- Customer prepayments and credits ................ 684 (1,389) 3,134 -------- -------- -------- Net cash provided (used) by operating activities ... 28,048 8,607 (11,594) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property and equipment ............ (4,239) (23,856) (13,686) Purchase of businesses ............................ (100) -- (13,008) Purchase of convertible debt securities ........... -- (2,693) -- Investments in affiliates ......................... -- (3,183) Advances .......................................... -- (2,300) -- Other, net ........................................ (313) (3,293) (887) -------- -------- -------- Net cash provided (used) by investing activities .... (4,652) (35,325) (27,581) -------- -------- --------
See Notes to Consolidated Financial Statements. 30 31 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years ended January 1, 1994, December 31, 1994 and December 30, 1995
1993 1994 1995 ---------- ---------- --------- (IN THOUSANDS) CASH FLOWS FROM FINANCING ACTIVITIES: Net payments under revolving credit facility . ($20,965) $ (230) -- Proceeds from issuance of debt ............... 20,000 10,000 20,685 Payments of long-term debt and capital lease obligations ................................. (19,856) (8,015) (1,419) Cash dividends paid .......................... (890) (1,027) -- Payment of debt issuance costs ............... (1,560) (1,458) (2,202) Repurchase of Common Stock ................... -- (215) -- Proceeds from issuance of Common Stock ....... 912 49,305 400 Other, net ................................... (1,007) (172) 340 -------- -------- -------- Net cash provided (used) by financing activities (23,366) 48,188 17,804 -------- -------- -------- Net increase (decrease) in cash and cash equivalents ................................... 30 21,470 (21,371) Cash and cash equivalents at the beginning of the year ...................................... 2,553 2,583 24,053 -------- -------- -------- Cash and cash equivalents at end of the year ... $ 2,583 $ 24,053 $ 2,682 ======== ======== ======== SUPPLEMENTAL CASH FLOW DISCLOSURES: Interest paid ................................ $ 4,883 $ 2,923 $ 4,586 Income taxes paid ............................ $ 71 $ 701 $ 1,318
See Notes to Consolidated Financial Statements. 31 32
Preferred Stock Preferred Stock Preferred Stock Class B 8% Cumulative 7.5% Cumulative Series B, Cumulative Shares Amount Shares Amount Shares Amount - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 26, 1992 0 $ 0 0 $ 0 0 $ 0 Net income applicable to common shareholders Mergers of H & H & THC into Hanover Direct, Inc. 40,000 25,516 569,532 7,158 Exchange of Class B 8 % Preferred and Common Stock (40,000) (25,516) Conversion of 7.5% Preferred Stock (569,532) (7,158) Issuance of Preferred Stock Stock dividends Amortization of deferred compensation Issuance of Common Stock - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1994 0 $ 0 0 $ 0 0 $ 0 Net income applicable to common shareholders Exercise of warrants Shares issued in Stock Offering Preferred stock dividends Conversion of one-third of the 6% Preferred Stock Conversion of note payable Issuance of Common Stock for Employee Benefit Plans, net - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 0 $ 0 0 $ 0 0 $ 0 Net income/(loss) applicable to common shareholders Issuance of Preferred Stock 634,900 5,400 Fair market value of warrant extensions Preferred stock dividends and accretion 158 Conversion of one-third of the 6% Preferred Stock Issuance of Common Stock for Employee Benefit Plans - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 30, 1995 0 $ 0 0 $ 0 634,900 $5,558 ===================================================================================================================================
Preferred Stock Class B Common Stock Common Stock Series A, 6.0% $.01 par value $.66 2/3 par value Shares Amount Shares Amount Shares - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 26, 1992 0 $ 0 12,270,503 $ 123 58,154,584 Net income applicable to common shareholders Mergers of H & H & THC into Hanover Direct, Inc. Exchange of Class B 8 % Preferred and Common Stock (12,270,503) (123) 18,937,169 Conversion of 7.5% Preferred Stock 2,278,128 Issuance of Preferred Stock 234,900 2,342 Stock dividends 36 Amortization of deferred compensation Issuance of Common Stock 3,766,661 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1994 234,900 $ 2,378 0 $ 0 83,136,542 Net income applicable to common shareholders Exercise of warrants 1,309,207 Shares issued in Stock Offering 8,045,296 Preferred stock dividends (6) Conversion of one-third of the 6% Preferred Stock (78,300) (783) 189,818 Conversion of note payable 13,945 Issuance of Common Stock for Employee Benefit Plans, net 283,426 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 156,600 $ 1,589 0 $ 0 92,978,234 Net income/(loss) applicable to common shareholders Issuance of Preferred Stock Fair market value of warrant extensions Preferred stock dividends and accretion 83 Conversion of one-third of the 6% Preferred Stock (78,300) (877) 427,785 Issuance of Common Stock for Employee Benefit Plans 287,143 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 30, 1995 78,300 $ 795 0 $ 0 93,693,162 ===================================================================================================================================
Capital Common Stock in Excess $.66 2/3 par value of Par Accum. Treasury Stock Amount Value (Deficit) Shares Amount - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 26, 1992 $38,774 $ 178,149 ($229,049) (2,169,713) ($7,170) Net income applicable to common shareholders 13,244 Mergers of H & H & THC into Hanover Direct, Inc. Exchange of Class B 8 % Preferred and Common Stock 12,625 13,014 Conversion of 7.5% Preferred Stock 1,519 5,639 Issuance of Preferred Stock Stock dividends (438) 684,890 2,946 Amortization of deferred compensation Issuance of Common Stock 2,505 13,470 364,791 1,094 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1994 $55,423 $ 209,834 ($215,805) (1,120,032) ($3,130) Net income applicable to common shareholders 14,703 Exercise of warrants 873 (873) Shares issued in Stock Offering 5,364 42,136 Preferred stock dividends Conversion of one-third of the 6% Preferred Stock 126 657 Conversion of note payable 9 162 Issuance of Common Stock for Employee Benefit Plans, net 190 1,294 (37,029) (215) - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1994 $61,985 $ 253,210 ($201,102) (1,157,061) ($3,345) Net income/(loss) applicable to common shareholders (30,230) Issuance of Preferred Stock Fair market value of warrant extensions 1,200 Preferred stock dividends and accretion Conversion of one-third of the 6% Preferred Stock 285 592 Issuance of Common Stock for Employee Benefit Plans 191 388 - ----------------------------------------------------------------------------------------------------------------------------------- Balance at December 30, 1995 $62,461 $ 255,390 ($231,332) (1,157,061) ($3,345) ===================================================================================================================================
Notes Receivable From Sale of Common Deferred Stock Comp. Total - -------------------------------------------------------------------------------------------------- Balance at December 26, 1992 $ 0 ($ 585) ($ 19,758) 13,244 Net income applicable to common shareholders 32,674 Mergers of H & H & THC into Hanover Direct, Inc. 0 Exchange of Class B 8 % Preferred and Common Stock 0 Conversion of 7.5% Preferred Stock 2,342 Issuance of Preferred Stock 2,544 Stock dividends 599 599 Amortization of deferred compensation Issuance of Common Stock (1,774) (1,072) 14,223 - -------------------------------------------------------------------------------------------------- Balance at January 1, 1994 ($1,774) ($ 1,058) $ 45,868 Net income applicable to common shareholders 14,703 Exercise of warrants 0 Shares issued in Stock Offering 47,500 Preferred stock dividends (6) Conversion of one-third of the 6% Preferred Stock 0 Conversion of note payable 171 Issuance of Common Stock for Employee Benefit Plans, net (138) 358 1,489 - -------------------------------------------------------------------------------------------------- Balance at December 31, 1994 ($1,912) ($ 700) $ 109,725 Net income/(loss) applicable to common shareholders (30,230) Issuance of Preferred Stock 5,400 Fair market value of warrant extensions 1,200 Preferred stock dividends and accretion 241 Conversion of one-third of the 6% Preferred Stock (0) Issuance of Common Stock for Employee Benefit Plans (111) 406 874 Balance at December 30, 1995 ($2,023) ($ 294) $ 87,210 ==================================================================================================
32 See notes to consolidated financial statements 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JANUARY 1, 1994, DECEMBER 31, 1994 AND DECEMBER 30, 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations - Hanover Direct, Inc. ("HDI") is a direct specialty retailer in the United States that publishes a portfolio of branded specialty catalogs offering home fashions, general merchandise and apparel. HDI also operates several retail operations in the United States which comprised approximately 3% of HDI's net revenues for the year ended December 30, 1995. 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 financial statements of THC had previously been included in the consolidated financial statements of H&H. The Merger was consummated by (i) the exchange of shares of H&H Common Stock for shares of HDI Common Stock, (ii) the exchange of shares of THC 7.5% Preferred Stock for shares of HDI's 7.5% Preferred Stock, and (iii) the exchange of shares of THC Class B Preferred Stock for 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 31, 1994 and December 30, 1995 were 52 - week years. The year ended January 1, 1994 was a 53 - week year. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories - Inventories consist principally of merchandise held for resale and are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. Prepaid Catalog Costs - Costs related to mail order catalogs and promotional material are amortized over their estimated productive lives, not exceeding six months. Depreciation and Amortization - Depreciation and amortization of property and equipment are provided on the straight-line method over the following lives: buildings and building improvements, 30-40 years; furniture, fixtures and equipment, 3-10 years; and leasehold improvements, over the lower of the estimated useful lives or the terms of the related leases. Expenditures for maintenance and repairs are charged to operations as incurred; major improvements are capitalized. 33 34 Capitalized development costs for the Company's new management information systems aggregated $6.4 million and $5.5 million at December 30, 1995 and December 31, 1994, respectively. Such costs are included in other assets and are being amortized over a five year period commencing July 1995. Goodwill - Excess of cost over the net assets of acquired businesses is being amortized on a straight-line basis over periods up to forty years. Accumulated amortization was $4.5 million and $5.6 million at December 31, 1994 and December 30, 1995, respectively. On an on-going basis, the Company assesses the carrying value and the economic useful life of the goodwill based on the acquired business' prior and future operating income and estimated net cash flows. Mailing Lists - The costs of acquired mailing lists are amortized over a five year period. Mailing lists, included in Other assets, amounted to $1.8 million and $3.5 million at December 31, 1994 and December 30, 1995, respectively, and are carried net of accumulated amortization of $.7 million and $1.6 million, respectively. On an ongoing basis, the Company assesses the carrying value and the economic useful life of the mailing lists based on the acquired business' potential future operating income and estimated net cash flows. Accounting for Income Taxes - The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109 - Accounting for Income Taxes ("SFAS 109"). Accounting for the Impairment of Long-Lived Assets: In March, 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This Statement is effective beginning in 1996 and requires long-lived assets as well as identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. The Company does not expect a material impact on their financial position upon implementation of this Statement in 1996. 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 Per Share - Net income 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 per share in 1994 and 1995 was 93,285,190 and 93,029,816 shares, respectively. For 1993 the weighted average number of shares for primary and fully diluted net income per share was 75,625,330 and 77,064,131 shares, respectively. Common share equivalents for purposes of net income per share consist of stock options and warrants. Supplemental Earnings Per Share - Assuming that the conversion of the 7.5% Preferred Stock and the exchange of the Class B 8% Preferred Stock and the Class B Common Stock discussed in Note 8 had been consummated at the beginning of fiscal year 1993, the weighted average number of shares outstanding for primary and fully diluted earnings per share for 1993 would have been 84,408,807 and 85,847,608 and earnings per share for 1993 would have been $.21 and $.20, respectively. 34 35 Supplemental Disclosure of Noncash Activities
1993 1994 1995 -------- -------- -------- (IN THOUSANDS) Dividend on Class B 8% Preferred Stock paid in THC Common Stock...................................................................... $ 2,508 $ - $ - ========== ============= ========= Exchange of 8% Class B Preferred Stock and 7.5% Convertible Preferred Stock for HDI Common Stock........................... $ 32,674 $ - $ - ========== ============= ========= Capital lease obligations................................................... $ 2,541 $ - $ 1,155 ========== ============= ========= Other equity issuances and exchanges........................................ $ 4,990 $ 1,823 $ 1,456 ========== ============= ========= Acquisition of businesses: Fair value of assets acquired............................................. $ 38,578 $ - $ 45,165 Fair value of liabilities assumed......................................... (26,180) - (26,757) Preferred stock issued.................................................... - - (5,400) Common stock issued....................................................... (12,298) - - ---------- ------------- --------- Net cash paid............................................................. $ 100 $ - $ 13,008 ========== ============= =========
2. ACQUISITIONS AND INVESTMENTS ACQUISITIONS - The Company made the following acquisitions in 1995: Leichtung, Inc. In January 1995, the Company acquired substantially all of the assets of Leichtung, Inc., a direct marketer of wood-working and home improvement tools and related products sold under the Improvements and Leichtung Workshops names, for a purchase price of approximately $12.8 million in cash and the assumption of certain liabilities. This acquisition has been accounted for using the purchase method of accounting based on the fair market values of the assets and liabilities acquired and has resulted in the recording of approximately $7.3 million of goodwill and $1.4 million of customer mailing list intangible assets. In connection with this acquisition the Company plans to sell the assets of the Leichtung Workshops catalog and has relocated all telemarketing and fulfillment operations to the Company's Hanover, PA facility. The distribution facility in Ohio and the Leichtung Workshops assets, which are being held for sale are being carried at their estimated net realizable value of $1.7 million, as of December 30, 1995. The Safety Zone. In February 1995, the Company acquired the remaining 80% of the outstanding common stock it did not already own of Aegis Safety Holdings, Inc. ("Aegis"), publisher of The Safety Zone catalog, through the issuance of 634,900 shares of a newly-created Series B Convertible Additional Preferred Stock ("Series B Stock") of the Company with a stated value of $10 per share. Previously, in September 1993, the Company had acquired 20% of the outstanding common stock of Aegis. Dividends can be payable on the Series B Stock at various rates and times and are contingent on specific earnings targets. The Series B Stock is also convertible, subject to antidilution, as discussed in Note 8. Dividends were not paid in 1995 based on The Safety Zone catalog's 1995 operating results. This investment has been accounted for using the purchase method of accounting based on the fair market values of Aegis' assets and liabilities and the Series B Stock, and has resulted in the recording of approximately $7.1 million of goodwill. The fair value of the Series B Stock, which is based on an independent appraisal, is $.9 million less than the stated value and the discount is being amortized over a five-year period. This amortization is included in preferred stock dividends in the statement of income from the date of acquisition. 35 36 Austad's. In May 1995, the Company acquired 67.5% of the outstanding shares of Austad's Holdings, Inc. ("Austad's"), which owned The Austad Company ("TAC"), the publisher of the Austad's catalog featuring golf equipment, apparel and gifts, for a purchase price of $1.8 million in cash. The Company also lent TAC, on a subordinated basis, $2.2 million which bears interest at the rate of 10% per annum and is due by May 2000. The Company also provided a $.4 million loan to TAC which bears interest at a fluctuating rate (8.75% through April 1996) and is secured by a second mortgage on TAC's office and warehouse. The acquisition has been accounted for using the purchase method of accounting based on the estimated fair market values of the assets and liabilities acquired and has resulted in the recording of approximately $4.5 million of goodwill and approximately $1.2 million of customer mailing list intangible assets. On February 16, 1996, David Austad and certain family members surrendered to Austad's their Austad's shares, amounting to 32.5% of the outstanding shares, and paid approximately $1.2 million (subject to certain post-closing adjustments) in exchange for all the outstanding shares of AGS, Inc. ("AGS"), a South Dakota corporation newly formed by TAC to hold the existing retail assets and liabilities of TAC. The transaction assumed a value for Austad's and TAC based on the Company's purchase price in the May 1995 acquisition, as adjusted by adding the net income of Austad's and TAC from May 25, 1995 through February 16, 1996. As a result of the reorganization, Austad's became a wholly owned subsidiary of the Company. In connection with the reorganization, TAC was released from all future obligations under three of four store leases. The Company expects that a similar release will be obtained in the near future regarding the fourth lease. AGS will operate the four existing retail stores acquired from TAC as Austad's stores under license from Austad's. The license grants Mr. Austad exclusive retail rights to the Austad's name in 37 states and Canada. Austad's retains all direct marketing rights and all other rights. Mr. Austad will continue to work together with TAC on joint buying and other cooperative efforts. The customer service and fulfillment operations of Austad's will be transferred to other Company facilities in the first quarter of 1996. The Company plans on selling the Austad's South Dakota warehouse and distribution facility. To the extent that the proceeds from both the sale of such facility and certain computer equipment produces any gain or loss, Mr. Austad will share therein to the extent of his previous 32.5% interest in Austad's. TAC had a revolving credit facility that was secured by substantially all of TAC's assets that was to expire on February 26, 1996. Such facility was paid off at the February 16th closing with the proceeds from the sale of the retail operations and from the Company's revolving credit facility. Accounting for Acquisitions - The acquisitions of Improvements, Leichtung Workshops, The Safety Zone and Austad's have been accounted for using the purchase method of accounting with goodwill of approximately $18.9 million in the aggregate initially recorded based upon the fair values of the net assets acquired and liabilities assumed. In addition, the Company recorded $3.1 million representing the fair value of acquired mailing lists. The operating results of the acquired companies are included in Consolidated Net Income (Loss) from their respective dates of acquisition. 36 37 The following represents the unaudited pro forma results of operations for the years ended January 1, 1994, December 31, 1994 and December 30, 1995 as if these three acquisitions had occurred at the beginning of fiscal year 1993.
(In thousands, except per share amounts) (Unaudited) 1993 1994 1995 ---- ---- ---- Revenues $782,365 $840,295 $763,786 ======== ======== ======== Income (loss) before extraordinary item $ 8,954 $ 14,305 $(28,083) ======== ======== ======== Net income (loss) $ 4,861 $ 14,170 $(30,160) ======== ======== ======== Per Share: Income (loss) before extraordinary item $ .06 $ .15 $ (.30) Extraordinary item - - (0.2) -------- -------- -------- Net income (loss) $ .06 $ .15 $ (.32) ======== ======== ========
The pro forma information does not purport to be indicative of the results that actually would have been obtained if the operations were combined during the periods presented and is not intended to be a projection of future results or trends. Per share amounts are expressed after deducting preferred stock dividends of $4.1, $.1 and $.2 , million in 1993, 1994 and 1995, respectively. OTHER INVESTMENTS - Other Investments include the following: Blue Ridge Associates - In January 1994, the Company purchased for $1.1 million a 50% interest in Blue Ridge Associates ("Blue Ridge"), a partnership which owns the apparel distribution center in Roanoke, Virginia. This investment is accounted for by the equity method of accounting. The Company made annual rent payments to the partnership totaling $.7 million and $.6 million in 1994 and 1995, respectively, as part of a 15 year lease through 2008. The Company recorded $.1 million in income for its portion of the partnership income in 1994, and 1995, respectively. The Company's investment in Blue Ridge was $1.1 million and $1.0 million at December 31, 1994 and December 30, 1995, respectively. Boston Publishing Company - In February 1994, the Company acquired a 20% equity interest in Boston Publishing Company ("BPC") and provided secured and unsecured loans to BPC. In August 1994, BPC filed for protection under Chapter 11 of the United States Code. In 1995, the Company received inventory and the customer mailing list of BPC in payment of its $1.2 million loan and subsequently realized $.3 million upon disposition of these assets and wrote off the remaining assets. Regal Communications, Inc. - During 1994, the Company invested approximately $2.7 million in convertible debt securities of Regal Communications, Inc. ("Regal"). In September 1994, Regal filed for protection under Chapter 11 of the United States Code. As a result, during 1994, the Company established a valuation allowance against the securities reflecting their estimated fair value of $1.7 million. In December 1995, a plan of reorganization was confirmed by the Bankruptcy Court and the Company expects to recover the $1.7 million carrying value of its investment. The Company received its first distribution of $.5 million in February 1996. 37 38 Tiger Direct. - In February 1995, the Company entered into an agreement to acquire certain securities of Tiger Direct, Inc. ("Tiger"), a direct marketer of computer software, peripherals and CD-ROM hardware and software. In February 1995, the Company entered into a loan and security agreement with Tiger pursuant to which the Company provided a secured working capital line of credit to Tiger, up to a maximum of $3.0 million, which was loaned under such agreement. In September 1995, due to the continued deterioration of Tiger's financial condition, the Company terminated the securities purchase agreement. The Company sold the loan to a third party and received payment in full for the principal of the loan and interest to the date of sale. During the period from February 1995 to September 1995, the Company provided certain services to Tiger and also incurred certain costs related to entering into the loan and security agreements aggregating $.5 million. Under the terms of the agreement, Tiger is required to reimburse the Company for such costs and services rendered. To date, Tiger has refused to reimburse the Company for these costs. The Company has instituted an action to recover such costs, which are carried at their realizable value. 3. PROVISION FOR CATALOG AND FACILITY CLOSINGS In 1995, the Company made a decision to discontinue six catalogs. The six discontinued catalogs generated an operating loss of $20 million in 1995 which included a provision of approximately $8.6 million. This provision was recorded in 1995 primarily to write-down the inventory associated with these catalogs to their liquidation value. The $8.6 million is included in the Provision for Catalog and Facility Closings in the Consolidated Statements of Income (Loss) and, at December 30, 1995, approximately $4.9 million remained in the inventory obsolescence reserve. There were no such charges incurred by the Company in 1993 or 1994. In 1995, the Company incurred costs, aggregating approximately $1.5 million, in connection with the consolidation of its fulfillment facilities. These cost included moving expenses, lease termination fees and severence expenses, substantially all of which were paid in 1995. There were no such charges incurred by the Company in 1993 and 1994. 4. SEARS LICENSING AGREEMENT In January 1994, the Company entered into a licensing agreement (the "Sears Agreement") with the direct marketing subsidiary of Sears Roebuck and Co. ("Sears") to produce specialty catalogs for customers of the recently discontinued Sears catalog. The specialty catalogs include: Show Place, based on the Domestications catalog, Great Kitchens, based on the Colonial Garden Kitchens catalog and Sears Improvements, based on the Improvements 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 shared between the parties on an equal basis. The Sears specialty catalogs generated revenues of $81 million and $71 million and earnings before interest and taxes ("EBIT") of $3.0 million and $2.9 million in 1995 and 1994, respectively. The Company also issued to Sears a performance warrant to purchase 3.5 million shares of Common Stock in 1999 if the licensed business with Sears has revenues of at least $250 million and EBIT of at least $30 million in 1998. Alternately, Sears will be entitled to purchase 7 million shares of Common Stock in 1999 if the licensed business with Sears has revenues of at least $500 million and EBIT of at least $60 million in 1998. The warrant exercise price is $10.57 per share. If neither of these goals is achieved, the performance warrant will expire unexercised in 1999. Through 1995, no charges have been required to be recorded in connection with the warrants. The Company is obligated to meet various operational performance standards and if the Company is unable to meet these standards, Sears is entitled to terminate the agreement. The Company also has the right to terminate the agreement in certain circumstances, including if Sears fails to comply with any material provision of the Sears Agreement. 38 39 5. ACCOUNTS RECEIVABLE, NET The Company currently maintains an agreement with an unrelated third party which provides for the sale and servicing of accounts receivable originating from the Company's revolving credit card. The agreement expires in December 2000. The Company remains obligated to repurchase uncollectible accounts pursuant to the recourse provisions of the agreement and is required to maintain a specified percentage of all outstanding receivables sold under the program as a deposit with the third party to secure its obligations under the agreement. At December 31, 1994 and December 30, 1995, the uncollected balances under this program were $45.9 million and $38.6 million, respectively, of which $11.5 million and $5.5 million, respectively, represent deposits under the agreement which are included in Accounts receivable, net. The total reserve balance maintained for the repurchase of uncollectible accounts was $2.3 million and $2.4 million at December 31, 1994 and December 30, 1995, respectively, of which $1.2 million and $1.4 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. 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 31, DECEMBER 30, 1994 1995 ------------ ------------ Reserve for future sales returns.................... $ 6,023 $ 5,535 Compensation........................................ 3,923 5,795 Taxes............................................... 1,330 3,007 Reserve for repurchase of accounts receivable sold with recourse.................................. 1,180 1,391 Other............................................... 7,759 10,241 ------- ------- $20,215 $25,969 ======= =======
39 40 7. LONG-TERM DEBT Long-term debt consists of the following (in thousands):
DECEMBER 31, DECEMBER 30, 1994 1995 ------------ ------------ Revolving Term Notes..................................... $ - $ 9,931 TAC Revolving Credit Facility............................. - 2,011 Term Financing Facility................................... 10,000 20,000 8.75% Mortgage Note Payable due 2003...................... - 1,718 Industrial Revenue Bonds with variable interest rates averaging 4.5% in 1994 and 4.1% in 1995 due 2003......... 8,000 8,000 6% Mortgage Notes Payable due 1998........................ 3,300 3,139 9.25% Subordinated Notes due 1998........................ 14,000 14,000 7 1/2% Convertible Subordinated Debentures due 2007....... 751 751 Other..................................................... 40 19 ------- ------- 36,091 59,569 Less current portion...................................... 184 2,286 ------- ------- Noncurrent portion........................................ $35,907 $57,283 ======= =======
Revolving Credit Facility - As a result of the operating losses incurred during 1995, the Company was not in compliance with certain financial covenants under its revolving credit facility that it had entered into in 1994. In order to obtain waivers to this facility for these covenant violations, the Company agreed to more restrictive terms with respect to availability (reduced from $80 million to $55 million), rate and financial covenants. The Company determined that the terms of these proposed amendments were too restrictive and agreed to a waiver through November 15, 1995, when the Company replaced this facility with a new $75 million secured credit facility with Congress Financial Corporation ("Congress Facility"). The Congress Facility is comprised of a revolving line of credit of up to $65 million with a three year term and two year term loans aggregating $10 million ("Revolving Term Notes"). The amount that can be borrowed under the Congress Facility is based on percentages of eligible inventory and accounts receivable from time to time. The revolving line of credit carries an interest rate of 1.25% above CoresSates' prime rate and the Revolving Term Notes carry an interest rate of 1.5% above CoreStates' prime rate. The Congress Facility is secured by all assets of the Company including customer mailing lists, and the Company is required to maintain a minimum net worth of $80 million, as well as working capital of $26 million. In addition, the Congress Facility places limitations on the incurrence of additional indebtedness. In October 1994, the Company consummated a five-year $80 million unsecured revolving credit facility with a syndicate of banks (the "Credit Facility") led by NationsBank of North Carolina, N.A. The Credit Facility provided for a $40 million revolving credit facility, a $20 million acquisition line and $20 million of 15 year Term Financing for certain capital expenditures ("Term Financing Facility"). There was a $35 million sub-limit for letters of credit under the Credit Facility. The Company borrowed $10 million in each of 1994 and 1995 under the Term Financing Facility. The rate of interest on the Term Financing Facility is based on the equivalent rate of A-1 commercial paper existing at the time of each borrowing. The face rate ranged from 5.85% to 6.30% and 5.73% to 6.02% at December 31, 1994 and December 30, 1995. The Term Financing Facility requires annual sinking fund payments of $1.0 million beginning October 1996 though October 1999 and increasing to $1.6 million for each of the ten years thereafter. 40 41 The Credit Facility was terminated and amounts outstanding under the revolving credit facility were repaid with the closing of the Congress Facility in November 1995. The Term Financing Facility continues to be outstanding and in effect under its original terms. All standby letters of credit issued under the Credit Facility were replaced with letters of credit issued by Congress. At December 30, 1995, the Company had no outstanding borrowings under the revolving line of credit and $9.9 million outstanding under the Revolving Term Notes. The rates of interest related to the revolving line of credit and Term Notes were 9.50% and 9.75%, respectively, at December 30, 1995. The face amount of unexpired documentary letters of credit at December 31, 1994 and December 30, 1995, were $7.2 million and $4.2 million, respectively. In addition, the Company had issued $31.2 million and $28.5 million of standby letters of credit at December 30, 1995 and December 31, 1994, respectively, which in 1995 included $8.6 million related to the Industrial Revenue Bonds due 2003 and $20.3 million related to the Term Financing Facility. The TAC Revolving Credit Facility was paid off with the proceeds from the Congress Facility on February 16, 1996 and accordingly has been classified as a long-term obligation. 8.75% Mortgage Note Payable due 2003 - TAC's 8.75% Mortgage Note Payable is reflected as an obligation of the Company and its subsidiaries as a result of the corporate reorganization, completed in February 1996. The 8.75% Mortgage Note Payable is secured by the TAC warehouse and distribution facility in South Dakota. That facility's operations have been largely transferred to other Company facilities and the Company plans to sell the South Dakota property. Monthly principal payments amount to approximately $.1 million per year with a final payment of $1.4 million due in March 2003. 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% Mortgage Notes Payable due 1998 - In connection with The Company Store acquisition, subsidiaries of the Company executed and delivered two secured notes in the aggregate amount of $3.5 million with interest at 6% per annum with principal and interest payments payable monthly on a fifteen-year amortization schedule with the remaining balance due in August 1998. The mortgage notes payable are non-recourse notes and are not guaranteed by the Company. The mortgage notes payable are secured by the manufacturing and office facilities of The Company Store. 9.25% Senior Subordinated Notes due 1998 - At December 30, 1995, the Company has $14 million of 9.25% Senior Subordinated Notes due 1998 ("9.25% Notes") outstanding. In November 1995 Intercontinental Mining & Resources Incorporated ("IMR"), an affiliate of NAR, purchased the 9.25% Notes from a third party in connection with the refinancing of the indebtedness under the Congress Facility. The Company paid NAR a commitment fee of $105,000 upon the signing of a repurchase and option agreement and a fee of $210,000 (1.5% of the outstanding principal amount of the 9.25% Notes acquired by IMR) upon the funding, as well as all expenses incurred by NAR in performing its obligation. The Company also extended by two years the terms of the warrants to purchase 5,033,735 shares held by NAR and IMR to August 1, 1998. The Company recorded as debt issuance costs, approximately $1.2 million, representing the fair value of the warrant extensions. Such costs are being amortized over the life of the 9.25% Notes. The Company has also agreed to indemnify NAR against any and all claims or losses asserted against it or incurred by it relating to the transactions contemplated by the repurchase and option agreement. 41 42 In connection with IMR's purchase of the 9.25% Notes, the Company and IMR agreed to amend the financial covenants contained in the Indenture relating to the 9.25% Notes and to grant to the Trustee for such 9.25% Notes a second priority security interest in the Company's customer and mailing lists. The Company is required to maintain certain financial covenants with which it was in compliance at December 30, 1995. General - As a result of the replacement of the Credit Facility and the purchase by IMR of the 9.25% Notes, the Company wrote off approximately $1.8 million of unamortized debt issuance costs as an extraordinary item due to the early extinguishment of debt. At December 30, 1995, the aggregate annual principal and sinking fund payments required on all long-term debt were as follows (in thousands): 1996 - $2,286; 1997 - $10,176; 1998 - $19,868; 1999 - $1,076; 2000 - $1,649 and thereafter - $24,514. 8. CAPITAL STOCK Public Offering - In April 1994, the Company completed a public offering (the "Public Offering") of 8,045,296 shares of Common Stock for proceeds of approximately $47.5 million, net of expenses. 6% Series A Convertible Additional Preferred Stock - In December 1993, in connection with the Company's acquisition of Tweeds Inc., ("Tweeds"), the Company entered into an exchange agreement with a major vendor of Tweeds. Under the exchange agreement, the Company issued 234,900 shares of its 6% Series A Convertible Additional Preferred Stock ("6% Preferred Stock") for an installment note, dated March 29, 1993, as amended, in the amount of approximately $2.4 million previously issued by Tweeds. Dividends began accruing on September 30, 1993. The 6% Preferred Stock is convertible into Common Stock of the Company over a three year period in equal amounts on September 30, 1994, 1995 and 1996. The conversion price is an amount equal to the average of the per share closing prices for the five trading days preceding the conversion dates. The Company converted the first and second equal portions of the 234,900 issued shares of the 6% Preferred Stock into 189,818 and 427,785 shares of Common Stock on September 30, 1994 and September 29, 1995, respectively. The Company elected to pay cash dividends of $.1 million related to the September 1994 conversion. Series B Convertible Additional Preferred Stock - In February 1995, the Company issued 634,900 shares of its Class B Convertible Additional Preferred Stock ("Series B Stock") to acquire the remaining 80% of the outstanding common stock of Aegis Safety Holdings, Inc. ("Aegis"), publisher of The Safety Zone catalog. The Series B Stock has a stated value of $10 per share. Non-cumulative dividends will accrue and be paid at 5% per annum during each of the first three years if Aegis attains at least $1 million in earnings before interest and taxes each year. In years four and five, dividends are cumulative and will accrue and be paid at 7% per annum and are not contingent on the achievement of any earnings target. Dividends will not be paid in 1995 based on The Safety Zone catalog's 1995 operating results. The Series B Stock is convertible at any time, at $6.66 per share, subject to antidilution, at the option of the holder and is convertible at the Company's option if the market value of the Company's Common Stock is greater than $6.66 per share, subject to antidilution, for 20 trading days in any consecutive 30 day trading period or at the holder's option from time to time. If, after five years, the Series B Stock is not converted, it is mandatorily redeemable, at the Company's option, in cash or for 952,359 shares of the Company's Common Stock provided the 42 43 market value of the stock is at least $6.33 per share, subject to antidilution. If the market value of the Company's Common Stock does not meet this minimum, the redemption rate is subject to adjustment which would increase the number of shares for which the Series B Stock is redeemed. The fair value of the Series B Stock, which is based on an independent appraisal, is $.9 million less than the stated value. This discount is being amortized over a five year period and resulted in a charge of $.2 million to preferred stock dividends in the statement of income for 1995. Warrants - The warrants outstanding at December 30, 1995 are as follows:
WARRANTS EXERCISE EXPIRATION ISSUED PRICE DATE ------ ----- ---- 1,541,301 $2.42 8/01/98 3,157,884 2.91 8/01/98 334,550 2.19 8/01/98 --------- 5,033,735
All of the above issued warrants are held by NAR and its affiliates. 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. General - At December 30, 1995, there were 93,452,768 shares of Common Stock, 78,300 shares of 6% Preferred Stock and 634,900 shares of Series B Stock outstanding. Additionally, an aggregate of 15,087,471 shares of Common Stock were reserved for issuance pursuant to (i) the exercise of outstanding options (265,000), (ii) the exercise of outstanding warrants (12,033,735), (iii) the Executive Equity Incentive Plan (1,021,170), (iv) the Restricted Stock Award Plan (275,700), and (v) the All Employee Equity Investment Plan (1,491,866). In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation", which is effective in 1996. The statement encourages entities to adopt the fair value based method of accounting for employee stock options, as opposed to the Company's current method, which measures compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has not as yet decided whether it will adopt SFAS No. 123 for financial statement purposes, however at a minimum it will be required to disclose in its footnotes to the financial statements, additional information relating to the Company's various stock-based employee benefit plans and the Company's pro forma net income and earnings per share, as if the options granted were expensed at their estimated fair values at the time of grant. If the Company decides to adopt SFAS No. 123 for financial statement purposes, an additional expense will be recorded, however the Company has not as yet calculated the impact of the adoption. Dividend Restrictions - The Company is restricted from paying dividends on its Common Stock or from acquiring 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 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 generally vest over three to four years. Payment for shares purchased upon the exercise of an option shall be in cash or stock of the Company. If paid in cash, a partial payment may be made with the remainder in installments evidenced by promissory notes at the discretion of the Compensation Committee. 43 44 Changes in options outstanding and options available for grant, expressed in numbers of shares, are as follows:
1993 1994 1995 ---------- ----------- --------- Options outstanding, beginning of period 603,765 365,250 496,050 Granted - 162,000 70,000 Exercised - (1,000) - Expired (214,165) (20,700) (334,050) Cancelled (24,350) (9,500) (142,000) --------- --------- --------- Options outstanding, end of period 365,250 496,050 90,000 ========= ========= ========= Options exercisable, end of period 365,250 334,050 20,000 ========= ========= ========= Available for grant of options, end of period 1,583,833 1,452,033 1,858,083 ========= ========= =========
The option prices and amounts are: $1.75 - 20,000 shares, $2.25 - 50,000 shares and $3.50 - 20,000 shares. In June 1994, one director was granted non-qualified options to purchase 55,000 shares at an exercise price of $6.125 per share which expire in 2000. In September 1992, six directors were granted options to purchase 20,000 shares each, at the market price, which at the time was $1.75 per share. These option grants were approved at the 1993 Annual Meeting of Shareholders and the options expire in 1997. The table above does not include these option grants. Hanover Direct, Inc. Savings Plan - The 401(k) Savings and Retirement Plan (the "401(k) Plan") allows eligible employees to contribute a percentage of their annual compensation to the 401(k) Plan. The Company makes matching contributions of one-third of the employees' pre-tax contributions. 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 1993, 1994 and 1995 were approximately $431,000, $608,000 and $556,000, respectively. Supplemental Retirement Plan - The Supplemental Retirement Plan (the "Retirement Plan") allows eligible employees to make contributions to a trust where the contributions are invested by the trust for each participant in a tax free money market fund. The Company makes matching contributions. Company contributions charged to expense in 1993, 1994 and 1995 amounted to approximately $130,000, $192,000 and $222,000, respectively. The Retirement Plan permits eligible employees to contribute up to 4% of their salary. The Company matches all participant contributions, up to 50% of their contributions with a cap of 2%. The Retirement Plan is not tax-qualified under the applicable provisions of the Internal Revenue Code of 1986, as amended. Incentive Compensation Plan - Bonus arrangements with certain executives and key employees generally provide for additional compensation based upon the attainment of certain profit levels, as well as other performance measures. These bonuses approximated an aggregate of $.4 million, $1.1 million and $1.5 million in 1993, 1994 and 1995, respectively. Under the bonus plan, 25% of the bonus is deferred and payable in cash or restricted stock that vests over a three year period. 44 45 Executive Equity Incentive Plan - In December 1992, the Board of Directors adopted the 1993 Executive Equity Incentive Plan (the "Incentive Plan"). The Incentive Plan was approved by shareholders at the 1993 Annual Meeting. Pursuant to the Incentive Plan, options to purchase shares of the Company's Common Stock will be granted from time to time by the Compensation Committee of the Board of Directors to selected executives of the Company or its affiliates. For each such option granted, 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. Changes in shares, options outstanding and options available for grant, expressed in numbers of shares, for the Incentive Plan are as follows:
1993 1994 1995 ----------- ----------- ----------- Shares outstanding beginning of period 663,830 753,830 Shares purchased 663,830 90,000 143,333 Shares cancelled - - (20,000) ----------- ----------- ----------- Shares outstanding end of period 663,830 753,830 877,163 ----------- ----------- ----------- Options outstanding, beginning of period - 1,101,000 1,073,836 Options granted 1,327,660 180,000 286,666 Options cancelled (226,660) (207,164) (339,332) ----------- ----------- ----------- Options outstanding, end of period 1,101,000 1,073,836 1,021,170 ----------- ----------- ----------- Total shares and options outstanding, end of period 1,764,830 1,827,666 1,898,333 =========== =========== =========== Available for grant of options and shares, end of period 635,170 572,334 501,667 =========== =========== ===========
The purchase prices per share of the Company's Common Stock upon exercise of stock options are as follows: $1.75 - 30,000 shares, $2.25 - 33,333 shares, $2.50 - 676,505 shares, $2.63 -50,000 shares, $2.75 - 133,332 shares, $3.00 - 20,000 shares, $3.89 - 20,000 shares and $4.50 - 58,000 shares. Options granted under the Incentive Plan become exercisable three years after the dates of grant and expire six years from the dates of grant. The purchase price shall be paid in full at the time of purchase in cash or shares of the Company's Common Stock valued at their fair market value or in a combination thereof. The difference between the Option Price and the fair market value of the Common Stock on the Tandem Investment Dates is being amortized over the three-year period in which the options become exercisable. The amount of amortization charged to expense was approximately $170,000, $137,000 and $72,000 for 1993, 1994 and 1995, respectively, net of forfeitures. Changes to the notes receivable related to the Incentive Plan are as follows:
1993 1994 1995 ------------ ------------ ------------ Notes receivable balance beginning period - $1,424,000 $1,522,000 Total consideration given by HDI $1,707,000 328,000 229,000 Payments (283,000) (230,000) (100,000) ---------- ---------- ---------- Notes receivable balance end of period $1,424,000 $1,522,000 $1,651,000 ========== ========== ==========
45 46 The Incentive Plan participants purchased shares at prices ranging from $1.75 to $4.50 with the Company accepting notes bearing interest at rates ranging from 5.35% to 7.75%. Restricted Stock Award Plan - In December 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 been 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, 224,300 shares were awarded to participants aggregating $785,000. Such amount is being amortized over a three-year vesting period. The amount of amortization charged to expense was approximately $188,000 in 1993, $292,000 in 1994 and $219,000 in 1995, net of forfeitures. All Employee Equity Investment Plan - In December 1992, the Board of Directors adopted the 1993 All Employee Equity Investment Plan (the "Investment Plan"). Such plan was approved by the shareholders at the 1993 Annual Meeting. Each full-time or permanent part-time employee of the Company or its affiliates who has attained the age of 18, has met certain standards of continuous service with the Company or an affiliate of the Company and is not covered by a collective bargaining agreement may participate in the Investment Plan. An eligible employee will 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. The employees who choose to participate in the Investment Plan vest in their shares equally over a three-year period beginning with the first anniversary of the day subsequent to the final day of the subscription period or when they reach the age of 65, die or become permanently disabled. An aggregate of 2,000,000 shares of the Company's Common Stock have been reserved for issuance under the Investment Plan. 46 47 Changes in shares outstanding and available for grant, expressed in numbers of shares for the Investment Plan are as follows:
1993 1994 1995 --------------- ----------------- --------------- Shares outstanding, beginning of period 211,883 380,563 Shares purchased 223,508 260,124 216,931 Forfeited 11,625 91,444 89,360 --------------- ----------------- --------------- Shares outstanding end of period 211,883 380,563 508,134 =============== ================= =============== Shares available for grant, end of period 1,788,117 1,619,437 1,491,866 =============== ================= ===============
The difference between the market price and the discounted price aggregated approximately $.4 million, $.4 million and $.2 million in 1993, 1994 and 1995, respectively. These amounts have been reduced by approximately $46,000 in 1993, $226,000 in 1994 and $181,000 in 1995 which have been charged to amortization expense. 10. INCOME TAXES At December 30, 1995, the Company had net operating loss carryforwards ("NOLs") totalling $162.5 million, which expire as follows: In the year 2001 - $17.3 million, 2003 - $14.6 million, 2004 - $14.3 million, 2005 - $20.6 million, 2006 - $46.9 million, 2007 - $27.7 million and 2010 - $21.1 million. The Company also has $1 million of general business tax credit carryforwards that expire in 2000 through 2009. The Company's available NOLs for tax purposes consists of $91.4 million of NOLs subject to a $4 million annual limitation under Section 382 of the Internal Revenue Code of 1986 and $71.2 million of NOLs not subject to a limitation. The unused portion of the $4 million annual limitation for any year may be carried forward to succeeding years to increase the annual limitation for those succeeding years. In addition, the Company's entire $91.4 million of NOLs, subject to the limitation, may be used to offset future taxable income generated by July 1996 from built-in gains (generally, taxable income from the sale of appreciated assets held by the Company at the date of its change in ownership in July 1991) without reference to the limitation. SFAS 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 that, based upon the conversion of interest-bearing debentures to equity, the issuance of additional Common Stock, the disposal of unprofitable discontinued restaurant operations, the Company's history of prior operating earnings in the direct marketing business and its expectations for the future, the operating income of the Company will, more likely than not, be sufficient to utilize $30 million of deductible temporary differences and NOLs prior to their expiration. In making such determination, the Company adjusted 1992 income by eliminating interest expense related to retired debt and assumed that such adjusted 1992 income level could be obtained in each of the next three years. The Company maintained a consistent adjusted income level in 1993. In 1994, the Company continued the practice of estimating the NOLs that it could utilize over the subsequent three years and estimated that it would be able to utilize up to $43 million of NOLs over the next three years based on the pre-tax income of the most recent two years. Despite incurring an additional $21.1 million NOL in 1995, management believes that the Company will 47 48 be able to utilize up to $43 million of NOLs over the next three years based upon the Company's assessment of numerous factors, including its future operating plans and its pre-tax income in 1993 and 1994 and its 1995 NOL. For the year ended January 1, 1994, the Company recognized an additional deferred tax asset of $.6 million, reflecting the effect of the increase in the Federal corporate income tax rate (from 34% to 35%). For the year ended December 31, 1994, the Company reduced its valuation allowance by $4.4 million, reflecting the increase in management's assessment of the future utilization of the Company's NOLs and deductible temporary differences. For the year ended December 30, 1995, the Company maintained its deferred tax asset of $15 million (net of a valuation allowance of $48.5 million). Management believes that the $15 million net deferred tax asset represents a reasonable estimate of the future utilization of the NOLs and will continue to routinely evaluate the likelihood of future profits and the necessity of future adjustments to the deferred tax asset valuation allowance. Realization of the future tax benefits is dependent on the Company's ability to generate taxable income within the carryforward period and the periods in which net temporary differences reverse. Future levels of operating income and taxable income are dependent upon general economic conditions, competitive pressures on sales and margins, postal and other delivery rates, and other factors beyond the Company's control. Accordingly, no assurance can be given that sufficient taxable income will be generated for utilization of NOLs and reversals of temporary differences. The Company's Federal income tax provision was $5.9 million in 1993, $4.2 million in 1994 and zero in 1995. The 1994 provision was offset by utilization of the NOLs. In addition, the Company recognized the $4.4 million benefit in 1994 discussed above. The Company's provision for state income taxes was $.5 million in 1993, $.9 million in 1994 and $1.0 million in 1995. The following is reconciliation of the Company's net income for financial statement purposes to taxable income (loss) for the years ended January 1, 1994, December 31, 1994 and December 30, 1995 (in thousands):
1993 1994 1995 ---------- ---------- ------- Net income (loss).................................. $ 17,337 $ 14,838 ($30,230) Income tax provision (benefit).................... (130) (3,509) 1,003 -------- -------- -------- Income (loss) before income taxes.................. 17,207 11,329 (29,227) -------- -------- -------- Differences between income before taxes for financial statement purposes and taxable income: State income taxes................................ (501) (860) (1,003) Utilization of carryovers......................... (2,543) (12,652) - Differences attributable to subsidiary not included in Company's tax return................. (313) Permanent differences............................. 28 717 1,223 Net change in temporary differences...................................... (14,191) 1,466 8,190 -------- -------- -------- (17,207) (11,329) 8,097 -------- -------- -------- Taxable income (loss).............................. $ - $ - ($21,130) ======== ======== ========
48 49 The components of the net deferred tax asset at December 30, 1995 are as follows (in millions):
Non- Current current Total ------- ------- ----- Federal tax NOL and business tax credit carryforwards.............................................. $ - $ 57.9 $ 57.9 Allowance for doubtful accounts............................. 1.7 - 1.7 Inventories................................................. 1.5 - 1.5 Prepaid catalog costs....................................... (1.8) - (1.8) Excess of net assets of acquired business................... - (1.4) (1.4) Accrued liabilities......................................... 2.3 - 2.3 Customer prepayments and credits............................ 1.7 - 1.7 Tax basis in net assets of discontinued operations in excess of financial statement amount.................... 0.6 - 0.6 Other ................................................... - 1.0 1.0 ------ ------ ------ Deferred tax asset.......................................... 6.0 57.5 63.5 Valuation allowance......................................... (2.7) (45.8) (48.5) ------ ------ ------ Deferred tax asset, net .................................... $ 3.3 $ 11.7 $ 15.0 ====== ====== ======
The Company has established a valuation allowance for a portion of the deferred tax asset, due to the limitation on the utilization of the NOLs and its estimate of the future utilization of the NOL's. 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 the NOLs. The Company believes, however, that IRS challenges that would limit the utilization of the NOLs will not have a material adverse effect on the Company's financial position. Total tax expense for each of the three fiscal years presented differ from the amount computed by applying the Federal statutory tax rate due to the following:
1993 1994 1995 PERCENT PERCENT PERCENT OF PRE-TAX OF PRE-TAX OF PRE-TAX INCOME INCOME INCOME ------ ------ ------ Tax (benefit) at Federal statutory rate........................ 35.0% 35.0% (35.0%) State and local taxes.......................................... 1.9 4.9 2.2 Effect of Federal rate change on deferred tax asset............. (3.7) - - Reversal of valuation allowance ............................... - (38.5) - Net increase in (reversal of) temporary differences............ (28.9) 4.5 9.7 Utilization of contribution and NOL carryover.................. (5.4) (39.1) - Tax NOLs for which no benefit could be recognized - - 25.3 Other.......................................................... 0.3 2.2 1.2 ------ ------- ------ (0.8%) (31.0%) 3.4% ====== ======= ======
49 50 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):
1993 1994 1995 ---- ---- ---- Minimum rentals $ 9,458 $ 13,572 $13,070 ======== ======== =======
Future minimum lease payments under noncancellable operating and capital leases relating to continuing operations that have initial or remaining terms in excess of one year, together with the present value of the net minimum lease payments as of December 30, 1995, are as follows (in thousands):
OPERATING CAPITAL YEAR ENDING LEASES LEASES ----------- ------ ------ 1996................................................... $ 9,815 $1,659 1997................................................... 7,722 1,396 1998................................................... 6,075 432 1999................................................... 5,296 20 2000................................................... 4,736 - Thereafter............................................. 35,391 - ------- ------ Total minimum lease payments........................... 69,035 3,507 ======= Less amount representing interest (a).................. 274 ------ Present value of minimum lease payments (b)............ $3,233 ======
(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 $628,000 and $1,196,000 at December 31, 1994 and $1,260,000 and $1,973,000 at December 30, 1995, respectively. The future minimum lease payments under noncancellable leases that remain from the discontinued restaurant operations as of December 30, 1995 are as follows: 1996 - $1.3 million; 1997 - $1.3 million; 1998 - $1.3 million; 1999 - $1.3 million; 2000 - $1.3 million; and thereafter $11.7 million. The above amounts exclude annual sublease income of $1.2 million from subleases which have the same expiration as the underlying leases. In connection with the Company's investment in Blue Ridge, a subsidiary of the Company is contingently liable with respect to the lease obligation related to the apparel distribution center in Roanoke, Virginia. 12. RELATED PARTY TRANSACTIONS At December 30, 1995, current and former officers and executives of the Company owed the Company approximately $2.2 million of which approximately $1.7 million relates to receivables under the Executive Equity Incentive Plan. These amounts due to the Company bear interest at rates ranging from 5.35% to 7.75% and are due from 1999 to 2001. The remaining $.5 million is due on demand from two officers of the Company and bears interest at rates ranging from 6.0% to 7.96%. 50 51 Since January 1993, pursuant to a consulting arrangement, a subsidiary of NAR renders management consulting, business advisory and investment banking services to the Company for an annual fee of $750,000. NAR will not collect such a fee in 1996. At December 30, 1995, NAR owned approximately 50% of the Company's outstanding Common Stock and would own 53% upon excercising all of their outstanding warrants. 13. COMMITMENTS AND CONTINGENCIES On or about September 2, 1994, a complaint was filed in the United States District Court for the District of New Jersey by Veronica Zucker, an individual who allegedly purchased shares of Common Stock of the Company in the public offering completed on April 7, 1994, against the Company, all of its directors, certain of its officers, Sun Life Insurance Company of America, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Alex. Brown & Sons, Incorporated. The complaint, which purports to be filed on behalf of a class of all persons who purchased the Common Stock of the Company in the public offering or thereafter through and including August 14, 1994, seeks to recover monetary damages the class has allegedly suffered as a result of certain alleged false and materially misleading statements contained in the Company's public offering prospectus dated March 30, 1994. In lieu of an answer, defendants filed a motion to dismiss the complaint in its entirety for failure to state a claim upon which relief can be granted. On May 23, 1995, the United States District Court for the District of New Jersey dismissed the plaintiff's claim, with prejudice, for failure to state a claim upon which relief could be granted. On June 22, 1995, plaintiff filed a notice of appeal of the May 23, 1995 decision to the United States Court of Appeal for the Third Circuit. The appeal was submitted on the briefs on March 11, 1996. On March 26, 1996, the Court rendered its decision affirming the District Court's decision. The Company is involved in other various routine lawsuits of a nature which are deemed customary and incidental to its business. In the opinion of management, the ultimate disposition of such actions will not have a material adverse effect on the Company's financial position or results of operations. The imposition of a sales and use tax collection obligation on out-of-state catalog companies in states to which they ship products was the subject of a case decided in 1994 by the United States Supreme Court. While the court reaffirmed an earlier decision that allowed direct marketers to make sales into states where they do not have a physical presence without collecting sales taxes with respect to such sales, the Court further noted that Congress has the power to change this law. The Company believes that it collects sales tax in all jurisdictions where it is currently required to do so. In connection with certain discontinued restaurant transactions, the Company remains contingently liable with respect to lease obligations for 9 restaurant properties, should the buyers fail to perform under the agreements. The future minimum lease payments as of December 30, 1995 are as follows (in thousands): 1996 - $336; 1997 - $278; 1998 - $192; 1999 - $192; 2000 - $143; and thereafter $403. 51 52 14. SUBSEQUENT EVENTS: In March 1996 the Company announced that the Board of Directors had voted to conduct a rights offering for $40 million of the Company's Common Stock after completion of the first quarter. The rights will be exercisable at a price to be determined at the time of commencement of the rights offering equal to 75% of the then-current market price, but not less than $1.00 nor more than $1.50 per share. NAR Group Limited, the Company's majority shareholder, will receive rights entitling it to purchase approximately 50% of the shares to be offered in the rights offering and has agreed to exercise such rights. In addition, NAR has agreed to standby and purchase all shares not subscribed by common shareholders and will receive a fee as a result. The proceeds of the rights offering will be used by the Company to repay the 9.25% Senior Subordinated Notes due on August 1, 1998 held by an affiliate of NAR, and for other general corporate purposes, including repaying outstanding indebtedness under its revolving credit facility. At such time the Company will record an extraordinary expense related to the early extinquishment of this debt, representing the write-off of the unamortized debt issuance costs of approximately $1.4 million. In February 1996, the Company announced that Rakesh K. Kaul was named President and Chief Executive Officer and elected to the Board of Directors effective March 7, 1996. Mr. Kaul has most recently served as Vice Chairman and Chief Operating Officer of Fingerhut Companies, Inc. 52 53 15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (in thousands, except per share amounts) 1994 Revenues $179,226 $185,113 $178,282 $226,263 Gross profit 64,942 70,243 62,407 84,815 Income from operations 4,258 4,145 1,159 6,413 -------- -------- -------- -------- NET INCOME 3,144 2,843 640 8,211 Preferred stock dividends (35) (35) (41) (23) -------- -------- -------- -------- Net income applicable to Common Shareholders $ 3,109 $ 2,808 $ 599 $ 8,188 ======== ======== ======== ======== Net income per share $ 0.04 $ 0.03 $ 0.01 $ 0.09 ======== ======== ======== ========
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (in thousands, except per share amounts) 1995 Revenues $176,592 $182,774 $169,175 $221,227 Gross profit 62,905 63,003 54,285 79,565 Loss from operations (4,147) (5,988) (6,042) (6,442) -------- -------- -------- -------- NET LOSS (4,903) (7,490) (9,586) (8,011) Preferred stock dividends (45) (59) (66) (70) -------- -------- -------- -------- Net loss applicable to Common Shareholders $ (4,948) $ (7,549) $ (9,652) $ (8,081) ======== ======== ======== ======== Net loss per share $ (0.05) $ (0.08) $ (0.10) $ (0.09) ======== ======== ======== ========
53 54 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 54 55 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.
TITLE AND OTHER OFFICE HELD NAME AGE INFORMATION(A) SINCE - ---- --- -------------- ----- Rakesh K. Kaul 44 President, Chief Executive 1996 Officer and Director since March 7, 1996. From 1995 until February 1996, Mr. Kaul was the Vice Chairman and Chief Operating Officer of Fingerhut Companies, Inc. From January 1992 until March 1995, Mr. Kaul was also the Executive Vice President and Chief Administrative Officer of Fingerhut. Prior to January 1992, Mr. Kaul was the Senior Vice President, Strategy and Finance and a director at Shaklee Corporation. Michael P. Sherman 43 Executive Vice President, 1990 Corporate Affairs, General Counsel and Secretary. Mr. Sherman joined the Company in 1983 and was elected Vice President-Assistant Secretary. From 1986 to 1990, Mr. Sherman held the position of Senior Vice President, General Counsel and Secretary. Wayne P. Garten 43 Executive Vice President and 1990 Chief Financial Officer. From 1989 to 1990, Mr. Garten held the position of Senior Vice President and Chief Financial Officer. He joined the Company
55 56 in 1983, was elected Vice President in 1984 and was elected Vice President-Finance in 1989. Michael Lutz 53 Executive Vice President Operations 1995 since September 1994. Prior to September 1994, Mr. Lutz held various positions with New Hampton, Inc./ Avon Direct Response. Chuck Hudson 50 Executive President, Men's Apparel since 1995 September 1993. Mr. Hudson joined the Company in 1986 as Vice President, Marketing. Edward J. O'Brien 52 Senior Vice President and 1991 Treasurer. Mr. O'Brien joined the Company in 1986 and was elected Vice President in 1988. Robert G. Kramer 52 Senior Vice President, MIS since October 1994. 1995 Prior to October 1994, Mr. Kramer held various positions with New Hampton, Inc./Avon Direct Response.
Jack E. Rosenfeld resigned as President and Chief Executive Officer and as a Director effective December 30, 1995. Alan G. Quasha, the Company's Chairman of the Board, served as acting President and Chief Executive Officer from January 1, 1996 until March 7, 1996. - --------------- (a) All references to dates and positions held by such executive officers prior to September 1993 refer to the Company's predecessor, The Horn & Hardart Company ("H&H"). H&H merged with and into the Company in September 1993, with the Company surviving. Pursuant to the Company's By-Laws, its officers are chosen annually by the Board of Directors and hold office until their respective successors are chosen and qualified. 56 57 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 58 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. Report of Independent Public Accountants Hanover Direct, Inc. and Subsidiaries Financial Statements 26 Consolidated Balance Sheets as of December 31, 1994 and December 30, 1995 27 Consolidated Statements of Income for the three years ended December 30, 1995 29 Consolidated Statements of Cash Flows for the three years ended December 30, 1995 30 Consolidated Statements of Shareholders' (Deficit) Equity for the three years ended December 30, 1995 32 Notes to Consolidated Financial Statements 33 Supplementary Data: Selected quarterly financial information (unaudited) for the two fiscal years ended December 30, 1995 53 2. Index to Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts 61 Schedules other than that listed above are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
58 59 3. Exhibits The exhibits required by Item 601 of Regulation S-K filed as part of, or incorporated by reference in, this report are listed in the accompanying Exhibit Index. (b) Reports on Form 8-K Current Report on Form 8-K dated September 30, 1995 reporting the Company's third quarter financial results under Item 5 Other Events. (c) Exhibits required by Item 601 of Regulation S-K. See Exhibit Index. (d) Financial Statement Schedules See (a) 2. above.
59 60 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 29, 1996 By: s/Rakesh K. Kaul ------------------------ Rakesh K. Kaul, 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 and on the date indicated below. 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, Director Jeffrey Laikind, Director s/Elizabeth Valk Long s/Robert F. Wright ---------------------------------- ---------------------------------- Elizabeth Valk Long, Director Robert F. Wright, Director Date: March 29, 1996
60 61 Schedule II HANOVER DIRECT VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 30, 1995, DECEMBER 31,1994 AND JANUARY 1,1994
- ----------------------------------------------------------------------------------------------------------------- COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E - ----------------------------------------------------------------------------------------------------------------- ADDITIONS ---------------------------- BALANCE AT CHARGED TO CHARGED TO BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS BALANCE AT DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD - ----------------------------------------------------------------------------------------------------------------- 1995: - ---------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE, CURRENT $ 3,912,000 4,796,000 (4) 42,000 (1) 4,760,000 $ 3,990,000 RESERVES FOR DISCONTINUED OPERATIONS 1,668,000 (2) 29,585 1,638,415 DEFERRED TAX ASSET VALUATION ALLOWANCE 38,600,000 (7) 9,900,000 48,500,000 ALLOWANCE FOR NET UNREALIZED LOSSES ON CONVERTIBLE DEBT SECURITIES 1,000,000 1,000,000 1994: - ---------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE, CURRENT 4,244,000 3,931,000 (1) 4,263,000 3,912,000 RESERVES FOR DISCONTINUED OPERATIONS 2,558,000 (2) 890,000 1,668,000 DEFERRED TAX ASSET VALUATION ALLOWANCE 49,700,000 (6) 11,100,000 38,600,000 ALLOWANCE FOR NET UNREALIZED LOSSES ON CONVERTIBLE DEBT SECURITIES 1,000,000 1,000,000 1993: - ---------------------------------- ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE, CURRENT 6,386,000 3,676,000 (4) 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 (5) 2,600,000 (3) 5,900,000 49,700,000 - -----------------------------------------------------------------------------------------------------------------
(1) Accounts written -off. (2) Utilization of reserves. (3) Utilization of valuation allowance. (4) Represents acquired allowance for doubtful accounts receivable. (5) Represents available NOL's and the effect of the increase in corporate tax rates from 34% to 35%. (6) Represents decrease due to: utilization of valuation allowance and recognition of NOL's estimated to be utilized by future operating results. (7) Represents the increase in the valuation allowance offset by an increase in the gross deferred tax asset. 61 62 EXHIBIT INDEX
EXHIBIT NUMBER ITEM 601 OF DESCRIPTION OF DOCUMENT AND INCORPORATION PAGE REGULATION S-K BY REFERENCE WHERE APPLICABLE NO. - -------------- ----------------------------- ---- 2.1 Asset Purchase Agreement dated as of December 1, 1994 among the Company, LWI Holdings, Inc., Bankers Trust Company, Leichtung, Inc. and DRI Industries, Inc. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 2.2 Stock Purchase Agreement dated as of February 16, 1995 among the Company, Hanover Holdings, Inc., Aegis Safety Holdings, Inc., F.L. Holdings, Inc., Roland A. E. Franklin, Martin E. Franklin, Jonathan Franklin, Floyd Hall, Frederick Field, Homer G. Williams, Frank Martucci, Norm Thompson Outfitters, Inc. and Capital Consultants, Inc., (as agent)(collectively, the "Aegis Sellers"). Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 2.3 Stock Purchase Agreement dated as of May 19, 1995 by and among the Company, Austad Holdings, Inc. ("AHI"), The Austad Company ("TAC"), David B. Austad ("DBA"), Denise Austad ("DA"), David Austad, as custodian ("DBAC"), Oscar Austad, Dorothy Austad, Randall Austad, Kristi Austad, Lori Miller, Robin Miller, Kerri Derenge, Sharon Stahl, Lori Miller, as custodian, Dorothy Austad, as attorney-in-fact, and Kara Miller (collectively, the "Austad Individuals"). FILED HEREWITH. 2.4 Agreement and Plan of Corporate Separation and Reorganization dated as of February 16, 1996 by and among the Company, AHI, TAC, DBA, DBAC, and DA. FILED HEREWITH.
E-1 63 3.1 Certificate of Incorporation. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended January 1, 1994. 3.2 Certificate of Amendment of the Company's Certificate of Incorporation together with Certificate of Designation of Series A Convertible Additional Preferred Stock. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended January 1, 1994. 3.3 By-laws. Incorporated by reference to the Company's Registration Statement on Form S-4 filed on April 16, 1993, Registration No. 33-6152. 3.4 Certificate of Designation of Series B Convertible Additional Preferred Stock of the Company. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 4.1 Indenture between the Company and First Trust National Association, as Trustee ("Trustee"), dated as of August 17, 1993. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended January 1, 1994. 4.2 First Supplement Indenture dated as of March 28, 1995 between the Company, the Guarantor Subsidiaries and the Trustee. FILED HEREWITH. 4.3 Second Supplemental Indenture dated as of November 14, 1995 between the Company, the Guarantor Subsidiaries and the Trustee. FILED HEREWITH. 4.4 Warrant Agreement dated as of October 25, 1991 ('NAR Warrant") between the Company* and NAR Group Limited ("NAR") for 279,110 shares of Common Stock. Incorporated by reference to the Company's* Current Report on Form 8-K dated October 25, 1991.
E-2 64 4.5 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. 4.6 Warrant Agreement dated as of January 1, 1994 between the Company and Sears Shop At Home Services, Inc. ("Sears"). Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 4.7 Registration Rights Agreement dated as of February 16, 1995 among the Company and the Aegis Sellers. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 1994. 4.8 Warrant Agreement dated as of July 8, 1991 between the Company and IMR for 1,750,000 shares of Common Stock. Incorporated by reference to the Company's Current Report on Form 8-K dated July 10, 1991. 4.9 Warrant Agreement dated as of October 25, 1991 between the Company and NAR for 931,791 shares of Common Stock. Incorporated by reference to the Company's Current Report on Form 8-K dated October 25, 1991. 4.10 Second Amendment to Warrant Agreement and Warrant Certificate for 931,791 shares of Common Stock between the Company and NAR dated as of November 13, 1995. FILED HEREWITH. 4.11 First Amendment to Warrant Agreement and Warrant Certificate for 1,750,000 shares of Common Stock between the Company and IMR dated as of November 13, 1995. FILED HEREWITH. 4.12 First Amendment to Warrant Agreement and Warrant Certificate for 279,110 shares of Common Stock between the Company and NAR dated as of November 13, 1995. FILED HEREWITH.
E-3 65 10.1 Stock Option Plan, as amended. Incorporated by reference to the Company's* Annual Report on Form 10-K for the fiscal year ended December 28, 1991. 10.2 Account Purchase Agreement dated as of December 21, 1992 among the Company*, Hanover Direct Pennsylvania, Inc. ("HDPI"), Brawn of California, Inc. ("Brawn") and General Electric Capital Corporation ("GECC"). Incorporated by reference to the Company's* Annual Report on Form 10-K for the fiscal year ended December 26, 1992. 10.3 Amendment No. 1 to the Account Purchase Agreement dated as of July 12, 1993 among the Company*, HDPI, Brawn, Gumps By Mail, Gump's, Gump's Holdings and GECC. Incorporated by reference to the Company's* Current Report on Form 8-K dated July 12, 1993. 10.4 Amendment No.2 to the Account Purchase Agreement dated as of June 1, 1995 among the Company, HDPI, Brawn, Gump's, Gump's By Mail, Gump's Holdings and GECC. FILED HEREWITH. 10.5 Waiver and Amendment No. 3 to the Account Purchase Agreement dated as of December 14, 1995 among the Company, HDPI, Brawn, Gump's, Gump's By Mail, Gump's Holdings and GECC. FILED HEREWITH. 10.6 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. 10.7 Executive Employment Agreement dated as of October 25, 1991 among the Company* and Jack E. Rosenfeld. Incorporated by reference to the Company's Current Report on Form 8-K dated October 25, 1991.
E-4 66 10.8 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. 10.9 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. 10.10 Employment Agreement dated as of October 14, 1991 between the Company* and Michael P. Sherman. Incorporated by reference to the Company's* Current Report on Form 8-K dated October 25, 1991. 10.11 Amendment No. 1 to the Employment Agreement dated as of June 18, 1993 between the Company and Michael P. Sherman. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended January 1, 1994. 10.12 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. 10.13 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. 10.14 Amendment No. 1 to the Employment Agreement dated as of June 18, 1993 between the Company and Wayne P. Garten. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended January 1, 1994.
E-5 67 10.15 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. 10.16 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. 10.17 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. 10.18 Hanover Direct, Inc. Savings Plan as amended. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended January 1, 1994. 10.19 Restricted Stock Award Plan. Incorporated by reference to the Company's* Registration Statement on Form S-8 filed on February 24, 1993, Registration No. 33-58760. 10.20 All Employee Equity Investment Plan. Incorporated by reference to the Company's* Registration Statement on Form S-8 filed on February 24, 1993, Registration No. 33-58756. 10.21 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. 10.22 Form of Supplemental Retirement Plan. Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended January 1, 1994.
E-6 68 10.23 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. 10.24 Loan and Security Agreement dated as of November 14, 1995 by and among Congress Financial Corporation, ("Congress") Hanover Direct Pennsylvania, Inc., Brawn of California, Inc., Gump's by Mail, Inc., Gump's Corp., The Company Store, Inc., Tweeds, Inc., LWI Holdings, Inc., Aegis Catalog Corporation, Hanover Direct Virginia, Inc and Hanover Realty Inc. FILED HEREWITH. 10.25 Subordination Agreement, dated as of November 14, 1995, among Congress, IMR and the Trustee. FILED HEREWITH. 21.1 Subsidiaries of the Registrant. FILED HEREWITH. 23.1 Consent of Independent Public Accountants. FILED HEREWITH. 27.1 Financial Data Schedule. FILED HEREWITH.**
- ------------- * Hanover Direct, Inc., a Delaware corporation, is the successor by merger to The Horn & Hardart Company and The Hanover Companies. ** EDGAR filing only. E-7 EX-2.3 2 STOCK PURCHASE AGREEMENT 1 Exhibit 2.3 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT dated as of May 19, 1995 (this "Agreement"), by and among The Austad Company, a South Dakota corporation ("Austad"); Hanover Direct, Inc., a Delaware corporation (the "Buyer"); David Austad, President and a majority shareholder of Austad, individually and as custodian for other individuals as set forth on the signatory pages hereof; Denise Austad, also a shareholder of Austad (together with David Austad, both in his individual and custodial capacities, the "David Austad Group"); Austad Holdings, Inc., a Delaware corporation (the "Company") formed by Austad; and certain other individuals who are either signatories hereto or whose custodian is executing on their behalf (the "Former Stockholders," and together with the members of the David Austad Group, the "Individuals"). W I T N E S S E T H: WHEREAS, Austad engages in the direct marketing of golf equipment, supplies, apparel and related goods and services through its Austad's catalog, and operates four retail stores offering the same or similar goods and services (the "Stores"); WHEREAS, pursuant to that certain stock redemption agreement dated April 29, 1995 to which the Former Stockholders and Austad are parties (the "Stock Redemption Agreement") Austad has redeemed all the shares of the capital stock of Austad owned by the Former Stockholders (such transactions being hereinafter referred to collectively as the "Redemption"), in exchange for certain promissory notes of Austad which are currently outstanding (the "Redemption Notes"); WHEREAS, the members of the David Austad Group are the owners, in the aggregate, of all the outstanding shares of the capital stock of Austad; WHEREAS, the Company desires to purchase from the members of the David Austad Group all the outstanding shares of capital stock of Austad and in exchange therefor to issue and sell to the members of the David Austad Group, in the aggregate, 32,500 shares of the Common Stock of the Company, $1.00 par value (the "Common Stock"), which will represent, in the aggregate, 32.5% of the issued and outstanding shares of the Common Stock (collectively, the "David Austad Group Shares"), all upon the terms and subject to the conditions set forth in that certain stock purchase agreement to be entered into between the Company and the members of the David Austad Group (the "David Austad Group Acquisition"); WHEREAS, the Company desires to issue and sell to the Buyer, and the Buyer desires to acquire from the Company, simultaneously with the David Austad Group Acquisition, 67,500 shares of the Common Stock, which will represent 67.5% of the issued and outstanding shares of the Common Stock (collectively, the "Buyer Shares"), for an aggregate cash purchase price of $1,800,000, all upon the terms and subject to the conditions set forth in this Agreement (the "Buyer Acquisition"); 2 WHEREAS, upon the satisfaction of certain financial goals during the 1995 fiscal year of the Company and Austad, the Buyer has agreed to make an additional capital contribution to the Company in an amount determined as set forth in Section 1.04 below; WHEREAS, upon consummation of the David Austad Group Acquisition and the Buyer Acquisition, the Company, Austad and the Buyer or a wholly owned subsidiary of the Buyer will enter into loan agreements substantially in the forms set forth in Exhibits A and B, with such additions and changes as shall be agreed upon by the parties (collectively, the "Loan Agreements"), pursuant to which the Buyer will lend Austad the sums of (a) $2,200,000 (the "Subordinated Term Loan"), and (b) a further $400,000 to be secured by a second mortgage (the "Second Mortgage") on Austad's office and warehouse facility in Sioux Falls, South Dakota (the "Second Mortgage Loan," and collectively with the Subordinated Term Loan, the "Loans"), all pursuant to the terms and conditions thereof; WHEREAS, upon the consummation of the David Austad Group Acquisition and the Buyer Acquisition and the provision of the Loans pursuant to the Loan Agreements, Austad will repay $1,500,000 of its existing indebtedness to First National Bank of Omaha, N.A. ("FNBO") under the Revolving Loan Agreement dated March 31, 1993 between Austad and FNBO, as amended (the "Revolving Loan Agreement"), in consideration of the extension of the Loan Termination Date under the Revolving Loan Agreement to a date no earlier than May 31, 1997, and will repay $400,000 of its existing indebtedness to Valley Bank ("Valley") under the Mortgage dated March 15, 1993 between Austad and Valley (the "Valley Mortgage"), in consideration of Valley's release of certain personal guarantees of David Austad and of Randall Austad, a Former Stockholder, outstanding in favor of Valley and, if required, Valley's consent to the Second Mortgage; WHEREAS, upon the consummation of the David Austad Group Acquisition and the Buyer Acquisition and the provision of the Loans pursuant to the Loan Agreements, Austad will also repay to certain Individuals notes payable in the aggregate amount of $767.878.32 outstanding at December 31, 1994 plus accrued interest through the Closing Date, and will pay to the respective members of the David Austad Group outstanding cash dividends, declared but as yet unpaid, in the aggregate amount of $600,000; WHEREAS, upon the consummation of the David Austad Group Acquisition and the Buyer Acquisition, (a) the members of the David Austad Group and the Buyer will become parties to a stockholders' agreement (the "Stockholders' Agreement"), and David Austad and the Company will become parties to a license agreement relating to new Stores to be developed by David Austad (the "License Agreement"); (b) the Company and the Buyer will enter into a cost sharing and reimbursement agreement (the "Reimbursement Agreement"), respecting cost allocations, cost reimbursements and related issues; and 2 3 (c) the Company and each of the Former Stockholders other than Oscar Austad, Dorothy Austad and Randall Austad will enter into a warrant agreement respecting those parties' rights to acquire certain shares of the Company's Common Stock (the "Warrant Agreements"); (d) the Buyer and each of David Austad and Randall Austad will enter into an indemnification agreement respecting certain potential liabilities (the "Indemnification Agreements"); such agreements to be substantially in the respective forms set forth in Exhibits C through G hereto, with such additions and changes as shall be agreed upon by the respective parties (together with the Loan Agreements, the "Other Agreements"; the transactions contemplated by the Other Agreements, together with the David Austad Group Acquisition and the Buyer Acquisition, being referred to as the "Transactions"); NOW, THEREFORE, in reliance upon the representations, warranties and agreements made herein and in consideration of the premises and mutual promises herein contained, the parties agree as follows: ARTICLE I TERMS OF THE BUYER ACQUISITION SECTION 1.01. SALE AND PURCHASE OF THE BUYER SHARES. On the Closing Date (as defined in Section 1.05), and simultaneously with the David Austad Group Acquisition, the Company shall issue, sell, transfer and deliver to the Buyer the Buyer Shares by delivering to the Buyer, against payment therefor as provided in Section 1.02, certificates for the Buyer Shares together with funds sufficient for the payment of all transfer taxes, if any. SECTION 1.02. PURCHASE PRICE. The Buyer Shares shall be sold by the Company and shall be purchased by the Buyer for an aggregate purchase price of $1,800,000 (the "Purchase Price"). The Purchase Price shall be paid to the Company against delivery of the certificates representing the Buyer Shares as provided in Section 1.01, on the Closing Date, by wire transfer of immediately available funds to an account designated by the Company at least two business days before the Closing Date. SECTION 1.03. CERTAIN EXPENSES. At the Closing (as defined in Section 1.05), the Company may pay up to 75% of the balance of the fee payable to Mesirow Financial, Inc. ("Mesirow") pursuant to a certain investment banking agreement among Austad, the Individuals and Mesirow, but not more than $56,250. Except as otherwise set forth below, neither Austad nor the Company, however, shall pay or be liable for or be required to pay any of the following liabilities, fees or expenses related to the Transactions, all of which shall be borne and paid for by the Individuals: (a) fees and expenses, if any, of Mesirow in excess of such amount, or of any person or entity other than Mesirow retained by the Company, Austad 3 4 and/or any Individual for financial services or services as a finder rendered to any such party in connection with the Transactions; (b) professional fees of counsel and any accountant or auditor for the Company, Austad or any of the Individuals for services rendered to any of such parties, or out-of-pocket disbursements and other expenses of any of such parties or professionals, any of their counsel or accountants, incurred in connection with the Transactions, including the expenses of the Company or Austad in connection with the preparation of the Balance Sheet; provided, that the Company shall be responsible for 80% of the professional fees payable to Lynn, Jackson, Shultz & Lebrun, P.C. and to Coopers & Lybrand, L.L.P. (the "Auditors") related to the Transactions and the Individuals shall pay the remaining 20% of such fees, such fees being estimated by the parties not to exceed $85,000 in the aggregate; (c) documentary stamp taxes or other similar charges, taxes or expenses incurred by the Company in connection with the transfer of the Buyer Shares to the Buyer; (d) any income, capital gains or other taxes incurred by the Company, Austad, any Individual, or any other person or entity as a result of the Redemption or the Transactions; and (e) any taxes of the Company or Austad not reflected in the Balance Sheet, other than taxes incurred in the ordinary course of business since the date of the Balance Sheet. SECTION 1.04. ADDITIONAL CAPITAL CONTRIBUTION. Provided certain financial targets are met during the 1995 fiscal year of the Company and Austad, as set forth below, the Buyer agrees to make an additional capital contribution (the "Additional Capital Contribution"), the amount (if any) to be determined as follows: (a) If 1995 EBIT (as defined in Section 1.04(c) below) shall be at least equal to $1,200,000 but less than $1,500,000, the Additional Capital Contribution shall be $700,000; (b) If 1995 EBIT shall be at least equal to $1,500,000 but less than $1,800,000, the Additional Capital Contribution shall be $1,400,000; and (c) If 1995 EBIT shall equal or exceed $1,800,000, the Additional Capital Contribution shall be $2,200,000. (d) For purposes of this Agreement, "1995 EBIT" shall mean the pro forma earnings before interest and income taxes of the Company and its subsidiaries for the twelve months ending on or about December 31, 1995, all in accordance with generally accepted accounting principles consistently applied throughout the periods covered ("GAAP"), but adjusted to exclude (i) any decrease in expenses for such period (compared with Austad's projected 1995 Business Plan, a copy of which is attached hereto as Exhibit 4 5 H (the "Business Plan")) resulting from the activities of the Buyer and its subsidiaries during such period on behalf of the Company and its subsidiaries, (ii) any expenses, profits or losses incurred by the Company or its subsidiaries in connection with the proposed opening in Fall 1995 of a new Austad's retail store and (iii) subject to the Buyer's reasonable review and approval, any costs incurred by the Company or Austad in connection with the Transactions and not payable by the Individuals pursuant to Section 1.03 above. (e) The Additional Capital Contribution, if any, shall be paid on or before April 30, 1996 (the "Payment Date"). At the Buyer's option, payment shall be either in cash or as an offset against any amount owed by Austad to the Buyer or any subsidiary of the Buyer and outstanding on the Payment Date. The parties agree that the making of the Additional Capital Contribution, if any, by the Buyer shall not change the relative share ownership of the Buyer and the members of the David Austad Group. SECTION 1.05. THE CLOSING. The closing of the Transactions (the "Closing") shall be held at the offices of Lynn, Jackson, Shultz & Lebrun, P.C., 141 North Main Avenue, Sioux Falls, South Dakota or at such other place or places as the parties may agree upon, at 10:00 A.M., local time, on May 19, 1995, or such other time and date as may be mutually approved by the parties in writing, but not later than May 31, 1995 (the "Closing Date"). At the Closing, (a) the appropriate parties will execute and deliver the Other Agreements, and will deliver the instruments and documents required hereby and thereby; (b) the Company will purchase from the members of the David Austad Group all the outstanding shares of capital stock of Austad and in exchange therefor will issue and sell the David Austad Group Shares to the respective members of such Group; (c) the Buyer will purchase the Buyer Shares pursuant to this Agreement and make or cause a subsidiary to make the Loans pursuant to the Loan Agreements; (d) Austad will make a payment of $1,500,000 to FNBO, in reduction of principal and accrued interest as agreed upon between Austad and FNBO, in consideration of which payment FNBO will execute and deliver an agreement extending the Loan Termination Date applicable under the Revolving Loan Agreement to a date not earlier than May 31, 1997 (the "FNBO Extension"); (e) Austad will make a payment of $400,000 to Valley, in reduction of principal and accrued interest on the Valley Mortgage as agreed upon between Austad and Valley, in consideration of which payment Valley will execute and deliver a release and discharge of each of the outstanding personal guarantees of David Austad and Randall Austad in favor of Valley (the "Valley Releases"), and Austad will execute and deliver the Second Mortgage to Buyer or its subsidiary; (f) Austad will repay to certain Individuals notes payable outstanding at December 31, 1994 in the aggregate amount of $767,878.32 plus accrued interest through the Closing Date, as set forth in Schedule 1.05; 5 6 (g) Austad will pay to the members of the David Austad Group outstanding cash dividends in the aggregate amount of $600,000 declared on April 28, 1995, as set forth in Schedule 1.05; and (h) Austad will pay to the Former Stockholders the amount of their Redemption Notes outstanding pursuant to the Redemption Agreement. ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY, AUSTAD AND THE INDIVIDUALS The Company, Austad, the members of the David Austad Group and the Former Stockholders represent and warrant, jointly and severally (but Denise Austad and the Former Stockholders only to the best of their knowledge), that: SECTION 2.01. THE COMPANY AND AUSTAD--ORGANIZATION AND AUTHORITY. The Company and Austad are corporations duly organized and validly existing and in good standing under the laws of the States of Delaware and South Dakota, respectively. Set forth in Schedule 2.01 is a list of jurisdictions in which each of the Company and Austad is qualified to do business. Except as set forth in Schedule 2.01, each of the Company and Austad is duly qualified and in good standing in each jurisdiction in which (i) the nature of the business conducted by it or the character or location of the properties owned or leased by it makes such qualification necessary and (ii) failure so to qualify would, if not remedied, materially impair title to its properties or its rights to enforce contracts against others or expose it to substantial liability in such jurisdictions. Each of the Company and Austad has all necessary corporate power and authority to own all of its properties and assets and to carry on its businesses as now conducted. SECTION 2.02. COMPANY AND AUSTAD CAPITALIZATION. The Company has an authorized capital of 200,000 shares of Common Stock, $1.00 par value, of which no shares are issued and outstanding, and no shares are held in the treasury of the Company. Austad has an authorized capital of 500,000 shares of capital stock, $1.00 par value, of which 14,569 shares are issued and outstanding, all of which are owned by the members of the David Austad Group, and 30,248 shares are held in the treasury of Austad, in consequence of the Redemption, it being Austad's intent that such treasury shares will be cancelled on or about the Closing Date. Upon issuance and payment therefor in accordance with this Agreement, each of the Buyer Shares and the David Austad Group Shares will be duly authorized and validly issued, fully paid and non-assessable and issued by the Company in compliance with all applicable Federal and state securities laws, rules and regulations. Except for the warrants to be issued pursuant to the Warrant Agreements, there are no outstanding options, warrants, convertible securities or other rights to subscribe for or purchase any securities of the Company or Austad. SECTION 2.03. SUBSIDIARIES. There are no corporations with respect to which the Company beneficially owns, directly or indirectly, in excess of 50% of the outstanding stock or other equity interests, the holders of which are entitled to vote for election of a majority of the board of directors or other governing body (hereinafter such an entity being sometimes referred to as a "Subsidiary"). On the Closing Date, upon consummation of the David Austad Group 6 7 Acquisition, Austad will become the Company's sole Subsidiary. Set forth in Schedule 2.03 is a list (including the capitalization thereof) of each partnership and joint venture agreement or arrangement (the "Joint Ventures") to which the Company or Austad is a party. Also set forth in Schedule 2.03 is a list of the corporations or entities with respect to which the Company beneficially owns, directly or indirectly, in excess of 5% of the outstanding stock or other equity interests, the holders of which are entitled to vote for election of a majority of the board of directors or other governing body. SECTION 2.04. FINANCIAL STATEMENTS; NO COMPANY ACTIVITIES OR OPERATIONS. (a) Austad has furnished the Buyer with copies, certified by the chief financial officer of Austad, of the audited financial statements of Austad for each of the two fiscal years ended December 31, 1993 and 1992, including in each case a balance sheet, the related statements of income and of changes in financial position for the period then ended, the accompanying notes and the reports thereon of the Auditors, all such reports being unqualified. Austad has also furnished the Buyer with copies, certified by the chief financial officer of Austad, of the unaudited financial statements of Austad for the fiscal year ended December 31, 1994, including a balance sheet, the related statements of income and of changes in financial position for the period then ended. The unaudited balance sheet of Austad as of December 31, 1994, a copy of which is attached hereto as Exhibit I, is herein referred to as the "Balance Sheet." All such financial statements (i) are correct and complete and have been prepared in accordance with the books and records of Austad, (ii) have been prepared in accordance with GAAP, (iii) reflect and provide adequate reserves in respect of all known liabilities of Austad in accordance with GAAP, including all known contingent liabilities as of their respective dates and (iv) present fairly the financial condition of Austad at such dates and the results of its operations for the periods then ended. (b) The Company was formed on May 12, 1995 and except as referred to in, or contemplated by, this Agreement, the Company has not engaged in any activities or incurred any liabilities. SECTION 2.05. REAL PROPERTY. (a) Except as identified and described in Schedule 2.05, Austad does not own, have legal or equitable title in, or have a leasehold interest in any real property. (b) Austad has good and marketable title in fee simple to the land described as owned by Austad in Part A of Schedule 2.05 (the "Owned Realty") and to all plants, buildings and improvements thereon, free and clear of any mortgage, lien, claim, charge, exception, imperfection of title, easement, or encumbrance (collectively "Encumbrances"), except for those Encumbrances (i) which are described in Part A of Schedule 2.05, (ii) which relate to imperfections of title or easements with respect to the properties identified in Part B of Schedule 2.05, or (iii) which, individually or in the aggregate, are not material in character, amount or extent and do not materially adversely affect the title to, or the present use of, the property subject thereto or affected thereby or otherwise materially impair the business operations of 7 8 Austad. True and complete copies of (i) all mortgages, pledge agreements and similar documents and agreements relating to the Owned Realty and all loan agreements and other instruments of indebtedness secured thereby or relating thereto (collectively, the "Mortgages") and (ii) all deeds, title insurance policies and surveys relating to Austad's ownership of such Owned Realty, as the same may exist, have been delivered to the Buyer. (c) Austad has a valid leasehold interest in the real property described as leased by Austad in Part C of Schedule 2.05 (the "Leased Realty"). True and complete copies of all leases, agreements and instruments (the "Leases") respecting the Leased Realty have been delivered to the Buyer. (d) With respect to the Leases and Mortgages referred to in Schedule 2.05, no default or event of default on the part of Austad as lessee or mortgagor or, to the knowledge of the Individuals or any officer of Austad, no default or event of default on the part of the lessor or mortgagee, under the provisions of any of said Leases or Mortgages, and no event which with the giving of notice or passage of time, or both, would constitute such default or event of default on the part of Austad or, to the knowledge of any Individual or any officer of Austad, on the part of any such lessor or mortgagee, has occurred and is continuing unremedied or unwaived. (e) The buildings and improvements owned or leased by Austad, and the operation or maintenance thereof as now operated and maintained, do not (i) contravene any zoning or building law or ordinance or administrative regulation or (ii) violate any restrictive covenant or any provision of Federal, state or local law, the effect of which materially interferes with or prevents the continued use of such properties for the purposes for which they are now being used, or would materially affect the value thereof. All of the plants, buildings and structures owned or leased by Austad are in good operating condition and in a state of reasonable maintenance and repair to the extent necessary for the efficient operation of the business of Austad. (f) Except as set forth in Schedule 2.05 there exists no pending or, to the knowledge of the Individuals or any officer of Austad, threatened condemnation, eminent domain or similar proceeding with respect to, or which could affect, any Owned Realty, Leased Realty or buildings or improvements thereon by the Company or Austad. SECTION 2.06. PERSONAL PROPERTY; ACCOUNTS RECEIVABLE. (a) Except as set forth in Schedule 2.06, Austad has good and marketable title to all personal property reflected in the Balance Sheet and all personal property acquired by Austad since the date of the Balance Sheet (except such personal property as has been disposed of in the ordinary course of the business of Austad), free and clear of any Encumbrance, except for those, if any, which in the aggregate are not material and which do not materially affect the continued use of such personal property or the continued operation of the business of Austad as now conducted. (b) Except for items disposed of in the ordinary course of business since the date of the Balance Sheet, all machinery, tools, equipment and other tangible assets (i) reflected 8 9 in the Balance Sheet (other than inventories), (ii) leased by Austad or (iii) acquired by Austad since the date of the Balance Sheet, currently are used, useable by or useful to Austad in the ordinary course of its business and in the manufacture of its products, and are in good operating condition and in a state of reasonable maintenance and repair. (c) The inventories reflected in the Balance Sheet were on the date thereof in good condition; such inventories, and any inventories acquired by Austad after the date of the Balance Sheet to the extent not sold or otherwise disposed of in the ordinary course of business, are in good condition, are used, useable by or useful to Austad in the ordinary course of its business and in the manufacture of its products, and, except as set forth in Schedule 2.06, are not in excess of reasonable requirements for the next six months. Except as set forth in such Schedule, no material item of inventory reflected in the Balance Sheet was valued in excess of the lower of cost (on a first-in, first-out basis) or market value. The finished goods produced by Austad conform to customary trade standards for marketable goods. (d) Except as indicated in the Balance Sheet or in Schedule 2.06, the accounts receivable reflected on the Balance Sheet, or acquired by Austad after the date of the Balance Sheet, have been collected or are (or will be) collectible within 120 days following the Closing Date in amounts not less than the aggregate amount recorded on the Balance Sheet, in the case of receivables reflected in the Balance Sheet, or not less than the aggregate amount recorded on the books of Austad, in the case of receivables acquired after the date of the Balance Sheet. Any payment on the accounts receivable made by any obligor thereon shall be applied first to the accounts receivable of such obligor outstanding for the longest period of time, unless such obligor shall have directed that the payment be applied to a specific receivable. SECTION 2.07. PERSONNEL; ETC. (a) Set forth in Schedule 2.07 is a correct and complete list of: (i) all contracts or agreements with directors, officers or employees, or consulting agreements, to which Austad is a party or is subject, provided that no such contracts or agreements need be listed in Schedule 2.07 if all such contracts and agreements, in the aggregate, involve a sum not in excess of $2,000; and provided further, that oral agreements entered into in the ordinary course of Austad's business with employees respecting their employment by Austad on an at-will basis at an annual salary of less than $30,000 need not be listed; (ii) all group insurance programs in effect for employees of Austad; (iii) the officers of Austad specifying their respective office; (iv) the directors of Austad; (v) the name of each bank with which the Company or Austad has an account or safe deposit box, the identifying numbers or symbols thereof and the name of each person authorized to draw thereon or to have access thereto; and 9 10 (vi) the name of each person, if any, holding tax or other powers of attorney from the Company or Austad and a summary statement of the terms thereof. (b) Austad is not in default under any agreement or contract listed in Schedule 2.07, and all such agreements and contracts are legally valid and binding on Austad and are in full force and effect. (c) A list of (i) all employees and consultants of Austad, including the title or job classification of each such person, and (ii) the names, positions and current salary rates of the 25 highest-paid employees of Austad has been provided to the Buyer. SECTION 2.08. ERISA. (a) Set forth in Schedule 2.08 is a correct and complete list of each employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended and the rules and regulations issued thereunder (collectively "ERISA") and other profit-sharing, deferred compensation, bonus, stock option, stock purchase and employee benefit plans or arrangements maintained or contributed to by or on behalf of Austad with respect to employees of Austad at any time on or after September 2, 1974, or to which Austad contributes or is required to contribute for its employees (collectively, the "Plans"). Each Plan (a "Tax-Qualified Plan") intended to be qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code") is identified as a Tax-Qualified Plan in such Schedule 2.08 and is so qualified. (b) Austad has heretofore delivered to the Buyer true and correct copies of the following: (i) each Plan listed in Schedule 2.08 and all amendments thereto to the date hereof; (ii) each trust agreement and annuity contract (or any other funding instruments) pertaining to any Plan, including all amendments to such documents to the date hereof; (iii) the most recent determination letter issued by the Internal Revenue Service (the "IRS") with respect to each of the Tax-Qualified Plans; (iv) the three most recent actuarial valuation reports for each Plan for which an actuarial valuation report is required to be prepared; and (v) the two most recent Annual Reports (IRS Forms 5500 series), including Schedules A and B and plan audits, if applicable, required to be filed with respect to each Plan. 10 11 (c) Each Plan is legally valid and binding and, except for Plans listed in Schedule 2.08 as having been terminated, shall be maintained in full force and effect through the Closing Date. The status of each Plan is set forth in Schedule 2.08, including (i) the amount of Austad's contribution to such Plan for each of the past three fiscal years and the plan year in which the Closing Date occurs, (ii) the amount of any liability of Austad for payments or contributions past due with respect to such Plan as of the last day of its most recent plan year and as of the end of any subsequent month ending prior to the Closing Date, and the date any such amounts were paid, (iii) any contribution to such Plan in a form other than in cash and (iv) whether such Plan has been terminated. Except as set forth in Schedule 2.08, neither the Company nor Austad has any obligations or liabilities with respect to any Plan or liabilities relating to any Plan under any collective bargaining agreement to which it is a party or by which it is bound. (d) Each Tax-Qualified Plan and any related trust agreements or annuity contracts (and any other funding instruments) currently comply, and have complied in the past, both as to form and operation, including compliance with all reporting and disclosure requirements, with the provisions of ERISA and the Code, as well as the provisions of any applicable collective bargaining agreement. The IRS has issued a favorable determination letter with respect to the qualification under Sections 401(a) and 501(a) of the Code of each Tax-Qualified Plan and related trust, if any, and has not taken any action to revoke such letters. In addition, all necessary governmental approvals for the Tax-Qualified Plans have been obtained. (e) With respect to each Tax-Qualified Plan that is subject to Title I, Subtitle B, Part 3 of ERISA (a "Pension Plan"), Schedule 2.08 sets forth as of the last day of the plan year (i) the actuarial present value (based upon the same actuarial assumptions as those heretofore used for funding purposes) of all vested and nonvested accrued benefits (whether on account of retirement, termination, death, or disability) under such Pension Plan (computed on the basis of an ongoing plan and without any assumption that nonvested accrued benefits have become nonforfeitable), (ii) if such Pension Plan uses a benefit accrual formula having reference to final earnings, the actuarial present value of the benefits under such Pension Plan as calculated in (i), but based upon projected earnings increases of five percent per annum, (iii) the actuarial present value (based upon the same actuarial assumptions, other than turnover assumptions, as those heretofore used for funding purposes) of vested benefits under such Pension Plan (computed on the basis of an ongoing plan), (iv) the net fair market value of the assets held to fund such Pension Plan and (v) the funding method used in connection with such Pension Plan. (f) With respect to all Pension Plans, except as set forth in Schedule 2.08, (i) Austad has paid all premiums (and interest charges and penalties for late payment, if applicable) due the Pension Benefit Guaranty Corporation ("PBGC") with respect to each plan year thereof for which such premiums are required; (ii) on and after September 2, 1974, there has been no "reportable event" (as defined in Section 4043(b) of ERISA and the regulations of the PBGC under that Section) subject to Title IV of ERISA; (iii) no liability to the PBGC has been incurred by the Company, Austad or any corporation or other trade or business under common control with the Company or Austad (as determined under Section 414(b) and (c) of the Code) ("Common Control Entity") on account of any termination subject to Title IV of ERISA; (iv) on 11 12 and after September 2, 1974, no filing has been made by the Company or Austad or any Common Control Entity with the PBGC, and no proceeding has been commenced by the PBGC, to termination any Pension Plan subject to Title IV of ERISA maintained, or wholly or partially funded, by the Company or Austad or any Common Control Entity; (v) neither the Company nor Austad nor any Common Control Entity has (A) ceased operations at a facility so as to become subject to the provisions of Section 4062(f) of ERISA, (B) withdrawn as a substantial employer so as to become subject to the provisions of Section 4063 of ERISA, (C) ceased making contributions on or before the Closing Date so as to become subject to Section 4064(a) of ERISA to which the Company or Austad or any Common Control Entity made contributions during the five years prior to the Closing Date, or (D) made a complete or partial withdrawal from a "Multiemployer Plan" (as defined in Section 3(37) of ERISA) so as to incur withdrawal liability as defined in Section 4201 of ERISA (without regard to a subsequent reduction or waiver of such liability under Sections 4207 or 4208 of ERISA); and (vi) future compliance with the requirements of ERISA as in effect on the Closing Date or any collective bargaining agreements to which the Company or Austad is a party will not result in any increase in the rate of benefit accrual. (g) In addition, with respect to all Plans, except as set forth in Schedule 2.08, (i) other than routine claims for benefits, there are no material actions, suits or claims pending or threatened against any Plan or the fiduciaries thereof, or against the assets of any Plan and (ii) on and after January 1, 1975, neither the Company nor Austad nor, to the knowledge of the Individuals, any plan fiduciary of any Plan has engaged in any prohibited transaction within the meaning of Title I of ERISA or Section 4975 of the Code and no imposition of excise tax penalties has occurred with respect thereto. SECTION 2.09. COMPLIANCE WITH LAW; PERMITS. (a) Except as set forth in Schedule 2.09, the Company and Austad have complied with all applicable statutes, regulations, orders and restrictions of the United States of America, all states, possessions and municipalities thereof, and all agencies and instrumentalities of the foregoing, the failure to comply with which could result in any liability, penalty or disability material to the conduct of the business of the Company or Austad or the ownership or operation by Austad of its properties. (b) Except as set forth in Schedule 2.09, the operations, practices, policies and procedures of the Company, Austad and their employees have been conducted and will be conducted in compliance with, and have not and will not give rise to any loss, liability, damage, costs or expenses under, all applicable Federal, state and local laws, orders, regulations, directives and restrictions concerning protection of the environment, the disposal of hazardous, toxic or industrial chemicals, substances or wastes and health and safety, including the following statutes and all orders, rules, regulations, directives and restrictions issued thereunder or promulgated in connection therewith: (i) the Clean Air Act, as amended; 12 13 (ii) the Federal Water Pollution Control Act, as amended; (iii) the Resource Conservation and Recovery Act of 1976, as amended; (iv) the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended; (v) the Toxic Substances Control Act, as amended; (vi) the Surface Mining Control and Reclamation Act of 1977, as amended; (vii) the Mine Safety and Health Act of 1977, as amended; (viii) the Occupational Safety and Health Act, as amended ("OSHA"); and (ix) any applicable state or local environmental statutes, including, without limitation, those of the states of Illinois, Minnesota and South Dakota. (c) Except as set forth in Schedule 2.09, Austad has all permits, licenses, authorizations and bonds necessary to the conduct of its business operations as presently conducted (collectively, the "Permits"). All such Permits are listed in Schedule 2.09 and, except as noted in Schedule 2.09, are currently valid and in full force and effect, and there are no material violations or breaches of or exceptions to any such Permits. (d) Except as set forth in Schedule 2.09, there are, under applicable Federal, state and local laws, orders, regulations, directives and restrictions concerning protection of the environment and health and safety, no outstanding notices of violations or consent orders to which the Company or Austad, or any of its or their properties, are subject or may become subject. Austad has set aside adequate capital reserves to fund all pending and threatened notices of violations, all as reflected on the Balance Sheet. (e) Austad has furnished the Buyer with (i) copies of all reports or other documents in Austad's files concerning Austad or its employees made by Austad during the past five years (A) pursuant to Title VII of the Civil Rights Act of 1964, as amended, (B) pursuant to OSHA, (C) pursuant to workers' compensation statutes, and (D) pursuant to the National Labor Relations Act, as amended, and copies or complete and accurate summaries of all notices, orders or other documents or correspondence notifying or indicating to Austad that any of its buildings or improvements or the operation or maintenance thereof as now maintained and operated contravene any zoning or building law or ordinance or other administrative regulation or violate any restrictive covenant or any provision of Federal, state or local law. 13 14 SECTION 2.10. LITIGATION. (a) Except as set forth in Schedule 2.10 there is no (i) action, suit, claim, proceeding or investigation pending or, to the knowledge of the Individuals or any Austad officer, threatened against or affecting the Company or Austad or its or their assets or properties, at law or in equity, or before or by any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign which is individually for an amount in excess of $1,000, (ii) arbitration proceedings relating to the Company or Austad or their respective assets or properties or (iii) governmental inquiries pending or, to the knowledge of the Individuals or any Austad officer, threatened relating to or involving the Company, Austad, their respective assets, the properties or business of Austad, or the Transactions (including inquiries as to the qualification of the Company or Austad to hold or receive any Permit). (b) Except as set forth in Schedule 2.10, neither the Company nor Austad has received any opinion or memorandum or legal advice or notice from legal counsel to the effect that it is exposed, from a legal standpoint, to any liability or disadvantage which may be material to its business. Neither the Company nor Austad is in default with respect to any order, writ, injunction or decree known to or served upon the Company or Austad of any court or of any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign. There is no pending action or suit brought by the Company or Austad against others. Neither the Individuals nor any Austad officer knows of any violation of the Federal or state antitrust laws by the Company or Austad; there has not been any claim received by the Company or Austad of violation of the Federal or state antitrust laws by the Company or Austad, and, so far as is known to the Individuals or any Austad officer, no basis for any such claim exists. SECTION 2.11. INTELLECTUAL PROPERTY. Set forth in Schedule 2.11 is a list and brief description or identification of (i) all patents, patent rights, patent applications, trademarks, trademark applications, trade names and copyrights licensed to, applied for, used by, owned by, or registered in the name of, the Company or Austad, or in which the Company or Austad has any rights, and (ii) all manufacturing methods or processes, designs, technical data, product development data, research data, know-how, secret processes, market reports, consumer investigations, product surveys, distribution methods and customer lists and trade secrets, computer and electronic data processing programs and software processes and other proprietary and intellectual property, rights and interests that Austad uses and believes are not within the general knowledge of the industry and in each case a brief description of the nature of such rights (the assets described in clauses (i) and (ii), collectively, hereinafter are referred to as "Intellectual Property"). Except as set forth in Schedule 2.11, Austad is not a licensor in respect of any Intellectual Property. Austad owns or possesses adequate licenses or other rights to use all Intellectual Property necessary to permit Austad to conduct its business as now operated. No claim is pending or, to the knowledge of any Individual or any officer of Austad, threatened to the effect that the present or past operations of Austad infringe upon or conflict with the asserted rights of any other person in respect of any Intellectual Property, and except only as set forth in Schedule 2.11 no claim is pending or threatened to the effect that any of such Intellectual 14 15 Property is invalid or unenforceable. No contract, agreement or understanding with any party exists which would impede or prevent the continued use by Austad of the entire right, title and interest of Austad in and to the Intellectual Property. SECTION 2.12. MATERIAL CONTRACTS. Austad has delivered to the Buyer true copies of all written contracts, obligations and commitments of the Company and Austad now in effect to which the Company or Austad is a party or by which it or its property may be bound, under which the total obligation of the Company or Austad is in excess of $5,000 (other than purchase orders by Austad which have been entered into in the ordinary course of business), all of which are described or otherwise referred to in Schedule 2.12 (the "Material Contracts"). No default, alleged default or anticipatory breach exists on the part of the Company or Austad or, to the knowledge of the Individuals or any Austad officer, on the part of any other party, under any Material Contract, and there are no material agreements of the parties relating to such Material Contracts which have not been disclosed to the Buyer. Neither the Company nor Austad is a party to any written or oral contract which could materially adversely affect the business of the Company or Austad. Except as set forth in Schedule 2.12, neither the Company nor Austad is a party to any written or oral: (a) contract not made in the ordinary course of business, other than this Agreement and the Other Agreements; (b) employment or consulting contract which is not terminable without cost or other liability to the Company, Austad or any successor thereof, upon notice of 30 days or less, other than those listed in Schedule 2.07; (c) contract or collective bargaining agreement with any labor union other than those listed in Schedule 2.13; (d) bonus, pension, profit-sharing, retirement, stock purchase, stock option, incentive compensation, hospitalization, insurance or similar plan, contract or understanding providing for employee benefits other than those listed in Schedule 2.08; (e) lease with respect to any property, real or personal, whether as lessor or lessee other than those listed in Schedule 2.05 or 2.06; (f) contract for the purchase of real property, equipment or fixed assets which involve in the aggregate more than $5,000; (g) contract for the future purchase of materials, supplies or inventory (i) which is in excess of the requirements of the business of Austad now booked or the requirements of Austad for its normal operating inventories, or (ii) which is not terminable without cost or liability to the Company or Austad, or any successor thereof, upon notice of 30 days or less except for those purchase orders described in Schedule 2.12; 15 16 (h) contract for the sale of goods (i) involving more than $5,000 or (ii) which is not terminable without cost or liability to the Company or Austad, or any successor thereof, upon notice of 30 days or less; (i) contract for the performance of services for or by the Company or Austad which is not terminable without cost or liability to the Company or Austad, or any successor thereof, upon notice of 30 days or less; (j) insurance contract other than those listed in Schedule 2.17; (k) contract continuing for a period of more than three months from its date, which is not terminable by the Company or Austad without cost or liability to the Company or Austad, or any successor thereof, upon notice of 30 days or less; (l) manufacturers' representative, sales agency, dealer or advertising contract which is not terminable on notice without cost or other liability to the Company or Austad; (m) agreement or indenture for the borrowing or lending of money; (n) agreement or indenture for the mortgaging or pledging of, or otherwise placing a lien or security interest on, any assets of the Company or Austad; (o) option, warrant or other contract for the issuance of any debt or equity security, or the conversion of any obligation, instrument or security, into debt or equity securities of the Company or Austad other than those contemplated in connection with the Transactions; (p) guaranty of any obligation for borrowed money or otherwise, excluding endorsements made for collection; (q) settlement agreement of any administrative or judicial proceedings within the past five years; or (r) agreement under which the Company or Austad has advanced or agreed to advance moneys in excess of $500 to any one individual or $1,000 in the aggregate. SECTION 2.13. LABOR AND EMPLOYMENT MATTERS. Except as disclosed in Schedule 2.13, neither the Company nor Austad is a party to any collective bargaining agreement with any labor organization. There is not pending, or to the knowledge of the Company or Austad threatened, any labor dispute, strike or work stoppage involving the employees of Austad. Except as indicated in Schedule 2.13, none of the key employees of Austad has terminated or 16 17 indicated an intention or plan to terminate his or her employment with Austad or had such employment terminated. SECTION 2.14. CONDUCT OF BUSINESS. Except as set forth in Schedule 2.14, since the date of the Balance Sheet, the Company has not conducted any business, and Austad has conducted its business in the ordinary course, has maintained its assets and property in at least such order and condition as is necessary to continue so to conduct its business, and neither the Company nor Austad has: (a) incurred any material obligation or liability (absolute, accrued, contingent or otherwise), except in connection with the Transactions or the Redemption or, in the case of Austad, in the ordinary course of Austad's business; (b) discharged or satisfied any lien or encumbrance, or paid or satisfied any obligation or liability (absolute, accrued, contingent or otherwise) except, in the case of Austad, for (i) liabilities shown or reflected on the Balance Sheet or (ii) liabilities incurred since the date of the Balance Sheet in the ordinary course of business; (c) increased or established any reserve for taxes or other liability on its books or otherwise provided therefor, except as may have been required in accordance with GAAP due to the operations or income of Austad since the date of the Balance Sheet; (d) mortgaged, pledged or subjected to any lien, charge or other encumbrance any of the assets, properties or business of the Company or Austad; (e) sold, assigned or transferred any asset, property or business or cancelled any debt or claim or waived any right, except, in the case of Austad, in the ordinary course of Austad's business, and except for that Owned Realty located at 208 N. Sycamore Avenue, Sioux Falls, South Dakota and identified in Part A of Schedule 2.05, such property being sold by Austad under the terms previously disclosed to the Buyer; (f) sold, assigned, transferred or permitted to lapse any rights with respect to any Intellectual Property or other intangible asset; (g) granted any general or uniform increase in the rates of pay of employees of Austad or any increase in salary payable or to become payable to any officer employee, consultant or agent of Austad, or changed or increased the compensation payable to any officer, employee, consultant or agent of Austad for any period before or after the date of the Balance Sheet, or by means of any bonus or pension plan, contract or other commitment increased the compensation of any officer, employee, consultant or agent of Austad, or, in the case of the Company, 17 18 engaged any employee, consultant or agent except in connection with the Transactions; (h) made or authorized any capital expenditures for additions to the plant or equipment of Austad in excess of $5,000 in the aggregate except as may have been involved in connection with ordinary repair, maintenance and replacement and minor plant equipment additions; (i) made any loan or payment to any stockholder, or declared, set aside or paid to any stockholder any dividend or other distribution in respect of its capital stock, or redeemed or purchased any of its capital stock, or agreed to take any such action except as contemplated by the Transactions; (j) issued, sold or transferred, or agreed to issue, sell or transfer, any stock, bond, debenture or other corporate security of the Company or Austad, whether newly issued or held in treasury, except as contemplated by the Redemption or the Transactions; (k) except as contemplated by the Redemption or the Transactions, entered into any material transaction, in the case of the Company, or any material transaction other than in the ordinary course of business of Austad, in the case of Austad; (l) experienced damage, destruction or loss (whether or not covered by insurance) materially and adversely affecting its properties, assets or business, or experienced any other material adverse change in its financial condition, assets, liabilities or business; (m) experienced any material change in the assets, liabilities, business, condition (financial or otherwise) from that disclosed on the Balance Sheet; or (n) taken any action which would have the effect of terminating any Permit. SECTION 2.15. TAX MATTERS. (a) Austad has filed all tax returns required to be filed by it under the laws of the United States of America, the State of South Dakota and each state or other jurisdiction in which its business activities (i) require qualification, as specified in Schedule 2.01, or (ii) could result in the imposition of liability for the payment of any taxes, as specified in Schedule 2.15. Austad has paid or set up an adequate reserve in respect of all taxes for the periods covered by such returns, as well as all other taxes, assessments and governmental charges which have become due or payable, including all taxes which Austad is obligated to withhold from amounts owing to employees, creditors and third parties. Such reserves include reserves for all tax liabilities of Austad in all jurisdictions in which Austad has business activities requiring qualification as specified in Schedule 2.01. Austad has set up as provisions for taxes in the 18 19 Balance Sheet amounts sufficient for all accrued and unpaid Federal, foreign, state, county and local taxes of Austad, whether or not disputed, including any interest and penalties in connection therewith, for all fiscal periods ending on or before the date of the Balance Sheet. (b) Austad's Federal income tax returns have never been examined by the United States Internal Revenue Service and no such examinations are in progress, nor has Austad been notified of an impending audit. There have been no state tax examinations of Austad except as set forth in Schedule 2.15 and no such examinations are in progress, nor has Austad been notified of an impending audit. Any deficiencies proposed as a result of any examination set forth in Schedule 2.15 have been paid or finally settled and no issue has been raised in any such examinations which, by application of similar principles, reasonably can be expected to result in the assertion of a deficiency for any other year not so examined. The results of any settlements and any necessary adjustments in taxes resulting therefrom are either set forth in Schedule 2.15 or set forth in the financial statements referred to in Section 2.04 above. Neither Austad nor any Individual is aware of any fact which would constitute grounds for any further tax liability with respect to any years. No agreements or waivers have been made by or on behalf of Austad for the extension of time for the assessment of any tax or for any applicable statute of limitations. (c) Except for taxes for the payment of which an adequate reserve has been established on the Balance Sheet, there are no tax liens, whether imposed by any Federal, foreign, state or local taxing authority, outstanding against any of the assets, properties or business of Austad. For purposes of this Section 2.15, the term "Austad" shall include the Company. SECTION 2.16. ABSENCE OF UNDISCLOSED LIABILITIES. The Company and Austad have no indebtedness or liabilities of any character whatsoever, whether or not accrued and whether or not fixed or contingent, which exceed $5,000 individually or $25,000 in the aggregate, except, in the case of Austad, for (i) liabilities reflected in the Balance Sheet, (ii) liabilities incurred in the ordinary course of business of Austad subsequent to the date of the Balance Sheet, none of which has been or is materially adverse to the assets, properties or business of Austad and, in the case of Austad and the Company, (iii) liabilities incurred in connection with performance of this Agreement. SECTION 2.17. INSURANCE. All policies of insurance, together with the premiums currently paid thereon, covering the plant, machinery, equipment and inventory used in the business of Austad, or providing for business interruption, general liability, personal and product liability coverage, are described in Schedule 2.17. Such policies adequately cover all risks reasonably and prudently foreseeable in the operation and conduct of the assets, properties, business, operations, products and services of the Company and Austad as the same are presently owned or conducted. All such policies will be outstanding and in full force and effect at the Closing Date, subject to the provisions of Section 4.04 below. Except as set forth in Schedule 2.17, there are no claims, actions, suits or proceedings arising out of or based upon any of such policies of insurance, and, so far as is known to the Individuals or any Austad officer, no basis 19 20 for any such claim, action, suit or proceeding exists. There are no notices of any pending or threatened terminations or substantial premium increases with respect to any of such policies and Austad is in compliance with all conditions contained therein. SECTION 2.18. TRANSACTIONS WITH AFFILIATES. Except as set forth in Schedule 2.18, there are no outstanding notes payable to or accounts receivable from, or advances by the Company or Austad to, and the Company and Austad are not otherwise creditors of, any officer, employee, subsidiary or affiliate of the Company or Austad. SECTION 2.19. SUPPLIERS. Except as set forth in Schedule 2.19, Austad is not aware of any loss or threatened loss of any key supplier of Austad. For purposes of this Section, the term "key supplier" means any supplier of Austad the loss of which might materially adversely affect its business. SECTION 2.20. CORPORATE NAME. Set forth in Schedule 2.20 is a correct and complete list of all locations in which the corporate name "The Austad Company," or any variation thereof, is currently used by the Company or Austad or any of their affiliates. Austad or one of its affiliates has the full legal right to so use such name and variations in each of such jurisdictions. Neither the Individuals, Austad, nor any affiliate thereof knows, or has reason to know, of any actual or threatened claim by any third party with respect to the use of such name or of any actual or proposed use of the name "The Austad Company," or any variation thereof, by any third party in conflict with the use thereof by the Company or Austad. The use by the Company and Austad of the name "The Austad Company" and the variations thereof used by them does not, to the knowledge of the Individuals, Austad and the Company, infringe upon the rights of any third party, and neither the Company nor any Individual nor any affiliate or associate of either has granted any third party any right to use such name or any variation thereof. SECTION 2.21. INDIVIDUALS' AUTHORITY. Each Individual has all necessary power and, as of the Closing Date, will be duly authorized to perform his or her obligations under this Agreement and the other documents, agreements and certificates executed and delivered by each in connection with the Transactions. Those Individuals signing as a custodian for any other Individual are, as of the date hereof, duly authorized to execute this Agreement on behalf of such other Individual and have provided to the Buyer documentation satisfactory in form and substance evidencing such authority. SECTION 2.22. BINDING OBLIGATION; CONSENTS. The execution and delivery of this Agreement by the Individuals, the Company and Austad do not, and the consummation of the Transactions will not, violate any provision of the certificate of incorporation or by-laws of the Company or Austad or violate any provision of, or result in a breach of any of the terms or provisions of, or result in the acceleration of any obligation under, or constitute a default under, any mortgage, lien, lease, agreement, instrument, order, arbitration award, judgment or decree, to which any Individual or the Company or Austad is a party, or to which any Individual or the Company or Austad is, or the assets, properties or business of any Individual or the Company or Austad are, subject. Each of this Agreement and the respective Warrant Agreement is a valid and binding agreement of the Individuals, enforceable against the respective Individuals in 20 21 accordance with its terms; the Stockholders' Agreement is a valid and binding agreement of the members of the David Austad Group, enforceable against each member in accordance with its terms; the License Agreement is a valid and binding agreement of the Company and David Austad, enforceable against such parties in accordance with its terms; each of the Loan Agreements is a valid and binding agreement of Austad, enforceable against it in accordance with its terms; each of the Indemnification Agreements is a valid and binding agreement of David Austad and Randall Austad, as applicable, enforceable against each of them in accordance with its terms; and each of this Agreement and the Reimbursement Agreement is a valid and binding agreement of the Company and Austad, enforceable against such parties in accordance with its terms. All authorizations, approvals and consents necessary for the execution and delivery (a) by the Individuals, of this Agreement and the respective Warrant Agreements, (b) by the members of the David Austad Group, of the Stockholders' Agreement, (c) by the Company and David Austad, of the License Agreement, (d) by David Austad, of his Indemnification Agreement, (e) by Austad, of the Loan Agreements, (f) by Randall Austad of his Indemnification Agreement, and (g) by the Company and Austad, of this Agreement and the Reimbursement Agreement, have been given or made. Except as set forth in Schedule 2.22 or otherwise referred to herein, no consent, action, approval or authorization of, or registration, declaration or filing with, any governmental department, commission, agency or other instrumentality having jurisdiction over the Individuals or the Company or Austad is required to be obtained by any of them to authorize their execution, delivery or performance of this Agreement or the Other Agreements to which they are party. SECTION 2.23. THE BUYER SHARES. On the Closing Date, all stock transfer or other taxes and charges (other than income taxes) which are required to be paid in connection with the issue, sale and transfer of the Buyer Shares to the Buyer hereunder will have been fully paid by the Individuals and all laws imposing such taxes or charges will have been fully complied with in respect of the Buyer Shares by the Individuals and the Company. SECTION 2.24. CUSTOMER LISTS. The disks, cartridges and tapes containing customer lists and data of Austad (the "Customer Lists") contain a true, correct and complete list of the customers who have actually purchased merchandise from Austad by year of last purchase and the approximate number of catalogs mailed, reported on an annual basis for the periods of time that such information is reported. The Customer Lists are the only customer lists which exist and such lists are deposited with Acxiom Corporation and with no other vendors. At least 10 days prior to the Closing, Austad shall authorize this vendor to make the Customer Lists available to the Buyer and its representatives as they may reasonably request. SECTION 2.25. CUSTOMS. All goods imported into the United States or any other country by Austad (the "Imported Goods") have been properly valued and classified in accordance with applicable tariff laws, rules and regulations and all proper duties, tariffs or excise taxes have been paid with respect to the Imported Goods, no penalties have been assessed, asserted or claimed with respect to any Imported Goods, and no written inquiries relating thereto have been received by the Company, Austad or any Individual. All Imported Goods have been properly marked as to country of origin, content and material. Austad has filed with the U.S. Customs Service all required buying agency agreements, as applicable, with respect to Imported 21 22 Goods. Except as set forth in Schedule 2.25, Austad has not delivered to any agents, suppliers or vendors any tools, equipment, molds, additional products or other assistance (collectively, the "Assists") which would be considered a dutiable assist. Schedule 2.25 sets forth a true, complete and correct list of all Assists. SECTION 2.26. DISCLOSURE; REPRESENTATIONS AND WARRANTIES. The Individuals, the Company and Austad have made full, true and complete responses to all the Buyer's requests for information, documents, contracts and records. Neither this Agreement nor any statement, certificate, writing or document furnished to the Buyer in connection with this Agreement by any Individual or by the Company or Austad contains, as of the dates of such documents, any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained therein not misleading. Except as set forth in this Agreement or in a Schedule hereto, no fact (other than circumstances or events which are common knowledge or normal business risks) with respect to the Company's and Austad's business, operations or condition is known to any Individual or the Company or Austad which materially and adversely affects the business, operations or condition of the Company or Austad or any of their respective assets or properties. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BUYER The Buyer represents and warrants that: SECTION 3.01. ORGANIZATION AND AUTHORITY. The Buyer is a corporation duly organized and validly existing in good standing under the laws of the State of Delaware. The Buyer has the corporate power to execute, deliver and perform this Agreement and the other documents, agreements and certificates executed and delivered by it in connection herewith and therewith. The Buyer has taken all action required by law, its certificate of incorporation, its by-laws or otherwise to authorize the execution and delivery of this Agreement, the Loan Agreements, the Stockholders' Agreement, the Warrant Agreements, the License Agreement, the Reimbursement Agreement and the Indemnification Agreements and the documents, agreements and certificates executed and delivered by the Buyer in connection herewith and therewith. The execution and delivery of this Agreement and the Stockholders' Agreement, the Warrant Agreements, the License Agreement, the Loan Agreements, the Reimbursement Agreement and the Indemnification Agreements by the Buyer (or, in the case of the Loan Agreements, by a subsidiary of the Buyer), do not, and the consummation of the transactions contemplated hereby and thereby will not, violate any provision of the certificate of incorporation or by-laws of the Buyer, or any provision of any agreement, instrument, order, judgment or decree to which the Buyer is a party or by which it is bound. SECTION 3.02. BINDING OBLIGATION; CONSENTS. The execution and delivery of this Agreement by the Buyer does not, and the consummation of the Transactions will not, violate any provision of the certificate of incorporation or by-laws of the Buyer or violate any provision of, or result in a breach of any of the terms or provisions of, or result in the acceleration of any obligation under, or constitute a default under, any mortgage, lien, lease, agreement, instrument, order, arbitration award, judgment or decree, to which the Buyer is a party or to which its assets, 22 23 properties or business are subject. Each of this Agreement, the Stockholders' Agreement, the Reimbursement Agreement, the Indemnification Agreements and the License Agreement (as to Article IX only) is a valid and binding agreement of the Buyer, enforceable against the Buyer in accordance with its terms, or, in the case of the Loan Agreements and the Second Mortgage, a valid and binding agreement of the Buyer's subsidiary, enforceable against such party in accordance with its terms. All authorizations, approvals and consents necessary for the execution and delivery by the Buyer of this Agreement, the Stockholders' Agreement, the Reimbursement Agreement, the Indemnification Agreements and the License Agreement (as to Article IX only), or, in the case of the Loan Agreements and the Second Mortgage, the Buyer's subsidiary, have been given or made. Except as set forth in Schedule 3.02 or otherwise referred to herein, no consent, action, approval or authorization of, or registration, declaration or filing with, any governmental department, commission, agency or other instrumentality having jurisdiction over the Buyer or any subsidiary is required to be obtained by any of them to authorize their execution, delivery or performance of this Agreement or the Other Agreements to which they are party. SECTION 3.03. ACQUISITION OF BUYER SHARES. The Buyer is purchasing the Buyer Shares for its own account for investment only and not with a present view to, or for sale in connection with, any distribution of the Buyer Shares. SECTION 3.04. LITIGATION; CONSENTS. (a) The Buyer knows of no pending or threatened action, suit, proceeding or investigation before any court or governmental body, or by any governmental agency to restrain or prevent the performance of the Transactions or which might affect the right of the Buyer to own the Buyer Shares. (b) Except as otherwise referred to herein, no consent, action, approval or authorization of, or registration, declaration or filing with, any governmental department, commission, agency or other instrumentality having jurisdiction over the Buyer is required to be obtained by the Buyer to authorize the execution, delivery and performance by the Buyer of this Agreement or the Other Agreements or their respective terms. SECTION 3.05. DISCLOSURE; REPRESENTATIONS AND WARRANTIES. The Buyer has made full, true and complete responses to all requests for information, documents, contracts and records. Neither this Agreement nor any statement, certificate, writing or document furnished to the Company, Austad or any Individual in connection with this Agreement by the Buyer contains, as of the dates of such documents, any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained therein not misleading. 23 24 ARTICLE IV COVENANTS OF THE COMPANY, AUSTAD AND THE BUYER SECTION 4.01. MAINTAIN BUYER SHARES. Before the Closing Date, neither the Company nor Austad nor David Austad will, without the consent of the Buyer, (a) issue, sell or otherwise transfer any of the Buyer Shares or (b) incur or permit to exist any lien, charge or encumbrance on any of the Buyer Shares. SECTION 4.02. APPROVALS; CONSENTS. The Company and/or Austad will obtain or cause to be obtained all consents, approvals and authorizations required by law, statute, rule, regulation, contract or agreement to be obtained by the Company or Austad in connection with the consummation of the sale and transfer by the Company to the Buyer of the Buyer Shares and the transactions contemplated hereby, all such consents, approvals and authorizations being set forth in the attached Schedule 4.02. SECTION 4.03. MAINTAIN COMPANY BUSINESS. (a) From the date hereof to and including the Closing Date, the Company, Austad and the Individuals will use their best efforts to preserve the business organization of the Company and Austad intact, to keep available to the Buyer the services of the incorporator of the Company and the present officers and employees of Austad, and to preserve for the Buyer the good will of the suppliers, customers and others having business relations with Austad. (b) From the date hereof to and including the Closing Date, the Company, Austad and the Individuals will use their best efforts to cause Austad to continue the operation of its business in the ordinary course, and to cause the Company and/or Austad, as the case may be, to maintain their respective real property and other assets, properties and rights in at least as good order and condition as exists on the date hereof, and will not permit the Company or Austad to: (i) encumber any of its assets, properties or right or enter into any transaction or make any contract or commitment relating to its assets, properties or business, except in the ordinary course of business; (ii) enter into any employment contract which is not terminable without cost or other liability to the Company or Austad, or any successor thereof, except for normal severance arrangements and accrued vacation pay, upon notice of 30 days or less; (iii) without the Buyer's consent, enter into any contract or agreement (x) which cannot be performed within three months or less or (y) which involves the expenditure of over $50,000; (iv) reclassify or change in any manner its outstanding shares of capital stock or issue or sell any shares of its capital stock or other securities, or redeem or otherwise acquire, or enter into any contract or commitment to redeem or 24 25 otherwise acquire, any shares of capital stock of the Company or Austad other than as set forth in Schedule 2.12 hereof; (v) make any declaration, payment or distribution of a dividend or any other payment to any stockholder other than as set forth in Schedule 2.12 hereof; (vi) transfer any assets of the Company or Austad to any stockholder; (vii) make any payment or distribution to any trustee under any bonus, pension, profit sharing or retirement plan or incur any obligation to make any such payment or contribution which is not in accordance with the Company's or Austad's usual past practice, or make any payment or contribution or incur any obligation pursuant to or in respect of any other plan, contract or arrangement providing for any bonus, incentive compensation, pension, deferred compensation, retirement payment, profit sharing contribution or any other employee benefit, which is not in accordance with the Company's or Austad's usual past practice; (viii) extend credit in excess of $10,000 to any customer who was not a customer before the date of this Agreement, or depart from the normal and customary trade, discount and credit policies of the Company or Austad; (ix) guarantee the obligation of any person, firm or corporation, except by the endorsement of negotiable instruments for deposit or collection in the ordinary course of business; (x) take any action of the character described in Section 2.14 (Conduct of Business) which would have been required to be disclosed pursuant thereto had such action been taken after the date of the Balance Sheet and before the date of this Agreement; (xi) purchase or sell any securities for investment; (xii) amend either its charter or by-laws; (xiii) make any changes in any of its methods of accounting or in any of its accounting practices; or (xiv) change the banking or safety deposit arrangements of the Company or Austad (except as contemplated by the Transactions). SECTION 4.04. INSURANCE. At any time before the Closing Date, Austad will add, if possible, new coverage or increase the coverage on, or otherwise amend, any of the insurance policies described in Schedule 2.17, the extent of such added or increased coverage or the nature of such amendment being a matter solely in the discretion of the Buyer. 25 26 SECTION 4.05. NON-COMPETE. (a) The Former Stockholders agree that from and after the Closing Date, they will not use the name "Austad" or any confusingly similar name or any other Intellectual Property in connection with any business related to the business of the Company, Austad or any of their Subsidiaries. (b) David Austad agrees that he will not use any Intellectual Property, his name, likeness or voicemail announcements in connection with any business related to the business of the Company, Austad or any of their Subsidiaries except as permitted by the License Agreement. (c) For a period of one year following the Closing Date, no Individual shall, directly or indirectly, in association with or as a stockholder, director, officer, consultant, employee, member or otherwise of or through any person, firm, corporation, partnership, association or other entity, engage in or conduct any enterprise or business anywhere in the world which distributes, designs, manufactures, markets, sells or otherwise deals in products or services of the type manufactured or sold by the Company, Austad, any of their Subsidiaries or Joint Ventures or competitive with the business of the Company, Austad, any of their Subsidiaries or the Joint Ventures or their successors as such business is currently being conducted by the Company, Austad, any of their Subsidiaries or the Joint Ventures on the date hereof except as may be otherwise provided for by the Stockholders' Agreement or the License Agreement; provided, however, that an investment in not more than five percent in the aggregate of the total capital of any such competitive enterprise whose stock is listed on a national securities exchange shall not be deemed a violation of this Section; and provided further, that (i) in the case of Randall Austad, the applicable period shall be two years following the Closing Date, and (ii) in the case of the members of the David Austad Group, the provisions of the Stockholders' Agreement and the License Agreement (as applicable) and not this Section 4.05(c) shall apply. SECTION 4.06. NOTICE OF BREACH. The Company will immediately give notice to the Buyer of the occurrence of any event or the failure of any event to occur that results in a breach of any representation or warranty hereunder by the Company, Austad or any Subsidiary or a failure by the Company, Austad or any Subsidiary to comply with any covenant, condition or agreement contained herein. SECTION 4.07. UNIFORM COMMERCIAL CODE SEARCHES. Austad shall, at its own expense, conduct, or cause to be conducted, a search in each state and county in which either the Company or Austad conducts its business or maintains any assets or properties for financing statements filed in such states and counties under the applicable provisions of the Uniform Commercial Code. Not later than 10 days prior to the Closing Date, Austad shall deliver a list, certified as true and complete by an officer of Austad, of all financing statements or other liens recorded in such jurisdictions and a description of the property and assets encumbered thereby. Austad shall, prior to the Closing Date, (i) remove or cause to be removed all such liens and 26 27 encumbrances except those permitted encumbrances set forth in Schedule 2.06, (ii) file or cause to be filed in such jurisdictions a release of such lien or encumbrance and (iii) deliver to the Buyer evidence satisfactory in form and substance to the Buyer of compliance by Austad with the provisions of this Section. SECTION 4.08. AUDITED FINANCIAL STATEMENTS. Before the Closing Date, Austad shall deliver to the Buyer audited financial statements of Austad for the fiscal year ended December 31, 1994, including a balance sheet, the related statements of income and of changes in financial position for the period then ended, the accompanying notes and reports of the Auditors, the only qualification of which shall relate to the effect of the current status of Austad's indebtedness to FNBO on Austad's ability to continue as a going concern. ARTICLE V COVENANTS OF THE PARTIES SECTION 5.01. ACCESS. The Individuals, the Company and Austad will (a) supply the Buyer with all information necessary or beneficial for the carrying out of the Transactions and will permit the Buyer and its accounting, legal and other representatives to complete, to its satisfaction, a review of the assets (including, without limitation, the Intellectual Property), liabilities, business, operations and prospects of the Company and Austad, (b) provide such assistance in connection with the Transactions as is reasonably requested and (c) will give the Buyer and its representatives and lenders access at all reasonable times to all things related to the assets, liabilities, business, operations and prospects of the Company and Austad and, as the same may relate to the Company and Austad, the Individuals. The Buyer will provide the Individuals with information reasonably required for their review of the Other Agreements. SECTION 5.02. RETURN OF INFORMATION. In the event that the parties are unable to consummate the Transactions, each party will, if requested by another party, promptly return all records and information concerning the Company or Austad, the Individuals, the Buyer and their subsidiaries and affiliates (as the case may be) in such party's possession. SECTION 5.03. CONFIDENTIALITY. Each party will treat as confidential all confidential information concerning the Company, Austad, the Individuals, the Buyer and their subsidiaries and affiliates disclosed to such party and which does not become generally available to third parties without fault of the receiving party, unless disclosure thereof is required by law. In the event that the parties are unable to consummate the Transactions, no party shall at any time thereafter disclose to third parties, or use, directly or indirectly, for its own benefit, any such information, written or oral, about the business or affairs of the other parties hereto. SECTION 5.04. REPRESENTATIONS. The parties hereto (a) will take all action necessary to render accurate as of the Closing Date their respective representations and warranties contained herein, (b) will refrain from taking any action which would render any such representation or warranty inaccurate in any material respect as of such time, and (c) will perform or cause to be satisfied each covenant or condition to be performed or satisfied by it or them as contemplated by this Agreement. 27 28 SECTION 5.05. GOVERNMENT REVIEWS. Austad and the Buyer, in a timely manner, shall (i) make required filings with, prepare applications to and conduct negotiations with each governmental agency as to which such filings, applications or negotiations are necessary or appropriate for the consummation of the transactions contemplated hereby, and (ii) provide such information as each may be required to make such filings, prepare such applications and conduct such negotiations. Austad and the Buyer shall cooperate with each other and use their best efforts to assist the other in making and pursuing such filings and applications and conducting such negotiations and promptly shall respond to all requests for additional information or documentation. SECTION 5.06. PRESS RELEASES. The timing and content of all announcements regarding any aspect of the Transactions to the financial community, government agencies, employees of Austad or the public generally will be mutually agreed upon by the parties hereto in advance. SECTION 5.07. BEST EFFORTS. Each of the Individuals, the Company and the Buyer shall use its best efforts to cause all of the conditions to the obligations of the others to consummate the Transactions to be met as soon as practicable after the date of this Agreement. SECTION 5.08. NOTICE OF BREACH. The Buyer will immediately give notice to David Austad, acting in such event as representative of all the Individuals, of the occurrence of any event or the failure of any event to occur that results in a breach of any representation or warranty hereunder by the Buyer or a failure by the Buyer to comply with any covenant, condition or agreement contained herein. ARTICLE VI INDEMNIFICATION SECTION 6.01. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND INDEMNITIES. The parties hereto agree that their respective representations, warranties and indemnities contained in this Agreement shall survive for a period of two years from the Closing Date, except that those set forth in Section 2.15 (Tax Matters) shall survive for the applicable statute of limitations, and those set forth in Section 2.09(b) (Compliance With Law; Permits) respecting environmental matters shall survive for an unlimited period (the applicable period of survival of any representation or warranty being referred to herein as the "Limitation Period"). No claim shall be made by any party for breach of any representation or warranty unless (i) pursuant to the indemnification provisions set forth in this Agreement and (ii) notice thereof is given prior to the end of the applicable Limitation Period. SECTION 6.02. INDEMNIFICATION BY THE COMPANY, AUSTAD AND THE INDIVIDUALS. The Company, Austad and the Individuals shall, jointly and severally, save, defend and indemnify the Buyer and its officers, directors, employees, affiliates, stockholders, agents, representatives, attorneys, consultants, principals and associates (individually, an "Indemnitee" 28 29 and collectively, "Indemnitees") against, and hold each of them harmless from, any and all Damages (as defined in Section 6.04 below): (a) arising from any breach of a representation or warranty of the Company, Austad or the Individuals contained in or made pursuant to this Agreement or the Other Agreements or in any certificate, instrument or agreement delivered to any Indemnitee pursuant to or in connection with this Agreement or the Other Agreements; (b) resulting from a default in the performance of any of the covenants or obligations that the Company, Austad or any Individual is required to perform under this Agreement or the Other Agreements; provided, that no Individual shall be responsible for Damages resulting from a default in the performance of any of the covenants or obligations that the Company or Austad is required to perform under either Loan Agreement or under the Second Mortgage, the License Agreement, the Reimbursement Agreement or the Warrant Agreements unless such Individual, acting in breach of his or her obligations to the Company or Austad, as the case may be, whether pursuant to this Agreement or any of the Other Agreements or otherwise, caused the Company or Austad, as the case may be, to so default; or (c) resulting from any foreign, Federal, state or local income or franchise tax payable (i) with respect to the period ending on the Closing Date or (ii) in consequence of the Redemption or the payment of the Redemption Notes; provided, however, that neither the Company, Austad nor any Individual shall be required to pay any Damages unless (i) the aggregate amount of Damages exceeds $100,000, in which event the indemnity pursuant to this Section 6.02 shall require payment of all Damages incurred by the Indemnitees in excess of $50,000 (e.g., if total Damages incurred are $150,000, payment of $100,000 shall be required), and (ii) the claim for such Damages is made by an Indemnitee and received by the Company, Austad or any Individual in accordance with the provisions of Sections 6.01 and 6.05, it being understood and agreed that the Indemnitee may elect, in its sole discretion, to bring such claim against any or all of the Company, Austad or an Individual. In no event, however, shall the Damages payable pursuant to this Section 6.02 by a Former Stockholder exceed, in the aggregate, the sum set forth opposite the name of such Former Stockholder in Schedule 6.02 attached hereto, nor shall the Damages payable pursuant to this Section 6.02 by parties who are not Former Stockholders exceed, in the aggregate, the sum of $4,000,000. SECTION 6.03. INDEMNIFICATION BY THE BUYER. The Buyer shall be liable for, save, defend and indemnify the Company, Austad and the Individuals and their respective officers, directors, employees, affiliates, stockholders, agents, representatives, attorneys, consultants, principals and associates (also individually, an "Indemnitee" and collectively, "Indemnitees") against, and hold each of them harmless from, any and all Damages: 29 30 (a) arising from any breach of a representation or warranty of the Buyer contained in or made pursuant to this Agreement or the Other Agreements or in any certificate, instrument or agreement delivered to an Indemnitee pursuant to or in connection with this Agreement or the Other Agreements; or (b) resulting from a default in the performance of any of the covenants or obligations that the Buyer is required to perform under this Agreement or the Other Agreements; provided, however, that the Buyer shall not be required to pay any Damages unless (i) the aggregate amount of such Damages exceeds $100,000, in which event the indemnity pursuant to this Section 6.03 shall require payment of all Damages incurred by the Indemnitees in excess of $50,000 (e.g., if total Damages incurred are $150,000, payment of $100,000 shall be required), and (ii) the claim for such Damages is made by an Indemnitee and received by the Buyer in accordance with the provisions of Sections 6.01 and 6.05. In no event, however, shall the Damages payable pursuant to this Section 6.03 exceed, in the aggregate, the sum of $4,000,000. SECTION 6.04. DAMAGES. For the purposes of this Agreement, "Damages" shall mean any loss, liability, damage, cost or expense, including, without limitation, reasonable costs of defense and prosecution of litigation and counsel fees incurred by an Indemnitee. SECTION 6.05. LEGAL PROCEEDINGS. (a) If any legal proceeding shall be instituted, or any claim or demand made, against an indemnified party in respect of which an indemnifying party may be liable hereunder, the indemnified party shall give prompt written notice thereof to the indemnifying party. The indemnifying party, at its expense, may participate in and, with the consent of the Indemnitee, direct any such legal proceeding and the negotiation and settlement of any such claim or demand. The Indemnitee shall have the absolute right, in its sole discretion and without the consent of the indemnifying party, to settle any such legal proceeding, claim or demand; provided, however, that if the Indemnitee shall so settle without the consent of the indemnifying party, the indemnifying party shall be discharged from any liability hereunder with respect to the proceeding, claim or demand so settled. (b) If the amount of Damages paid, at any time subsequent to such payment, shall be reduced by any recovery, settlement or otherwise, the amount of such reduction, less any expense incurred by the party receiving such recovery in connection therewith, promptly shall be repaid to the indemnifying party. (c) The parties hereto shall consult and use their best efforts to cooperate in resolving questions regarding Damages. If a party hereto shall believe that it has a claim under this Article VI, such party shall give notice of such claim to the other parties, specifying in reasonable detail the nature of the Damages for which payment is claimed, the Section or Sections of this Agreement upon which such claim is based and the amount payable in respect thereof. 30 31 ARTICLE VII TERMINATION OF AGREEMENT SECTION 7.01. TERMINATION OF AGREEMENT. This Agreement and the Transactions may be terminated or abandoned at any time before the Closing Date: (a) by mutual consent of the parties; (b) by the Buyer, if there has been a material misrepresentation in this Agreement by the Company, Austad or any Individual, or a material breach by the Company, Austad or any Individual of any warranty or covenant set forth herein, or a failure of any condition to which the obligations of the Buyer are subject; (c) by the Company, if there has been a material misrepresentation in this Agreement by the Buyer, or a material breach by the Buyer of any warranty or covenant set forth herein, or a failure of any condition to which the obligations of the Company are subject; or (d) by either the Company or the Buyer, if the Closing Date shall not have occurred on or before May 31, 1995, for any reason other than the failure of the party seeking to terminate this Agreement to perform its obligations hereunder. ARTICLE VIII CONDITIONS TO THE BUYER'S OBLIGATIONS The obligations of the Buyer to purchase the Buyer Shares pursuant to this Agreement, enter into the Other Agreements and perform thereunder, shall be subject to the satisfaction, at or before the Closing Date, of the following conditions (any of which may be waived, in whole or in part, by the Buyer): SECTION 8.01. REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company, Austad and the Individuals contained in this Agreement (including the Schedules and Exhibits hereto), or in any certificate or document delivered to the Buyer in connection herewith, shall be true in all material respects at the Closing Date as if made again on and as of the Closing Date. The Company, Austad and the Individuals shall have duly performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by them at or before the Closing Date. The Buyer shall have been furnished with certificates of the Individuals and of appropriate officers of the Company and Austad certifying in such detail as the Buyer may reasonably request to the fulfillment of the foregoing conditions. SECTION 8.02. CERTAIN DOCUMENTS. Austad shall have furnished the Buyer with the following documents: (a) The Certificate or Articles (as the case may be) of Incorporation of the Company and Austad and all amendments thereto, duly certified by the proper officials of the jurisdictions in which the Company and Austad were organized; 31 32 (b) Certificates as to the good standing of the Company and Austad and payment of all applicable state taxes thereby, executed, in the case of the Company, by the appropriate official of the State of Delaware and each jurisdiction listed in Schedule 2.01, and, in the case of Austad, by the appropriate official of the State of South Dakota and each jurisdiction listed in Schedule 2.01; (c) The by-laws of the Company and Austad, duly certified by the incorporator of the Company and the Secretary or an Assistant Secretary of Austad as being in full force and effect; (d) Uniform Commercial Code search reports, on Form UCC-11 or other appropriate form, from the appropriate official for the States of Delaware, South Dakota and other jurisdictions in which Austad is qualified to do business, and from the appropriate official or recording office in each county or other jurisdictional subdivision of each state in which the Company or Austad leases any real property or maintains an office or any assets, as to any liens, claims, charges, exceptions or encumbrances of record on any of the assets, properties or business of the Company or Austad; (e) Resignations, effective on the Closing Date, of certain of the officers and directors of Austad, other than David Austad, as may be requested by the Buyer; (f) The complete and correct corporate minute books, stock transfer records and corporate seals of the Company and Austad; (g) A certificate of the Secretary or an Assistant Secretary of Austad certifying (i) that attached thereto is a true and complete copy of all instruments reflecting actions of the incorporator of the Company, and of all resolutions of the board of directors of Austad pertaining to the Transactions, the latter being duly adopted at meetings of such board at which a quorum of directors was present and acting throughout, and certifying (ii) as to the incumbency and authority of the incorporator and officers of the Company and Austad executing this Agreement and the documents executed and delivered by the Company and Austad in connection herewith; (h) Evidence satisfactory to the Buyer that the members of the David Austad Group are the sole stockholders of Austad and that the Company has no stockholders; (i) Evidence satisfactory to the Buyer respecting the declaration of a dividend by Austad to the members of the David Austad Group, in return of a capital contribution, in the aggregate amount of $600,000; (j) Third-party and governmental and regulatory approvals and consents necessary to consummate the Transactions, including, without limitation, all required approvals and consents of (i) FNBO, Valley and any other lenders to Austad, (ii) lessors of Leased Realty and (iii) the Lease Finance Group and/or its assignees, as applicable; 32 33 (k) Evidence satisfactory to the Buyer that (i) the Revolving Loan Agreement shall have been amended to provide for a Loan Termination Date not earlier than May 31, 1997, and shall have been amended in no other manner except for changes, if any, required to reflect the payment of $1,500,000 to be made to FNBO at the Closing as contemplated by Section 1.05(d) above, and (ii) the Valley Releases shall have been executed and delivered to David Austad and Randall Austad, respectively; (l) A copy of the memorandum of the Auditors respecting certain tax matters; (m) A copy of the audited financial statements of Austad for the fiscal year ended December 31, 1994, including a balance sheet, the related statements of income and of changes in financial position for the period then ended, the accompanying notes and reports of the Auditors, the only qualification of which shall relate to the effect of the current status of Austad's indebtedness to FNBO on Austad's ability to continue as a going concern; (n) Evidence satisfactory to the Buyer that David Austad has obtained at least $130,000 in loan funds from his family members; and (o) All documents referred to herein and such other documents as the Buyer may reasonably request. SECTION 8.03. OPINION OF COUNSEL. The firm of Lynn, Jackson, Shultz & Lebrun, P.C. shall have delivered to the Buyer a favorable opinion or opinions, dated the Closing Date, substantially in the form of Exhibit J. SECTION 8.04. LEGAL MATTERS SATISFACTORY. All legal matters, and the form and substance of all documents to be delivered by the Company, Austad and the Individuals to the Buyer at the Closing, shall have been approved by and satisfactory to the Buyer. SECTION 8.05. THE BUYER SHARES. The Company shall have delivered to the Buyer a certificate or certificates for the Buyer Shares together with funds sufficient for payment of any applicable stock transfer tax payable in respect of the transfer of the Buyer Shares to the Buyer. SECTION 8.06. FORMER STOCKHOLDER RELEASES. Each Former Stockholder shall have delivered to the Buyer, the Company, Austad and the members of the David Austad Group a general release of all claims he or she may have through the Closing Date against the Company, Austad or any member of the David Austad Group. SECTION 8.07. NO MATERIAL CHANGE. There shall not have been any material adverse change in the assets, liabilities, results of operations, business, or prospects of the Company or Austad at the Closing Date from that disclosed in the Balance Sheet for the period from the date of the Balance Sheet to the Closing Date, or in the assets or properties of the Company and Austad, taken as a whole, from the date of the Balance Sheet to the Closing Date, and the Buyer shall have been furnished with a certificate to that effect executed by the President 33 34 or Vice President and the Treasurer or Chief Financial Officer of Austad and the incorporator of the Company. SECTION 8.08. NO LITIGATION. No action, suit, proceeding or investigation shall be pending or, so far as is known to the Buyer, the Individuals, the Company or Austad's executive officers, be threatened before any court or governmental body, or by any governmental agency challenging the transactions contemplated by this Agreement or otherwise seeking damages, or seeking to restrain or prevent the consummation of the Transactions or to prohibit or limit the ability of the Buyer to exercise full rights of ownership of the Buyer Shares. SECTION 8.09. OTHER AGREEMENTS. The Company, Austad and the Individuals, in each case as applicable, shall have executed and delivered the Loan Agreements, the Stockholders' Agreement, the License Agreement, the Reimbursement Agreement, their respective Warrant Agreements and Indemnification Agreements. SECTION 8.10. TITLE INSURANCE. The Buyer shall have obtained title insurance for the Owned Realty which represents the principal place of business of Austad in amounts and pursuant to such terms and conditions as the Buyer shall reasonably require. SECTION 8.11. COMPANY CONSENTS, ETC. The Company and Austad shall have received all written consents, authorizations and approvals for the Transactions (i) required by any applicable law, rule or regulation of any Federal or state governmental or administrative body, (ii) from the lessors under the Leases, (iii) from FNBO, such consent to include the FNBO Extension, (iv) from Valley and from any other lender pursuant to the Mortgages, (v) from the Lease Finance Group and/or its assignees, as required, and (vi) from any other third party to a material contract with the Company or Austad as deemed necessary by the Buyer. SECTION 8.12. BUYER CONSENTS. The Buyer shall have received consent to the Transactions from such of its lenders as may be required. SECTION 8.13. ENVIRONMENTAL. The Buyer shall have received a Phase I environmental study with respect to the Owned Realty and the Leased Realty satisfactory in form and substance to the Buyer. ARTICLE IX CONDITIONS TO THE COMPANY'S AND DAVID AUSTAD'S OBLIGATIONS The obligations of the Company to sell the Buyer Shares to the Buyer pursuant to this Agreement and of David Austad to execute and deliver this Agreement and the Other Agreements to which he is a party shall be subject to the satisfaction, at or before the Closing Date, of the following conditions (any of which may be waived, in whole or in part, by the Company or David Austad): 34 35 SECTION 9.01. REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Buyer contained in this Agreement or in any certificate or document delivered to the Company pursuant hereto shall be true in all material respects at the Closing Date as if made on and as of the Closing Date. The Buyer shall have duly performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by the Buyer at or before the Closing Date. The Company shall have been furnished with certificates of appropriate officers of the Buyer, dated the Closing Date, certifying in such detail as the Company may reasonably request to the fulfillment of the foregoing conditions. SECTION 9.02. PAYMENT. The Buyer shall have paid to the Company by wire transfer on the Closing Date the amount required to be paid to the Company pursuant to Section 1.02. SECTION 9.03. OPINION OF COUNSEL. The Buyer shall have furnished to the Company and David Austad a favorable opinion, dated the Closing Date, of Michael P. Sherman, Esq., General Counsel of the Buyer, substantially in the form of Exhibit K. SECTION 9.04. CERTAIN DOCUMENTS. The Buyer shall have furnished the Company with the following documents: (a) The Certificate of Incorporation of the Buyer and all amendments thereto; (b) Certificate as to the good standing of the Buyer, executed by the appropriate official of the State of Delaware. (c) The By-laws of the Buyer, duly certified by the Secretary or an Assistant Secretary of the Buyer as being in full force and effect; (d) A certificate of the Secretary or an Assistant Secretary of the Buyer certifying (i) that attached thereto is a true and complete copy of all resolutions of the executive committee of the board of directors of the Buyer pertaining to the Transactions, duly adopted at meetings of such committee at which a quorum of directors was present and acting throughout and (ii) as to the incumbency and authority of the officers of the Buyer executing this Agreement and the documents executed and delivered by the Buyer in connection herewith; and (e) such other documents as the Company may reasonably request. SECTION 9.05. OTHER AGREEMENTS. The Buyer shall have executed and delivered the Stockholders' Agreement, the License Agreement (in acknowledgment of its obligations pursuant to Article IX thereof), the Reimbursement Agreement and the Indemnification Agreements. SECTION 9.06. LEGAL MATTERS SATISFACTORY. All legal matters, and the form and substance of all documents to be delivered by the Buyer to the Company, Austad and the Individuals, shall have been approved by and satisfactory to the Company, Austad and the Individuals. 35 36 SECTION 9.07. CONSENTS. The Buyer shall have received all written consents, authorizations and approvals required by any applicable law, rule or regulation of any Federal or state governmental or administrative body respecting the sale of the Buyer Shares pursuant to the provisions of this Agreement. SECTION 9.08. VALLEY RELEASES. David Austad and Randall Austad shall have received their respective Valley Releases, each such release to be satisfactory in form and substance to such party and his counsel. ARTICLE X MISCELLANEOUS SECTION 10.01. BANK AND VENDOR TRANSACTIONS. At the Closing, the Company and/or Austad shall provide satisfactory evidence of (a) the payment of $1,500,000 to FNBO and the receipt of the FNBO Extension; (b) the payment of $400,000 to Valley and the receipt of the Valley Release; (c) the repayment of certain notes payable to the Former Stockholders as set forth in Schedule 1.05; (d) the payment to the members of the David Austad Group of cash dividends in the aggregate amount of $600,000 declared on April 28, 1995 as set forth in such Schedule; and (e) the payment to the Former Stockholders of the outstanding Redemption Notes. SECTION 10.02. OTHER COMMITMENTS OF DAVID AUSTAD. (a) At the Closing, David Austad shall purchase from Austad the meeting facility of Austad located at Okoboji Lake, Iowa, as more fully described in Exhibit L attached hereto, for a cash purchase price of $75,000, payable one third at the Closing, one third on or before July 1, 1995 and one third on or before December 31, 1995, in each case by certified check or wire transfer with no prepayment penalties or interest charges to an account designated by Austad, in exchange for a quitclaim deed in recordable form to be delivered to David Austad by Austad upon full payment of all such amounts. (b) David Austad will expend at least $800,000 in the opening and roll out of the two New Stores to be opened pursuant to the License Agreement. SECTION 10.03. OTHER COMMITMENTS OF THE BUYER. (a) The Buyer agrees to cause its subsidiaries to phase in the receipt of Austad catalog telemarketing activities pursuant to a schedule to be mutually agreed upon by Austad, David Austad and the Buyer. The Buyer further agrees that it shall not allocate to the Company or Austad any telemarketing customer contact costs incurred from the Closing Date through December 30, 1995 in excess of $3.28 per customer order, representing a guaranteed savings of at least 10% over Austad's projected 1995 Business Plan cost of $3.64 per customer order (based upon such Plan's budgeted talk time and call to order ratio). For the 1996 fiscal year and beyond, costs shall be allocated in the same manner as for the Buyer's other catalogs, as set forth in the Reimbursement Agreement. 36 37 The Buyer will retain and produce for inspection during normal business hours, on reasonable notice by Austad, data sufficient to verify the accuracy of the costs incurred and allocations made. The Buyer agrees that Austad shall not approve the relocation of warehouse and telemarketing facilities for the Austad business in the absence of a demonstrated plan for savings of at least 10% over Austad's now-current fulfillment costs. (b) The Buyer agrees that the Buyer will, at its expense, use its best efforts to link the Buyer's MACSII system with Austad's Richter and inventory forecasting systems on a one-way outbound feed from a data center operated by the Buyer or one of its subsidiaries. The Buyer further agrees to use its best efforts to integrate Austad's operations with the Buyer's MACSII system by March 31, 1996 and to complete such outbound-feed link within sixty (60) days following such integration into the MACSII system. (c) The Buyer acknowledges to David Austad its present intention to cause the Company and/or Austad to open one new Austad's retail store in 1995 and four in 1996, provided in each case that (i) the Company's Austad's retail stores collectively are profitable, (ii) the Company as a whole is operating on budget and (iii) the new stores in question are self-funding (including use of availability under the Revolving Loan Agreement provided that such use does not restrict in any way other business activities of the Company and/or Austad) so that no financing need be obtained in order to open any such store. The parties acknowledge that the statement of intention set forth in this Section 10.03(c) shall be a nonbinding expression of intent only. (d) The Buyer agrees with each of David Austad and Randall Austad that, within the following time periods, the Buyer will obtain the release and discharge of the respective personal guarantees made by each: (i) the guarantees in favor of FNBO, on or before May 31, 1997, and (ii) the guarantees in favor of the Lease Finance Group as set forth in Schedule 2.06, on or before May 31, 1998. (e) The Buyer agrees with each of David Austad and Randall Austad to execute and deliver, at the Closing, the Indemnification Agreements, substantially in the form set forth in Exhibit G, with such additions and changes as shall be agreed upon by the Buyer, David Austad and Randall Austad. SECTION 10.04. REPRESENTATIONS AND WARRANTIES. The representations and warranties made in this Agreement and in any certificate, Schedule, Exhibit, release or other instrument or document delivered in connection therewith shall survive the Closing Date. The covenants of the parties hereto shall continue in full force and effect in accordance with their terms. SECTION 10.05. NO BROKERS. Except as contemplated by Section 1.03 hereof, each party hereto represents and warrants that there are no claims for brokerage commissions or finder's fees in connection with the transactions contemplated hereby resulting from any action taken by any party, or the officers or directors of any corporate party. 37 38 SECTION 10.06. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the internal, substantive laws of the State of New Jersey, without giving effect to the conflict of law rules thereof. SECTION 10.07. NOTICES. All notices, consents, requests, instructions, approvals and other communications provided for herein shall be deemed validly given, made or served if in writing and delivered personally (as of such delivery) or sent by certified mail, return receipt requested (as of two days after deposit in a United States post office), postage prepaid, or by facsimile transmission (as of such transmission provided it is subsequently confirmed in writing) or by prepaid overnight courier (as of the time of delivery): (a) if to the Buyer, addressed to: Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, New Jersey 07087 Attention: Michael P. Sherman, Esq. Fax No.: 201-392-5005 (b) if to the Company or Austad, addressed to: Austad Holdings, Inc. 4500 East 10th Street Sioux Falls, South Dakota 57196 Attention: David Austad Fax. No.: 605-336-7221 (c) if to the Individuals, addressed to: c/o David Austad 812 Bayberry Circle Sioux Falls, South Dakota 57106 and also to: c/o Randall Austad 1508 South Gray Goose Circle Sioux Falls, South Dakota 57103 or such other address as shall be furnished in writing by a party to the others. It is understood and agreed that the confirmed receipt by either of David Austad or Randall Austad of a notice sent to them on behalf of the Individuals shall constitute notice to all of the Individuals. SECTION 10.08. JURISDICTION; AGENT FOR SERVICE. Legal proceedings commenced by any party hereto arising out of any of the Transactions or obligations contemplated by this Agreement shall be brought exclusively in the Federal courts or, in the absence of Federal jurisdiction, state courts, in either case in the State of New Jersey. The parties hereto irrevocably and unconditionally submit to the jurisdiction of such courts and agree to take any and all future action necessary to submit to the jurisdiction of such courts. Each of the parties hereto irrevocably waives any objection which it may now or hereafter have to the laying of venue of 38 39 any suit, action or proceeding brought in any Federal or state court in the State of New Jersey and further irrevocably waives any claims that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. The Company hereby irrevocably designates, appoints and empowers Corporation Trust Company, whose present address is 820 Bear Tavern Road, West Trenton, New Jersey 08628, as its authorized agent to receive, for and on behalf of the Company, service of process in the State of New Jersey as and when such actions and proceedings may be brought, and such service of process shall be deemed completed upon the date of delivery thereof to such agent, whether or not such agent gives notice thereof to the Company, or upon the earliest of any other date permitted by applicable law. Final judgment against the Company in any such suit shall be conclusive and may be enforced in other jurisdictions by suit on the judgment, a certified or true copy of which shall be conclusive evidence of the fact and the amount of any indebtedness or liability of the Company therein described, or by appropriate proceedings under any applicable treaty or otherwise. SECTION 10.09. ASSIGNMENT; AMENDMENTS, WAIVERS. (a) Neither the Buyer nor the Company shall assign any of its rights or obligations under this Agreement without the prior written consent of the other, except that the Buyer may assign its rights hereunder to one or more direct or indirect wholly-owned subsidiaries of the Buyer provided that the Buyer shall continue to be obligated to perform all the obligations to be performed by the Buyer hereunder. (b) This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors and permitted assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. (c) No provision of this Agreement may be amended, modified or waived except by written agreement duly executed by each of the parties. SECTION 10.10. ENTIRE AGREEMENT. This Agreement represents the entire agreement between the parties and supersedes and cancels any prior oral or written agreement, letter of intent or understanding related to the subject matter hereof, including, without limitation, that certain letter of intent dated March 15, 1995 among the Buyer, Austad, and David Austad individually and on behalf of the other Individuals. SECTION 10.11. BINDING AGREEMENT. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. SECTION 10.12. COUNTERPARTS. This Agreement may be executed in one or more counterparts, and shall become effective when one or more counterparts have been signed by --BALANCE OF PAGE LEFT INTENTIONALLY BLANK-- 39 40 each of the parties. IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto on the day and year first above written. HANOVER DIRECT, INC. By: /s/ Michael P. Sherman ---------------------- Name: Michael P. Sherman Title: EVP AUSTAD HOLDINGS, INC. By: /s/ David Austad ---------------------- Name: David Austad Title: Incorporator THE AUSTAD COMPANY By: David Austad ---------------------- Name: David Austad Title: President/CEO THE INDIVIDUALS: (a) THE DAVID AUSTAD GROUP: /s/ David Austad ------------------------------------- David Austad, individually /s/ David Austad ------------------------------------- David Austad, as custodian for each of Ryan, Sara and Melissa Austad /s/ Denise Austad ------------------------------------- Denise Austad (b) THE FORMER STOCKHOLDERS: /s/ Oscar Austad ------------------------------------- Oscar Austad --SIGNATURES CONTINUED ON FOLLOWING PAGE-- 40 41 --SIGNATURES CONTINUED FROM PRECEDING PAGE-- /s/ Dorothy Austad ------------------------------------- Dorothy Austad /s/ Randall Austad ------------------------------------- Randall Austad /s/ Kristi Austad ------------------------------------- Kristi Austad /s/ Lori Miller ------------------------------------- Lori Miller, individually /s/ Robin Miller ------------------------------------- Robin Miller /s/ Kerri Derenge ------------------------------------- Kerri Derenge /s/ Sharon Stahl ------------------------------------- Sharon Stahl /s/ Lori Miller ------------------------------------- Lori Miller, as custodian for each of Kara and Andrew Miller /s/ Dorothy Austad ------------------------------------- Oscar Austad by Dorothy Austad, his attorney in fact 41 EX-2.4 3 AGREEMENT AND PLAN OF CORPORATE SEPARATION 1 Exhibit 2.4 AGREEMENT AND PLAN OF CORPORATE SEPARATION AND REORGANIZATION AGREEMENT AND PLAN OF CORPORATE SEPARATION AND REORGANIZATION dated as of February 16, 1996 by and among AUSTAD HOLDINGS, INC. ("Holdings"), a Delaware corporation; THE AUSTAD COMPANY ("TAC"), a South Dakota corporation and wholly owned subsidiary of Holdings; HANOVER DIRECT, INC. ("Hanover"), a Delaware corporation and the owner of 67.5% of the outstanding shares of capital stock of Holdings; DAVID B. AUSTAD, a resident of the State of South Dakota, individually ("David Austad") and as custodian for certain members of his immediate family under the South Dakota Uniform Transfer to Minors Act ("SDUTMA"); and DENISE AUSTAD, also a resident of the State of South Dakota (collectively with David Austad, both individually and as custodian as aforesaid, the "David Austad Group", the members of such Group being collectively the owners of the remaining 32.5% of the outstanding shares of capital stock of Holdings). W I T N E S S E T H: WHEREAS, TAC is, and since 1973 has been, actively engaged in the business of direct marketing of golf equipment, supplies, apparel and related goods and services through its Austad's catalog in Sioux Falls, South Dakota; and WHEREAS, TAC is also actively engaged, through its Retail Division (the "Division"), in the business of the retail sale of golf equipment, supplies, apparel and related goods and services, such business having been commenced by TAC in a single retail store in Sioux Falls in 1974 and expanded by two stores in Minnesota and a fourth store in Illinois during the period 1989 through 1991; and WHEREAS, Hanover and the David Austad Group acquired their respective interests in Holdings on May 25, 1995, the former in exchange for a cash capital contribution and certain other consideration, and the latter in exchange for all the outstanding capital shares of TAC, in a transaction in which no gain or loss was recognized in whole or in part under the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, in consequence of the foregoing transactions, 2 Holdings is the sole shareholder of TAC; and WHEREAS, TAC has offered to transfer all assets of the Division, subject to all liabilities of the Division, such assets and liabilities being substantially those appearing on the pro forma balance sheet prepared February 13, 1996 and dated February 16, 1996, attached hereto as Exhibit A (the "Balance Sheet"), as adjusted from such date to the date on which the closing of such transfer shall take place (the "Closing Date"), to AGS, Inc. ("Newco"), a South Dakota corporation organized by TAC on January 19, 1996, in exchange for the original issue of 100,000 shares of common stock, par value $1.00 per share, of Newco (the "Newco Shares"), which shall constitute all of the outstanding common stock of Newco, in a transaction qualifying as a tax-free reorganization under Sections 368(a)(1)(D) and 355 of the Code; and WHEREAS, TAC has offered to spin off the Newco Shares acquired by it to Holdings, in a transaction intended to qualify as a tax-free reorganization under Section 355 of the Code; and WHEREAS, Holdings has offered to transfer the Newco Shares acquired from TAC to the members of the David Austad Group, in exchange for (1) the payment of $1,164,445 by the members of the David Austad Group to First National Bank of Omaha, a national banking association ("FNBO"), as payment of a liability of the Division, representing a partial paydown of TAC's existing indebtedness to FNBO (the "FNBO Payment"), and (2) the surrender by the members of the David Austad Group of all their respective shares of the Common Stock, $1.00 par value, of Holdings, representing an aggregate of 32,500 such shares, in a transaction intended to qualify as a tax-free split-off under Section 355 of the Code, and the members of the David Austad Group desire to accept such offer subject to the terms and conditions set forth herein. NOW, THEREFORE, in reliance upon the representations, warranties and agreements made herein and in consideration of the premises and mutual promises herein contained, the parties agree as follows: 1. PLAN OF REORGANIZATION. The parties hereby adopt a Plan of Reorganization intended 2 3 to effect a tax-free reorganization under Section 355 and various other Sections of the Code. Pursuant to the terms of this Agreement hereinafter set forth, the reorganization will consist of: a. SECTION 351 TRANSFER: The transfer by TAC of the part of its assets constituting the Division, subject to all liabilities of the Division, to Newco in exchange solely for all of the outstanding voting stock of Newco; b. SECTION 355 AND 368(A)(1)(D) TRANSFERS: (1) The transfer by TAC to Holdings of all the shares of Newco's voting stock acquired by TAC as aforesaid; and (2) The distribution by Holdings to the members of the David Austad Group of an aggregate of 100,000 Newco Shares, constituting all the stock of Newco acquired by Holdings, in exchange for the FNBO Payment and 32,500 shares of Holdings' Common Stock, $1.00 par value, constituting all of the voting stock of Holdings owned by such members. 2. TRANSFER OF THE DIVISION TO NEWCO. The parties acknowledge that Newco's articles of incorporation, bylaws, and organizational minutes are in a form approved by counsel for TAC and the David Austad Group, its corporate name having been agreed upon by David Austad and TAC, and that the initial capitalization of Newco consists solely of 100,000 shares of Common Stock, par value $1.00 per share. The initial officers and the initial director of Newco shall be as follows: Wayne Garten President Edward O'Brien Vice President and Treasurer Michael P. Sherman Vice President, Secretary and Sole Director TAC agrees to take, or cause to be taken, the following action at or prior to the Closing Date: 3 4 a. TAC shall transfer to Newco, in exchange for the Newco Shares, all of the assets, properties and business of the Division, subject to all of the liabilities, debts, obligations and contracts of the Division (including all assets and the liabilities appearing on the books and records of the Division and included in Exhibit A hereto, but subject to certain adjustments as set forth in Section 4 below). The transfer and assignment of assets shall be by bulk or individual assignments substantially in the form set forth in Exhibits 2.a.1 through 2.a.__ attached hereto, in each case with such other appropriate instruments of title as counsel for the David Austad Group may reasonably request. b. TAC shall then transfer the Newco Shares to Holdings pursuant to a unanimous written consent of the Board of Directors and Sole Shareholder of TAC. 3. PAYMENT ON ACCOUNT OF CERTAIN INDEBTEDNESS; EXCHANGE OF STOCK. On the Closing Date, the members of the David Austad Group agree: a. to pay, or cause Newco to pay, to FNBO, as payment of a liability of the Division, by wire transfer to an account designated by FNBO, the sum of $1,164,445, representing a portion of the outstanding obligations of TAC to FNBO under the Loan Agreement dated as of May 31, 1995 between TAC and FNBO, such sum being reflected as the "Revolving Credit Facility" line item in the Retail column of the Liabilities section of the Balance Sheet (sometimes hereinafter referred to as the "Balance Due Amount" as described in Section 4 below). b. to deposit, or cause Newco to deposit, into the Escrow Account (as defined in Section 4 below), the sum of $200,000 (along with any interest or earnings thereafter earned thereon, the "David Austad Escrow Deposit"), to be held as provided in Section 4; and c. to transfer, assign, and surrender to Holdings a total of 32,500 shares of the Common Stock, par value $1.00 4 5 per share, of Holdings, which shares shall constitute, in the aggregate, all of the shares of voting stock of Holdings owned by any of such members at the Closing Date; and in exchange solely for such payment and such transfer of shares, Holdings agrees: d. to transfer to the respective members of the David Austad Group, on the Closing Date, the number of Newco Shares set forth opposite the name of each in Exhibit 3.d attached hereto, representing a total of 100,000 Newco Shares, which shares shall constitute all of the outstanding capital stock of Newco at the Closing Date, and e. to deposit, or cause TAC to deposit, into the Escrow Account the sum of $200,000 (along with any interest or earnings thereafter earned thereon, the "TAC Escrow Deposit"), to be held as provided in Section 4 below. 4. ESCROW ACCOUNT; POST-CLOSING ADJUSTMENTS. a. CERTAIN DEFINITIONS. The parties agree that the following capitalized terms shall have the meanings indicated: (1) Agreed Company Value--At February 16, 1996, 2,733,992, representing $2,666,667(1) plus net income of Holdings and subsidiary for the period May 26, 1995 through the date of the Balance Sheet, the Balance Sheet having been prepared in accordance with the methodology set forth in Exhibit B attached hereto. (2) Balance Due Amount--The "Revolving Credit Facility" line item in the Balance Sheet, representing the amount by which Retail Net Asset - ---------------- (1) In accordance with the parties' agreement, this calculation is based on Hanover's May 1995 purchase price of $1,800,000 for 67.5% of Holdings' outstanding shares. 5 6 Value (ignoring the Revolving Credit Facility line item) exceeds 32.5% of the Agreed Company Value at the date of the Balance Sheet, for a calculation at February 16, 1996 as follows: Total Retail Assets: $2,836,072 less Total Retail Liabilities: -1,947,524 ---------- Retail Net Asset Value 888,548 plus Retail Revolving Credit Facility line item: 1,164,445 ---------- 2,052,993 less 32.5% of $2,733,992: 888,548 ---------- $1,164,445
(3) Retail Net Asset Value--Total Assets less Total Liabilities as set forth in the Retail column in the Balance Sheet. b. FINAL BALANCE SHEET. As soon as reasonably practicable after the Closing Date but in no event later than the thirtieth (30th) day following the Closing Date, Holdings shall prepare, in consultation with Newco, a pro forma balance sheet of Holdings and subsidiary on a combined basis as at the Closing Date (the "Final Balance Sheet"), which shall contain all categories of assets and liabilities reflected in the Balance Sheet, and shall separately identify Retail and Catalog line items in the manner set forth in the Balance Sheet. The Escrow Agent (as defined below in Section 4.c) shall make a cash payment (the "Adjustment Payment") in accordance with the Escrow Agreement referred to in Section 4.c, as follows: if the Balance Due Amount set forth in the Final Balance Sheet exceeds that set forth in the Balance Sheet, the Adjustment Payment shall be made to TAC in an amount equal to such excess; if the Balance Due Amount set forth in the Final Balance Sheet is less than that set forth in the Balance Sheet, however, the Adjustment Payment shall be made to Newco in an amount equal to such deficit. In the event of a dispute between David Austad and Holdings as to the Balance Due Amount in the Final Balance Sheet, the 6 7 parties shall promptly negotiate in good faith to resolve the issue or issues which form the basis for such dispute. If the parties are unable to agree on the resolution of the dispute within ten (10) days after delivery of the Final Balance Sheet to David Austad and Holdings, the parties will refer such dispute to Arthur Andersen LLP for determination of an appropriate adjustment to the Final Balance Sheet to resolve the disputed issues. The parties agree that such determination shall be binding on all parties. David Austad and Holdings each shall pay one-half of the fees, expenses and costs of such firm for the services described herein. c. ESCROW AGENT; ESCROW AGREEMENT. At the Closing, David Austad shall deliver the David Austad Escrow Deposit, and TAC shall deliver the TAC Escrow Deposit, in each case to The First National Bank in Sioux Falls (the "Escrow Agent"), for deposit into escrow in accordance with this Section 4 and the escrow agreement among the Escrow Agent, David Austad, acting for himself and the other members of the David Austad Group, TAC and the Escrow Agent, such agreement to be in the form attached as Exhibit 4.c (the "Escrow Agreement"). The Adjustment Payment shall be made by the Escrow Agent in accordance with the Escrow Agreement within ten (10) days following the delivery of the Final Balance Sheet; provided, that in the event of a dispute between David Austad and TAC regarding the Adjustment Payment, the Escrow Agent shall retain an amount equal to the disputed amount, and shall continue to hold such retained amount pursuant to the Escrow Agreement pending resolution of such dispute. d. SALE OF FACILITY; SALE OF COMPUTER EQUIPMENT. (1) Sale or other disposition to a third party of TAC's office and distribution facility commonly known as 4500 East 10th Street, Sioux Falls, South Dakota (the "Facility"), and of the computer hardware and software leased by TAC from Lease Finance Group, Inc. or its assignees (the "Computer Equipment"), shall require the written 7 8 consent of Newco, which consent shall not be unreasonably withheld. Should Newco not respond to a written request for consent within five business days following delivery thereof, its consent shall be presumed. (2) Within twenty (20) days following the sale or other disposition of the Facility or the Computer Equipment to a third party, (A) TAC shall pay to Newco a sum in cash, notes or other consideration (in the same types and the same proportion as received by TAC from the third party) equal to 32.5% of any Gain (as defined below) on such sale, or, as the case may be, (B) Newco shall pay TAC an amount in cash equal to 32.5% of any Loss (as defined below) on such sale. The parties acknowledge that any sale of Computer Equipment to Newco shall be treated as a sale to a third party for purposes of this Section 4.d. (3) For purposes of this Section 4.d, "Gain" shall refer to the excess of net proceeds of sale or other disposition over the aggregate indebtedness secured by the asset in question and remaining unpaid at the date of sale, and "Loss" shall refer to the excess of such indebtedness over the net proceeds of sale or disposition, all determined net of any applicable income or other taxes. "Net proceeds of sale or other disposition" shall mean, in the event of a sale, the selling price less any reasonable brokerage fee, the South Dakota transfer fee(if any), attorneys fees, and improvements required by the purchaser (if any), but not including any reduction for fees or expenses associated with the shutdown of the Facility or the Computer Equipment; and to the extent shutdown fees and expenses have previously been included in the Balance Sheet, such fees and expenses will not be deducted in the calculation of Gain or Loss. Federal and state taxes shall be determined for such purposes as if Holdings and TAC were filing applicable tax returns on their own and not with Hanover on a consolidated basis, 8 9 and payments shall be subject to adjustment following any tax or other audits. The amount of income taxes allocable to the computation of Gain or Loss shall be the incremental income tax computed based on the inclusion of the tax gain or loss on sale of the asset in question in all applicable returns. In calculating the applicable income tax, TAC shall maximize the use of any available AMT and regulat net operating loss to reduce the applicable tax, if any. In calculating Gain or Loss, TAC shall ignore payments on the indebtedness other than the regularly scheduled installments on the indebtedness secured by the property in question, and likewise shall ignore any increase in any such indebtedness after the date hereof. (3) Payment in the case of any adjustment under this Section 4.d will be made by check or wire transfer as designated by the party to receive such payment. 5. REPRESENTATIONS AND WARRANTIES OF HOLDINGS AND TAC. Holdings and TAC, jointly and severally, represent and warrant to the members of the David Austad Group as follows: a. On the Closing Date, Newco will be a corporation duly organized and existing and in good standing under the laws of the State of South Dakota, and will have all necessary corporate power and authority to own and conduct the business now being conducted by the Division. b. On the Closing Date, the authorized capital of Newco shall consist of 500,000 shares of Common Stock, par value $1.00 per share, of which 100,000 shares shall be issued and outstanding. All of the issued and outstanding shares shall have been duly authorized, validly issued, fully paid, and nonassessable and shall be owned beneficially and of record by Holdings, free and clear of any liens, claims, charges, options or encumbrances. 9 10 c. On the Closing Date, all of the assets, properties and business of every kind, character and description, whether tangible or intangible, whether real, personal or mixed, and wherever located, of the Division, subject to the debts, liabilities, contracts and obligations of the Division, shall have been transferred, assigned, conveyed and delivered to Newco, free and clear of any liens or encumbrances, including, without limitation, any liens in favor of FNBO (assuming payment in full of outstanding obligations due to FNBO from TAC, release by FNBO of its Form UCC- 3 termination statements and any other applicable agreements or instruments terminating any security interests of FNBO ("FNBO Termination Instruments"), and filing of the FNBO Termination Instruments with governmental authorities as applicable) or in favor of Congress Financial Corporation ("Congress"), but subject however to the adjustments provided for in Section 4 above. d. At any time and from time to time after the Closing Date, upon request of Newco or David Austad and without the payment of any further consideration, Holdings or TAC or both of them shall duly execute, acknowledge and deliver all such assignments, conveyances and other instruments of transfer and other assurances and documents, and will take such other action, consistent with the terms of this Agreement, as reasonably may be requested for the purpose of better assigning, transferring and conveying to Newco or reducing to its possession any and all of the assets, properties and business of the Division. e. At the request of Newco or David Austad, and at Newco's expense, TAC will prosecute or otherwise enforce in its own name for the benefit of Newco, any and all claims or rights in the name of TAC which, or the benefits of which, are transferred to Newco pursuant to this Agreement and which are required to be prosecuted or otherwise enforced in TAC's name. f. On the Closing Date, Holdings and TAC will deliver or cause to be delivered to David Austad the stock record 10 11 book, minute book, financial records and all other corporate documents of Newco. Holdings and TAC shall thereafter be entitled to reasonable access to such records and documents as are applicable to periods prior to the Closing Date. g. To the best of the knowledge of Patrick D. Penney and Chuck Kurth, the Chief Financial Officers, respectively, of TAC and of Brawn of California, Inc., an affiliate of Holdings, there are no material assets of TAC or Holdings, and no material agreements, commitments, liens, encumbrances, obligations or liabilities (absolute, accrued, contingent or otherwise) of or affecting TAC or Holdings or any of the property of either, except as shown or reflected in the Balance Sheet or otherwise disclosed in writing to David Austad. For purposes hereof, an asset or liability is material if it involves an amount in excess of $20,000. h. The shares of Holdings' Common Stock to be acquired by Holdings hereunder will be acquired for its own account for investment only and not with a present view to, or for sale in connection with, any distribution of such shares. i. To the best of the knowledge of Chuck Kurth and of Wayne Garten, Executive Vice President and Chief Financial Officer of Hanover, in each case without specific inquiry, David Austad has not breached any representation or warranty made by him and set forth in the Stock Purchase Agreement referred to in Section 18 below or in any related agreement of the parties executed and delivered on or about May 19, 1995 or May 25, 1995; it being understood and agreed by the parties that the representation and warranty set forth in this Section 5.i is based in part on, and made in partial reliance on, a certificate of David Austad dated on or about this date, a copy of which is attached hereto as Exhibit 5.i. 6. REPRESENTATIONS AND WARRANTIES OF THE DAVID AUSTAD GROUP MEMBERS. 11 12 The members of the David Austad Group, jointly and severally, represent and warrant to Holdings and TAC as follows: a. The respective members of the David Austad Group own beneficially and of record that number of shares of Holdings Common Stock set forth opposite the name of each in Exhibit 6.a attached hereto, and each member has full power and authority to sell and transfer such shares to Holdings in the manner provided herein, free and clear of any liens, claims, charges, options and encumbrances. b. At any time and from time to time after the Closing Date, upon request of Holdings or TAC and without the payment of any further consideration, the members of the David Austad Group or Newco or any of them shall duly execute, acknowledge and deliver all such assumption agreements, assignments, conveyances and other instruments of transfer and other assurances and documents, and will take such other action, consistent with the terms of this Agreement, as reasonably may be requested for the purpose of better assuming the liabilities of the Division being assumed by Newco, or transferring and conveying to Newco or reducing to its possession any and all of the assets, properties and business of the Division. c. The Newco Shares to be acquired by the members of the David Austad Group hereunder will be acquired for their own account for investment only and not with a present view to, or for sale in connection with, any distribution of such shares. d. To the best of David Austad's knowledge, there are no material assets of TAC or Holdings, and no material agreements, commitments, liens, encumbrances, obligations or liabilities (absolute, accrued, contingent or otherwise) of or affecting TAC or Holdings or any of the property of either, except as shown or reflected in the Balance Sheet or otherwise disclosed in writing to Hanover's Chief Financial Officer. 12 13 7. OTHER COVENANTS OF THE PARTIES. a. Each of David Austad, Newco and Holdings agrees to use his or its best efforts to obtain, prior to the Closing Date, all third-party and other consents required by Congress in connection with its contemplated provision of loans and/or other financial accommodations to Holdings and TAC, including, without limitation, the consent of Valley Bank, provider of mortgage financing respecting the Facility, substantially in the form set forth in the attached Exhibit 7.a. b. As promptly as possible and in any event prior to the Closing Date, TAC and Newco shall arrange for the transfer of sponsorship of TAC's Go for the Green Plan (the "TAC Plan") from TAC to Newco. The parties acknowledge that TAC Plan participants who become eligible and choose to participate in the Hanover 401(k) Plan following the Closing Date shall continue to retain all appropriate rights in their undistributed account balances in accordance with the TAC Plan. TAC agrees to pay Newco a one-time fee of $2,000 in respect of administration of the TAC Plan, payable on the Closing Date. c. On the Closing Date, the appropriate parties shall execute and deliver: (1) the Escrow Agreement, executed by the parties and the Escrow Agent; (2) an Amended License Agreement among Holdings, TAC, Hanover (as to Article IX only) and David Austad, substantially in the form attached as Exhibit 7.c.2, providing for an exclusive license for retail use in a 37-state territory and Canada of certain Holdings trademarks and other intellectual property rights of Holdings and TAC; (3) a Joint Buying and Mutual Cooperation Agreement among TAC, Newco and DBA, Inc. ("DBA"), a South Dakota corporation (DBA being wholly owned by David Austad and having been formed by him to open 13 14 and operate a fifth Austad's retail store in Omaha, Nebraska, pursuant to the foregoing Amended License Agreement), substantially in the form attached as Exhibit 7.c.3, providing for coordinated purchasing and other activities; and (4) a Consulting Agreement between TAC and David Austad, substantially in the form attached as Exhibit 7.c.4, respecting consulting services to be provided by David Austad to TAC and/or Holdings; (5) bulk or individual assignments substantially in the form set forth in Exhibits 2.a.1 through 2.a.__ attached hereto, in each case with such other appropriate instruments of title as counsel for the David Austad Group may reasonably request. The foregoing agreements may be referred to collectively hereinafter as the "Other Agreements." 8. CONDITIONS TO CLOSING--HOLDINGS AND TAC. The obligation of Holdings to exchange the Holdings shares owned by the members of the David Austad Group for the Newco Shares, and the obligations of Holdings and TAC to make the TAC Escrow Deposit and to execute and deliver the Other Agreements pursuant to this Agreement, shall be subject to the satisfaction, at or before the Closing Date, of the following conditions (any of which may be waived, in whole or in part, by Holdings): a. The representations and warranties of the members of the David Austad Group contained in this Agreement, or in any certificate or document delivered to Holdings in connection herewith, shall be true in all material respects at the Closing Date as if made again on and as of the Closing Date, and such members and Newco shall have duly performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by them at or before the Closing Date. Holdings shall have been furnished with certificates of such members and of appropriate 14 15 officers of Newco certifying in such detail as Holdings may reasonably request to the fulfillment of the foregoing conditions. b. David Austad or Newco shall have paid to FNBO the FNBO Payment and shall have deposited the David Austad Escrow Deposit with the Escrow Agent. c. David Austad shall have furnished Holdings with the following documents: (1) Resignations of the following from all positions with Holdings and TAC, effective on the Closing Date: David Austad Director, President and Chief Executive Officer-- Holdings, TAC Randall Stewart Director--Holdings Patrick Penney Treasurer--Holdings, TAC (2) Evidence of the payment by TAC to the respective Warrant Holders of the sums required by Exhibit 8.c.3, it being agreed by the parties that 32.5% of each such sum, or $8,125 in the aggregate, is being paid by TAC on behalf of the members of the David Austad Group and shall be reflected in the Final Balance Sheet as an adjustment thereto. (3) The executed Warrant Holder Releases, together with warrants submitted in proper form for cancellation. d. The members of the David Austad Group and Newco shall have executed and delivered the Other Agreements to which they are parties. e. All necessary authorizations and approvals required for the execution, delivery and consummation of the transactions provided for in this Agreement shall have been obtained, including, without limitation, the consents of Congress and Valley Bank. 15 16 f. Holdings shall have received either (1) executed agreements from landlords for TAC's retail stores approving the assignment to Newco of each of TAC's lease agreements respecting such stores, as identified in Exhibit 8.e hereto (collectively, the "Lease Agreements"), and releasing TAC from all obligations under the Lease Agreements, or, at Holdings' election exercised in its sole discretion, (2) agreements approving and effecting the assignment of each of the Lease Agreements to Newco or subleases executed by Newco in respect of each Lease Agreement, in each case satisfactory in form and substance to Holdings and its counsel. g. Holdings and TAC shall have received a Certificate of the Secretary of Newco certifying as to the incumbency and authority of the officers of Newco executing all documents to be executed and delivered by Newco in connection herewith. 9. CONDITIONS TO CLOSING--DAVID AUSTAD GROUP AND NEWCO. The obligation of the members of the David Austad Group to exchange the Holdings shares owned by them for the Newco Shares, the obligation of David Austad to deposit funds with the Escrow Agent pursuant to the Escrow Agreement, and the respective obligations of David Austad and Newco to enter into the Other Agreements pursuant to this Agreement, shall be subject to the satisfaction, at or before the Closing Date, of the following conditions (any of which may be waived, in whole or in part, by David Austad): a. The representations and warranties of Holdings and TAC contained in this Agreement, or in any certificate or document delivered to the members of the David Austad Group or Newco in connection herewith, shall be true in all material respects at the Closing Date as if made again on and as of the Closing Date. b. TAC shall have deposited the TAC Escrow Deposit with the Escrow Agent. c. Holdings shall have furnished David Austad with the 16 17 following documents: (1) The Certificate or Articles of Incorporation of Newco and all amendments thereto, duly certified by the proper officials of the jurisdiction of Newco's organization. (2) A certificate as to the good standing of Newco and payment of all applicable state taxes thereby, executed by the appropriate officials of the States of South Dakota. (3) The by-laws of Newco, duly certified by the Secretary of Newco and the Secretary or an Assistant Secretary of Newco as being in full force and effect. (4) A certificate of the Secretary or an Assistant Secretary of Newco, certifying (a) that attached thereto is a true and complete copy of all instruments reflecting actions of the incorporator of Newco, and of all resolutions of the board of directors of Newco pertaining to the transactions contemplated by this Agreement, the latter being duly adopted at meetings of such board at which a quorum of directors was present and acting throughout, and certifying (b) as to the incumbency and authority of the incorporator and officers of Newco. (5) A favorable opinion of May, Johnson, Doyle and Becker, P.C., dated the Closing Date, substantially in the form of Exhibit 9.c.5, relating to the formation of Newco, the issuance of its shares of Common Stock and the transfer of such shares by TAC to Holdings. (6) Evidence of the payment by TAC to the respective Warrant Holders of the sums required by Exhibit 8.c.3, it being agreed by the parties that 67.5% of each such sum, or $16,875 in the aggregate, is being paid by TAC for its own account and the balance on behalf of the members of the David 17 18 Austad Group as provided in Section 8.c(3) above, such balance to be reflected in the Final Balance Sheet as an adjustment thereto. d. TAC and Holdings shall have executed and delivered the Other Documents to which they are parties. e. All necessary authorizations and approvals required for the execution, delivery and consummation of the transactions provided for in this Agreement shall have been obtained, including, without limitation, the consents of Valley Bank, Congress and First National Bank in Sioux Falls. 10. THE CLOSING. The closing of the transactions contemplated hereby (the "Closing") shall be held at the offices of Lynn, Jackson, Shultz & Lebrun, P.C., 141 North Main Avenue, Sioux Falls, South Dakota or at such other place or places as the parties may agree upon, at 10:00 A.M., local time, on February 16, 1996, or such other time and date as may be mutually approved by the parties in writing, but not later than February 28, 1996. 11. CERTAIN EXPENSES. Except as otherwise set forth below, neither Hanover, Holdings nor TAC shall pay or be liable for or be required to pay any of the following liabilities, fees or expenses related to the transactions contemplated hereby, all of which shall be borne and paid for by David Austad: a. professional fees of counsel and any accountant or auditor for any member of the David Austad Group, or for Newco in respect of activities conducted following the Closing, or for a Warrant Holder or other former stockholder of TAC; provided, that at the Closing TAC shall reimburse David Austad for professional fees of counsel respecting the obtaining of landlord consents to assignment and releases of TAC's obligations thereunder, upon receipt of itemized documentation 18 19 thereof; b. fees and expenses, if any, of Mesirow Financial, Inc. or any other investment banking company or any person or entity retained for financial services or services as a finder rendered to a member of the David Austad Group or a Former Stockholder or a Warrant Holder in connection with the transactions contemplated hereby; and c. any income, capital gains or other taxes incurred by one or more members of the David Austad Group or Newco in connection with the transactions contemplated hereby; provided, that in the event the transactions contemplated in this Agreement fail to qualify for treatment as a tax-free reorganization under the Code as aforesaid, TAC shall pay to the members of the David Austad Group an amount equal to 67.5% of any federal income tax liability incurred by such members as a result of such failure, it being understood that such members will be responsible for the balance of such liability. 12. CERTAIN OPERATIONAL AND TAX MATTERS; MAINTENANCE OF RECORDS a. The parties acknowledge that they have been advised that the written consent of United Properties Investment Company ("Landlord") to the assignment to Newco of TAC's interest as tenant under its undated lease for a 10-year lease term expiring July 31, 1999 with The Northtown Triangle Limited Partnership, Landlord's predecessor in interest, respecting TAC's retail store premises at the Northcourt Commons Shopping Center, Blaine, Minnesota (the "Northcourt Lease"), such consent to include a release of TAC (such consent and release, the "Northcourt Consent"), may not be received prior to the Closing. In view of this possible delay, and in view of Newco's expectation that such Consent will be received no more than twenty (20) days following the Closing Date, Newco has requested that TAC waive the condition to closing set forth in Section 8.f above to the extent required to permit 19 20 Newco to operate the retail store business in such premises, as a Licensee's Store pursuant to the Amended License Agreement, pending receipt of the expected consent. TAC agrees to permit such operation, pending receipt of the Northcourt Consent, under the terms and conditions set forth below: (1) Newco shall perform all obligations of TAC under the Northcourt Lease, except that TAC shall continue to pay rent and other sums due to the landlord from time to time under the Northcourt Lease, and Newco shall pay TAC, at the Closing, an amount equal to ten (10) days' rent to cover the anticipated rent expenses; (2) Newco and David Austad shall use their best efforts to obtain the Northcourt Consent as promptly as possible and in any event not later than the twentieth (20th) day following the Closing Date; (3) Should the Northcourt Consent not be received by the close of business on the tenth (10th) day following the Closing Date, Newco shall immediately commence to perform all obligations under the Northcourt Lease, including, without limitation, the direct payment to the Landlord of rent and other sums due to the Landlord from time to time under the Northcourt Lease. The parties shall then use their best efforts to obtain the Northcourt Consent, or if the parties are unsuccessful in obtaining such Consent, some agreement satisfactory to Landlord whereby Newco is assigned the Northcourt Lease or Newco shall become a subtenant, TAC being the Sublandlord, and in any such event Newco and David Austad, jointly and severally, shall indemnify and hold harmless TAC, its officers, directors, shareholders, subsidiaries, affiliates, agents and representatives as more fully set forth in the Indemnification Agreement. In the event that no mutually satisfactory agreement can be negotiated with Landlord, the parties hereto shall negotiate 20 21 in good faith to arrange for the transfer to TAC of the Northcourt retail business assets and liabilities and to agree upon a settlement among the parties whereby TAC remains as tenant of the Northcourt Lease and resumes operation of the Austad's retail store in such premises. b. From and after the Closing Date, Newco shall endorse its insurance policies to be primary to any other policies in effect, and shall provide TAC with satisfactory evidence of such endorsement. Notwithstanding the assumption of the Division's liabilities by Newco pursuant to this Agreement and the Assignment and Assumption Agreement between TAC and Newco being delivered at the Closing (the form of such agreement being included as Exhibit 2.a.1 hereto), TAC agrees to be responsible for any claim respecting the Division's assets and business that arises prior to the Closing Date, provided TAC receives notice of such claim, and provided such claim is covered by TAC's liability policies under the applicable terms and conditions of such policies in effect prior to the Closing Date; and provided further, that TAC's responsibility hereunder shall be only to the extent of such coverage. c. From and after the Closing Date, each of the parties shall cooperate with the other parties in connection with any audits or other examinations by federal, state, local or other taxing authorities, shall make reasonably available to the other parties their respective books, records and other data relating to the transactions contemplated by this Agreement and the business and affairs of Holdings, TAC and Newco (which books, records and other data such parties shall maintain until the later of (i) six years after the Closing Date (and permanently for personnel- related records) or (ii) the completion of any Internal Revenue Service or state tax audits of Holdings and/or TAC), and shall provide assistance to the other parties and their counsel and accountants, all as reasonably requested and during normal business hours. In addition to the foregoing, each of Holdings and TAC, 21 22 its counsel and accountants shall have the right to remove and take possession of any of Holdings' or TAC's books, records and other data that are transferred to Newco on the Closing Date, as reasonably may be requested, provided that (i) Newco shall have the right to make copies thereof at TAC's expense before such removal and (ii) Holdings or TAC, as the case may be, promptly will return such books, records and other data upon the request of Newco. Except as otherwise provided in the foregoing sentence, each party shall bear its own costs incurred in connection with the cooperation and maintenance of records provided for herein. 13. SURVIVAL. The representations and warranties made in this Agreement and in any certificate, Schedule, Exhibit, release or other instrument or document delivered in connection therewith shall survive the Closing Date. The covenants of the parties hereto shall continue in full force and effect in accordance with their terms. 14. NO BROKERS. Each party hereto represents and warrants that there are no claims for brokerage commissions or finder's fees in connection with the transactions contemplated hereby resulting from any action taken by any party, any Warrant Holder, or the officers or directors of any corporate party. 15. GOVERNING LAW. This Agreement shall be construed and enforced in accordance with the internal, substantive laws of the State of New Jersey, without giving effect to the conflict of law rules thereof. 16. NOTICES. All notices, consents, requests, instructions, approvals and other communications provided for herein shall be deemed validly given, made or served if in writing and delivered 22 23 personally (as of such delivery) or sent by certified mail, return receipt requested (as of two days after deposit in a United States post office), postage prepaid, or by facsimile transmission (as of such transmission provided it is subsequently confirmed in writing) or by prepaid overnight courier (as of the time of delivery): (a) if to Holdings, TAC or Hanover, addressed to: Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, New Jersey 07087 Attention: Michael P. Sherman, Esq. Fax No.: 201-392-5005 (b) if to a member of the David Austad Group, addressed to such member c/o David Austad as follows: c/o David Austad 812 Bayberry Circle Sioux Falls, South Dakota 57106 or such other address as shall be furnished in writing by a party to the others. 17. JURISDICTION; AGENT FOR SERVICE. Legal proceedings commenced by any party hereto arising out of any of the transactions or obligations contemplated by this Agreement shall be brought exclusively in the Federal courts or, in the absence of Federal jurisdiction, state courts, in either case in the State of New Jersey. The parties hereto irrevocably and unconditionally submit to the jurisdiction of such courts and agree to take any and all future action necessary to submit to the jurisdiction of such courts. Each of the parties hereto irrevocably waives any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding brought in any Federal or state court in the State of New Jersey and further irrevocably waives any claims that any such suit, action or proceeding brought in any such court has been brought in an inconvenient forum. Each of TAC and Newco hereby irrevocably designates, appoints and empowers Corporation Trust Company, whose present address is 820 Bear Tavern Road, West Trenton, New Jersey 08628, as its 23 24 authorized agent to receive, for and on behalf of TAC and Newco, respectively, service of process in the State of New Jersey as and when such actions and proceedings may be brought, and such service of process shall be deemed completed upon the date of delivery thereof to such agent, whether or not such agent gives notice thereof to TAC or Newco, as the case may be, or upon the earliest of any other date permitted by applicable law. Final judgment against TAC or Newco in any such suit shall be conclusive and may be enforced in other jurisdictions by suit on the judgment, a certified or true copy of which shall be conclusive evidence of the fact and the amount of any indebtedness or liability of TAC or Newco therein described, or by appropriate proceedings under any applicable treaty or otherwise. 18. ENTIRE AGREEMENT; ETC. This Agreement represents the entire agreement between the parties and supersedes and cancels any prior oral or written agreement, letter of intent or understanding related to the subject matter hereof, including (a) the Stockholders' Agreement dated as of May 25, 1995 to which the members of the David Austad Group and Hanover are parties, and the Reimbursement Agreement dated the same date between TAC and Hanover, but not including (b) the Stock Purchase Agreement dated as of May 19, 1995 (the "Stock Purchase Agreement") to which TAC, Hanover, the members of the David Austad Group and Holdings are parties, which latter agreement shall continue in full force and effect. Notwithstanding the generality of the foregoing, the parties agree in respect of the Stock Purchase Agreement that the provisions of Sections 1.04 (relating to an Additional Capital Contribution), 10.02(b) (relating to the expenditure of minimum amounts on two new Austad's stores by David Austad) and 10.03(a) through (c) (relating to relocation of certain TAC operations, MIS linkups and proposed new TAC stores) shall be superseded and of no further force or effect. Also notwithstanding the generality of the foregoing, the parties specifically agree that those certain Indemnification Agreements dated May 25, 1995 between Hanover and each of David Austad and Randall Austad shall remain in full force and effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respec- 24 25 tive successors and permitted assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. This Agreement may be executed in one or more [BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK] 25 26 counterparts, and shall become effective when one or more counterparts have been signed by each of the parties. IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto on the day and year first above written. AUSTAD HOLDINGS, INC. By: /s/ Michael Sherman ------------------------------- Name: Michael Sherman Title: Vice President THE AUSTAD COMPANY By: /s/ Michael P. Sherman ------------------------------- Name: Michael P. Sherman Title: Vice President HANOVER DIRECT, INC. By: /s/ Wayne Garten ------------------------------- Name: Wayne Garten Title: Executive VP THE DAVID AUSTAD GROUP: /s/ David Austad ----------------------------------- David Austad, individually /s/ David Austad ----------------------------------- David Austad, as custodian under the SDUTMA for each of Ryan, Sara and Melissa Austad /s/ Denise Austad ----------------------------------- Denise Austad 26 EX-4.2 4 FIRST SUPPLEMENT INDENTURE 1 Exhibit 4.2 FIRST SUPPLEMENTAL INDENTURE, dated as of March 28, 1995 (the "First Supplemental Indenture"), to the Indenture, dated as of August 17, 1993 (the "Indenture"), among THE HANOVER COMPANIES, a Nevada corporation (the "Company"), THE HORN & HARDART COMPANY, a Nevada corporation (the "Guarantor"), the subsidiaries of the Company which have executed the Indenture (the "Guarantor Subsidiaries"), and FIRST TRUST NATIONAL ASSOCIATION, a national association, as Trustee (the "Trustee"). WHEREAS, the Company, the Guarantor and the Trustee heretofore entered into the Indenture; WHEREAS, the Company and the Guarantor were merged with and into Hanover Direct, Inc., a Delaware corporation ("HDI"), pursuant to the provisions of the Agreements and Plans of Merger, dated as of April 15, 1993, between each of the Company and the Guarantor and HDI, and when the mergers became effective, HDI became responsible for the obligations of, and succeeded to and was substituted for, the Company and the Guarantor, respectively, pursuant to Section 5.2 of the Indenture; WHEREAS, pursuant to the Indenture, $14,000,000 aggregate principal amount of HDI's 9.25% Senior Subordinated Notes due August 1, 1998 (the "Securities") remain outstanding; WHEREAS, Sun Life Insurance Company of America ("Sun Life") is the sole Holder of all the outstanding Securities; WHEREAS, Section 9.2 of the Indenture provides that HDI, the Guarantor Subsidiaries and the Trustee may amend the Indenture with the written consent of the Holders of at least a majority in principal amount of the then outstanding Securities; and WHEREAS, HDI and the Guarantor Subsidiaries desire to amend the Indenture as set forth herein and Sun Life has provided its written consent to the substance of such amendments in consideration of the payment to it of an amendment fee in the amount of $70,000 (the "Amendment Fee") concurrently with the execution of this First Supplemental Indenture. NOW THEREFORE, each party agrees as follows: 2 ARTICLE I AMENDMENTS 1.1 Definitions. The definitions of "CFC Credit Agreement" and "Permitted Investments" set forth in Section 1.1 of the Indenture are amended and restated in their entirety to read as follows: "CFC Credit Agreement" means that certain Revolving Credit and Term Loan Agreement, dated as of October 12, 1994, by and among HDI, the lenders from time to time party thereto and NationsBank of North Carolina, National Association, as Agent, and that certain Credit Facilities and Reimbursement Agreement, dated as of October 12, 1994, by and among HDI, the lenders from time to time party thereto and NationsBank of North Carolina, National Association, as Agent, as the same may be amended, modified or supplemented. "Permitted Investments" means (i) Cash and Marketable Securities, (ii) investments in Restricted Subsidiaries that are Consolidated Subsidiaries, (iii) investments consisting of the acquisition of (a) up to 50.1% of the outstanding capital stock of Tiger Direct, Inc., in accordance with the terms of the purchase agreement dated as of February 28, 1995, as amended by an amendment thereto dated as of March 20, 1995, between Software Investment Corporation and Tiger Direct, Inc., for which the aggregate of funds invested by way of direct or indirect equity purchase, loans, advances or other extensions of credit shall in the aggregate be less than $18,000,000, and (b) up to 67.5% of the outstanding capital stock of The Austad Company in accordance with the terms of the letter of intent dated March 15, 1995 between HDI and The Austad Company, for which the aggregate of funds invested by way of direct or indirect equity purchase, loans, advances or other extensions of credit shall in the aggregate be less than $8,500,000, (iv) investments in the capital stock or other equity interests (or equity equivalents) of another Person which, when added to the equity interests (and equity equivalents) held prior to such investment, constitute less than 35% of the capital stock or other equity interests (and equity equivalents), and (v) with the written consent of the Holders of at least a majority in principal amount of the then outstanding Securities, investments in the capital stock or other equity interests (or equity equivalents) of another Person which, when added to the equity interests (and equity equivalents) held prior to such investment, constitute 35% or more of the capital stock or other equity interests (and equity equivalents). -2- 3 1.2 Indebtedness to Consolidated Earnings Ratio. Section 4.10 of the Indenture is amended to delete the table therein and substitute the following:
Period Ratio ------ ----- December 31, 1993 to December 31, 1994 5.00 to 1.0 January 1, 1995 to April 1, 1995 8.50 to 1.0 April 2, 1995 to July 1, 1995 9.00 to 1.0 July 2, 1995 to September 30, 1995 6.75 to 1.0 October 1, 1995 to December 28, 1996 4.50 to 1.0 December 29, 1996 to August 1, 1998 4.00 to 1.0
1.3 Maintenance of Consolidated Net Worth. Section 4.12 of the Indenture is amended to delete such section in its entirety and substitute therefore the following: "HDI shall not permit Consolidated Net Worth of HDI during the periods commencing on April 1, 1995 and ending on the last day of the most recently completed fiscal quarter to be less than the greater of (i) $90,000,000 or (ii) $90,000,000 plus 85% of HDI's cumulative net income (including 100% of any losses) as shown on its consolidated statements of income for such periods." 1.4 Fixed Charge Coverage Ratio. Section 4.20 of the Indenture is amended to delete the table therein and substitute the following:
Minimum Fixed Charge Period Coverage Ratio ------ -------------- July 1, 1993 to December 31, 1993 1.70 to 1.0 January 1, 1994 to December 31, 1994 1.80 to 1.0 January 1, 1995 to April 1, 1995 1.25 to 1.0 April 2, 1995 to July 1, 1995 1.18 to 1.0 July 2, 1995 to September 30, 1995 1.35 to 1.0 October 1, 1995 to December 30, 1995 1.75 to 1.0 December 31, 1995 to December 28, 1996 2.00 to 1.0 December 29, 1996 to August 1, 1998 and at all times thereafter 2.15 to 1.0
1.5 Accounting Changes. Section 4.26(a)(ii) of the Indenture is amended to add after the words "change its fiscal year" the words "or any fiscal quarter". -3- 4 ARTICLE II MISCELLANEOUS 2.1 The Guarantor Subsidiaries shall have submitted each and every Guaranty contemplated by Article 11 of the Indenture and HDI shall have paid the Amendment Fee to Sun Life prior to the execution of this First Supplemental Indenture. 2.2 Except as expressly supplemented by this First Supplemental Indenture, the Indenture is in all respects hereby ratified and confirmed and shall remain in full force and effect. 2.3 This First Supplemental Indenture is executed and shall constitute an indenture supplemental to the Indenture and shall be construed in connection with and as part of the Indenture. This First Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York. 2.4 The recitals contained herein shall be taken as the statements of HDI and the Guarantor Subsidiaries, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this First Supplemental Indenture. 2.5 This First Supplemental Indenture may be executed in any number of counterparts each of which shall be an original, but all such counterparts shall together constitute but one and the same instrument. 2.6 Capitalized terms used herein but not otherwise defined shall have the meanings ascribed to them in the Indenture. 2.7 Upon the execution and delivery of this First Supplemental Indenture, no Event of Default (and no event that, after notice or lapse of time, or both, would become an Event of Default) shall be created or have occurred and be continuing. -4- 5 IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. HANOVER DIRECT, INC. By: /s/ Wayne Garten -------------------------- Wayne Garten Title: Executive Vice President [CORPORATE SEAL] ATTEST: /s/ - ----------------------------- HANOVER DIRECT PENNSYLVANIA, INC. BRAWN OF CALIFORNIA, INC. HANOVER DIRECT NEW JERSEY, INC. GUMP'S BY MAIL, INC. GUMP'S HOLDINGS, INC. HANOVER LIST MANAGEMENT INC. HANOVER SYNDICATION CORP. LEAVITT ADVERTISING AGENCY, INC. YORK FULFILLMENT COMPANY, INC. COMPANY STORE HOLDINGS, INC. TWEEDS, INC. HANOVER CASUALS, INC. HANOVER DIRECT VIRGINIA INC. HANOVER FULFILLMENT OF VIRGINIA, INC. HANOVER HOLDINGS INC. HANOVER VENTURES, INC. LWI HOLDINGS, INC. HANOVER REALTY, INC. HANOVER CATALOG HOLDINGS, INC. By: /s/ Wayne Garten -------------------------- Wayne Garten Title: Vice President [CORPORATE SEAL] ATTEST: /s/ - ----------------------------- -5- 6 FIRST TRUST NATIONAL ASSOCIATION, as Trustee By: --------------------------- Title: [CORPORATE SEAL] ATTEST: - ----------------------------- -6- EX-4.3 5 SECOND SUPPLEMENTAL INDENTURE 1 Exhibit 4.3 SECOND SUPPLEMENTAL INDENTURE SECOND SUPPLEMENTAL INDENTURE, dated as of November 14, 1995 (the "Second Supplemental Indenture"), to the Indenture, dated as of August 17, 1993, as supplemented by a First Supplemental Indenture, dated as of March 25, 1995 (as so supplemented, the "Indenture"), among THE HANOVER COMPANIES, a Nevada corporation (the "Company"), THE HORN & HARDART COMPANY, a Nevada corporation (the "Guarantor"), the subsidiaries of the Company which have executed the Indenture (the "Guarantor Subsidiaries"), and FIRST TRUST NATIONAL ASSOCIATION, a national association, as Trustee (the "Trustee"). WHEREAS, the Company, the Guarantor and the Trustee heretofore entered into the Indenture; WHEREAS, the Company and the Guarantor were merged with and into Hanover Direct, Inc., a Delaware corporation ("HDI"), pursuant to the provisions of the Agreements and Plans of Merger, dated as of April 15, 1993, between each of the Company and the Guarantor and HDI and, when the mergers became effective, HDI became responsible for the obligations of, and succeeded to and was substituted for, the Company and the Guarantor, respectively, pursuant to Section 5.2 of the Indenture; WHEREAS, pursuant to the Indenture, $14,000,000 aggregate principal amount of HDI's 9.25% Senior Subordinated Notes due August 1, 1998 (the "Securities") remain outstanding; WHEREAS, Sun America Life Insurance Company ("Sun Life") was, until the date hereof, the sole Holder of all the outstanding Securities; WHEREAS, as of the date hereof, Intercontinental Mining & Resources Incorporated ("IMR") purchased all of the outstanding Securities from Sun Life; WHEREAS, Section 9.2 of the Indenture provides that HDI, the Guarantor Subsidiaries and the Trustee may amend the Indenture with the written consent of the Holders of at least a majority in principal amount of the then outstanding Securities; and WHEREAS, HDI and the Guarantor Subsidiaries desire to amend the Indenture as set forth herein and IMR has provided its written consent to the substance of such amendments. 2 NOW THEREFORE, each party agrees as follows: ARTICLE I AMENDMENTS 1.1 Financial Covenants. Section 4.10 and 4.20 of the Indenture are hereby deleted in their entirety. 1.2 Maintenance of Consolidated Net Worth. Section 4.12 of the Indenture is hereby amended and restated in its entirety to read as set forth in Section 6.20 of the CFC Credit Agreement (together with related definitions) except that the number set forth in the penultimate line thereof shall be Seventy Six Million Dollars ($76,000,000) rather than Eighty Million Dollars ($80,000,000). 1.3 Working Capital Adequacy. Section 4.33 of the Indenture is hereby amended and restated in its entirety to read as set forth in Section 6.19 of the CFC Credit Agreement (together with related definitions) except that the number set forth in the penultimate line thereof shall be Twenty Four Million Seven Hundred Thousand Dollars ($24,700,000) rather than Twenty Six Million Dollars ($26,000,000). 1.4 Definitions. The definitions of "CFC Credit Agreement," "Collateral Documentation" and "Subordination Agreement" set forth in Section 1.1 of the Indenture are hereby amended and restated in their entirety to read as follows: "CFC Credit Agreement" means that certain Loan and Security Agreement, dated as of November 14, 1995, by and among Congress Financial Corporation ("Congress") and Hanover Direct Pennsylvania, Inc., Brawn of California, Inc., Gump's By Mail, Inc, Gump's Corp. The Company Store, Inc., Tweeds, Inc., LWI Holdings, Inc., Aegis Catalog Corporation and Hanover Realty Inc., as the same may be amended, modified or supplemented. "Collateral Documentation" shall mean the Escrow Agreement, 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. "Subordination Agreement" means the Subordination Agreement among Congress and Intercontinental Mining & Resources Incorporated, attached to the Second Supplemental -2- 3 Indenture as Exhibit A, as in effect on the date thereof and as the same may be amended, modified or supplemented. 1.5 Events of Default. Section 6.1(2) of the Indenture is hereby amended to delete the language set forth in lines eleven through thirteen thereof as follows: "... 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..." and is hereby replaced with the following "... or any default under Section 6.19 or 6.20 of the CFC Credit Agreement occurs and continues for a period of thirty (30) days..." 1.6 Security. Article 12 of the Indenture is hereby amended to add a new Section 12.4 which shall read as follows: "Section 12.4. Customer Lists. The performance of the Company, the Guarantor and the Guarantor Subsidiaries shall also be secured by a continuing second security interest in all existing and future mailing and customer lists used in the direct mail marketing business of HDI, on the date hereof, and all future customer and mailing lists used in the direct mail marketing business of HDI, as such lists may be updated, modified, amended and supplemented, 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 complied in the future, but not including any customer lists owned by third parties who are not Affiliates of Hanover Direct Pennsylvania, Inc., Brawn of California, Inc., Gump's By Mail, Inc, Gump's Corp. The Company Store, Inc., Tweeds, Inc., LWI Holdings, Inc. and Aegis Catalog Corporation, which are leased to, or otherwise licensed for use by such entities, with permission of such third party owners (the "Customer Lists"), pursuant to a Customer and Mailing List Escrow Agreement, dated as of November 14, 1995, by and among HDI, HOSSCO, as storage and escrow agent, and the Trustee (the "Escrow Agreement"), 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 HDI to update and deposit in escrow updated Customer Lists periodically and for the storage and -3- 4 escrow agent to hold and store the updated Customer Lists, and the right of the Trustee 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, or otherwise." 1.7 Subordination Agreement and Escrow Agreement. The Trustee shall execute and deliver the Subordination Agreement dated as of the date hereof with Congress in substantially the form attached hereto as Exhibit A and the Escrow Agreement dated as of the date hereof with HOSSCO in substantially the form attached hereto as Exhibit B. 1.8 Guarantors. Leavitt Advertising Agency, Inc. and Hanover Fulfillment of Virginia, Inc. shall be deleted as Guarantor Subsidiaries pursuant to Article 11 of the Indenture. 1.9 Certain Transactions. Section 4.29 of the Indenture is hereby deleted in its entirety ab initio. ARTICLE II MISCELLANEOUS 2.1 Except as expressly supplemented by this Second Supplemental Indenture, the Indenture is in all respects hereby ratified and confirmed and shall remain in full force and effect. 2.3 This Second Supplemental Indenture is executed and shall constitute an indenture supplemental to the Indenture and shall be construed in connection with and as part of the Indenture. This Second Supplemental Indenture shall be governed by and construed in accordance with the laws of the State of New York. 2.4 The recitals contained herein shall be taken as the statements of HDI and the Guarantor Subsidiaries, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Second Supplemental Indenture. 2.5 This Second Supplemental Indenture may be executed in any number of counterparts each of which shall be an original, but all such counterparts shall together constitute but one and the same instrument. 2.6 Capitalized terms used herein but not otherwise defined shall have the meanings ascribed to them in the Indenture. -4- 5 2.7 This Second Supplemental Indenture, together with the Indenture, and any other instruments or documents delivered or to be delivered in connection herewith or therewith represent the entire agreement and understanding concerning the subject matter hereof among the parties hereto, and supersede all prior proposals, agreements, understandings, negotiations and discussions, representations, warranties, commitments, offers and contracts concerning the subject matter hereof, whether oral or written. 2.8 Upon the execution and delivery of this Second Supplemental Indenture, no Event of Default (and no event that, after notice or lapse of time, or both, would become an Event of Default) shall be created or have occurred and be continuing that is not otherwise waived pursuant to any waiver executed by the Holders. -5- 6 IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. HANOVER DIRECT, INC. By: /s/ Wayne Garten ----------------------------- Title: Executive VP [CORPORATE SEAL] ATTEST: /s/ Michael Sherman - ----------------------------- HANOVER DIRECT PENNSYLVANIA, INC. BRAWN OF CALIFORNIA, INC. HANOVER DIRECT NEW JERSEY, INC. GUMP'S BY MAIL, INC. GUMP'S HOLDINGS, INC. HANOVER LIST MANAGEMENT INC. HANOVER SYNDICATION CORP. YORK FULFILLMENT COMPANY, INC. COMPANY STORE HOLDINGS, INC. TWEEDS, INC. HANOVER CASUALS, INC. HANOVER DIRECT VIRGINIA INC. HANOVER HOLDINGS INC. HANOVER VENTURES, INC. LWI HOLDINGS, INC. HANOVER REALTY, INC. HANOVER CATALOG HOLDINGS, INC. By: /s/ Wayne Garten ----------------------------- Title: Vice President [CORPORATE SEAL] ATTEST: /s/ Michael Sherman - ----------------------------- -6- 7 FIRST TRUST NATIONAL ASSOCIATION, as Trustee By: /s/ Rick Prokofch ----------------------------- Title: Trust Officer [CORPORATE SEAL] ATTEST: /s/ Kathi Mohammadzadah - ----------------------------- Kathi Mohammadzadah -6- EX-4.10 6 SECOND AMENDMENT TO WARRANT AGREEMENT 1 Exhibit 4.10 SECOND AMENDMENT TO WARRANT AGREEMENT AND WARRANT CERTIFICATE BETWEEN HANOVER DIRECT, INC. AND NORTH AMERICAN RESOURCES LIMITED This Second Amendment, dated as of November 13, 1995 (this "Amendment"), to that certain Warrant Agreement, dated as of October 25, 1991, as amended by that certain First Amendment, dated as of July 8, 1991, between The Horn & Hardart Company, a Nevada corporation and the predecessor- in-interest to Hanover Direct, Inc. (the "Company"), and North American Resources Limited, a British Virgin Islands corporation ("NAR"), and Warrant Certificate No. 1. WHEREAS, the Company and NAR are parties to that certain Warrant Agreement, dated as of October 25, 1991, as amended by that certain First Amendment, dated as of July 8, 1991 (as so amended, the "Warrant Agreement"), and pursuant thereto the Company has issued to NAR Warrant Certificate No. 1 (the "Warrant Certificate"); and WHEREAS, the Company and NAR desire to further amend the Warrant Agreement and the Warrant Certificate. NOW, THEREFORE, in consideration of the premises and agreements herein contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: A. Amendment to the Warrant Agreement. The Warrant Agreement is hereby amended as follows: Section 5(a) is hereby amended to extend the Expiration Date through August 1, 1998 as part of the total compensation to be paid to NAR by the Company in connection with NAR's purchase from SunAmerica Life Insurance Company of $14 million aggregate principal amount of the Company's 9.25% Senior Subordinated Notes due August 1990. As a result, Section 5(a) is hereby amended to delete the following: "May 8, 1996" and to substitute therefor the following: "August 1, 1998". B. Amendment to the Warrant Certificate. The Warrant Certificate is hereby amended as follows: (i) The words "MAY 8, 1996" are hereby deleted from the caption of the Warrant Certificate and the words "AUGUST 1, 1998" are substituted therefor. 2 (ii) The following is hereby deleted from the first paragraph of the Warrant Certificate: "May 8, 1996" and the following is substituted therefor: "August 1, 1998". C. Ratification. Except as expressly amended hereby, all terms and provisions of the Warrant Agreement, as heretofore amended, remain unamended, unmodified and in full force and effect. The Warrant Agreement, as amended hereby, and all rights and powers created thereby, is in all respects ratified and confirmed. From and after the date hereof, all references to the Warrant Agreement shall be deemed to mean the Warrant Agreement as amended by this Amendment. D. Counterparts. This Amendment may be executed in counterparts, each of which, when executed and delivered, shall for all purposes be deemed an original. Both of the counterparts, when taken together, shall constitute but one and the same Amendment. E. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to principles of conflict of laws. F. Definitions. Except as otherwise expressed or provided or unless the context otherwise requires, all terms used herein which are defined in the Warrant Agreement shall have the meanings ascribed to them in the Warrant Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. HANOVER DIRECT, INC. By: /s/ Michael P. Sherman ----------------------------- Name: Michael P. Sherman Title: NORTH AMERICAN RESOURCES LIMITED By: /s/ Thomas A. Huser ----------------------------- Name: Thomas A. Huser Title: Attorney-in-Fact -2- EX-4.11 7 FIRST AMENDMENT TO WARRANT AGREEMENT 1 Exhibit 4.11 FIRST AMENDMENT TO WARRANT AGREEMENT AND WARRANT CERTIFICATE BETWEEN HANOVER DIRECT, INC. AND INTERCONTINENTAL MINING AND RESOURCES LIMITED This First Amendment, dated as of November 13, 1995 (this "Amendment"), to that certain Warrant Agreement, dated as of July 8, 1991, between The Horn & Hardart Company, a Nevada corporation and the predecessor-in- interest to Hanover Direct, Inc. (the "Company"), and Intercontinental Mining Resources Limited, a British Virgin Islands corporation ("IMR"), and Warrant Certificate No. 1. WHEREAS, the Company and IMR are parties to that certain Warrant Agreement, dated as of July 8, 1991 (the "Warrant Agreement"), and pursuant thereto the Company has issued to IMR Warrant Certificate No. 1 (the "Warrant Certificate"); and WHEREAS, the Company and IMR desire to amend the Warrant Agreement and the Warrant Certificate. NOW, THEREFORE, in consideration of the premises and agreements herein contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: A. Amendment to the Warrant Agreement. The Warrant Agreement is hereby amended as follows: Section 5(a) is hereby amended to extend the Expiration Date through August 1, 1998 as part of the total compensation to be paid to IMR by the Company in connection with IMR's purchase from SunAmerica Life Insurance Company of $14 million aggregate principal amount of the Company's 9.25% Senior Subordinated Notes due August 1990. As a result, Section 5(a) is hereby amended to delete the following: "the earlier to occur of (i) the 60th day after default by IMR in its obligations under the Credit Agreement if such default shall not have been cured or waived by such 60th day, and (ii) the fifth anniversary of the date of this Agreement" and to substitute therefore the following: "August 1, 1998". B. Amendment to the Warrant Certificate. The Warrant Certificate is hereby amended as follows: 2 (i) The words "JULY 10, 1996" are hereby deleted from the caption of the Warrant Certificate and the words "AUGUST 1, 1998" are substituted therefore. (ii) The following is hereby deleted from the first paragraph of the Warrant Certificate: "the earlier to occur of (i) the 60th day after default by Intercontinental Mining & Resouirces Limited ("IMR") in its obligations under the Credit Agreement, if such default shall not have been cured or waived by such 60th day, and (ii) July 10, 1996" and the following is substituted therefore: "August 1, 1998". C. Ratification. Except as expressly amended hereby, all terms and provisions of the Warrant Agreement, as heretofore amended, remain unamended, unmodified and in full force and effect. The Warrant Agreement, as amended hereby, and all rights and powers created thereby, is in all respects ratified and confirmed. From and after the date hereof, all references to the Warrant Agreement shall be deemed to mean the Warrant Agreement as amended by this Amendment. D. Counterparts. This Amendment may be executed in counterparts, each of which, when executed and delivered, shall for all purposes be deemed an original. Both of the counterparts, when taken together, shall constitute but one and the same Amendment. E. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to principles of conflict of laws. F. Definitions. Except as otherwise expressed or provided or unless the context otherwise requires, all terms used herein which are defined in the Warrant Agreement shall have the meanings ascribed to them in the Warrant Agreement. -2- 3 IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. HANOVER DIRECT, INC. By: /s/ Michael P. Sherman ------------------------------- Name: Michael P. Sherman Title: INTERCONTINENTAL MINING & RESOURCES LIMITED By: /s/ Thomas A. Huser ------------------------------- Name: Thomas A. Huser Title: -3- EX-4.12 8 FIRST AMENDMENT TO WARRANT AGREEMENT 1 Exhibit 4.12 FIRST AMENDMENT TO WARRANT AGREEMENT AND WARRANT CERTIFICATE BETWEEN HANOVER DIRECT, INC. AND NORTH AMERICAN RESOURCES LIMITED This First Amendment, dated as of November 13, 1995 (this "Amendment"), to that certain Warrant Agreement, dated as of October 25, 1991, between The Horn & Hardart Company, a Nevada corporation and the predecessor-in- interest to Hanover Direct, Inc. (the "Company"), and North American Resources Limited, a British Virgin Islands corporation ("NAR"), and Warrant Certificate No. 1. WHEREAS, the Company and NAR are parties to that certain Warrant Agreement, dated as of October 25, 1991 (the "Warrant Agreement"), and pursuant thereto the Company has issued to NAR Warrant Certificate No. 1 (the "Warrant Certificate"); and WHEREAS, the Company and NAR desire to amend the Warrant Agreement and the Warrant Certificate. NOW, THEREFORE, in consideration of the premises and agreements herein contained and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties agree as follows: A. Amendment to the Warrant Agreement. The Warrant Agreement is hereby amended as follows: Section 5(a) is hereby amended to extend the Expiration Date through August 1, 1998 as part of the total compensation to be paid to NAR by the Company in connection with NAR's purchase from SunAmerica Life Insurance Company of $14 million aggregate principal amount of the Company's 9.25% Senior Subordinated Notes due August 1990. As a result, Section 5(a) is hereby amended to delete the following: "July 10, 1996" and to substitute therefore the following: "August 1, 1998". B. Amendment to the Warrant Certificate. The Warrant Certificate is hereby amended as follows: (i) The words "JULY 10, 1996" are hereby deleted from the caption of the Warrant Certificate and the words "AUGUST 1, 1998" are substituted therefor. 2 (ii) The following is hereby deleted from the first paragraph of the Warrant Certificate: "July 10, 1996" and the following is substituted therefor: "August 1, 1998". C. Ratification. Except as expressly amended hereby, all terms and provisions of the Warrant Agreement, as heretofore amended, remain unamended, unmodified and in full force and effect. The Warrant Agreement, as amended hereby, and all rights and powers created thereby, is in all respects ratified and confirmed. From and after the date hereof, all references to the Warrant Agreement shall be deemed to mean the Warrant Agreement as amended by this Amendment. D. Counterparts. This Amendment may be executed in counterparts, each of which, when executed and delivered, shall for all purposes be deemed an original. Both of the counterparts, when taken together, shall constitute but one and the same Amendment. E. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York, without giving effect to principles of conflict of laws. F. Definitions. Except as otherwise expressed or provided or unless the context otherwise requires, all terms used herein which are defined in the Warrant Agreement shall have the meanings ascribed to them in the Warrant Agreement. IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. HANOVER DIRECT, INC. By: /s/ Michael P. Sherman ------------------------------ Name: Michael P. Sherman Title: NORTH AMERICAN RESOURCES LIMITED By: /s/ Thomas A. Huser ------------------------------ Name: Thomas A. Huser Title: Attorney-in-Fact -2- EX-10.4 9 AMENDMENT NO. 2 - ACCT. PURCHASE AGREEMENT 1 Exhibit 10.4 SECOND AMENDMENT TO ACCOUNT PURCHASE AGREEMENT AMENDMENT, made and entered into as of June 1, 1995, by and among HANOVER DIRECT, INC. ("HDI"), a Delaware corporation and the successor-in-interest to The Hanover Companies, HANOVER DIRECT PENNSYLVANIA, INC. ("HDPI"), a Pennsylvania corporation formerly known as Hanover Direct, Inc. and Hanover Direct Fulfillment, Inc., BRAWN OF CALIFORNIA, INC. ("Brawn"), a California corporation, GUMP'S BY MAIL, INC. ("Gump's By Mail"), a Delaware corporation, GUMP'S CORP. ("GUMP'S"), a California corporation formerly known as GSF Acquisition Corp., and GUMP'S HOLDINGS, INC. ("Gump's Holdings"), a Delaware corporation (HDI, HDPI, Brawn, Gump's By Mail, Gump's and Gump's Holdings being hereinafter collectively and individually referred to as "Hanover") and GENERAL ELECTRIC CAPITAL CORPORATION ("GE Capital"), a New York corporation. W I T N E S S E T H: WHEREAS, Hanover and GE Capital are parties to an Account Purchase Agreement dated as of December 21, 1992, as amended by an amendment dated as of July 12, 1993 and as amended, restated and renamed as of April 25, 1994 and as further amended as of November 2, 1994 (collectively the "Purchase Agreement"); WHEREAS, it is the mutual desire of Hanover and GE Capital that the Purchase Agreement be amended in accordance with the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the mutual promises and subject to the terms and conditions hereinafter set forth, the parties hereto hereby agree as follows: 1. Capitalized terms used herein which are not otherwise defined shall have the same meaning as in the Purchase Agreement. 2. All references to (i) "Hanover Companies" throughout the Purchase Agreement shall be omitted and replaced with "HDI", (ii) "HDFI" and "Hanover Direct" throughout the Purchase Agreement shall be omitted and replaced with "HDPI", and (iii) "GSF" throughout the Purchase Agreement shall be omitted and replaced with "GUMP'S". 3. The following definition shall be added after the definition of "Collection Policy" in Section 1: "Commercial Paper Rate" shall mean the rate of so-called sixty day high-grade unsecured notes sold through dealers by major corporations in multiples of one thousand dollars 2 ($1,000) as published by The Wall Street Journal in its "Money Rates" section under the heading "Commercial Paper" (or if such publication is discontinued, such other publication of similar type designated by GE Capital), on any Business Day that such rate is published, whether or not such rate is actually charged or paid by an entity. 4. The following definition shall be added after the definition of "Agreement" in Section 1: "Average Commercial Paper Rate" shall mean, for any period, the sum of the Commercial Paper Rates for each Business Day on which such rate is published during such period, divided by the number of Business Days on which such rate is published during such period. 5. The following definition shall be added after the definition of "Ineligible Indebtedness" in Section 1: "Insurance Program" shall mean any program which may be offered through GE Capital pursuant to Section 2.10 under which GE Capital or any insurance company or other third party makes available insurance coverage to Account Debtors. 6. The definition of "Termination Date" in Section 1 is deleted and substituted in its place is the following: "Termination Date" shall mean the last day of the Settlement Period immediately after December 31, 2000 or after any subsequent fifth anniversary thereafter, as the case may be, upon extension of the term of the arrangements contemplated hereby as provided in Section 12.1 hereof. 7. The following definition shall be added after the definition of "Total Equity Investment" in Section 1: "Value-Added Program" shall mean any products or services which may be offered by or through GE Capital to Account Debtors pursuant to Section 2.11 that enhance the features of the Accounts including, without limiting the foregoing, credit card protection plans, legal services, auto clubs and extended warranties; provided, however, that the term shall not be deemed to include credit insurance or any offerings falling within the definition of "Insurance Programs." 8. The first sentence of Section 2.3 shall be deleted, and the following shall be added at the beginning of such Section: -2- 3 2.3. Unit Fee. On each Settlement Date (including each Settlement Date during any renewal term), Hanover shall pay GE Capital a Unit Fee of $2.168 for each Account that is an Active Account during the immediately preceding Settlement Period. 9. Section 2.3 (a) is deleted and substituted in its place is the following: (a) For each Settlement Period, the Unit Fee shall be increased or decreased, respectively, by adding an amount equal to .9075 cents ($.009075) for each dollar by which the Average Net Account Balance exceeds $132.00, or by subtracting an amount equal to .9075 cents ($.009075) for each dollar by which the Average Net Account Balance is less than $132.00. 10. The Section Title and the first sentence of Section 2.4 (a) (i) shall be deleted, and the following shall be added at the beginning of such Section: 2.4. Service Fee Adjustment. (a) (i) During the first thirty (30) Settlement Periods after execution of the Existing Agreement, if the Prime Rate in effect on the last Business Day of any Settlement Period exceeds 6.0%, Hanover shall be charged an additional fee calculated by multiplying the Aggregate Investment in such Settlement Period (to the extent that such Aggregate Investment exceeds the Funding Date Aggregate Investment) by 74.8% of such excess in the Prime Rate over 6.0%, and dividing the product by 12. 11. Section 2.4 (b) is deleted, and substituted in its place is the following: (b) After the first thirty (30) Settlement Periods through and including the thirty-sixth Settlement Period after execution of the Existing Agreement, Hanover shall be charged each Settlement Period an additional fee equal to (i) the amount by which the product of the Average Commercial Paper Rate (calculated as of the end of such Settlement Period) and ninety-four percent (94%) exceeds 5.04%, multiplied by (ii) the Aggregate Investment in such Settlement Period (to the extent that such Aggregate Investment exceeds the Funding Date Aggregate Investment) and (iii) divided by twelve (12). Such amount shall be payable on the next Settlement Date. GE Capital shall credit to Hanover each Settlement Period an amount equal to (i) the amount by which 5.04% exceeds the product of the Average Commercial Paper Rate (calculated as of the end of such Settlement Period) and ninety-four percent (94%), multiplied by (ii) the Aggregate Investment in such Settlement Period (to the extent that such Aggregate Investment exceeds the Funding Date Aggregate Investment) and (iii) divided by twelve (12). Any amounts so due and owing to Hanover shall be deducted from the Unit Fee due and owing to GE Capital on the next Settlement Date. -3- 4 12. The following new Subsection 2.4 (c) shall be added: (c) After the first thirty-six (36) Settlement Periods after the execution of the Existing Agreement, Hanover shall be charged each Settlement Period an additional fee equal to (i) the amount by which the product of the Average Commercial Paper Rate (calculated as of the end of such Settlement Period) and ninety-four percent (94%) exceeds 5.04%, multiplied by (ii) the Aggregate Investment in such Settlement Period and (iii) divided by twelve (12). Such amount shall be payable on the next Settlement Date. GE Capital shall credit to Hanover each Settlement Period an amount equal to (i) the amount by which 5.04% exceeds the product of the Average Commercial Paper Rate (calculated as of the end of such Settlement Period) and ninety-four percent (94%), multiplied by (ii) the Aggregate Investment in such Settlement Period and (iii) divided by twelve (12). Any amounts so due and owing to Hanover shall be deducted from the Unit Fee due and owing to GE Capital on the next Settlement Date. 13. Section 2.10 is deleted, and substituted in its place is the following: 2.10. Insurance Solicitation of Accounts. GE Capital, or its agents, may solicit Account Debtors for Insurance Programs. GE Capital and Hanover will, through solicitations, mailings and other advertising media, jointly develop and cooperate with each other in the offering of such Insurance Programs. These Insurance Program offerings may be made in the form of Credit Agreement application enrollments, direct mail or statement inserts. GE Capital shall pay Hanover an expense reimbursement allowance (which reimbursement may include but not be limited to direct out-of-pocket expenses) for enrolling Account Debtors in any such Insurance Program. The expense reimbursement allowance will be paid once on each insured Account in the amount of one dollar ($1.00) for each Account on which the Account Debtor elects insurance. At Hanover's option and subsequent to the date which Hanover provides evidence of proper insurance licensing either on Hanover's part or on behalf of one of its affiliated companies, GE Capital shall pay Hanover forty percent (40%) of GE Capital's net annual income (exclusive of any insurance proceeds) derived from such Insurance Programs, to the extent allowable under applicable law. 14. The following new Section 2.11 shall be added: 2.11 Value-Added Solicitation of Account. GE Capital, or its agents, may solicit Account Debtors for Value-Added Programs. GE Capital shall pay Hanover forty percent (40%) of the net annual income derived from such Value-Added Programs. 15. The first sentence of Section 3.4 shall be deleted, and the following shall be added at the beginning of such Section: 3.4 Promotion. -4- 5 (a) Hanover agrees to actively promote the credit program and will promote the purchase of merchandise on credit, including without limitation in Hanover's mail-order catalogues, to create Accounts for submission to, or establishment and/or addition by, GE Capital, all substantially in accordance with its past practices. 16. The following new Subsections 3.4 (b) and (c) shall be added: (b) Beginning June 1, 1995 and fifteen (15) days after the end of each Settlement Period, provided there exists no Event of Default on the part of Hanover on any such date and neither party has delivered a notice of termination in accordance with Section 12 hereof as of such date, GE Capital shall contribute an amount equal to one-twelfth (1/12) of the product of the Aggregate Investment for the prior Settlement Period, multiplied by .005. The amounts contributed pursuant to the immediately preceding sentence shall be known as the "Promotion Fund". (c) The costs of all mutually agreed upon marketing promotions shall be paid on a matching basis, whereby Hanover shall direct GE Capital to pay one-half (1/2) of the costs of any such promotions from the Promotion Fund and Hanover shall pay directly one-half (1/2) of such costs. Hanover shall have the right to use the Promotion Fund on a matching basis until it is fully expended and any unused portion can be carried over from year to year during the term of this Purchase Agreement; provided, however, that it is the intention of Hanover and GE Capital to fully utilize the Promotion Fund during each year of the term of this Purchase Agreement; and, provided, further, that amounts not so utilized in the calendar year after the year in which such amounts were contributed shall thereafter be forfeited by Hanover. 17. The last sentence of Section 6.2 shall be deleted, and the following shall be added at the end of the Section: During each Settlement Period thereafter the Required Reserve has been or shall be adjusted as described in Sections 6.4 and 6.5 below to an amount equal to the sum of: (i) 10% of Eligible Indebtedness as of the relevant Billing Dates, plus (ii) 100% of Ineligible Indebtedness as of such Billing Dates. 18. Subsection 12.1 (a) is deleted, and substituted in its place is the following: (a) Subject to the provisions of subsection (b) below and Section 13 hereof, this Agreement shall be in effect until the Termination Date and shall automatically renew itself for successive five-year terms thereafter unless either party terminates such arrangement at the end of any term by giving the other party written notice of such termination at least one hundred eighty (180) days prior thereto, in which event termination of this Agreement -5- 6 shall be effective as of the last day of the Settlement Period ending immediately after the Termination Date. 19. The last sentence of Section 12.2 shall be deleted, and the following shall be added at the end of the Section: Without in any way limiting the generality of the foregoing, upon such termination, (a) Hanover shall continue to be liable for (i) the Unit Fee and other fees provided for in Sections 2.3 and 2.4 hereof and for (ii) RPR Indebtedness to the extent specified in Section 2 5 hereof, (b) the Unit Fee under 2.3 shall in no event be less than $2.168 plus adjustments for postage and delinquency under Section 2.3(b) and (c), until such time as there is no Indebtedness owned by GE Capital pursuant to Section 12.2 hereof, whichever shall occur earlier, and (c) GE Capital shall continue to perform its obligations under this Agreement, other than those set forth in Section 2.1 hereof and related functions including, but not limited to, new account processing and promotions. 20. Each party shall pay its own out-of-pocket legal expenses in connection with the execution and delivery of this Amendment and the closing of the transactions relating thereto. 21. Except as specifically provided herein, the terms and conditions of the Purchase Agreement shall continue in full force and effect and shall be fully binding on the parties hereto. Upon execution of this Amendment, each reference in the Purchase Agreement to "this Purchase Agreement," "hereunder," "hereof," or words of like import, shall mean and be a reference to the Purchase Agreement as amended hereby. In the event of any conflict between the terms of the Purchase Agreement and the terms of this Amendment, the terms of this Amendment shall prevail. 22. This Amendment may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument, and any of the parties hereto may execute this Amendment by signing any such counterpart. IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and year first above written. HANOVER DIRECT, INC. By: /s/ Edward J. O'Brien ----------------------------------------- Name: Edward J. O'Brien ------------------------------- -6- 7 Title: Vice President ------------------------------- HANOVER DIRECT PENNSYLVANIA, INC. By: /s/ Edward J. O'Brien ----------------------------------------- Name: Edward J. O'Brien -------------------------------- Title: Vice President -------------------------------- BRAWN OF CALIFORNIA By: /s/ Edward J. O'Brien ----------------------------------------- Name: Edward J. O'Brien -------------------------------- Title: Vice President -------------------------------- GUMP'S BY MAIL, INC. By: /s/ Edward J. O'Brien ----------------------------------------- Name: Edward J. O'Brien -------------------------------- Title: Vice President -------------------------------- GUMP'S CORP. By: /s/ Edward J. O'Brien ----------------------------------------- Name: Edward J. O'Brien --------------------------------- Title: Vice President -------------------------------- -7- 8 GUMP'S HOLDINGS, INC. By: /s/ Edward J. O'Brien ----------------------------------------- Name: Edward J. O'Brien --------------------------------- Title: Vice President -------------------------------- GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Richard C. McKenzie ----------------------------------------- Name: Richard C. McKenzie --------------------------------- Title: Manager ------------------------------- -8- EX-10.5 10 AMENDMENT NO. 3 TO ACCT. PURCHASE AGREEMENT 1 Exhibit 10.5 WAIVER AND AMENDMENT NO. 3 TO AMENDED AND RESTATED ACCOUNT PURCHASE AGREEMENT Waiver and Amendment No. 3, dated as of November 14, 1995 to Account Purchase Agreement dated as of December 21, 1992, and amended, restated and renamed as of April 25, 1994, and as further amended as of November 2, 1994 and June 1, 1995, by and among Hanover Direct, Inc., a Delaware corporation (the legal successor by merger to the Hanover Companies, a Nevada corporation) ("HDI"), Hanover Direct Pennsylvania, Inc. (f/k/a Hanover House Industries, Inc.,), a Pennsylvania corporation ("HDPI"), Brawn of California, a California corporation ("Brawn"), Gump's By Mail, Inc. a Delaware corporation ("Gump's By Mail"), Gump's Corp. (f/k/a/ GSF Acquisition Corp.), a California corporation ("GSF"), and Gump's Holdings, Inc., a Delaware corporation ("Gump's Holdings"), (HDI, HDPI, Brawn, Gump's By Mail, GSF and Gump's Holdings being hereinafter collectively referred to as "Hanover"), on the one hand, and General Electric Capital Corporation, a New York corporation ("GE Capital"), on the other hand (the "Account Purchase Agreement"). W I T N E S S E T H: WHEREAS, Hanover and GE Capital are parties to the Account Purchase Agreement and capitalized terms used herein without definition shall have the respective meanings ascribed to them in the Account Purchase Agreement; and WHEREAS, Hanover has entered into certain financing arrangements, dated as of the date hereof, with Congress Financial Corporation ("Congress") pursuant to which Hanover will grant to Congress a security interest in certain assets of Hanover, including Hanover's rights in the Reserve Account, and in connection therewith certain existing liens in favor of other parties will be released. WHEREAS, Hanover anticipates that it will not be in compliance with certain financial covenants set forth in the Account Purchase Agreement at December 31, 1995, and has requested that GECC waive compliance currently with respect to such covenants. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged and with the intent to be legally bound hereby, the parties hereto agree as follows: 2 I. Amendments: 1. The last sentence of Section 6.2 (as amended in Amendment No. 2 to the Account Purchase Agreement) shall be deleted, and the following shall be added at the end of the Section: During each Settlement Period thereafter the Required Reserved has been or shall be adjusted as described in Sections 6.4 and 6.5 below to an amount equal to the sum of (i) 15% of Eligible Indebtedness as of the relevant Billing Dates for each Billing Date on and after the date hereof, plus (ii) 100% of Ineligible Indebtedness as of such Billing Dates. 2. Section 8.7 of the Account Purchase Agreement is hereby amended by deleting same in its entirety and substituting the following in lieu thereof: "8.7. Liens. Hanover shall not create or permit any Lien, in and to the Accounts in which GE Capital has an interest hereunder, the Indebtedness in which GE Capital has an interest hereunder, or the Reserve Account except presently existing or hereafter created Liens in favor of GE Capital and Liens created by or through GE Capital; provided, however, that Hanover may create in favor of Congress Financial Corporation a lien, junior in right and subject to the terms and conditions acceptable to GE Capital, in the Reserve Account. 3. Sections 7.12 and 8.24 of the Account Purchase Agreement are hereby deleted in their entirety II. Waivers. GECC hereby waives compliance by Hanover with the provisions of Section 8.19 of the Account Purchase Agreement solely with respect to Section 4.1(e)(iii) and Section 4.1(e)(iv) as at December 31, 1995. This waiver shall not relate to any subsequent period. III. General. 1. Except as specifically provided herein, the terms and conditions of the Account Purchase Agreement as amended herein shall continue in full force and effect and shall be fully binding on the parities hereto. Upon the execution of this Amendment, each reference in the Account Purchase Agreement to "this agreement," "hereunder," "hereof," or words of like import, shall mean and be a reference to the Agreement as amended hereby. In the event of any conflict between the terms of the Account Purchase Agreement and the terms of this Amendment, the terms of this Amendment shall prevail. -2- 3 2. This Amendment may be executed in two or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have cause this Amendment to be executed as of the date and year first stated above. GENERAL ELECTRIC CAPITAL CORPORATION By: /s/ Daniel W. Porter --------------------------------------------- Name: Daniel W. Porter Title: VP and General Manager HANOVER DIRECT, INC. By: /s/ Edward J. O'Brien --------------------------------------------- Name: Edward J. O'Brien Title: Senior Vice President and Treasurer HANOVER DIRECT PENNSYLVANIA, INC. By: /s/ Edward J. O'Brien --------------------------------------------- Name: Edward J. O'Brien Title: Senior Vice President BRAWN OF CALIFORNIA, INC. By: /s/ Edward J. O'Brien --------------------------------------------- Name: Edward J. O'Brien Title: Vice President GUMP'S BY MAIL, INC. By: /s/ Edward J. O'Brien --------------------------------------------- Name: Edward J. O'Brien Title: Vice President -3- 4 -4- 5 GUMP'S CORP. By: /s/ Edward J. O'Brien --------------------------------------------- Name: Edward J. O'Brien Title: Vice President GUMP'S HOLDINGS, INC. By: /s/ Edward J. O'Brien --------------------------------------------- Name: Edward J. O'Brien Title: Vice President -5- EX-10.24 11 LOAN AND SECURITY AGREEMENT 1 Exhibit 10.24 LOAN AND SECURITY AGREEMENT by and among CONGRESS FINANCIAL CORPORATION and HANOVER DIRECT PENNSYLVANIA, INC., BRAWN OF CALIFORNIA, INC., GUMP'S BY MAIL, INC. GUMP'S CORP. THE COMPANY STORE, INC. TWEEDS, INC. LWI HOLDINGS, INC. AEGIS CATALOG CORPORATION HANOVER DIRECT VIRGINIA INC. HANOVER REALTY, INC. Dated as of November 14, 1995 2 INDEX
SECTION 1. DEFINITIONS........................................................ 2-31 SECTION 2. CREDIT FACILITY.................................................... 34 2.1 Revolving Loans.................................................... 34 2.2 Lending Sublimits.................................................. 37 2.3 Letter of Credit Accommodations.................................... 38 2.4 Term Loans......................................................... 42 2.5 Maximum Credit..................................................... 43 2.6 Reserves........................................................... 43 2.7 Fees............................................................... 44 2.8 Interest........................................................... 45 2.9 Conduct of Accounts; Cross-Collateralization....................... 46 2.10 Use of Proceeds.................................................... 49 SECTION 3. CONDITIONS PRECEDENT TO LOANS AND OTHER FINANCIAL ACCOMMODATIONS................................. 51 3.1 Conditions to Loans................................................ 51 3.2 Additional and Continuing Condition................................ 54 SECTION 4. COLLATERAL......................................................... 54 4.1 Security Interests in Borrowers' Property.......................... 54 4.2 Guarantees......................................................... 56 4.3 Security Interests in Property of Guarantors....................... 56 SECTION 5. REPRESENTATIONS AND WARRANTIES..................................... 56 5.1 Organization....................................................... 56 5.2 Corporate Power and Authority...................................... 57 5.3 Capitalization; Solvency........................................... 58 5.4 Compliance with Other Agreements and Applicable Law...................................... 58 5.5 Environmental Compliance........................................... 59 5.6 Governmental Approval.............................................. 61 5.7 Chief Executive Offices; Collateral Locations...................... 61 5.8 Priority of Liens; Title to Properties............................. 62 5.9 Taxes.............................................................. 62 5.10 Litigation......................................................... 63 5.11 Intellectual Property.............................................. 63 5.12 Employee Benefits.................................................. 64 5.13 Investment Company................................................. 65 5.14 Regulation G; Securities Exchange Act of 1934 ........................................... 65 5.15 No Material Adverse Change......................................... 66 5.16 Financial Statements............................................... 66 5.17 Disclosure......................................................... 66 5.18 Labor Disputes..................................................... 67 5.19 Corporate Name; Prior Transactions................................. 67 5.20 [Reserved]......................................................... 67 5.21 Schedule of Indebtedness........................................... 67
(i) 3 5.22 Certain Affiliated Ownership........................................................ 68 5.23 Common Enterprise................................................................... 68 5.24 Subordination of Certain Obligations................................................ 69 SECTION 6. ADDITIONAL COVENANTS................................................................ 69 6.1 Tradenames.......................................................................... 69 6.2 Subsidiaries........................................................................ 70 6.3 Indebtedness........................................................................ 71 6.4 Limitation on Liens................................................................. 73 6.5 Loans; Investments; Guarantees; Etc................................................. 74 6.6 Transactions with Affiliates........................................................ 77 6.7 Maintenance of Existence............................................................ 79 6.8 Sale and Leasebacks................................................................. 79 6.9 Sale of Assets, Consolidation, Merger, Dissolution, Etc. .......................................................... 79 6.10 Compliance with Laws, Regulations, Etc.............................................. 80 6.11 Compliance with Environmental Laws.................................................. 80 6.12 Payment of Taxes and Claims......................................................... 82 6.12A Accounts Covenants.................................................................. 83 6.13 Properties in Good Condition........................................................ 85 6.14 Insurance........................................................................... 87 6.15 Appraisals.......................................................................... 88 6.16 Compliance with ERISA............................................................... 89 6.17 Notice of Default................................................................... 90 6.18 Financial Statements and Other Information.......................................... 90 6.19 Consolidated Working Capital........................................................ 94 6.20 Consolidated Net Worth.............................................................. 95 6.21 Further Assurances.................................................................. 95 6.22 Sales of Outdated and Surplus Inventory............................................. 95 6.23 Maintenance and Delivery of Customer Lists; MACS Software............................................................................ 96 6.24 Rental or License of Customer Lists................................................. 96 6.25 No Termination or Amendment of Credit Card Agreements.......................................................................... 97 6.26 Obligations to be Senior Indebtedness............................................... 97 6.27 Mail Order Joint Ventures........................................................... 97 6.28 9.25% Notes......................................................................... 99 6.29 Litigation Notices.................................................................. 99 SECTION 7. EVENTS OF DEFAULT AND REMEDIES...................................................... 100 7.1 Events of Default................................................................... 100 7.2 Remedies............................................................................ 102 SECTION 8. COLLECTION AND ADMINISTRATION....................................................... 105 8.1 Receipts............................................................................ 105 8.2 Depository Accounts; Blocked Accounts; Customer Prepayment Accounts........................................................ 107 8.3 Right of Inspection; Access......................................................... 108 8.4 Specific Powers..................................................................... 108
(ii) 4 SECTION 9. EFFECTIVE DATE; TERMINATION; COSTS; MISCELLANEOUS........................................................................ 109 9.1 Term................................................................................. 109 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..................................................................... 114 9.7 Amendments and Waivers............................................................... 115 9.8 Applicable Law....................................................................... 115 9.9 Successors and Assigns............................................................... 115 9.10 Severability......................................................................... 115 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..................................................... 116 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 1.35, 5.7 CHIEF EXECUTIVE OFFICES AND LOCATIONS OF COLLATERAL EXHIBIT D EXISTING LIENS Section 5.8 EXHIBIT E LIST OF HANOVER DEBT Section 3.1(b) INSTRUMENTS EXHIBIT F PENDING LITIGATION Section 5.10 EXHIBIT G TRADENAMES Sections 5.19, 6.1 EXHIBIT H-1 EXISTING INDEBTEDNESS Section 5.21 EXHIBIT H-2 EXISTING LETTERS OF CREDIT Section 5.21 UNDER NATIONS BANK CREDIT AGREEMENT EXHIBIT H-3 EXISTING INTERCOMPANY Sections 5.21, INDEBTEDNESS 6.5(b) EXHIBIT I FORM OF MORTGAGEE/LANDLORD Section 1.35, 6.8 WAIVER, ACCESS AND USE AGREEMENT EXHIBIT J LIST OF LABOR DISPUTES Section 5.18 EXHIBIT K ENVIRONMENTAL DISCLOSURE Section 5.5 -1- 6 LOAN AND SECURITY AGREEMENT LOAN AND SECURITY AGREEMENT, dated as of November __, 1995, 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), THE COMPANY STORE, INC., a Wisconsin corporation ("TCS", as hereinafter further defined), TWEEDS, INC., a Delaware corporation ("Tweeds", as hereinafter further defined), LWI HOLDINGS, INC., a Delaware corporation ("LWI", as hereinafter further defined), AEGIS CATALOG CORPORATION, a Delaware corporation ("Aegis", as hereinafter further defined), HANOVER DIRECT VIRGINIA INC. ("HDV", as hereinafter further defined) and HANOVER REALTY, INC., a Virginia corporation ("Hanover Realty", as hereinafter further defined; and together with HDPI, Brawn, GBM, Gump's, TCS, Tweeds, LWI, Aegis and HDV, 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, Borrowers have requested that Lender make loans and advances and provide other financial accommodations to Borrowers; and WHEREAS, Lender is willing to 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); 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): 7 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 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 "Accounts Loan Financial Test" shall mean Lender's determination, as to any Program Quarter, whether Hanover's actual consolidated net income or loss before taxes for the applicable Measurement Quarter represents a positive net income before taxes equal to or greater than, or a net loss equal to, or a smaller net loss than, the applicable Adjusted Forecast Amount for such Measurement Quarter. 1.4 "Accounts Loan Formula" shall have the meaning given in Section 2.1(a) hereof. 1.5 "Adjusted Forecast Amount" shall mean, as to a Measurement Quarter, Hanover's projected consolidated net income or loss before taxes for such Measurement Quarter, as shown on the financial budget of Hanover approved by Hanover's Board of Directors and delivered to Lender prior to the commencement of the fiscal year in which the Measurement Quarter occurs (or such updated financial projection for the Measurement Quarter approved by Hanover's Board of Directors, submitted to and approved by Lender in writing, in its sole discretion, expressly for purposes of calculating the Adjusted Forecast Amount for one or more Measurement Quarters, in lieu of the originally-delivered financial projections as aforesaid), multiplied by (i) eighty-five (85%) percent, if the projected amount for such Measurement Quarter is a positive amount, or (ii) one hundred fifteen (115%) percent, if the projected amount for such Measurement Quarter is a negative amount (loss). 1.6 "Aegis" shall mean Aegis Catalog Corporation, a Delaware corporation, and its successors and assigns. - 2 - 8 1.7 "Aegis Eligible Inventory" shall mean all finished goods Inventory of Aegis in the merchandise categories of safety and anti-hazard products, personal fitness, home and personal care, and comfort and security products, offered for sale by Aegis in its "The Safety Zone" catalog, or such other catalogs created or acquired by Aegis covering substantially similar merchandise which Aegis has requested Lender to include in this Inventory category. 1.8 "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 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. 1.9 "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. 1.10 "Appraisal" the appraisal dated September 28, 1995, prepared by the Appraiser with respect to Borrowers' Inventory, as updated by the Appraiser from time to time as provided herein, in each case, in form, scope and methodology acceptable to Lender. - 3 - 9 1.11 "Appraiser" shall mean Daley-Hodkin Appraisal Corporation, or such other appraisal firm acceptable to Lender. 1.12 "Assignment of Partnership Interest" shall mean the Collateral Assignment and Security Agreement of General Partnership Interest, dated of even date herewith, made by Tweeds in favor of Lender, as the same now exists or may hereafter be amended, supplemented, modified, renewed, restated or replaced. 1.13 "Austad" shall mean, individually and collectively, Austad Holdings, Inc., a Delaware corporation, and The Austad Company, a South Dakota corporation, and their respective successors and assigns. 1.14 "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. 1.15 "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. 1.16 "Blocked Accounts" shall have the meaning set forth in Section 8.2 hereof. 1.17 "Board" shall mean the Board of Governors of the Federal Reserve System, and any successor or replacement board, governmental agency or other entity having the same or similar authority and responsibilities. 1.18 "Borrowers" shall mean, individually and collectively, Revolving Loan Borrowers and Term Loan Borrowers. 1.19 "Brawn" shall mean Brawn of California, Inc., a California corporation, and its successors and assigns. 1.20 "Collateral" shall have the meaning set forth in Section 4 hereof. 1.21 "Congress" shall mean Congress Financial Corporation, a California corporation, and its successors and assigns. 1.22 "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 - 4 - 10 taking total assets and subtracting therefrom total liabilities of such Person and its Subsidiaries; provided, however, that solely for purposes of calculating Consolidated Net Worth of Hanover and its Subsidiaries as at the end of Hanover's 1995 fiscal year, up to $4,500,000 in write-downs of Hanover's deferred taxes asset, as required pursuant to Financial Accounting Standards No. 109, due to losses incurred by Hanover and its Subsidiaries in such fiscal year, shall not be considered reductions of the deferred taxes asset of Hanover. 1.23 "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 clause (c) of the definition of Indebtedness, 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 Consolidated Working Capital hereunder, the outstanding balance of the Revolving Loans and Term Loans shall not be considered current liabilities. 1.24 "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. 1.25 "Credit Facility" shall mean, individually and collectively, the Revolving Loans, the Letter of Credit Accommodations and the Term Loans. 1.26 "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 - 5 - 11 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 Revolving Loan Borrowers, which are leased to, or otherwise licensed for use by Revolving Loan Borrowers, with permission of such third party owners. 1.27 "Customer List Escrow Agreement" shall mean the Customer and Mailing List Escrow Agreement, dated on or about the date hereof, by and among HDI on behalf of its Subsidiaries and Affiliates, Lender and a storage and escrow agent acceptable to Lender, providing for, among other things, the deposit in escrow of the Customer Lists and source and executable code, documentation and related media for the then-current MACS system software utilized by Borrowers ("MACS Software") with, and the storage of such Customer Lists and MACS Software by, such agent, the obligation of Hanover, on behalf of its Subsidiaries and Affiliates, including Revolving Loan Borrowers and certain Guarantors, to update and deposit in escrow updated Customer Lists and MACS Software periodically and for the storage and escrow agent to hold and store the updated Customer Lists and MACS Software, and the right of Lender to obtain from such agent possession of the Customer Lists and MACS Software, as such Escrow Agreement now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.28 "DM Advertising" shall mean D.M. Advertising, Inc., a New Jersey corporation, and its successors and assigns. 1.29 "Deferred Billing Agreement" shall mean the letter agreement, dated on or before the date hereof, by and among Litle and Hanover with respect to Deferred Billing Option Programs of certain Borrowers, as the same now exists or may hereafter be amended, modified, supplemented, extended, restated, renewed or replaced. 1.30 "Deferred Billing Borrowers" shall mean, individually and collectively, each Revolving Loan Borrower who sells goods under a Deferred Billing Option Program. 1.31 "Deferred Billing Option Program" shall mean a deferred billing option program from time to time made available by a Revolving Loan Borrower to its mail order customers who wish to purchase merchandise from such Revolving Loan Borrower offered for sale in its mail order catalogs pursuant to which (a) such Revolving Loan Borrower, or Hanover as agent for such Revolving Loan Borrower, upon the placement of an order by such customer, verifies with the applicable Third Party Credit Card Issuer or - 6 - 12 its agent that such customer's bank credit card is valid, (b) after such verification, such Revolving Loan Borrower ships the Inventory purchased by such customer together with an invoice dated the sale date, (c) such Revolving Loan Borrower completes the credit card transaction and sales records for such sales in accordance with the Litle Agreements, (d) such sales are accepted by Litle for purchase within ninety (90) days from the date of sale, and (e) Litle remits payment for the sale to the Blocked Accounts one (1) business day following purchase by Litle in accordance with the Litle Agreements. 1.32 "Early Termination Fee" shall have the meaning set forth in Section 9.1(f) hereof. 1.33 "Eligible Deferred Billing Receivables" shall mean MasterCard/VISA Receivables of Deferred Billing Borrowers arising from sales of merchandise offered for sale under a Deferred Billing Option Program through mail order catalogs of Deferred Billing Borrowers offering Eligible Inventory of Deferred Billing Borrowers, and which Master Card/VISA Receivables are and continue to be acceptable to Lender based on the criteria set forth below. In general, such MasterCard/VISA Receivables shall be Eligible Deferred Billing Receivables if: (a) such MasterCard/VISA Receivables arise from the actual and bona fide sale and delivery to customers by Deferred Billing Borrowers in the ordinary course of business, which sales are completed in accordance with the terms and provisions contained in any agreements between Deferred Billing Borrowers and their customers related thereto; (b) the credit card transaction and sales records evidencing such MasterCard/VISA Receivables are submitted to Litle by Deferred Billing Borrowers and/or Hanover in its capacity as their agent in accordance with the Deferred Billing Agreement and the other Litle Agreements; (c) such MasterCard/VISA Receivables are purchased by Litle at the end of the deferred submission period (which shall not exceed ninety (90) days from the date of sale); (d) Litle remits payment of the MasterCard/VISA Receivables to the Blocked Account specified by Lender, within ninety-one (91) days from the date of sale and, if earlier, one (1) business day after purchase by Litle; (e) such MasterCard/VISA Receivables comply with the applicable terms and conditions contained in Section 6.12A of this Agreement; (f) Litle has not asserted a counterclaim, defense or dispute, and does not have any right of setoff against such - 7 - 13 MasterCard/VISA Receivables, other than in respect of chargebacks for returns and customer disputes in the ordinary course of business in accordance with the terms of the Litle Agreements; (g) there are no facts, events or occurrences which would impair the validity, enforceability or collectability of such MasterCard/VISA Receivables or reduce the amount payable or delay payment by Litle or the purchase thereof; (h) such MasterCard/VISA Receivables, until purchased and paid for in full by Litle, are subject to the first priority, valid and perfected security interest of Lender and any goods giving rise thereto are not, and were not at the time of the sale thereof, subject to any liens except those permitted in this Agreement; (i) Lender shall have received, in form and substance reasonably satisfactory to Lender, a Third Party Credit Card Acknowledgement and a copy of the Deferred Billing Agreement, upon which Lender is expressly permitted to rely, each duly authorized, executed and delivered by Litle, and no cancellation, termination, or default by Litle or Hanover or any Revolving Loan Borrower, or any suspension of Hanover or any Revolving Loan Borrower, or any institution of or increase in reserves or designation of special member status, shall have occurred under the Litle Agreements; (j) neither Litle nor any officer or employee of Litle with respect to such MasterCard/VISA Receivable is an officer, employee or agent of or affiliated with a member of the Affiliated Borrower Group directly or indirectly by virtue of family membership, ownership, control, management or otherwise; (k) there are no proceedings or actions which are threatened or pending against Litle which might result in any material adverse change in the financial condition of Litle or impair its ability to purchase and pay for any Master Card/VISA Receivables. General criteria for Eligible Deferred Billing Receivables may be established and revised from time to time by Lender in good faith. Any Master Card/VISA Receivables or other Accounts of Borrowers which are not Eligible Deferred Billing Receivables shall nevertheless be part of the Collateral. 1.34 "Eligible Inventory" shall be determined by Lender from time to time, and generally shall consist of Aegis Eligible Inventory, Gump's Eligible Inventory, GBM Eligible Inventory, General Merchandise Inventory, Home Furnishings Inventory, LWI Eligible Inventory, Men's Fashion Inventory, TCS Eligible Inventory, Tweeds Eligible Inventory and Women's Fashion Inventory of Revolving Loan Borrowers which are first quality, - 8 - 14 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 Revolving Loan Borrowers. Inventory acquired by Revolving Loan Borrowers under documentary letters of credit issued as a Letter of Credit Accommodation pursuant to Section 2.3 hereof, 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 Revolving Loan 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 Revolving Loan 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) raw materials, work-in-process, packaging and shipping materials, (b) Inventory located at retail stores of Revolving Loan 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 Revolving Loan Borrowers which is not subject to the first priority perfected security interest of Lender (subject to the provisions of Section 6.4 hereof), (g) damaged or defective goods, (h) Inventory purchased on consignment, (i) merchandise of Revolving Loan Borrowers, other than Gump's, that may otherwise be Eligible Inventory but which is not among the product categories included in the calculation of the Net Orderly Liquidation Value as set forth in the most current Appraisal, (j) - 9 - 15 merchandise that may otherwise be Gump's Eligible Inventory but which is not among the product categories included in the calculation of Net GOB Value as set forth in the most current Appraisal, and (k) merchandise of Revolving Loan Borrowers on hand six (6) months after the catalog through which it is offered is discontinued or disposed of by a Revolving Loan Borrower. Any Inventory of Revolving Loan Borrowers which Lender determines to be ineligible or unacceptable for lending purposes at any time shall nevertheless be and remain at all times part of the Collateral. 1.35 "Eligible Inventory Locations" shall mean (a) the fulfillment centers or warehouses owned or leased by Revolving Loan 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 Revolving Loan Borrowers after the date hereof, not located in the State of California, with respect to the acquisition of which Revolving Loan 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 Revolving Loan Borrowers, unless Revolving Loan 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 the form of Exhibit I attached hereto or such other 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. 1.36 "Environmental Laws" shall mean all Federal, State and local laws, rules, regulations, ordinances, and consent decrees relating to health, hazardous substances, pollution and environmental matters, as now or at any time hereafter in effect, applicable to the Affiliated Borrower Group's business and facilities (whether or not owned by it), including laws relating to emissions, discharges, releases or threatened releases of pollutants, contamination, chemicals, or hazardous, toxic or dangerous substances, materials or wastes into the environment (including, without limitation, ambient air, surface water, - 10 - 16 ground water, land surface or subsurface strata) or otherwise relating to the generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of pollutants, contaminants, chemicals, or hazardous, toxic or dangerous substances, materials or wastes. 1.37 "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. 1.38 "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. 1.39 "Event of Default" shall have the meaning set forth in Section 7.1 hereof. 1.40 "Excess Availability" shall mean, at any time, the amount, if any, as determined by Lender, by which: (i) the amount of the Revolving Loans determined by Lender to be available to Revolving Loan Borrowers pursuant to the Revolving Loan Formulas (but not to exceed (A) in the case of each Revolving Loan Borrower, the applicable lending sublimits hereunder, (B) in the case of Revolving Loan Borrowers considered together, the Revolving Loan Limit) exceeds (ii) the sum of: (A) the amount of all outstanding and unpaid Obligations of Revolving Loan 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 - 11 - 17 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 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. 1.41 "Financing Agreements" shall mean this Agreement, the Mortgages, the HDPI Term Note, the Hanover Realty Term Note, the Supplemental Security Agreements, the Guarantees, the 9.25% Note 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(b)), 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. 1.42 "GBM" shall mean Gump's By Mail, Inc., a Delaware corporation, and its successors and assigns. 1.43 "GBM Eligible Inventory" shall mean all Inventory of GBM in the merchandise categories or gifts, tabletop, interior design, outdoor furnishings, stationery, decorative art, collectibles, home furnishings, home textiles, apparel, jewelry and fashion, offered for sale by GBM in its "Gump's" and "Gump's Interiors" catalog, or such other catalogs created or acquired by GBM covering substantially similar merchandise which GBM has requested Lender to include in this Inventory category. - 12 - 18 1.44 "GECC" shall mean General Electric Capital Corporation, a New York corporation, and its successors and assigns. 1.45 "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 Credit Card Agreement, except this clause (iii) shall not exclude the GECC Reserve Balance and the Written-off Accounts (but the - 13 - 19 GECC Reserve Balance shall nevertheless be part of the Collateral); (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 Card 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 1.45, the following terms shall have the following meanings: - 14 - 20 (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 1.45 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 1.45 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 December 21, 1992, by and among Debtor, Brawn, Hanover Direct, Inc. and GECC, as amended by that certain Amendment to Account Purchase Agreement, dated as of July 12, 1993, as amended, restated and renamed by that certain Amended and Restated Account Purchase Agreement, dated as of April 25, 1994, as amended by Amendment No. 1 to Amended and Restated Account Purchase Agreement, dated as of November, 1994, and as amended by that certain Second Amendment to Account Purchase Agreement, made and entered into as of June 1, 1995, and as amended by that certain Amendment No. 3 to Amended and Restated Account Purchase Agreement dated on or about the date hereof, as the same may hereafter be 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 - 15 - 21 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 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 - 16 - 22 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. (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 Revolving Loan 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. 1.46 "GECC Lien Clarification Agreement" shall mean that certain Agreement by and between GECC and Lender, dated of even date herewith, 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. 1.47 "General Merchandise Inventory" shall mean all Inventory of Borrowers offered for sale in the "Hanover House" and "Colonial Garden Kitchens", "Kitchen & Home" catalogs of HDPI, or such other catalogs created or acquired by any Revolving Loan Borrower covering substantially similar merchandise, that such Revolving Loan 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. 1.48 "General Security Agreement" shall have the meaning set forth in Section 4.3 hereof. - 17 - 23 1.49 "Guarantee" or "Guarantees" shall have the meaning set forth in Section 4.2 hereof. 1.50 "Guarantor Collateral" shall have the meaning set forth in Section 4.3 hereof. 1.51 "Guarantors" shall mean, jointly and severally, individually and collectively (i) Hanover and each existing and future direct or indirect Subsidiary of Hanover which owns any assets in excess of Ten Thousand Dollars ($10,000), other than Non-Guarantor Subsidiaries, and (ii) each of their respective successors and assigns. 1.52 "Gump's" shall mean Gump's Corp., formerly known as GSF Acquisition Corp., a California corporation, and its successors and assigns. 1.53 "Gump's Eligible Inventory" shall mean all Inventory of Gump's in the merchandise categories of gifts, tabletop, interior design, outdoor furnishings, stationery, decorative art, collectibles, home furnishings, home textiles, apparel, jewelry and fashion, offered for sale by Gump's at the Gump's Main Store. 1.54 "Gump's Main Store" shall mean the retail store operated by Gump's, known as Gump's San Francisco, located at 135 Post Street, San Francisco, California. 1.55 "Hanover" or "HDI" 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, and its successors and assigns. 1.56 "Hanover Catalog Holdings" shall mean Hanover Catalog Holdings, Inc., a Delaware corporation, and its successors and assigns. 1.57 "Hanover Finance" shall mean Hanover Finance Corporation, a Delaware corporation, d/b/a Horn & Hardart Finance Corporation, and its successors and assigns. 1.58 "Hanover Realty" shall mean Hanover Realty, Inc., a Virginia corporation, and its successors and assigns. 1.59 "Hanover Realty Term Loan" shall mean the term loan made by Lender to Hanover Realty as provided for in Section 2.4(b) hereof. 1.60 "Hanover Ventures" shall mean Hanover Ventures, Inc., a Delaware corporation, and its successors and assigns. 1.61 "Hazardous Materials" shall mean any hazardous, toxic or dangerous substances, materials and wastes, including, without - 18 - 24 limitation, hydrocarbons (excluding hydrocarbons naturally occurring on the premises), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including, without limitation, materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials, or wastes and including any other substances, materials or wastes that are or become regulated under any Environmental Law (including, without limitation any that are or become classified as hazardous or toxic under any Environmental Law). 1.62 "HDI Floating Rate Bond Financing" shall mean the Twenty-Million Dollar ($20,000,000) Series A and Series B floating rate notes of Hanover due October 1, 2009 in connection with the acquisition and development of the warehouse and distribution center owned by Hanover Realty located in Roanoke, Virginia, and for improvements to the Gump's Main Store, and all agreements, documents and instruments relating thereto, as such bonds and related agreements, documents and instruments now exist or may hereafter be amended, supplemented, extended, renewed, restated or replaced. 1.63 "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., and its successors and assigns. 1.64 "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 acquisition, construction or improvement of a fulfillment center located at Kindig Lane, in Conewago Township, Adams County, Pennsylvania, and the ground lease held by HDPI as lessee of the underlying land, as such arrangements now exist or may hereafter be amended, supplemented, extended, renewed, restated or replaced. 1.65 "HDPI Term Loan" shall mean the term loan made by Lender to HDPI as provided for in Section 2.4(a) hereof. 1.66 "Home Furnishings Inventory" shall mean all Inventory of Revolving Loan Borrowers offered for sale in the "Domestications" and "Tapestry" catalogs of HDPI, or such other catalogs created or acquired by any Revolving Loan Borrower covering substantially similar merchandise which such Revolving Loan Borrower has requested Lender to include in this Inventory category, which Inventory shall include, among other items, home textiles (including sheets, towels, curtains, comforters, - 19 - 25 blankets, pillows, featherbeds and other such items) and decorative home products and loungewear. 1.67 "IMR" shall mean Intercontinental Mining & Resources Incorporated, a British Virgin Islands corporation, its successors and assigns. 1.68 "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. 1.69 "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. 1.70 "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. 1.71 "Interest Rate" shall mean (a) a rate of one and one quarter percent (1.25%) per annum in excess of the Prime Rate on all Revolving Loans or, after the occurrence and during the continuance of any Event of Default, or after termination or non-renewal hereof, a rate of three and one quarter percent (3.25%) per annum in excess of the Prime Rate and (b) a rate of one and one half percent (1.5%) per annum in excess of the Prime Rate on all Term Loans or, after the occurrence and during the continuance of any Event of Default, or after termination or non-renewal hereof, a rate of three and one half percent (3.5%) per annum in excess of the Prime Rate. In the event that the aggregate amount of Revolving Loans and Letter of Credit Accommodations to one or more Revolving Loan Borrowers exceeds the amounts determined by Lender to be available pursuant to the Revolving Loan Formulas, net of reserves and subject to the applicable lending sublimits as to each Revolving Loan Borrower, - 20 - 26 and subject to the Revolving Loan Limit as to all Revolving Loan Borrowers considered together, the Interest Rate hereunder shall be three and one half percent (3.5%) 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 Revolving Loan Formulas in the absence of an Event of Default which is continuing, the Interest Rate hereunder shall be one and one half percent (1.5%) per annum greater than the Prime Rate as to the amount of any such excess(es) for a period of five (5) days after Lender notifies the affected Revolving Loan Borrowers of such discretionary reduction in the Revolving Loan Formulas and, at and after the expiration of such period of five (5) days, the Interest Rate hereunder shall be three and one half percent (3.5%) 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. 1.72 "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. 1.73 "Inventory Loan Formulas" shall have the meaning set forth in Section 2.1(b) hereof. 1.74 "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. 1.75 "Lender" shall mean Congress Financial Corporation, a California corporation, its successors and assigns. 1.76 "Letter of Credit Accommodations" shall have the meaning set forth in Section 2.3(a) hereof. - 21 - 27 1.77 "Litle" shall mean, collectively, Litle & Company, Inc., a Delaware corporation, and First USA Merchant Services, a Nevada corporation, and their respective successors and assigns. 1.78 "Litle Agreements" shall mean (a) the Member Agreement, dated May 26, 1995, by and among Litle and Hanover and its Affiliates, (b) the Deferred Billing Agreement, and (c) the Third Party Credit Card Acknowledgment, dated of even date herewith, by and among Litle and Hanover, as each of the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.79 "LWI" shall mean LWI Holdings, Inc., a Delaware corporation, and its successors and assigns. 1.80 "LWI Eligible Inventory" shall mean all Inventory of LWI in the merchandise categories of do-it-yourself, home care and convenience and woodworking products offered for sale by LWI in its "Improvements" and "Leichtung Workshops" catalogs, or such other catalogs created or acquired by LWI covering substantially similar merchandise which LWI has requested Lender to include in this Inventory category. 1.81 "Mail Order Joint Venture" shall mean one or more Persons, not Affiliate(s) of Revolving Loan Borrowers, engaged in a joint undertaking with Revolving Loan 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 Revolving Loan Borrowers, with respect to products or markets not previously sold or engaged in by Revolving Loan Borrowers at the time of formation. 1.82 "MasterCard/VISA Receivables" shall mean Third Party Credit Card Receivables that arise solely from goods sold by Revolving Loan Borrowers or Guarantors to customers who have purchased goods using a valid MasterCard or VISA bank-issued credit card, which are processed, purchased and paid for by Litle. 1.83 "Maximum Credit" shall mean the aggregate principal amount of Seventy-Five Million Dollars ($75,000,000), less payments and prepayments in respect of the Term Loans. 1.84 "Measurement Quarter" shall mean, as to a Program Quarter, the second preceding fiscal quarter of Hanover ending prior to the commencement of such Program Quarter. 1.85 "Men's Fashion Inventory" shall mean all Inventory of Revolving Loan Borrowers offered for sale in the "International Male", "Undergear", "Outtakes" catalogs of Brawn, or such other - 22 - 28 catalogs created or acquired by any Revolving Loan Borrower covering substantially similar merchandise that such Revolving Loan 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, shoes, costume jewelry and accessories, and other apparel offered in such catalogs. 1.86 "Mortgages" shall mean, individually and collectively, each of the following (as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced): (a) the Open-End Fee and Leasehold Mortgage and Security Agreement, dated of even date herewith, by HDPI in favor of Lender with respect to the Real Property and related assets of HDPI located in Hanover, Pennsylvania, (b) the Credit Line Deed of Trust, Assignment and Security Agreement, dated of even date herewith, by Hanover Realty in favor of Lender with respect to the Real Property and related assets of Hanover Realty in Roanoke, Virginia, and (c) the Open-End Fee and Leasehold Mortgage and Security Agreement, dated of even date herewith, by LWI in favor of Lender with respect to the Real Property and related assets of LWI in Cleveland, Ohio. 1.87 "NAR" shall mean North American Resources Limited, a British Virgin Islands corporation, its successors and assigns. 1.88 "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. 1.89 "NationsBank" shall mean, collectively, NationsBank, National Association, formerly known as NationsBank, National Association (Carolinas), as successor-in-interest to NationsBank of North Carolina, National Association, individually as lender and as agent for Chemical Bank, The First National Bank of Maryland, Fleet Bank and The Bank of Tokyo Trust Company under the NationsBank Credit Agreements, and each of their respective successors and assigns. 1.90 "NationsBank Credit Agreements" shall mean the Credit Facilities and Reimbursement Agreement, dated as of October 12, 1994, by and among Hanover and NationsBank (the "NationsBank Credit Agreement"), together with any agreements, documents and instruments executed and/or delivered in connection therewith or related thereto and any amendments, supplements, extensions, renewals, restatements of any of the foregoing, including, without limitation all of the security agreements, documents and instruments executed and/or delivered by Hanover and certain Borrowers and Guarantors, as guarantors of the NationsBank Credit Agreement, being held in escrow pursuant to the Waiver Letter, dated September 29, 1995, among NationsBank, Hanover and certain - 23 - 29 other Borrowers and subsidiaries, as guarantors of the NationsBank Credit Agreement, under the Escrow Agreement, dated September 29, 1995 by and among Hanover, those Borrowers and Guarantors, NationsBank and Smith, Helms, Mulliss & Moore, L.L.P. 1.91 "Net Amount of Eligible Deferred Billing Receivables" shall mean the gross amount of Eligible Deferred Billing Receivables, less (a) discounts and fees payable by Deferred Billing Borrowers to Litle or claimed by Litle with respect thereto, and (b) to the extent not included under clause (a) any prepayments, holdbacks, chargeback deposits, chargeback reserves, refund reserves, processing fees and other reserves, claims, credits (including credits for returned goods), allowances or other charges payable to or claimed by Litle. 1.92 "Net GOB Percentage" shall mean, as to Gump's Eligible Inventory, the Net GOB Value thereof, expressed as a percentage of cost thereof. 1.93 "Net GOB Value" shall mean, as to Gump's Eligible Inventory, an amount equal to (a) the amount of gross proceeds that could be realized in cash if such Inventory were sold within a ninety (90) day period in a going out of business liquidation sale, as set forth or calculated in the most recent Appraisal, minus (b) the estimated costs, expenses, fees, including reasonable attorneys fees, taxes and other charges which would be incurred in connection with such sale, and estimated returns, all as set forth in, or calculated using, the most recent Appraisal. 1.94 "Net Orderly Liquidation Value" shall mean, as to Eligible Inventory other than Gump's Eligible Inventory, an amount equal to (a) eighty (80%) percent of the gross proceeds that could be realized in cash if such Inventory were sold within a six (6) to nine (9) month period in an orderly liquidation sale, minus (b) the estimated costs, expenses, fees, including reasonable attorneys fees, taxes and other charges which would be incurred in connection with such sales, and estimated returns, all as set forth in, or calculated using, the most recent Appraisal. 1.95 "Net OLV Percentage" shall mean, as to Eligible Inventory other than Gump's Eligible Inventory, the Net Orderly Liquidation Value thereof, expressed as a percentage of cost thereof. 1.96 "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 Hanover under the 9.25% Notes. 1.97 "9.25% Notes" shall mean the aggregate of $14,000,000 in principal amount of outstanding 9.25% Senior Subordinated - 24 - 30 Notes of Hanover due August 1, 1998, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, exchanged, restated or replaced. 1.98 "9.25% Note Assignment" shall mean the Repurchase and Option Agreement dated as of September 29, 1995 among Sun America Life Insurance Company, IMR and Hanover with respect to the 9.25% Notes, Hanover and the 9.25% Note Guarantors, together with all instruments and agreements delivered thereunder, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.99 "9.25% Subordination Agreement" shall mean the Subordination Agreement, dated of even date herewith, between Lender and acknowledged by the Indenture Trustee (as defined therein), Hanover and the 9.25% Guarantors, as the same may now exist or may hereafter be amended, modified, supplemented, restated or replaced. 1.100 "Non-Guarantor Subsidiary" shall mean each of (a) Austad, (b) the Restaurant Business Subsidiaries and (c) any direct Subsidiary of Hanover that, on the date hereof, owns assets having an aggregate value of 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 - 25 - 31 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 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 Six Hundred Dollar ($600) 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. If any Subsidiary of Hanover formed or acquired after the date hereof at any time, or Austad, with respect to clauses (ii), (iv) or (v), at any time, does not meet or no longer meets any of the foregoing requirements, such Subsidiary or Austad 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. 1.101 "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 - 26 - 32 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 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, letter of credit fees, closing fees, 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. 1.102 "Participant" shall mean any Person which at any time participates with Lender in respect of the Revolving Loans, the Term Loans, the Letter of Credit Accommodations or other Obligations of Borrowers or any portion thereof. 1.103 "Person" or "person" shall mean an individual, a partnership, a limited partnership, a corporation (including a business trust), a joint stock company, a trust, an unincorporated association, a joint venture, a limited liability company, a limited liability partnership or other entity or a government or any agency, instrumentality or political subdivision thereof. 1.104 "Prime Rate" shall mean the prime commercial interest rate from time to time publicly announced by CoreStates Bank, - 27 - 33 N.A., Philadelphia, Pennsylvania, whether or not such announced rate is the best rate available at such bank. 1.105 "Private Credit Card Agreement" shall mean (a) that certain Account Purchase Agreement, dated December 21, 1992, by and among Debtor, Brawn, Hanover Direct, Inc. and GECC, as amended by that certain Amendment to Account Purchase Agreement, dated as of July 12, 1993, as amended, restated and renamed by that certain Amended and Restated Account Purchase Agreement, dated as of April 25, 1994, as amended by Amendment No. 1 to Amended and Restated Account Purchase Agreement, dated as of November, 1994, and as amended by that certain Second Amendment to Account Purchase Agreement, made and entered into as of June 1, 1995, and as amended by that certain Amendment No. 3 to Amended and Restated Account Purchase Agreement dated on or about the date hereof, as the same may hereafter be amended and/or restated from time to time 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. 1.106 "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 Revolving Loan Borrowers and approved for inclusion in this definition by Lender, in writing, in Lender's sole discretion. 1.107 "Private Credit Card Purchaser" shall mean GECC, its successors and assigns, or such other successor or replacement purchaser under the Private Credit Card Agreement. 1.108 "Private Credit Card Receivables" shall mean all Accounts representing the rights of certain Revolving Loan Borrowers 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 Revolving Loan Borrowers. 1.109 "Program Quarter" shall mean each fiscal quarter of Hanover during which a Deferred Billing Option Program is commenced or remains in effect as to new sales. 1.110 "Purchase Money Lien" shall mean the liens meeting the requirements in Section 6.4(d) hereof. 1.111 "Real Property" shall mean all now owned and hereafter acquired real property of Borrowers, together with all buildings, structures, and other improvements located thereon and - 28 - 34 all licenses, easements and appurtenances relating thereto, wherever located, including without limitation, the real property, leasehold interests and related assets more particularly described in the Mortgages, located in Hanover, Pennsylvania, Roanoke, Virginia and Warrensville Heights, Ohio. 1.112 "Renewal Date" shall have the meaning set forth in Section 9.1(a) hereof. 1.113 "Restaurant Business Subsidiaries" shall mean, the Subsidiaries of Hanover listed on Exhibit B-3 attached hereto. 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 Accounts Loans" shall mean the outstanding Obligations owed to Lender by Deferred Billing Borrowers consisting of the secured loans and advances, heretofore, now or hereafter made by Lender to Deferred Billing 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 "Revolving Inventory Loans" shall mean the outstanding Obligations owed to Lender by Revolving Loan Borrowers consisting of the secured loans and advances, heretofore, now or hereafter made by Lender to Revolving Loan Borrowers as provided for in Section 2.1(b) hereof, on a revolving basis (involving advances, repayments and readvances), subject to the terms and conditions of this Agreement and the other Financing Agreements. 1.117 "Revolving Loan Borrowers" shall mean, individually and collectively, HDPI, Brawn, GBM, Gump's, TCS, Tweeds, LWI, HDV and Aegis. 1.118 "Revolving Loan Formulas" shall mean, collectively, the Accounts Loan Formula and the Inventory Loan Formulas. 1.119 "Revolving Loan Limit" shall mean, at any time, the amount of Sixty Five Million ($65,000,000) Dollars, less the amount of outstanding Letter of Credit Accommodations at such time. 1.120 "Revolving Loans" shall mean, individually and collectively, Revolving Accounts Loans and Revolving Inventory Loans. - 29 - 35 1.121 "Sears" shall mean Sears Shop At Home Services, Inc., a Delaware corporation, together with its affiliates, and its and their successors and assigns. 1.122 "Sears Agreements" shall mean (a) the License Agreement, effective January 1, 1994, between Hanover Ventures and Sears, together with any agreements, operating policies and procedures, guidelines, advertising policies, information transfer requirements, settlement procedures and schedules thereto and any other documents, instruments or agreements executed and/or delivered in connection therewith or relating thereto, (b) the letter agreement, dated April 5, 1995, between LWI and Sears, and (c) any license or other agreement between Sears and a member of the Affiliated Borrower Group providing for substantially similar arrangements as those contemplated by the agreements referred to in clauses (a) and (b) of this definition, together with all agreements, documents and instruments executed and/or delivered in connection therewith or related thereto, as each of the foregoing now exist or may hereafter be amended, modified, supplemented, extended, renewed or restated. 1.123 "SEC" shall mean the United States Securities and Exchange Commission. 1.124 "Specified Action" shall mean the meaning set forth in Section 9.1(g) hereof. 1.125 "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. 1.126 "Tax Sharing Agreement" shall mean that certain Tax Sharing Agreement, dated as of February 1, 1987, presently by and among Hanover and HDPI, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.127 "TCS Factory" shall mean The Company Factory, Inc., a Wisconsin corporation, and its successors and assigns. 1.128 "TCS Office" shall mean The Company Office, Inc., a Wisconsin corporation and its successors and assigns. - 30 - 36 1.129 "TCS" shall mean The Company Store, Inc., a Wisconsin corporation, and successors and assigns. 1.130 "TCS Eligible Inventory" shall mean: all Inventory of TCS in the merchandise categories of comforters, blankets, sheets, towels, curtains, pillows, featherbeds, decorative home products, loungewear and outer garments offered for sale by TCS in its "The Company Store" catalog, or such other catalog created by TCS covering substantially similar merchandise which TCS has requested Lender to include in this Inventory category. 1.131 "Term" shall have the meaning set forth in Section 9.1(a) hereof. 1.132 "Term Loans" shall mean the HDPI Term Loan and Hanover Realty Term Loan. 1.133 "Term Loan Borrowers" shall mean, individually and collectively, HDPI and Hanover Realty. 1.134 "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 Revolving Loan Borrowers under the Third Party Credit Card Agreements, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.135 "Third Party Credit Card Agreements" shall mean all agreements now or hereafter entered into by Revolving Loan 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 Revolving Loan 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 agreements referred to in subparagraphs (a) and (b) of the definition of Litle Agreements; (b) the Agreement for American Express Card Acceptance, effective April 1, 1995, between American Express Travel Related Services Company, Inc. and HDPI; - 31 - 37 (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 Diners Club Inc. covering individual catalogs of HDPI; and (d) the Merchant Services Agreement, made as of October 14, 1986, by and between Discover Card Services, Inc. and Hanover. 1.136 "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, Carte Blanche, and Sears Card non-bank credit cards. 1.137 "Third Party Credit Card Receivables" shall mean all Accounts representing the Revolving Loan Borrowers' and Guarantors' 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, including, without limitation, rights to payment from the customer and from any Third Party Credit Card Issuer or party to a Third Party Credit Card Agreement, together with the proceeds of the foregoing, but excluding returned, repossessed or reclaimed goods relating to such Accounts and excluding other Inventory of Revolving Loan Borrowers. 1.138 "Trademark Security Agreements" shall mean the Trademark Collateral Assignment and Security Agreements, by and between each of Hanover Catalog Holdings, Company Store Holdings, Inc., Scandia Down Corporation, Hanover, Aegis Safety Holdings, Inc., Gump's, Tweeds and Brawn, and each other Borrower or Guarantor who at any time owns any registered trademarks or service marks, in favor of Lender, and instruments thereunder, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.139 "Tradename" shall have the meaning set forth in Section 6.1 hereof. 1.140 "Tweeds Eligible Inventory" shall mean all Inventory of Tweeds in the merchandise categories of men's and women's apparel, shoes, hosiery, costume jewelry, accessories and outerwear offered for sale by Tweeds in its "Tweeds" catalog or such other catalogs created or acquired by Tweeds covering substantially similar merchandise which Tweeds has requested Lender to include in this Inventory category. 1.141 "UCC" shall mean the Uniform Commercial Code as from time to time in effect in the State of New York. - 32 - 38 1.142 "Value" shall mean, as determined by Lender, with respect to Eligible Inventory, the lower of (a) cost computed for Eligible Inventory of Revolving Loan Borrowers other than Gump's, on a first-in-first-out basis in accordance with generally accepted accounting principles consistently applied, and, in the case of Eligible Inventory of Gump's, computed under a retail accounting methodology acceptable to Lender, (excluding, in any event, and as to all Eligible Inventory, indirect costs such as purchasing, warehousing, distribution, but including incoming freight costs) or (b) market value, as determined by Lender. 1.143 "Voluntary Termination Notice" shall have the meaning given in Section 9.1(g). 1.144 "Westmark" shall mean Westmark Holdings Limited, a British Virgin Islands corporation, its successors and assigns. 1.145 "Women's Fashion Inventory" shall mean all Inventory of Revolving Loan Borrowers offered for sale in the "Silhouettes" catalog of HDPI, or such other catalogs created or acquired by any Revolving Loan Borrower covering substantially similar merchandise that such Revolving Loan Borrower has requested Lender to include in this Inventory category, including, without limitation, women's apparel, shoes, hosiery, costume jewelry, accessories and outerwear (including moderately priced, discount, contemporary women's fashions, contemporary apparel for larger sized women and unique and other women's fashions). 1.146 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. 1.147 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. Whether or not expressly so provided herein or in 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 - 33 - 39 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. 1.148 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. 1.149 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, 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 Loans (a) Revolving Accounts 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 Loans to each of the Deferred Billing Borrowers, at its request, of up to eighty percent (80%) of their respective Net Amounts of Eligible Deferred Billing Receivables, or such greater or lesser percentages thereof as Lender shall, in its sole discretion, determine from time to time (the "Accounts Loan Formula"); provided, however, that no Revolving Accounts Loans shall be made available or be permitted to remain outstanding, unless (a) Lender receives written notification from the applicable Deferred Billing Borrowers of their intention to commence or continue as to new sales one or more Deferred Billing Option Programs, which notice shall describe the program in reasonable detail and be received by Lender not less than thirty (30) days prior to the commencement of each applicable Program Quarter, and (b) with respect to each Program Quarter commencing after the first fiscal quarter of 1996, Lender determines that the Deferred Billing Borrowers meet the Accounts Loan Financial Test with respect to such Program Quarter. (b) Revolving Inventory Loans. Subject to, and upon the terms and conditions contained herein and in the other - 34 - 40 Financing Agreements, Lender shall, from time to time, make Revolving Inventory Loans (i) to each Revolving Loan Borrower, other than Gump's, at such Revolving Loan Borrower's request, of up to the lesser of (A) sixty percent (60%) of the Value of the Eligible Inventory of such Revolving Loan Borrower or (B) the Net OLV Percentage of the Value of such Eligible Inventory and (ii) to Gump's, at its request, of up to the lesser of (A) sixty percent (60%) of the Value of Eligible Inventory of Gump's or (B) the Net GOB Percentage of the Value of Eligible Inventory of Gump's, or, in each of clauses (b)(i) or (b)(ii), such greater or lesser percentages thereof as Lender shall, in its sole discretion, determine from time to time (the "Inventory Loan Formulas"). Without limiting the foregoing, the sixty (60%) percent lending formula component referred to in clauses (b)(i)(A) and (b)(ii)(A) may be adjusted downward by Lender based upon any adverse change, individually or in the aggregate, in the turnover of Eligible Inventory or deterioration in mix, nature or quality of Eligible Inventory in the respective categories of Eligible Inventory, and any such downward adjustment made for such reason(s) (or on the basis of the lending formula component set forth in clauses (b)(i)(B) or (b)(ii)(B) above) shall not be considered solely discretionary for purposes of the provision contained in the definition of Interest Rate and Section 2.7(c) hereof. (c) Borrowing Procedures. For each Revolving Loan requested by Revolving Loan Borrowers, a Responsible Officer or other authorized Person of such respective Revolving Loan 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 Revolving Loan Borrower is a Responsible Officer or other authorized Person of such Revolving Loan Borrower. Lender may, but shall have no duty to, require borrowing requests to be made or confirmed in writing. (d) Approval and Disbursement of Loans. Upon Lender's receipt of a borrowing request pursuant to Section 2.1(b) hereof, Lender shall determine whether the Revolving Loan Borrower(s) making the request for a Revolving Loan is entitled to such loan, based upon and subject to all of the other terms and conditions hereof. If Lender determines that the Revolving Loan Borrower(s) making the request is not so entitled hereunder to a requested loan, Lender shall so advise such Revolving Loan 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 - 35 - 41 Lender approves a requested loan, or if Lender fails to notify such Revolving Loan 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 Revolving Loan Borrowers that it declines to make such loan) from Lender's disbursing bank or banks to the respective Revolving Loan Borrower's bank account from time to time designated and approved by Lender and Revolving Loan 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 Revolving Loan Borrowers for any delay or failure on the part of any bank or banks to transfer the funds to Revolving Loan 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 Revolving Loan Borrower(s) that it has approved, or is deemed under Section 2.1(d) hereof to have approved, a request to make a Revolving Loan which request was timely made by such Revolving Loan 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 Revolving Loan Borrower(s) shall fail to receive the wire or other transfer of funds to its bank account previously designated 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 Revolving Loan Borrower(s) for any customary and reasonable administrative service charges and overdraft interest charges, if any, actually imposed on such Revolving Loan 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 Revolving Loan 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. - 36 - 42 2.2 Lending Sublimits (a) Subject to, and upon the terms and conditions contained herein (i) the aggregate principal amount of Revolving Inventory Loans and Letter of Credit Accommodations made available to Brawn shall not exceed Eight Million Dollars ($8,000,000) at any one time outstanding. (b) 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 HDPI shall not exceed, in the aggregate (i) until HDPI and HDV have notified lender in writing, that the "Domestications" catalog business has been transferred to HDV, Forty Million Dollars ($40,000,000) at any one time outstanding, and (ii) following Lender's receipt of such notice, Twenty Million Dollars ($20,000,000), at any one time outstanding. (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 Seven Million Dollars ($7,000,000). (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 Five Million Dollars ($5,000,000) at any one time outstanding. (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 TCS shall not exceed Fifteen Million Dollars ($15,000,000) at any one time outstanding. (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 Eight Million Dollars ($8,000,000) at any one time outstanding. (g) 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 Aegis shall not exceed One Million Five Hundred Thousand Dollars ($1,500,000) at any one time outstanding. (h) 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 LWI shall not exceed Three Million Dollars ($3,000,000) at any one time outstanding. - 37 - 43 (i) 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 HDV shall not exceed, in the aggregate (i) until HDPI and HDV have notified Lender in writing that the "Domestications" catalog business has been transferred to HDV, zero ($0); and (ii) following Lender's receipt of such notice, Twenty Million Dollars ($20,000,000), at any one time outstanding. (j) Without limiting the foregoing lending sublimits, (i) the aggregate amount of Revolving Loans shall not at any one time outstanding exceed the Revolving Loan Limit for all Revolving Loan Borrowers and (ii) the aggregate amount of Revolving Accounts Loans for all Deferred Billing Borrowers shall not at any one time outstanding exceed Ten Million Dollars ($10,000,000). Lender shall have the right, from time to time, to establish and revise Revolving Accounts Loan sublimits for each Deferred Billing Borrower, within the overall Ten Million Dollar ($10,000,000) sublimit applicable to all Revolving Accounts Loans. 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 Revolving Loan Borrower, provide one or more of the following financial accommodations to such Borrower ("Letter of Credit Accommodations"): (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 a Revolving Loan 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 a Revolving Loan 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, including standby letters of credit (collectively, the "Distribution Center Standby LCs") issued to replace, or issued to NationsBank as sole security for, letters of credit previously issued by NationsBank for the account of Hanover or its subsidiaries, not to exceed the aggregate amount of Thirty Million Dollars ($30,000,000), to secure the HDPI Pennsylvania IRB Financing and the HDI Floating Rate Bond Financing. (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 Loans pursuant to the Revolving Loan Formulas, subject to reserves against availability established by Lender hereunder and within all applicable lending sublimits and the Revolving Loan Limit, shall be available to the - 38 - 44 respective Revolving Loan 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 Revolving Loan Borrower must be in an amount equal to or greater than the sum of (1) forty percent (40%) of the landed cost of such Eligible Inventory (or such greater percentage as shall equal one hundred percent (100%) minus the applicable Inventory Loan Formula determined by Lender under Section 2.1(b) hereof), plus (2) 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 (B) if the proposed Letter of Credit Accommodation is in the form of a Distribution Center Standby LC or for any other purpose, such additional availability of Revolving Loans to such Revolving Loan 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 Revolving Loan 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 the issuer, 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) Revolving Loan 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 Revolving Loan Borrowers and Lender, or between Lender and/or Revolving Loan Borrowers and any issuer, including the payment of all fees, commissions and charges set forth herein and therein. (c) Revolving Loan 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. Revolving Loan Borrowers further agree that payments made or other obligations incurred by, and all indemnities given by, Lender in connection with Letter of Credit Accommodations are part of the Obligations of Revolving Loan 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 Revolving Loan Borrowers prior to such termination or non-renewal, shall automatically be treated for - 39 - 45 purposes hereof as Revolving Loans and shall accrue interest at the Interest Rate then payable by Revolving Loan Borrowers commencing on the date such payment is made by Lender. (d) The aggregate amount of Revolving Loans which may otherwise be made available to the respective Revolving Loan Borrowers by Lender pursuant to the Revolving Loan Formulas and within the Revolving Loan Limit and subject to the applicable lending sublimits for the respective Revolving Loan Borrowers, shall be reduced from time to time as follows: (i) as to Letter of Credit Accommodations for the purpose of purchasing Eligible Inventory, by an amount equal to the sum of (A) forty (40%) percent of the value of Eligible Inventory purchased with such Letter of Credit Accommodations (or such greater percentage as shall equal one hundred percent (100%) minus the applicable Inventory Loan Formula applied by Lender under Section 2.1(b) hereof), plus (B) 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 in the form of the Distribution Center Standby LCs or 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 respective Revolving Loan Borrowers' lending sublimits, and the aggregate lending sublimit set forth in Section 2.2 hereof. (f) In addition to any charges, fees or expenses charged by any bank or issuer in connection with the Letter of Credit Accommodations, Revolving Loan Borrowers agree to pay to Lender a letter of credit fee at a rate equal to (i) one and one-half percent (1.5%) per annum on the daily outstanding balance of the Distribution Center Standby LCs and (ii) two percent (2%) per annum on the daily outstanding balance of all other Letter of Credit Accommodations, in each case payable monthly in arrears and (iii) any other commissions, fees and charges set forth herein. (g) 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 Revolving Loan Borrowers in connection therewith shall not, at any one time - 40 - 46 outstanding, exceed Forty Million Dollars ($40,000,000). Lender shall have the right, from time to time, to establish and revise sublimits for Letter of Credit Accommodations for the account of the respective Revolving Loan Borrowers, within the overall Forty Million Dollar ($40,000,000) limit on Letter of Credit Accommodations. (h) In connection with, in addition to, and without limiting that which is otherwise set forth in this Section 2.3, from time to time each Revolving Loan 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. (i) At any time upon or after the occurrence and during the continuance of an Event of Default, upon Lender's request, Revolving Loan Borrowers shall either furnish cash collateral to secure the reimbursement obligations to the issuer in connection with any Letter of Credit Accommodations or furnish cash collateral to Lender for the Letter of Credit Accommodations, and in either case, the Revolving Loans otherwise available to Revolving Loans Borrowers shall not be reduced as provided in Section 2.3(c) to the extent of such cash collateral. Revolving Loan Borrowers shall indemnify and hold Lender harmless from and against any and all losses, claims, damages, liabilities, costs and expenses which Lender may suffer or incur in connection with any Letter of Credit Accommodations and any documents, drafts or acceptances relating thereto, including, but not limited to, any losses, claims, damages, liabilities, costs and expenses due to any action taken by any issuer or correspondent with respect to any Letter of Credit Accommodation. Revolving Loan Borrowers assume all risks with respect to the acts or omissions of the drawer under or beneficiary of any Letter of Credit Accommodation and for such purposes the drawer or beneficiary shall be deemed the agent of Revolving Loan Borrowers. Revolving Loan Borrowers assume all risks for, and agree to pay, all foreign, Federal, State and local taxes, duties and levies relating to any goods subject to any Letter of Credit Accommodations or any documents, drafts or acceptances thereunder. Revolving Loan Borrowers hereby release and hold Lender harmless from and against any acts, waivers, errors, delays or omissions, whether caused by Revolving Loan Borrowers, by any issuer or correspondent or otherwise with respect to or relating to any Letter of Credit Accommodation. The provisions of this Section 2.3(i) shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. (j) Nothing contained herein shall be deemed or construed to grant Revolving Loan Borrowers any right or authority to pledge the credit of Lender in any manner. Lender shall have no liability of any kind with respect to any Letter of - 41 - 47 Credit Accommodation provided by an issuer other than Lender unless Lender has duly executed and delivered to such issuer the application or a guarantee or indemnification in writing with respect to such Letter of Credit Accommodation. Revolving Loan Borrowers shall be bound by any interpretation made in good faith by Lender, or any issuer or correspondent under or in connection with any Letter of Credit Accommodation or any documents, drafts or acceptances thereunder, notwithstanding that such interpretation may be inconsistent with any instructions of Revolving Loan Borrowers. Lender shall have the sole and exclusive right and authority to, and Revolving Loan Borrowers shall not: (i) at any time an Event of Default exists or has occurred and is continuing, (A) approve or resolve any questions of non-compliance of documents, (B) give any instructions as to acceptance or rejection of any documents or goods or (C) execute any and all applications for steamship or airway guaranties, indemnities or delivery orders, and (ii) at all times, (A) grant any extensions of the maturity of, time of payment for, or time of presentation of, any drafts, acceptances, or documents, and (B) agree to any amendments, renewals, extensions, modifications, changes or cancellations of any of the terms or conditions of any of the applications, Letter of Credit Accommodations, or documents, drafts or acceptances thereunder or any letters of credit included in the Collateral. Lender may take such actions either in its own name or in any Borrower's name. (k) Any rights, remedies, duties or obligations granted or undertaken by Revolving Loan Borrowers to any issuer or correspondent in any application for any Letter of Credit Accommodation, or any other agreement in favor of any issuer or correspondent relating to any Letter of Credit Accommodation, shall be deemed to have been granted or undertaken by Revolving Loan Borrowers to Lender. Any duties or obligations undertaken by Lender to any issuer or correspondent in any application for any Letter of Credit Accommodation, or any other agreement by Lender in favor of any issuer or correspondent relating to any Letter of Credit Accommodation, shall be deemed to have been undertaken by Revolving Loan Borrowers to Lender and to apply in all respects to Revolving Loan Borrowers. 2.4 Term Loans. (a) Subject to and upon the terms and conditions contained herein and in the other Financing Agreements, Lender shall make a term loan to HDPI in the aggregate original principal amount of Four Million Dollars ($4,000,000) (the "HDPI Term Loan"). The HDPI Term Loan is (a) evidenced by the HDPI Term Note in such original principal amount duly executed and delivered by Borrower to Lender concurrently herewith; (b) to be repaid, together with interest and other amounts, in accordance with this Agreement, the HDPI Term Note, and the other Financing Agreements and (c) secured by all of the Collateral. - 42 - 48 (b) Subject to and upon the terms and conditions contained herein and in the other Financing Agreements, Lender shall make a term loan to Hanover Realty in the aggregate original principal amount of Six Million Dollars ($6,000,000) (the "Hanover Realty Term Loan"). The Hanover Realty Term Loan is (a) evidenced by the Hanover Term Hanover Realty Note in such original principal amount duly executed and delivered by Borrower to Lender concurrently herewith; (b) to be repaid, together with interest and other amounts, in accordance with this Agreement, the Hanover Realty Term Note, and the other Financing Agreements and (c) secured by all of the Collateral. 2.5 Maximum Credit (a) The aggregate principal amount of the Revolving Loans, Term Loans 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 Loans or Letter of Credit Accommodations, or the aggregate amount of the outstanding Revolving Loans and/or Letter of Credit Accommodations to exceed the amounts available under the Revolving Loan Formulas, or the applicable lending sublimits or the Revolving Loan Limit; 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 Revolving Loan Borrowers, or any portion thereof, in accordance with any other term of this Agreement or the other Financing Agreements, Revolving Loan Borrowers shall remain liable therefor and Revolving Loan Borrowers shall, upon demand by 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). 2.6 Reserves (a) Without limiting any other rights or remedies of Lender hereunder or under the other Financing Agreements, all Revolving Loans and Letter of Credit Accommodations made or otherwise available to Revolving Loan Borrowers hereunder shall be subject to Lender's continuing right, in its discretion, to establish a reserve against the availability of such Revolving Loans 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. - 43 - 49 (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 Revolving Loan 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 Revolving Loan 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, any Borrower 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, Ohio, Virginia and Wisconsin. Nothing contained in this Section 2.6(b) or in Section 2.6(c) 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. (c) Lender shall be entitled to establish and maintain a reserve against Revolving Loan availability of Revolving Loan Borrowers in the amount of $2,000,000, being the maximum amount of the obligations of Hanover Ventures to Sears for unpaid royalties owed by Hanover Ventures to Sears under the Sears Agreements, as to which obligations (but as to no other obligations to Sears) Lender has, at the request of Borrowers and Guarantors, subordinated its rights to payment from Hanover Ventures of the Obligations of Hanover Ventures to Lender. 2.7 Fees (a) Closing Fee. Borrowers shall pay to Lender, contemporaneously herewith, a closing fee in the amount of Seven Hundred Fifty Thousand Dollars ($750,000), which fee is fully earned as of the date hereof; provided, that Borrowers shall be entitled to a credit of Two Hundred Fifty Thousand Dollars ($250,000) against such closing fee in respect of the commitment fee paid by Hanover in consideration of the issuance of the Commitment Letter, dated November 9, 1995, among Hanover, Borrowers and Lender. (b) Facility Fees. Borrowers shall pay to Lender an annual facility fee of One Hundred Eighty-Seven Thousand Five Hundred Dollars ($187,500), for each year or part thereof during - 44 - 50 the Term of this Agreement, which fee shall be fully earned and payable in advance on the date hereof and on each anniversary date of this Agreement during the Term and for so long thereafter as any of the Obligations are outstanding. (c) Unused Line Fee. With respect to each calendar month (or part thereof) during the Term, Borrowers shall pay to Lender monthly an unused line fee, fully earned and payable on the first day of each month, at a rate equal to one half of one percent (.5%) per annum, calculated upon the excess, if any, of (i) Sixty-Five Million Dollars ($65,000,000) over (ii) the average of the daily aggregate principal balances of the outstanding Revolving Loans 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 any Inventory Loan 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 Sixty-Five Million Dollars ($65,000,000) set forth in clause (i) by a percentage thereof equal to the difference between the Inventory Loan Formula otherwise applicable under Section 2.1(b) and the Inventory Loan Formula as so reduced solely by virtue of Lender's discretion. (d) Servicing Fee. With respect to each calendar month (or part thereof) during the Term, Borrowers shall pay to Lender a servicing fee in the amount of Twenty Thousand Dollars ($20,000) per calendar month, fully earned and payable in advance on the date hereof and on the first day of each month (or part thereof) hereafter. (e) Fees as Obligations. The fees provided for in this Section 2.7 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 any of the loan accounts of Borrowers maintained by Lender. 2.8 Interest (a) Interest on all of the Revolving Loans, the Term Loans and other non-contingent Obligations of Borrowers shall be payable by Borrowers to Lender at the applicable 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 - 45 - 51 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 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 Loans, the Term Loans, 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. 2.9 Conduct of Accounts; Cross-Collateralization (a) Lender may maintain one or more accounts reflecting the Revolving Loans, the Term Loans, the Letter of Credit Accommodations, repayments of the Revolving Loans, the Term Loans, 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 Loans and Term Loans 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 - 46 - 52 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 Loans, Term Loans, 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 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 Loans and the Obligations of Borrowers with respect to the Letter of Credit Accommodations or any portion(s) thereof. (c) Subject to the terms and conditions of this Agreement, the Term Loan Borrowers may prepay the Term Loans, in whole or in part, at any time prior to an Event of Default and not in contemplation of the termination of the Credit Facility, without payment of any separate prepayment premium or prepayment penalty. Any such partial prepayment of the Term Loans shall be applied to principal payments coming due thereunder in the inverse order of maturity. No proceeds of any Revolving Loans shall be used for the prepayment of all or any part of the Term Loans. Any amounts paid or prepaid in respect of the Term Loans may not be thereafter reborrowed. (d) 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' - 47 - 53 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, 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, 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, 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). The provisions of this Section 2.9(d) shall 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 2.9(d) shall survive the termination of this Agreement and the other Financing Agreements. (e) 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. Revolving Loan Borrowers expressly agree that principal, interest, fees and other obligations of Term Loan Borrowers in respect of the Term Loans may, at Lender's sole option, be charged to the Revolving Loan accounts of Revolving Loan Borrowers who may thereafter obtain reimbursement from the Term Loan Borrowers. (f) Lender shall deliver to Hanover, on behalf of the Borrowers at the address 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 - 48 - 54 written notice of all exceptions to such statement of account with specificity, within forty-five (45) days after the date of such statement. 2.10 Use of Proceeds (a) Borrowers shall use the proceeds of all Revolving Loans, Term Loans and Letter of Credit Accommodations made or arranged by Lender on the date hereof (i) for the repayment by Borrowers of intercompany indebtedness to Hanover, to be used by Hanover to satisfy, or as sole security for, the outstanding obligations of Hanover to NationsBank, and to satisfy, or as sole security for, the outstanding obligations of Borrowers as guarantors of all outstanding obligations of Hanover to NationsBank and (ii) for the costs, expenses and fees incurred by Borrowers in connection with this Agreement and the other Financing Agreements. (b) All Revolving Loans and Letter of Credit Accommodations provided on or after the date hereof to Revolving Loan Borrowers pursuant to the provisions hereof shall be used to purchase Inventory and for general operating, working capital and capital expenditures of Revolving Loan Borrowers, and other proper corporate purposes of Revolving Loan Borrowers, not otherwise prohibited by the terms hereof. 2.11 Additional Borrower. (c) The parties hereto contemplate that The Austad Company may become a Revolving Loan Borrower hereunder, and that certain Accounts of The Austad Company under future Deferred Billing Option Programs and certain Inventory of The Austad Company held for sale through its mail order catalogs may be considered by Lender to be Eligible Deferring Billing Receivables and Eligible Inventory, respectively, conditioned upon the following: (i) Lender shall have determined, after a field examination of Austad conducted by Lender at Revolving Loan Borrowers' expense (including payment by Revolving Loan Borrowers of per diem charges of Six Hundred Dollars ($600.00) per person per day plus reimbursement of out-of-pocket expenses) (A) that such Accounts and such Inventory of The Austad Company meet Lender's criteria for Eligible Deferred Billing Receivables and Eligible Inventory, respectively, and (B) that the results of such field examination of Austad, its property, business and operations are in all other respects satisfactory to Lender; (ii) Lender shall have received a current Appraisal with respect to the Inventory of The Austad Company, prepared at Revolving Loan Borrowers' expense by the Appraiser in form, scope and methodology acceptable to Lender and addressed to - 49 - 55 Lender or upon which Lender is expressly permitted to rely, that is satisfactory to Lender and will enable Lender to calculate the Net Orderly Liquidation Value of such Inventory and the Net OLV Percentage with respect thereto; (iii) The Austad Company shall have executed and delivered to and in favor of Lender such documents and instruments as Lender requires in order for The Austad Company (A) to become a Revolving Loan Borrower hereunder by, inter alia, assuming the Obligations of a Revolving Loan Borrower hereunder, making the representations, warranties and covenants of the Borrowers hereunder in favor of Lender and granting Lender a security interest in and lien upon its Collateral and (B) to guarantee payment to Lender of the Obligations of all other Borrowers, all in form and substance satisfactory to Lender; (iv) Austad Holdings Inc. shall become a Guarantor hereunder with respect to the Obligations to Lender of The Austad Company and all other Borrowers, and shall have executed and delivered to and in favor of Lender such guaranties, security agreements, mortgages, documents and instruments as are required to be delivered by a Guarantor under Sections 4.2 and 4.3 hereof, all in form and substance satisfactory to Lender; (v) Each other Borrower and Guarantor shall have executed and delivered to Lender a supplemental or amended Guarantee with respect to the Obligations to Lender of The Austad Company; (vi) Austad shall deliver or cause to be delivered to and in favor of Lender, all agreements, documents and instruments, including, without limitation, agreements, documents and instruments executed by third parties, of the kinds required to be delivered by Borrowers and Guarantors under Section 3.1 hereof, and such other agreements, documents and instruments from Austad and third parties as Lender requires to perfect and protect Lender's interests in the Collateral and Guarantor Collateral of Austad and its rights thereto; (vii) Lender shall have received Secretary's Certificates of Directors' Resolutions with Shareholders' Consent evidencing the adoption and subsistence of corporate resolutions approving the execution, delivery and performance by Austad and the other Borrowers and Guarantors of the agreements, documents and instruments to be delivered pursuant to this Section 2.11, together with such opinions of counsel to Austad, Borrowers and Guarantors with respect thereto, addressed to Lender as Lender shall reasonably require, all in form and substance and satisfactory to Lender; and (viii) No Event of Default or Incipient Default shall have occurred, after giving effect to the assumption of - 50 - 56 Obligations, representations, warranties and covenants made by Austad as provided above. (d) Notwithstanding the foregoing, Lender shall have, at all times, the rights (i) to determine those portions (if any) of the Accounts and Inventory of The Austad Company that are and remain Eligible Deferred Billing Receivables or Eligible Inventory, respectively, pursuant to the other provisions of this Agreement, (ii) to establish sublimits for Revolving Loans and/or Letter of Credit Accommodations requested by The Austad Company, (iii) to determine initially whether the Inventory Loan Formula and the Accounts Loan Formula, or some lesser percentage(s), shall apply to The Austad Company (and thereafter to adjust such percentage(s) as permitted herein) and (iv) to establish initially such availability reserves as Lender shall require in respect of The Austad Company and thereafter to establish and adjust additional availability reserves as permitted herein. (e) Nothing set forth in this Section 2.11 shall in any manner be construed to limit or impair any other rights or remedies of Lender hereunder or under any of the other Financing Agreements. SECTION 3. CONDITIONS PRECEDENT TO LOANS AND OTHER FINANCIAL ACCOMMODATIONS 3.1 Conditions to Loans The making and providing of Revolving Loans, the Term Loans 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): (a) Termination of NationsBank Credit Agreements. Borrowers shall have provided evidence to Lender of the termination of the NationsBank Credit Agreements as in effect immediately prior to the date hereof and the release and termination of the NationsBank Credit Agreements held in escrow prior to the date hereof, except only such surviving obligations to NationsBank as are set forth in the Amended and Restated Reimbursement Agreement dated as of the date hereof among NationsBank, Hanover, Borrowers and Guarantors, in form and substance satisfactory to Lender. (b) Subordination of Certain Obligations. The Indebtedness owed by any member of the Affiliated Borrower Group to holders of the Hanover 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 - 51 - 57 Lender. In addition, Hanover shall have executed and delivered in favor of Lender an Intercompany 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. (c) 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. (d) Private Credit Card Agreement. Borrowers shall have delivered, in form and substance satisfactory to Lender, (i) the Private Credit Card Agreement (ii) 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 (iii) 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). (e) Closing Excess Availability. Borrowers shall have Excess Availability, as of the date hereof, in the aggregate amount of not less than Five Million Two Hundred Thousand Dollars ($5,200,000). (f) 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 licensors of distribution equipment and computer software, granting Lender the right to use such equipment and software. - 52 - 58 (g) Opinions of Counsel. Lender shall have received, in form and substance satisfactory to Lender, one or more opinion letters of independent counsel to Borrowers, Guarantors and IMR in respect of the Financing Agreements, the Collateral and Guarantor Collateral and such other matters as Lender may reasonably request. (h) 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. (i) Insurance. Lender shall have received evidence of insurance required hereunder and under the other Financing Agreements, and mortgagee's and lender's loss payable endorsements in favor of Lender with respect thereto, all in form and substance satisfactory to Lender. (j) Appraisals. Lender shall have received (i) the Appraisal, (ii) a current appraisal, conducted at Borrowers' expense by an appraiser acceptable to Lender and in form, scope and methodology acceptable to Lender, addressed to Lender or upon which Lender is expressly permitted to rely, setting forth a current orderly liquidation value of not less than Six Million Dollars ($6,000,000) with respect to the Equipment owned by Borrowers and Guarantors at Eligible Inventory Locations that will be subject to Lender's first priority liens and security interests as provided herein and (iii) current appraisals conducted at Borrowers' expense by an appraiser or appraisers acceptable to Lender and in form, scope and methodology acceptable to us, addressed to Lender or upon which Lender is expressly permitted to rely, setting forth the fair market value of the Real Property owned by Term Loan Borrowers, which shall not be less than an aggregate of Seventeen Million Dollars ($17,500,000). (k) Environmental Audits. Lender shall have received environmental audits of Borrowers' plants and the Real Property conducted by an independent environmental engineering firm acceptable to Lender, and in form, scope and methodology satisfactory to Lender, confirming to the satisfaction of Lender and its environmental consultant (who shall review such audits and follow-up work requested by such consultant at Borrowers' expense) (i) Borrowers are in compliance with all material applicable Environmental Laws and (ii) the absence of any material environmental problems. - 53 - 59 (l) Title Insurance. Lender shall have received, in form and substance satisfactory to Lender, a valid and effective title insurance policy issued by a company and agent acceptable to Lender (i) insuring the priority, amount and sufficiency of the Mortgages, (ii) insuring against matters that would be disclosed by surveys and (iii) containing any legally available endorsements, assurances or affirmative coverage requested by Lender for protection of its interests. 3.2 Additional and Continuing Condition Each Revolving Loan 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, 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 MasterCard/VISA Receivables and all other Third Party Credit Card Receivables, and all monies, credit balances and other amounts due from or through or held by Third Party Credit Card Issuers, or other parties to the Third Party Credit Card Agreements, all monies paid by or through the Private Credit Card Purchaser, all rentals or license fees receivable in respect of sale, lease, or license of Customer Lists, all monies, securities and other property and the proceeds thereof, now or hereafter held or received by, or in transit to, Lender from or for 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 - 54 - 60 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) Real Property; (v) all present and future books, records, ledger cards, computer software (including all manuals, upgrades, modifications, enhancements and additions thereto), computer tapes, disks, other electronic data storage media, documentation of file and record formats and source code, documents, other property and general intangibles evidencing or relating to any of the above, any other Collateral or any Account Debtor, together with the file cabinets or containers in which the foregoing are stored; (vi) all present and future real property owned by Borrowers; and (vii) all present and future products and proceeds of the foregoing, in any form whatsoever, including, without limitation, any insurance proceeds and any claims against third persons for loss or damage to or destruction of any or all of the foregoing. Notwithstanding the foregoing, the Collateral does not include (a) the GECC Collateral, other than the GECC Reserve Balance or (b) any leasehold interests in real property other than the ground leases with respect to the Kindig Lane, Conewago Township, Adams County, Pennsylvania facility of HDPI and the Warrensville Heights, Ohio facility of LWI. - 55 - 61 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, the Guarantees by the Guarantors and the Guarantees by Borrowers, each Borrower shall execute and deliver to Lender, and Borrowers shall cause Guarantors, in form and substance satisfactory to Lender, as provided therein (as all of such Guarantees, now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, individually a "Guarantee" and collectively the "Guarantees"). 4.3 Security Interests in Property of Guarantors As collateral security for the prompt performance, observance and payment in full of all of the Obligations of Guarantors, under their respective Guarantees and otherwise, Borrowers shall cause to be delivered to Lender a general security agreement by Guarantors in favor of Lender, providing for a grant of a security interest in and pledge of all assets of such Guarantor, except for (i) any capital stock of any Non-Guarantor Subsidiary owned by Hanover, and (ii) all now owned and hereafter acquired fixtures and real property in LaCrosse, Wisconsin owned by TCS Factory and TCS Office in form and substance satisfactory to Lender (each, a "General Security Agreement"). (All of the collateral security now or hereafter granted to or held by Lender by the Guarantors pursuant to the General Security Agreements, or otherwise, and the products and proceeds thereof, herein the "Guarantor Collateral".) SECTION 5. REPRESENTATIONS AND WARRANTIES Borrowers, jointly and severally, represent and warrant to Lender, as follows, (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 - 56 - 62 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 NAR 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 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, Austad 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 Exhibit B-1 attached hereto, which sets forth the owner and ownership percentages as to each member of the Affiliated Borrower Group. (g) As of the date hereof, each of the Non-Guarantor Subsidiaries, other than the Restaurant Subsidiaries and Austad, has less than Ten Thousand Dollars ($10,000) of assets. 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 - 57 - 63 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 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 - 58 - 64 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 Sections 5.5 and 5.9 hereof as to the matters described therein, each Borrower and Guarantor has obtained all material permits, licenses, approvals, consents, 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). 5.5 Environmental Compliance (a) Except as set forth on Exhibit K hereto, to the knowledge of each Responsible Officer of Borrowers and Guarantors, no Borrower or Guarantor has generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off its premises (whether or not owned by it) in violation of any applicable Environmental Law or any license, permit, certificate, approval or similar authorization thereunder, and the operations of each Borrower and Guarantor complies with all Environmental Laws and all licenses, permits, certificates, approvals and similar authorizations thereunder, except to the extent that any violation or non-compliance, would not result in either (i) a fine, judgment, penalty, loss or liability, including any remediation expenses and including costs and engineering and attorneys' fees, not covered by insurance, which exceeds $250,000 with respect to any individual violation or non-compliance, or series of related violations or non-compliance or (ii) a restraint on operations of any Borrower which prevents such Borrower from conducting its operations in the ordinary course, or (iii) any adverse effect on any Collateral having a value of $250,000 or more, or a material - 59 - 65 adverse effect on the business, assets, liabilities or financial condition of any Borrower or of the Affiliated Borrower Group taken as a whole. (b) Except as set forth on Exhibit K hereto, no Responsible Officer of any Borrower or Guarantor has knowledge of any investigation, proceeding, complaint, order, directive, claim, citation or notice by any governmental authority or any other person nor, to the best of any such Responsible Officer's knowledge, is any of the same pending or threatened with respect to any non-compliance with or violation of the requirements of any Environmental Law by any Borrower, or the release, spill or discharge, threatened or actual, of any Hazardous Material or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or any other environmental, health or safety matter, which affects any Borrower or Guarantor or its business, operations or assets or any properties at which any Borrower or Guarantor has transported, stored or disposed of any Hazardous Materials, except to the extent that any such matter, if adversely determined, would not result in either (i) a fine, judgment, penalty, loss or liability, including remediation expenses and including costs and engineering and attorneys' fees, not covered by insurance, which exceeds $250,000 with respect to any individual violation or non-compliance or series of related violations or non-compliance or (ii) a restraint on operations of any Borrower which prevents such Borrower from conducting its operations in the ordinary course, or (iii) any adverse effect on any Collateral having a value of $250,000 or more, or a material adverse effect on the business, assets, liabilities or financial condition of any Borrower or of the Affiliated Borrower Group taken as a whole. (c) Except as set forth on Exhibit K hereto, no Responsible Officer of any Borrower or Guarantor has knowledge of any liability (contingent or otherwise) of any one or more Borrowers and Guarantors in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials, except to the extent the potential liability (contingent or otherwise) of any Borrowers or Guarantors with respect thereto (including any fines, liabilities, remediation expenses, costs and engineering and attorneys' fees), does or would not exceed $250,000 as to any individual releases, spill or discharge, threatened or actual, or any series of related releases, spills or discharges, threatened or actual, or any generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials. (d) Each Borrower and Guarantor has all licenses, permits, certificates, approvals or similar authorizations - 60 - 66 required to be obtained or filed in connection with the operations of such Borrower or Guarantor under any Environmental Law and all of such licenses, permits, certificates, approvals or similar authorizations are valid and in full force and effect, except where the failure to obtain the same would not have an adverse effect upon any Collateral having a value of $250,000 or more, or a material adverse effect upon business, assets, liabilities or financial condition of any Borrower or of the Affiliated Borrower Group taken as a whole. 5.6 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 the Mortgages and other instruments required to perfect security interests or liens in certain property constituting Collateral or Guarantor Collateral. 5.7 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 5.7(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) 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. - 61 - 67 5.8 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. 5.9 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 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 2.6(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 Revolving Loan Borrower owns any Inventory or owns or - 62 - 68 leases property, including, without limitation, the States of Pennsylvania, New Jersey, California, Ohio, 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). 5.10 Litigation Except as set forth in Exhibit F attached hereto, as of the date hereof 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 The Horn & Hardart Company 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 Three Hundred Thousand Dollars ($300,000) 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. Except as set forth on Exhibit F attached hereto, (i) there are no product recall directives presently in effect, and (ii) to the knowledge of any Responsible Officer of Borrowers and Guarantors, there are no investigations by any governmental agency, pending or threatened, in each instance concerning a possible product recall involving goods of or sold by Borrowers or Guarantors having an aggregate value of Three Hundred Thousand Dollars ($300,000) or more. 5.11 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 sold by or employed by Borrowers or the other members of the Affiliated - 63 - 69 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, except for any claims or litigation, which if adversely determined against any one 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 Three Hundred Thousand Dollars ($300,000) 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. 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. 5.12 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). (c) Full payment has been made of all amounts which any Borrower or any other member of the Affiliated Borrower - 64 - 70 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. 5.13 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. sub-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. 5.14 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 hereunder to be considered a "purpose credit" within the meaning of Regulation G of the Board, as amended. None of the Borrowers - 65 - 71 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 the date hereof or as amended hereafter. 5.15 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 since September 30, 1995. 5.16 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. 5.17 Disclosure (a) The information contained in, and the representations and warranties set forth in this Agreement, the 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 - 66 - 72 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. 5.18 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 K 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. 5.19 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. 5.20 [Reserved] 5.21 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 - 67 - 73 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 NationsBank Credit Agreements in effect as of the date hereof pursuant to which Hanover or any Subsidiary of Hanover 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-3 attached hereto is a complete and correct list of all intercompany balances each of Borrowers owed to Hanover and each other Subsidiary of Hanover as of September 30, 1995, 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-3 attached hereto; and there have been no changes in such balances since that date and through the date hereof, except for payments and advances in the ordinary course of business of the kinds that would be permitted hereunder. 5.22 Certain Affiliated Ownership As of the date hereof, 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 and IMR, which own, in the aggregate, directly and beneficially, approximately fifty and two-tenths (50.2%) percent of all of the issued and outstanding voting shares of Hanover, and NAR is entitled, through Westmark and IMR, to elect a majority of the members of the Board of Directors of Hanover. 5.23 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, outer garments, woodworking products, and safety equipment in which, among other things: (i) certain 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, or have jointly appointed Hanover to act as their agent under, Third - 68 - 74 Party Credit Card Agreements in order to facilitate administrative efficiency and cost savings; (ii) the collections of customer payments of certain Borrowers 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 Inc., a Guarantor, 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 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 borrow money from Hanover and the other Subsidiaries of Hanover; and (ix) Hanover and its Subsidiaries have many common officers and directors. 5.24 Subordination of Certain Obligations The payment terms and subordination provisions contained in the debt instruments of Hanover 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 the date hereof 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, 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 Revolving Loan Borrower hereby agrees that: - 69 - 75 (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, including proceeds of goods sold through catalogs bearing a Sears tradename pursuant to the Sears Agreements, shall, except to the extent indicated on Exhibit G hereto, be owned solely by the respective Borrower whose goods were sold either directly or as assignee pursuant to an intercompany assignment (and further assignment to Lender) pursuant to Section 8.1(c) hereof, and shall be subject to the security interests of Lender and the other terms of this Agreement and the other Financing Agreements. (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 - 70 - 76 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, 1995. 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; (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 described on Exhibits H-1 through H-3 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; (e) Intercompany loans or advances permitted under Section 6.5 hereof; (f) 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 the date hereof, or incurred in connection with the ongoing upgrading of Borrowers' computer system, provided (i) the aggregate amount of all such Indebtedness at any one time outstanding does not exceed Five Million Dollars ($5,000,000) 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 Two Hundred Fifty Thousand Dollars ($1,250,000) in the aggregate in any one fiscal year of Borrowers; provided, however, that any Indebtedness incurred by Borrowers or other Subsidiaries of Hanover, and guaranties thereof by Hanover, for the purposes of refinancing or repaying the Term Loans shall not be subject to the restrictions set forth - 71 - 77 in clauses (i) and (ii) of this Section 6.3(f), so long as Lender has granted its prior written consent to the incurrence of such Indebtedness, including the form of the transaction, its terms and the form and content of any agreements to be entered into by Borrowers or any other member of the Affiliated Borrower Group in connection therewith, and Borrowers and Guarantors execute and deliver, or cause to be executed and delivered, to Lender, such agreements, documents and instruments, as Lender shall require as a condition of its consent (if Lender determines to provide its consent); and (g) Indebtedness of the 9.25% Guarantors to IMR as holder 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 subordinated in right of payment to the Obligations of Hanover and of the 9.25% Guarantors upon the terms set forth in the 9.25% Subordination Agreement and shall be secured only by a junior security interest upon customer lists to the extent permitted in and subject to restrictions on enforcement and other restrictions set forth in the 9.25% Subordination Agreement; provided, that, (i) the aggregate principal amount of such Indebtedness at any time outstanding shall not exceed Fourteen Million Dollars ($14,000,000), (ii) Hanover shall promptly furnish to the Lender such information and documents with respect thereto and as Lender may, from time to time, reasonably request, (iii) the 9.25% Guarantors and Hanover shall not, directly or indirectly, (A) 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 (B) amend, modify, alter or change the terms of the arrangements or any agreements with respect to such Indebtedness, or (C) 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, so long as no Event of Default or Incipient Default has occurred that is continuing, the 9.25% Notes may be (x) repaid or prepaid with the proceeds of an equity offering of Hanover, (y) repaid at scheduled maturity on August 1, 1998, and (z) 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 the then-outstanding principal balance of the 9.25% Notes in the aggregate for such refinancing(s) provided (I) the proceeds are used to repay the 9.25% Notes and (II) 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 and limitations on collateral (which terms of subordination and limitations on collateral 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 - 72 - 78 which are used for such refinancing) other than any changes which are not adverse to Lender, and (iv) 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 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 2.6(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 - 73 - 79 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 percent (100%) 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; and (g) liens on equipment or leasehold improvements securing the Indebtedness under the capital lease obligations and incurred for leasehold establishment and improvements as permitted by Section 6.3(g) and (h) hereof; (h) liens on the real property and fixtures of TCS Office and TCS Factory, each located in LaCrosse, Wisconsin; and (i) liens on customer lists of the Borrowers, junior in priority to Lender's liens thereon, to the extent permitted by and subject to the restrictions on enforcement and other restrictions set forth in the 9.25% Subordination Agreement. 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: - 74 - 80 (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-3 attached hereto: (A) in the aggregate amount during Borrowers' fiscal year ending on or about December 31, 1996 not to exceed One Hundred Sixty Thousand Dollars ($160,000), solely to be used by Hanover to pay (x) dividends, sinking fund payments or redemption payments required under the terms and conditions existing on the date hereof of the Series A and Series B Convertible Additional Preferred Stock of Hanover, and (y) interest on The Horn & Hardart Company 7 1/2% Convertible Subordinated Debentures according to their terms existing as of the date hereof; (B) in the aggregate amount during Borrowers' fiscal year ending on or about December 31, 1997 not to exceed Fifty Seven Thousand Dollars ($57,000), solely to be used by Hanover to pay (x) dividends, sinking fund payments or redemption payments required under the terms and conditions existing on the date hereof of the Series A and Series B Convertible Additional Preferred Stock of Hanover, and (y) interest on The Horn & Hardart Company 7 1/2% Convertible Subordinated Debentures according to their terms existing as of the date hereof; (C) in the aggregate amount necessary to pay, and so used by Hanover to pay, the regularly scheduled payments of principal and interest upon, and annual placement and remarketing agent fees payable under, the HDI Floating Rate Bond Financing; and (D) in the aggregate amount necessary to pay, and so used by Hanover to pay, a portion of the regularly scheduled payments of interest under - 75 - 81 the 9.25% Notes, but not to exceed such interest upon Fourteen Million Dollars ($14,000,000) in principal amount of the 9.25% Notes, or up to Fourteen Million Dollars ($14,000,000) in principal of the 9.25% Notes, if and to the extent permitted to be repaid pursuant hereto, or in the amount necessary to pay the out-of-pocket expenses of IMR 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 on the date hereof and provided that such payments are permitted to be made and received under the terms of the 9.25% Subordination Agreement. (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 Revolving Loan Borrower, is permitted under Section 6.27 hereof; (e) the guarantee by any of the Revolving Loan 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 Revolving Loan Borrowers arising under the Agreement for American Express Card Acceptance, effective April 1, 1995, among Revolving Loan 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 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. - 76 - 82 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 either (i) involves the sale of Inventory in the ordinary course of business at no less than cost by a Borrower to another Borrower or to a Guarantor who has assigned its rights to the proceeds of any resale of such Inventory pursuant to an intercompany assignment (subject to further assignment to Lender) pursuant to Section 8.1(c) hereof, or (ii) 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 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 Hanover, as the case may be, each Borrower may pay to 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 Hanover arising under the Tax Sharing Agreement in respect of the prior use by such Borrower of 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 Hanover, as the case may be; provided, that, such Borrower is required to make each such payment to Hanover pursuant to the Tax Sharing Agreement; (ii) payments of interest and principal to IMR as the holder of the 9.25% Notes, to the extent permitted under this Agreement and under the 9.25% Subordination Agreement; - 77 - 83 (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 calendar year during the Term; (iv) customary and reasonable directors' fees to directors of Borrowers or Hanover, in the same amounts as are paid to its non-Affiliate directors, not to exceed $500,000 in the aggregate for all directors' fees in any calendar year; (v) payments of legal expenses incurred by Hanover on behalf of Borrowers, not to exceed Five Hundred Thousand Dollars ($500,000) in any one fiscal year of Borrowers; and (vi) payments of corporate expenses of Hanover incurred for the joint benefit of Borrowers and Guarantors in the ordinary course of business in accordance with past practices, in the amount of up to Six Hundred Thousand Dollars ($600,000) in Hanover's 1995 fiscal year, One Million Three Hundred Fifty Thousand Dollars ($1,350,000) in Hanover's 1996 fiscal year, and One Million Five Hundred Thousand Dollars ($1,500,000) in Hanover's 1997 fiscal year; and (vii) 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 or payments by Term Loan Borrowers to reimburse a Revolving Loan Borrower for payments in respect of its Obligations in respect of the Term Loan that are charged to such Revolving Loan Borrower's Revolving Loan account; 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 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 Hanover issued or outstanding on the date hereof in accordance with its terms as of the date hereof, in - 78 - 84 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 Advertising Agency, Inc. and Ring Response Ltd. shall be liquidated into Hanover by no later than December 31, 1995 and (iii) on not less than ten (10) days' prior written notice to Lender, (A) DM Advertising may be merged into Hanover Direct New Jersey, Inc. and the name of the surviving corporation changed to DM Advertising, Inc., (B) TW Acquisitions, Inc. may be merged into Tweeds, Inc. and (C) Hanover Realty may be merged into HDV. 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 the date hereof and such Borrower delivers to Lender all applicable mortgagee and landlord waivers, access and use agreements, in the form of Exhibit I attached hereof. 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 - 79 - 85 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 6.13 hereof and except as permitted under Sections 6.22 and 6.24 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), 6.6(b) or 6.7 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) 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 5.9(b) and 2.6(b) hereof, which shall control with respect to such matters in lieu of this Section 6.10. 6.11 Compliance with Environmental Laws (a) Each Borrower and Guarantor shall, at all times, comply in all material respects with all the Environmental Laws. (b) Each Borrower and Guarantor shall establish and maintain, at its expense, a system to assure and monitor its continued compliance with all Environmental Laws in all of its operations, which system shall include annual reviews of such compliance by employees or agents of each Borrower and Guarantor - 80 - 86 who are familiar with the requirements of the Environmental Laws. Copies of all environmental surveys, audits, assessments, feasibility studies and results of remedial investigations shall be promptly furnished, or caused to be furnished, by Borrowers and Guarantors to Lender. Each Borrower and Guarantor shall take prompt and appropriate action to respond to any non-compliance with any of the Environmental Laws and shall regularly report to Lender on such response. (c) Each Borrower and Guarantor shall give both oral and written notice to Lender, as soon as practicable after a Responsible Officer's receipt of any notice of, or his or her otherwise obtaining knowledge of, (i) the occurrence of any event involving the release, spill or discharge, threatened or actual, of any Hazardous Material or (ii) any investigation, proceeding, complaint, order, directive, claims, citation or notice with respect to: (A) any non-compliance with or violation of any Environmental Law by any Borrower or Guarantor or (B) the release, spill or discharge, threatened or actual, of any Hazardous Material or (C) the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or (D) any other environmental matter, which can reasonably be expected to (1) involve any potential liability (contingent or otherwise) of any Borrowers or Guarantors with respect thereto (including any fines, liabilities, remediation expenses, costs and engineering and attorneys' fees) greater than Two Hundred Fifty Thousand Dollars ($250,000), or (2) result in a restraint on operations of any Borrower which prevents such Borrower from conducting its operations in the ordinary course, or (3) have an adverse effect on any Collateral having a value of Two Hundred Fifty Thousand Dollars ($250,000) or more, or a material adverse effect on the business, assets, liabilities or financial condition of any Borrower or of the Affiliated Borrower Group taken as a whole, or on any properties at or to which any Borrower or Guarantor transported, stored or disposed of any Hazardous Materials. (d) Without limiting the generality of the foregoing, whenever Lender reasonably determines that there is non-compliance, or any condition which requires any action by or on behalf of any Borrower or Guarantor in order to avoid any material non-compliance with any Environmental Law, which could reasonably be expected to (i) involve any potential liability (contingent or otherwise) of any Borrowers or Guarantors with respect thereto (including any fines, liabilities, remediation expenses, costs and engineering and attorneys' fees) greater than Two Hundred Fifty Thousand Dollars ($250,000), or (ii) result in a restraint on operations of any Borrower which prevents such Borrower from conducting its operations in the ordinary course, or (iii) have an adverse effect on any Collateral having a value of Two Hundred Fifty Thousand Dollars ($250,000) or more, or a material adverse effect on the business, assets, liabilities or - 81 - 87 financial condition of any Borrower or of the Affiliated Borrower Group taken as a whole, each Borrower and Guarantor shall, at Lender's request and Borrowers' and Guarantors' expense: (i) cause an independent environmental engineer acceptable to Lender to conduct such tests as are reasonably necessary of the site where such non-compliance or alleged non-compliance with such Environmental Laws has occurred as to such non-compliance and prepare and deliver to Lender a report as to such non-compliance setting forth the results of such tests, a proposed plan for responding to any environmental problems described therein, and an estimate of the costs thereof and (ii) provide to Lender a supplemental report of such engineer whenever the scope of such non-compliance, or such Borrower's or Guarantor's response thereto or the estimated costs thereof, shall change in any material respect. (e) Each Borrower and Guarantor shall indemnify and hold harmless Lender, its directors, officers, employees, agents, invitees, representatives, successors and assigns, from and against any and all losses, claims, damages, liabilities, costs, and expenses (including reasonable attorneys' fees and legal expenses) directly or indirectly arising out of or attributable to the use, generation, manufacture, reproduction, storage, release, threatened release, spill, discharge, disposal or presence of a Hazardous Material, including, without limitation, the costs of any required or necessary repair, cleanup or other remedial work with respect to any property of any Borrower or Guarantor and the preparation and implementation of any closure, remedial or other required plans. All representations, warranties, covenants and indemnifications in this Section 6.11 shall survive the payment of the Obligations and the termination or non-renewal of this Agreement. (f) Borrowers and Guarantors may contest the assertion by any governmental authority or any third party of any obligation or liability for alleged non-compliance with Environmental Laws or otherwise relating to the release, spill or discharge, threatened or actual, of Hazardous Materials, or the generation use, storage, treatment, transportation, manufacturing, handling, production or disposal of Hazardous Materials, but no such contest shall relieve Borrowers and Guarantors from their obligations to Lender in regard to such matters as provided in this Agreement and the other Financing Agreements. 6.12 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 - 82 - 88 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 5.9(b) and 2.6(b) hereof shall control with respect to such matters in lieu of this Section 6.12. 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. 6.12A Accounts Covenants (a) Borrower shall notify Lender promptly, but in any event within two (2) Banking Days after any Responsible Officer of Borrower knows of: (i) any delay of more than five (5) days attributable to computer breakdown or processing errors, or any delay of more than one (1) Banking Day for any other reason, or any default in performance by any Borrower or Guarantor of, any of its obligations to any party to a Credit Card Agreement, or by any party to a Credit Card Agreement, to any Revolving Loan Borrower or Hanover, or any suspension or cessation by any party to Credit Card Agreement in purchasing or refusal by any party to a Credit Card Agreement to purchase credit card sales transactions, or the assertion of any claims, offsets, defenses or counterclaims by, or existence of any disputes with, any party to a Credit Card Agreement, or any settlement, adjustment or compromise thereof, (ii) all material adverse information relating to the financial condition of any party to a Credit Card Agreement, and (iii) any event or circumstance which, to Borrower's knowledge would cause Lender to consider any MasterCard/VISA Receivables as no longer constituting Eligible Deferred Billing Receivables. No credit, discount, allowance or extension or agreement for any of the foregoing shall be granted to any party to a Credit Card Agreement except in the ordinary course of Borrowers' or any other Borrowers' business in accordance with its then current practices and policies consistently applied. So long as no Event of Default exists or has occurred and is continuing, Borrowers shall settle, adjust or compromise any claim, offset, - 83 - 89 counterclaim or dispute with any party to a Credit Card Agreement. At any time that an Event of Default exists or has occurred and is continuing, Lender shall, at its option, have the exclusive right to settle, adjust or compromise any claim, offset, counterclaim or dispute with any party to a Credit Card Agreement, or grant any credits, discounts or allowances. (b) At any time that Inventory sold under a Deferred Billing Option Program is returned, reclaimed or repossessed, the related Account shall not be deemed an Eligible Deferred Billing Receivable. (c) At any time an Event of Default exists or has occurred and is continuing, Borrower shall, upon Lender's request, (i) hold any returned Inventory in trust for Lender, (ii) dispose of the returned Inventory solely according to Lender's instructions, and (iii) not issue any credits, discounts or allowances with respect thereto without Lender's prior written consent. (d) With respect to each Credit Card Agreement: (i) no payments shall be made thereunder except payments delivered to Lender pursuant to the terms of this Agreement, (ii) there shall be no material setoffs, deductions, contras, defenses, counterclaims or disputes existing or asserted with respect thereto except as reported to Lender in accordance with the terms of this Agreement, and (iii) none of the transactions giving rise thereto will violate any applicable State or Federal laws or regulations in any material respect, all documentation relating thereto will be legally sufficient under such laws and regulations in all material respects and all such documentation will be legally enforceable in accordance with its terms. (e) 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 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 applicable amount set forth in Section 6.12A(g) 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). - 84 - 90 (f) 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, and each issuer, purchaser or factor thereof under the Credit Card Agreements, 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 applicable amount set forth in Section 6.12A(g) hereof (which disclosure need only be made by disclosing the gross amount of non-conforming Accounts). (g) The representations and warranties as to the Accounts contained in Sections 6.12A(e) and (f) 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). (h) 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. (i) Each Revolving Loan Borrower shall give Lender written notice of its intention to commence or continue as to new sales any Deferred Billing Option Program at least thirty (30) days prior to the commencement of each Program Quarter (whether or not the Accounts Loan Financial Test would be satisfied and whether or not such Revolving Loan Borrower intends to request Revolving Accounts Loans with respect to such Program.) 6.13 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 - 85 - 91 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 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 6.22 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) Borrowers shall use the Equipment with all reasonable care and caution and in accordance with applicable standards of any insurance and in conformity with all applicable laws. (d) Borrowers shall not remove any Equipment from the locations set forth for the respective Borrowers on Exhibit C hereto or otherwise permitted herein for the applicable Borrower, except to the extent necessary to have any Equipment repaired or maintained in the ordinary course of the business of Borrowers or to move Equipment directly from one location set forth on Exhibit C hereto for that Borrower or otherwise permitted herein for that Borrower, to another such location and except for the movement of motor vehicles used by or for the benefit of the Borrowers in the ordinary course of business. (e) The Equipment of Borrowers is now and shall remain personal property and Borrowers shall not permit any of their Equipment to be or become a part of or affixed to real property. - 86 - 92 (f) 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. (g) 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, 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. (h) 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. 6.14 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 - 87 - 93 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. 6.15 Appraisals (a) Borrowers shall, at Borrowers' expense and after Lender's request, deliver to Lender at least one (1) time per location during each calendar year during the Term (excluding the delivery of the Appraisal or any update in connection with the closing hereunder), or permit Lender, with the same frequency, to obtain, written reports, Appraisals or updated appraisals by the Appraiser of any or all of the Inventory of Borrower, in form, scope and methodology acceptable to Lender, and including, but not limited to, a report as to the Net Orderly Liquidation Value of the Inventory of Borrowers, other than Inventory of Gump's at the Gump's Main Store, and of the Net GOB Value of the Inventory of Gump's at the Gump's main store; 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 Inventory of Borrowers, including, but not limited to, reports as to the Net Orderly Liquidation Value and Net GOB Value of the Inventory of Borrowers, as - 88 - 94 applicable, or such other reports in such form, scope and methodology acceptable to Lender. (b) Upon Lender's request, Borrowers shall, at their expense, once in any calendar year during the Term (excluding any such reports or appraisals delivered in connection with the closing hereunder) and at any time or times as Lender may request on or after an Event of Default, deliver or cause to be delivered to Lender written reports or appraisals as to their Equipment in form, scope and methodology acceptable to Lender and by an appraiser acceptable to Lender. 6.16 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). (b) As used in this Section 6.16, 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. - 89 - 95 6.17 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. 6.18 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 Arthur Andersen & Co. or one of the following independent certified public accountants selected by Hanover: 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 and consolidating unaudited balance sheets of Hanover and its Subsidiaries as at the end of such quarter, consolidated and consolidating unaudited statements of income and expense and changes in financial position for Hanover 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 Hanover and its Subsidiaries as at the date thereof and for such periods, prepared in accordance with generally accepted accounting principles, consistently applied. The foregoing financial statements shall be certified to comply with this Section 6.18 by the chief financial officer(s) of - 90 - 96 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 Hanover and its Subsidiaries as at the end of such month, and (y) sixty (60) days after the end of each fiscal month, the consolidating unaudited balance sheets of Hanover and its Subsidiaries as at the end of such month. (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 Hanover and its Subsidiaries for such month and for the period from the beginning of the fiscal year to the end of such month. All such statements in Sections 6.18(a)(iii)(A) and (B) hereof shall be in reasonable detail, fairly presenting the financial position and results of operation of Hanover and its Subsidiaries, 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 6.18(a)(iii)(A) and (B) shall be certified to comply with this Section by the chief financial officer(s) of 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 6.18(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 - 91 - 97 compliance with the covenants set forth in Sections 6.19 and 6.20 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 public accountants to Hanover and its 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, indicating for such Inventory category, the sales for each catalog of each Borrower and of each retail store of Borrowers and Guarantors; 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, indicating for such Inventory category, the sales for each catalog of each Borrower and each retail store of Borrowers and Guarantors. (viii) Reports on Inventory, including: (A) Weekly reports as to Inventory, indicating the aggregate Value of each category of Inventory of each Borrower (showing catalog and retail store Inventory of Borrowers and Guarantors separately); - 92 - 98 (B) Monthly reports as to Inventory, including each category of Inventory of each Borrower, and each catalog of each Borrower and each retail store of Borrowers and Guarantors 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 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) Daily reports on the Accounts of each Borrower and Guarantor under Deferred Billing Option Programs and other deferred billing Accounts of Borrowers and Guarantors and monthly agings with respect to all other Accounts of each Borrower and Guarantor, including, as to the foregoing, the aggregate outstanding amounts, prepayments, accruals and returns and other credits. (xi) Any other financial and other information regardingthe 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 Sears under the Sears Agreements, 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. - 93 - 99 (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 6.18, 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 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 6.18(f), which consent such Borrower or Guarantor shall not unreasonably withhold or delay. 6.19 Consolidated Working Capital Hanover shall, as at the end of each fiscal month, maintain Consolidated Working Capital, calculated on a consolidated basis for Hanover and its Subsidiaries, of not less than Twenty Six Million Dollars ($26,000,000). - 94 - 100 6.20 Consolidated Net Worth Hanover shall, as at the end of each fiscal month, maintain Consolidated Net Worth, calculated on a consolidated basis for Hanover and its Subsidiaries, of at least Eighty Million Dollars ($80,000,000). 6.21 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. 6.22 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 ($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 - 95 - 101 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 6.22(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. 6.23 Maintenance and Delivery of Customer Lists; MACS Software 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. Updated revisions of the MACS Software shall be delivered to the storage and escrow agent as soon as practicable following the installation and use of such updated versions on Borrowers' systems (other than testing). Receipt of the delivery of such updated Customer Lists and, as applicable, updated MACS Software 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 and MACS Software 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 and MACS Software in its possession to Lender and Lender shall have the right to require Borrowers to deliver all Customer Lists and MACS Software 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. 6.24 Rental or License of Customer Lists Borrowers are and shall be the sole owners of all Customer Lists used in Borrowers' business, except for the customer lists of Sears used under the Sears Agreement until Hanover Ventures acquires rights to the lists of "Program Customers" as provided in the Sears Agreement. 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 - 96 - 102 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 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. 6.25 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. 6.26 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 Hanover 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. 6.27 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 Hundred Thousand Dollars ($500,000) for the period from the date hereof 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 - 97 - 103 Inventory; provided, that in the case of Eligible Inventory so sold (but not in the case of such sales of Inventory which is Eligible 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) 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 nonAffiliated 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 6.27(b)(v) hereof to the extent required by the non-Affiliated lender providing such stand alone financing. - 98 - 104 6.28 9.25% Notes (a) 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. (b) 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 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. 6.29 Litigation Notices Borrowers and Guarantors shall provide written notice to Lender of each investigation by any governmental agency that, to the knowledge of any Responsible Officer, is pending or threatened against or affects any Borrower or any other member of the Affiliated Borrower Group or their properties or business, and of each action, suit, proceeding or claim by any Person that, to the knowledge of any Responsible Officer, is 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 The Horn & Hardart Company as to leased properties not used in or related to the business of Borrowers), or against or affecting any transaction 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 - 99 - 105 covered by insurance, which, individually, exceeds Three Hundred Thousand Dollars ($300,000) 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. Borrowers and Guarantors shall also provide written notice to Lender of each investigation by any governmental agency or supplier that, to the knowledge of any Responsible Officer, is pending or threatened concerning a possible product recall, or that actually results in, a product recall, of goods of or sold by Borrowers or Guarantors having an aggregate value of Three Hundred Thousand dollars ($300,000) or more. 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 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 Hanover, as successor to The Horn & Hardart Company, is the sole obligor relating to property not used in the business of - 100 - 106 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 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 Hanover 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 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 Guarantor 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 Loans or Letter of Credit Accommodations), or if any Borrower or Hanover 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 or any other Guarantor having assets in excess of Two Hundred Fifty Thousand Dollars ($250,000) or any of their respective properties; or - 101 - 107 (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, administrative tribunals or other bodies having jurisdiction against any Borrower, Hanover 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 September 30, 1995; 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. 7.2 Remedies (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 - 102 - 108 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 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 - 103 - 109 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. (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 - 104 - 110 since entry thereof), and charge Borrowers' loan account(s) 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. (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. 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, checks, credit or debit card transaction records, and all forms of retail store receipts (other than daily receipts of Brawn - 105 - 111 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 one (1) Banking Day after Lender's receipt at its designated bank account for such purposes of federal funds wire transfers and one (1) Banking 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 Borrowers' 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. (c) Each Guarantor whose sale proceeds are remitted to one of the Blocked Accounts shall enter into an intercompany assignment of its Accounts and other proceeds of the sale of goods in favor of those of the Revolving Loan Borrowers from whom such Guarantor acquired the goods sold. Such assigned rights and agreements therefor shall in turn, be deemed further assigned by the Revolving Loan Borrowers to Lender as part of the Collateral. All such proceeds collected in the Blocked Accounts or otherwise applied to the Revolving Loan shall be treated as payments (or prepayments) for good sold (or to be sold) by Revolving Loan Borrowers to the respective Guarantors. - 106 - 112 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 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 (all such blocked accounts and such deposit accounts, collectively, the "Blocked Accounts"). 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. Without limiting the provisions of Section 8.4 below in favor of Lender, each of the Borrowers and Guarantors hereby irrevocably appoints Hanover and HDPI, acting jointly or singly, as its agent for all purposes in connection with the Blocked Accounts, including, without limitation, the execution, delivery and performance on its behalf of all Blocked Account agreements, Third Party Credit Card Acknowledgments and the performance of such obligations thereunder as Lender, the depository, or any other party thereto shall require. (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. - 107 - 113 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 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 any books and records and Lender may, without cost or expense to it, use such of Borrowers' or any of the Guarantors' 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 of Borrowers' Inventory or other proceeds of any Collateral or Guarantor Collateral. 8.4 Specific Powers 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 - 108 - 114 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. SECTION 9. EFFECTIVE DATE; TERMINATION; COSTS; MISCELLANEOUS 9.1 Term (a) This Agreement and the other Financing Agreements shall become effective as of the date hereof and this Agreement shall continue in full force and effect for a term ending on the date three (3) years from the date hereof (the "Renewal Date"), and from year-to-year thereafter, unless sooner terminated pursuant to the terms hereof; provided, that, Lender may, at its option extend the Renewal Date four (4) years from the date hereof by giving Borrowers notice at least sixty (60) days prior to the third anniversary of this Agreement. (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 (subject to Lender's right to extend the Renewal Date as provided in Section 9.1(a) hereof), 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 - 109 - 115 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, the Term Loans 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 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 - 110 - 116 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 the first anniversary of this Agreement; (ii) one percent (1%) of the Maximum Credit, if such termination is effective after the first anniversary of this Agreement, but on or prior to the second anniversary of this Agreement; or (iii) one-half of one percent (.5%) of the Maximum Credit, if such termination is effective after the second anniversary of this Agreement but prior to the third anniversary of this Agreement, or, if the Renewal Date is extended by Lender provided in Section 9.1(a) hereof, prior to the fourth anniversary of this Agreement. 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 Hanover subtracted under clause (ii)(D) of the definition of Excess Availability, 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 - 111 - 117 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 Loan Formula. For purposes hereof, the term "Specified Action" shall mean the reduction by Lender of a Inventory Loan Formula to a percentage less than the Inventory Loan Formula otherwise applicable under Section 2.1(b) in respect of Eligible Inventory, other than Eligible Inventory of Gump's, based on the exercise of its discretionary rights to do so at any time and from time to time. 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; (iv) taxes, fees and other charges for recording the Mortgages or 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 Six Hundred Dollars ($600) 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; (ix) costs and expenses and fees for title insurance and other insurance premiums, environmental audits, surveys, assessments, engineering reports and inspections, appraisal fees and search fees; and (x) costs and expenses (including reasonable attorneys' and paralegals' fees and disbursements) paid or incurred to obtain payment of the - 112 - 118 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). 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. 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 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 - 113 - 119 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. 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 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 - 114 - 120 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. 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 Loans, Term Loans 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 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 - 115 - 121 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. 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. 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 - 116 - 122 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: /s/ Peter R. Seekel ------------------------ Title: Senior Vice President HANOVER DIRECT PENNSYLVANIA, INC. By: /s/ Wayne Garten ------------------------ Title: Executive VP [SIGNATURES CONTINUE ON FOLLOWING PAGE] - 117 - 123 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] BRAWN OF CALIFORNIA, INC. By: /s/ Wayne Garten ------------------------ Title: Vice President GUMP'S BY MAIL, INC. By: /s/ Wayne Garten ------------------------ Title: Executive VP GUMP'S CORP. By: /s/ Wayne Garten ------------------------ Title: President THE COMPANY STORE, INC. By: /s/ Wayne Garten ------------------------ Title: Vice President TWEEDS, INC. By: /s/ Wayne Garten ------------------------ Title: Vice President LWI HOLDINGS, INC. By: /s/ Wayne Garten ------------------------ Title: President [SIGNATURES CONTINUE ON FOLLOWING PAGE] - 118 - 124 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] AEGIS CATALOG CORPORATION By: /s/ Wayne Garten ------------------------ Title: President HANOVER DIRECT VIRGINIA INC. By: /s/ Wayne Garten ------------------------ Title: President HANOVER REALTY, INC. By: /s/ Wayne Garten ------------------------ Title: President [SIGNATURES CONTINUE ON FOLLOWING PAGE] - 119 - 125 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] 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: /s/ Wayne Garten ---------------------------- Title: Executive VP AEGIS RETAIL CORPORATION By: /s/ Wayne Garten ---------------------------- Title: President AEGIS SAFETY HOLDINGS, INC. By: /s/ Wayne Garten ---------------------------- Title: President AEGIS VENTURES, INC. By: /s/ Wayne Garten ---------------------------- Title: President AMERICAN DOWN & TEXTILE COMPANY By: /s/ Wayne Garten ---------------------------- Title: Vice President [SIGNATURES CONTINUE ON FOLLOWING PAGE] - 120 - 126 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] BRAWN WHOLESALE CORP. By: /s/ Wayne Garten ---------------------------- Title: Vice President THE COMPANY FACTORY, INC. By: /s/ Wayne Garten ---------------------------- Title: Vice President THE COMPANY OFFICE, INC. By: /s/ Wayne Garten ---------------------------- Title: Vice President COMPANY STORE HOLDINGS, INC. By: /s/ Wayne Garten ---------------------------- Title: Vice President D.M. ADVERTISING, INC. By: /s/ Wayne Garten ---------------------------- Title: Vice President GUMP'S CATALOG, INC. By: /s/ Wayne Garten ---------------------------- Title: Executive Vice President [SIGNATURES CONTINUE ON FOLLOWING PAGE] - 121 - 127 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] GUMP'S HOLDINGS, INC. By: /s/ Wayne Garten ---------------------------- Title: Vice President HANOVER CASUALS, INC. By: /s/ Wayne Garten ---------------------------- Title: President HANOVER CATALOG HOLDINGS, INC. By: /s/ Wayne Garten ---------------------------- Title: President HANOVER DIRECT NEW JERSEY, INC. By: /s/ Wayne Garten ---------------------------- Title: President HANOVER FINANCE CORPORATION By: /s/ Wayne Garten ---------------------------- Title: President HANOVER HOLDINGS, INC. By: /s/ Wayne Garten ---------------------------- Title: President [SIGNATURES CONTINUE ON FOLLOWING PAGE] - 122 - 128 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER LIST MANAGEMENT, INC. By: /s/ Wayne Garten --------------------------- Title: Vice President HANOVER VENTURES, INC. By: /s/ Wayne Garten --------------------------- Title: President LEICHTUNG OF MICHIGAN, INC. By: /s/ Wayne Garten --------------------------- Title: President LWI RETAIL, INC. By: /s/ Wayne Garten --------------------------- Title: President SCANDIA DOWN CORPORATION By: /s/ Wayne Garten --------------------------- Title: Vice President SKANDIA DOWN SALES, INC. By: /s/ Wayne Garten --------------------------- Title: Vice President [SIGNATURES CONTINUE ON FOLLOWING PAGE] - 123 - 129 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] TW ACQUISITIONS, INC. By: /s/ Wayne Garten --------------------------- Title: President TWEEDS OF VERMONT, INC. By: /s/ Wayne Garten --------------------------- Title: President YORK FULFILLMENT COMPANY, INC. By: /s/ Wayne Garten --------------------------- Title: President - 124 - 130 EXHIBIT A JURISDICTIONS OF QUALIFICATION - 125 - 131 EXHIBIT B-1 EXISTING SUBSIDIARIES - 126 - 132 EXHIBIT B-2 EXISTING MAIL ORDER JOINT VENTURES - 127 - 133 EXHIBIT B-3 EXISTING RESTAURANT BUSINESS SUBSIDIARIES - 128 - 134 EXHIBIT B-4 ADDITIONAL NON-GUARANTOR SUBSIDIARIES - 129 - 135 EXHIBIT C PRINCIPAL PLACES OF BUSINESS, CHIEF EXECUTIVE OFFICES AND LOCATIONS OF COLLATERAL - 130 - 136 EXHIBIT D EXISTING LIENS - 131 - 137 EXHIBIT E LIST OF HANOVER DEBT INSTRUMENTS - 132 - 138 EXHIBIT F PENDING LITIGATION - 133 - 139 EXHIBIT G TRADENAMES - 134 - 140 EXHIBIT H-1 EXISTING INDEBTEDNESS OTHER THAN LETTERS OF CREDIT - 135 - 141 EXHIBIT H-2 EXISTING LETTERS OF CREDIT UNDER NATIONSBANK CREDIT AGREEMENT - 136 - 142 EXHIBIT H-3 EXISTING INTERCOMPANY INDEBTEDNESS - 137 - 143 EXHIBIT I FORM OF MORTGAGEE/LANDLORD WAIVER, ACCESS AND USE AGREEMENT - 138 - 144 EXHIBIT J LIST OF LABOR DISPUTES - 139 - 145 EXHIBIT K ENVIRONMENTAL DISCLOSURE - 140 - EX-10.25 12 SUBORDINATION AGREEMENT 1 Exhibit 10.25 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT is made as of the 14th day of November, 1995 among CONGRESS FINANCIAL CORPORATION, a California corporation (together with its transferees, successors and assigns, "Senior Creditor"), INTERCONTINENTAL MINING & RESOURCES INCORPORATED, a British Virgin Islands corporation (together with its transferees, successors and assigns, "IMR", and together with the Indenture Trustee (as defined below), individually and collectively, "Junior Creditor"). Senior Creditor and Junior Creditor are sometimes individually referred to herein as "Creditor" and collectively as "Creditors." W I T N E S S E T H: WHEREAS, The Hanover Companies, a Nevada corporation ("THC") entered into certain debt financing arrangements, pursuant to which THC issued and Sun Life Insurance Company of America (now known as SunAmerica Life Insurance Company, "SunAmerica") purchased from THC an aggregate of $20,000,000 in principal amount of 9.25% Senior Subordinated Notes due August 1, 1998 (as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, exchanged, restated or replaced, the "Notes"); and WHEREAS, payment of the obligations of THC to Junior Creditor under the Notes was guaranteed by The Horn & Hardart Company ("H&H"), which was, at the time the Notes were issued, the parent company of THC, and by certain direct and indirect Subsidiaries of THC; and WHEREAS, Hanover Direct, Inc. (together with its successors and assigns, "Hanover"), as successor to THC and H&H, has previously repaid $6,000,000 in principal amount of the Notes, plus accrued interest thereto; and WHEREAS, as of the date hereof, the unpaid balance of the Notes is guaranteed by only those Subsidiaries of Hanover listed on Exhibit A annexed hereto (the "Subsidiary Guarantors") (such guarantees of the Notes, collectively, the "Guarantees"); and WHEREAS, IMR has, on or before the date hereof, purchased from SunAmerica, all of SunAmerica's right, title and interest in and to the remaining Notes, in the outstanding principal amount of $14,000,000, and the Guarantees, pursuant to a Repurchase and Option Agreement dated as of September 29, 1995; and WHEREAS, in connection with its purchase of the remaining Notes, Hanover and certain of the Subsidiary Guarantors, are about to grant to Junior Creditor a security interest in their customer lists to secure payment of the Notes; and 2 WHEREAS, Senior Creditor is about to enter into financing arrangements with certain Subsidiaries of Hanover, pursuant to which Senior Creditor may from time to time make loans and provide other financial accommodations to certain direct and indirect Subsidiaries of Hanover, upon the terms and conditions set forth in that certain Loan and Security Agreement, dated as of the date hereof, among Senior Creditor, and certain direct and indirect Subsidiaries of Hanover, as acknowledged and agreed to by Hanover and various other direct and indirect Subsidiaries of Hanover (as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, the "Loan Agreement"; and together with any and all supplements thereto, and all other agreements, acknowledgments, documents and instruments now or at any time hereafter executed and/or delivered in connection therewith or related thereto, as the same now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced, collectively, the "Financing Agreements"); and WHEREAS, payment and performance of the obligations of the Borrowers to Senior Creditor under the Financing Agreements have been guaranteed by Hanover and its direct and indirect Subsidiaries; and WHEREAS, as a condition of its willingness to enter into the Financing Agreements, Senior Creditor has required that Junior Creditor enter into this Subordination Agreement to provide for (i) the terms and conditions of the subordination in favor of Senior Creditor of the obligations of Hanover to Junior Creditor in respect of the Junior Debt (as defined below), and of any other persons now or hereafter obligated, as borrower, guarantor or otherwise, in respect of all or any part of the Junior Debt (Hanover, the Subsidiary Guarantors, together with any other persons so obligated to Junior Creditor in respect of all or any part of the Junior Debt and also obligated to Senior Creditor, as borrower, guarantor or otherwise, in respect of all or any part of the Obligations under the Financing Agreements, individually, an "Obligor" and, collectively, "Obligors"), (ii) the relative priorities of Senior Creditor and Junior Creditor with respect to liens upon and security interests in the property of Obligors, and (iii) related matters; NOW THEREFORE, in consideration of the mutual benefits accruing to Creditors hereunder and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agree as follows: 1. DEFINITIONS As used in this Subordination Agreement, the following terms shall have the meanings ascribed to them below: -2- 3 1.1. "Agreements" shall mean, collectively, the Senior Creditor Agreements and the Junior Creditor Agreements. 1.2. "Borrowers" shall have the meaning ascribed to such term in the Loan Agreement. 1.3. "Complete Standstill Event" shall mean the giving of notice to the Indenture Trustee by Senior Creditor of the occurrence of one or more of the following dates or events: (i) a default in payment of any portion of the Senior Debt when due under the Senior Credit Agreements (whether or not payment of the Senior Debt is accelerated) or (ii) Senior Creditor accelerates payment of the Senior Debt at any time following any event of default under the Senior Creditor Agreements, or (iii) the effective date the Loan Agreements are terminated or not renewed, by either Senior Creditor or the Borrowers, whether at the end of the stated term or any renewal thereof, by reason of default, through voluntary termination by the parties, or otherwise. No subsequent, contemporaneous or prior judicial action or taking of possession of Collateral (as defined below) or foreclosure of Liens thereon or other action shall be required in order for the occurrence of any of the dates or events set forth in this definition to constitute a Complete Standstill Event. A Complete Standstill Event shall be deemed terminated upon Senior Creditor's waiver in writing, signed by Senior Creditor, waiving the event of default and/or rescinding the acceleration constituting the Complete Standstill Event, and/or Senior Creditor's acceptance of any permitted cure of any such event of default or acceleration. 1.4. "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 (as defined in the Loan Agreement) of Borrowers, which are leased to, or otherwise licensed for use by Borrowers, with permission of such third party owners. 1.5. "IMR Agreements" shall mean, collectively, the Repurchase and Option Agreement, dated as of September 29, 1995, among IMR, SunAmerica and Hanover, together with all instruments -3- 4 and agreements delivered thereunder, the Second Supplemental Indenture dated on or about the date hereof among Hanover, the Subsidiary Guarantors and the Indenture Trustee, and the Customer and Mailing List Escrow Agreement dated on or about the date hereof, among Hanover, the Indenture Trustee, and HOSSCO, as escrow agent, as the same now exist or may hereafter be amended, modified, supplemented, restated or replaced. 1.6. "Indenture" shall mean that certain Indenture dated as of August 1, 1993, among H&H, THC, the Subsidiary Guarantors and the Indenture Trustee, as supplemented by the First Supplemental Indenture dated as of March 27, 1995, and the Second Supplemental Indenture dated on or about the date hereof, as the same now exists or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. 1.7. "Indenture Trustee" shall mean First Trust National Association, as Trustee under the Indenture, any successor Trustee, and their respective successors and assigns. 1.8. "Junior Creditor Agreements" shall mean, collectively, the Notes (including any notes exchanged therefor), the Purchase Agreement dated as of August 17, 1993 presently among Hanover, certain of the Subsidiary Guarantors and IMR as assignee of SunAmerica, the Indenture, the guarantees by the Subsidiary Guarantors, the IMR Agreements and all other agreements, documents and instruments now or at any time hereafter executed and/or delivered by H&H, THC, Hanover, the Subsidiary Guarantors or any other person to, with or in favor of Junior Creditor in connection therewith or related thereto, as all of the foregoing now exist or may hereafter be amended, modified, supplemented, extended, renewed, exchanged, restated or replaced. 1.9. "Junior Creditor Representative" shall mean the Indenture Trustee. 1.10. "Junior Debt" shall mean all of the following evidenced by or arising under or in connection with the Notes or the other Junior Creditor Agreements to the extent relating to the Notes or the debt evidenced thereby: all loans, obligations, liabilities, letters of credit, credit facilities and other indebtedness of any kind, nature and description owing by any Obligor to Junior Creditor, including principal, interest, charges, fees, premiums, indemnities and expenses, whether as principal, surety, endorser, guarantor or otherwise, whether now existing or hereafter arising, whether arising after the commencement of any case with respect to any Obligor under the U.S. Bankruptcy Code or any similar statute, whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, original, renewed or extended, and whether arising -4- 5 directly or howsoever acquired by Junior Creditor including from any other person outright, conditionally or as collateral security, by assignment, merger with any other person, participations or interests of Junior Creditor in the obligations of any Obligor to others, or by assumption or operation of law, or by way of a claim or right of contribution, exoneration, reimbursement, indemnification, subrogation or otherwise, however evidenced, and shall also include all amounts chargeable to any Obligor under the Junior Creditor Agreements or in connection with any of the foregoing. 1.11. "Lien" shall mean any pledge, hypothecation, assignment, deposit arrangement, right of setoff, security interest, encumbrance, mortgage, deed of trust (including, but not limited to, easements, rights of way and the like), lien (statutory or other), security agreement or transfer intended as security, including, without limitation, any conditional sale or other title retention agreement, the interest of a lessor under a capital lease or any financing lease having substantially the same economic effect as any of the foregoing. 1.12. "Payment Block Notice" shall have the meaning set forth in Section 3.2 hereof. 1.13. "Person" or "person" shall mean an individual, a partnership, a corporation (including a business trust), a joint stock company, a limited liability company, a limited liability partnership, a trust, an unincorporated association, a joint venture, or other entity or a government or any agency, instrumentality or political subdivision thereof. 1.14. References. All terms defined in the Uniform Commercial Code as in effect in the State of New York, unless otherwise defined herein, shall have the meanings set forth therein. 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. References in the singular include the plural and references in the plural include the singular. Use of the term "or" shall mean "and/or" unless the context otherwise clearly requires. Unless the context otherwise clearly requires, references to "herein" or "hereunder" shall mean this entire Subordination Agreement, not only the particular provision in which such reference appears. 1.15. "Senior Creditor Agreements" shall mean, individually and collectively, the Loan Agreement, the other Financing Agreements, and all agreements, documents and instruments now or at any time hereafter executed and/or delivered by any Obligor or any other person to, with or in favor of Senior Creditor in connection therewith or related thereto, as all of the foregoing now exist or may hereafter be amended, modified, supplemented, extended, renewed, restated or replaced. -5- 6 1.16. "Senior Debt" shall mean any and all loans, obligations, liabilities, letters of credit, credit facilities and indebtedness of every kind, nature and description owing by any Obligor to Senior Creditor or its participants, including principal, interest, charges, fees, premiums, indemnities and expenses, however evidenced, whether as principal, surety, endorser, guarantor or otherwise, in each case arising under the Senior Creditor Agreements, whether now existing or hereafter arising, whether arising before, during or after the initial or any renewal term of the Senior Creditor Agreements, or after the commencement of any case with respect to any Obligor under the U.S. Bankruptcy Code or any similar statute, whether or not allowable in whole or in part against any Obligor or any successor of any Obligor in any case under the U.S. Bankruptcy Code or similar statute, whether direct or indirect, absolute or contingent, joint or several, due or not due, primary or secondary, liquidated or unliquidated, secured or unsecured, original, renewed or extended and whether arising directly or howsoever acquired by Senior Creditor under the Senior Creditor Agreements or by assumption or operation of law, or by way of any claim or right of contribution, indemnification, exoneration, reimbursement, subrogation or otherwise and shall also include all amounts chargeable to any Obligor under the Senior Creditor Agreements or in connection with any of the foregoing. 1.17. "Standstill Period" shall mean the period beginning on the earlier of the date that Junior Creditor has received a Payment Block Notice or the date that Junior Creditor has given written notice to Senior Creditor that an event of default under the Junior Creditor Agreements has occurred and specifying such event of default and ending 180 days after such date; provided, however, that the aggregate number of days that any one or more Standstill Periods shall be in effect may not exceed 180 days in any consecutive 365 day period; and provided, further, that no event of default under the Senior Creditor Agreements which (i) is specified in the written notice under this Section commencing a Standstill Period and (ii) is subsequently waived by Senior Creditor, shall be or be made the basis for the commencement of a subsequent Standstill Period unless such event of default shall be waived by Senior Creditor as to the specific circumstances giving rise to such event of default, for a period of not less than 365 days following the occurrence of such event of default. 1.18. "Subsidiary" shall have the meaning ascribed to such term in the Loan Agreement. 1.19. "Triggering Default" shall mean the occurrence or existence of any event of default in respect of the Junior Debt under the Junior Creditor Agreements, which remains uncured and unwaived or otherwise continues beyond the expiration of the Standstill Period hereunder with respect to such event of default. -6- 7 2. SECURITY INTERESTS; PRIORITIES; COVENANTS 2.1. Acknowledgment of Senior Creditor Security Interests. Junior Creditor hereby agrees and acknowledges that, pursuant to the Loan Agreement, Senior Creditor has been granted a Lien upon all of the assets of Hanover, the Borrowers and all other direct and indirect Subsidiaries of Hanover, whether such assets are now owned or are hereafter arising or acquired, including, without limitation, all present and future accounts, contract rights, general intangibles (including, without limitation, Customer Lists), documents, instruments, chattel paper, inventory, equipment, fixtures and real property, and the proceeds and products thereof, excluding only such assets of Hanover, the Borrowers and other direct and indirect Subsidiaries of Hanover as are expressly excluded from the Liens of Senior Creditor pursuant to the terms of the Loan Agreement (such assets subject to the Lien of Senior Creditor at any time and from time to time, the "Collateral"). 2.2. No Contest of Creditor Liens. (a) Junior Creditor agrees that it shall not contest the validity, perfection, priority or enforceability of the Liens granted to or held by Senior Creditor upon the Collateral and that, as between Senior Creditor and Junior Creditor, the terms of this Subordination Agreement shall govern even if part or all of the Senior Debt or the Liens securing payment and performance thereof are avoided, disallowed, set aside or otherwise invalidated in any judicial proceeding or otherwise. (b) Senior Creditor agrees that it shall not contest the validity, perfection, priority or enforceability of the Lien granted in or held by Junior Creditor upon the Customer Lists of Hanover and certain of the Subsidiary Guarantors, and that, as between Senior Creditor and Junior Creditor, the terms of this Subordination Agreement shall govern even if part or all of the Junior Debt or the Lien upon the Customer Lists securing payment and performance thereof are avoided, disallowed, set aside or otherwise invalidated in any judicial proceeding or otherwise. 2.3. Senior Creditor's Priority Liens. Notwithstanding the order or time of attachment, or the order, time or manner of perfection, or the order or time of filing or recordation of any document or instrument, or other method of perfecting a security interest in favor of each Creditor in any Collateral, and notwithstanding any conflicting terms or conditions which may be contained in any of the Agreements, the Liens of Senior Creditor upon the Collateral have and shall have priority over the Liens of Junior Creditor upon the Collateral and such Liens of Junior Creditor are and shall -7- 8 be, in all respects, subject and subordinate to the Liens of Senior Creditor therein to the full extent of the Senior Debt outstanding at any time and from time to time and secured thereby. 2.4. Priority Absolute. The Lien priorities provided in Section 2.3 shall not be altered or otherwise affected by any amendment, modification, supplement, extension, renewal, restatement or refinancing of the Senior Debt or the Junior Debt, nor by any invalidity of the Senior Debt or any failure to perfect or lapse in perfection by Senior Creditor of any Lien on any Collateral, nor by any action or inaction which any Creditor may take or fail to take in respect of the Collateral. 2.5. Rights of Creditors to Enforce Collateral. (a) Senior Creditor shall have the exclusive right to manage, perform and enforce the terms of the Senior Creditor Agreements with respect to the Collateral, to exercise and enforce all privileges and rights thereunder according to its discretion and the exercise of its business judgment, including, without limitation, the exclusive right to take or retake control of possession of the Collateral and to hold, prepare for sale, process, sell, lease, dispose of, collect upon, or liquidate the Collateral. The provisions of this Section 2.5(a) shall not, however, restrict the rights of enforcement of the Junior Creditor to the extent permitted under and subject to the terms of Sections 2.6 and 3.5 hereof. (b) Notwithstanding anything to the contrary contained in any of the Agreements, only Senior Creditor shall have the right to restrict or permit, or approve or disapprove, the sale, transfer or other disposition of Collateral. Each of IMR and the Indenture Trustee shall, upon the request of Senior Creditor, release or otherwise terminate the Liens held by or on behalf of Junior Creditor on the Collateral to the extent such Collateral is sold or otherwise disposed of either by Senior Creditor, its agents, or any Obligor as permitted under the Senior Creditor Agreements or as otherwise consented to by Senior Creditor, and the Indenture Trustee and IMR shall deliver such release of Lien documents as Senior Creditor may reasonably require in connection therewith. Senior Creditor may apply the proceeds so realized to the Senior Debt in such order and manner provided or as otherwise permitted under the Senior Creditor Agreement, and may relend such proceeds to any Borrower or other Obligor as Senior Creditor shall deem fit, and all obligations to Senior Creditor arising from such relending, shall be part of Senior Debt. 2.6. Restrictions on Junior Creditor Rights. Notwithstanding any right or remedy available to Junior Creditor under any of the -8- 9 Junior Creditor Agreements, applicable law or otherwise, Junior Creditor may accelerate the Junior Debt (subject to required rescission of acceleration upon cure as provided below), but shall not, directly or indirectly take any of the following actions until all of the Senior Debt has been indefeasibly paid and satisfied: (a) unless and until a Triggering Default has occurred and provided a Complete Standstill Event has not occurred, exercise any of its rights or remedies (other than acceleration of the Junior Debt as aforesaid) as against any Obligor or its property upon an event of default by any Obligor under the Junior Creditor Agreements or otherwise, including, without limitation, the termination of the Junior Creditor Agreements or the commencement of suit for the enforcement of any provisions of the Junior Creditor Agreements or for collection of the Junior Debt as against or from any Obligor or its property; (b) hold, seek to obtain or enforce any Lien in or upon any Collateral or any other property of any Obligor, except after a Triggering Default has occurred and provided a Complete Standstill Event has not occurred, Junior Creditor may hold, obtain or enforce, subject to the Liens of Senior Creditor thereon, any non-consensual Lien upon property of any Obligor, to the extent such Lien is acquired through judicial enforcement of the Junior Debt; or (c) commence, any administrative, legal or equitable action or proceeding against any Obligor or its properties seeking any reorganization, arrangement, composition, readjustment, liquidation, bankruptcy or any other action involving the readjustment of all or any part of any Obligor's obligations, or other similar relief under the U.S. Bankruptcy Code or any present or future statute, law or regulation relative to any Obligor or its properties or any proceedings for voluntary liquidation, dissolution or other winding up of any Obligor's businesses or the appointment of any trustee, receiver or liquidator for any Obligor or any part of its properties or any assignment for the benefit of creditors or any marshalling of assets of any Obligor. 3. SUBORDINATION OF JUNIOR DEBT 3.1. Subordination. Except as specifically set forth in Sections 3.2 and 3.5 below, Junior Creditor hereby subordinates its right to payment and satisfaction of the Junior Debt, and the payment thereof, directly or indirectly, by any means whatsoever, is deferred and subordinated, to the prior indefeasible payment and satisfaction in full of all Senior Debt. -9- 10 3.2. Permitted Payments. (a) Subject to all the other terms and conditions of this Subordination Agreement, Senior Creditor hereby agrees that, unless and until Senior Creditor has notified the Junior Creditor Representative of the occurrence of a default or an event of default or the occurrence of an event or existence of a condition which does, or would, with notice or lapse of time or both constitute an event of default under the Senior Creditor Agreements, and in each case specifying such event (such notice a "Payment Block Notice"), Hanover may make, and Junior Creditor may receive and retain from Hanover (i) payments of interest when due as regularly scheduled, and (ii) payment of principal when due at scheduled maturity on August 1, 1998, and (iii) prepayments of principal, plus accrued interest thereon, funded with the proceeds of an equity offering of Hanover, in each case under clauses (i) and (ii) in accordance with the terms of the Notes and the Indenture as in effect on the date hereof (but not any other prepayment of principal or interest or other payment of principal or any payment pursuant to acceleration or claims of breach or any payment to acquire any Junior Debt or otherwise), and (iv) reimbursement to Junior Creditor, prior to an event of default under any Junior Debt, for out-of-pocket expenses payable by Hanover pursuant to the Junior Creditor Agreements. After a Payment Block Notice is given, no payment otherwise permitted to be made to or received in respect of the Junior Debt may be made to or received by Junior Creditor until the expiration of the Standstill Period hereunder, and no such payment may be made or received after such period if a Complete Standstill Event has occurred or shall thereafter occur and while such Complete Standstill Event is continuing. (b) No event of default which existed or was continuing under the Senior Creditor Agreements on the date any Payment Block Notice is given, and which is subsequently waived by Senior Creditor, shall be or be made the basis for the giving of a subsequent Payment Block Notice, unless such event of default shall be waived by Senior Creditor as to the specific circumstances giving rise to such event of default, for a period of not less than 365 days following the occurrence of such event of default. (c) Senior Creditor may give any number of Payment Block Notices hereunder, provided that the aggregate number of days that any one or more Standstill Period(s) hereunder shall be in effect shall not exceed 180 days during any 365 consecutive days, irrespective of the number of defaults with respect to the Senior Creditor Agreements; and provided further that, upon expiration or rescission of such Standstill Period, Junior Creditor must receive payment of all regularly scheduled payments of interest and, if applicable, principal payments described in clauses (ii) and (iii) of Section 3.2(a) which have become due -10- 11 (on an unaccelerated basis, whether or not there has been an acceleration of any Junior Debt), plus interest on such overdue payments as provided in the Indenture, before a subsequent Payment Block Notice may be given. 3.3. Distributions. (a) In the event of any distribution, division, or application, partial or complete, voluntary or involuntary, by operation of law or otherwise, of all or any part of the assets of any Obligor or the proceeds thereof to the creditors of any Obligor or readjustment of the obligations and indebtedness of any Obligor, whether by reason of liquidation, bankruptcy, arrangement, receivership, assignment for the benefit of creditors, marshalling of assets of any Obligor or any other action or proceeding involving the readjustment of all or any part of the obligations of any Obligor or the application of the assets of any Obligor to the payment or liquidation thereof, or upon the dissolution or other winding up of any Obligor's business, or upon the sale of all or substantially all of the assets of any Obligor then, and in any such event, Junior Creditor agrees that: (i) Senior Creditor shall first receive indefeasible payment in full in cash of all of the Senior Debt (including, without limitation, interest after the commencement of any such liquidation, dissolution or bankruptcy at the rate specified in the applicable Senior Creditor Agreements, whether or not such interest is an allowable claim in any such proceeding) prior to the payment of all or any part of the Junior Debt; and (ii) Senior Creditor shall be entitled to receive any payment or distribution of any kind or character, whether in cash, securities or other property (including, without limitation, interest after the commencement of any such liquidation, dissolution or bankruptcy at the rate specified in the applicable Junior Creditor Agreements) which may be payable or deliverable in respect of any or all of the Junior Debt. Provided, however, that if the Senior Creditor accepts shares of stock and/or debt securities issued by any Obligor in connection with any liquidation, dissolution or bankruptcy case or proceeding, then, notwithstanding clauses (i) and (ii) of this Section 3.3(a), Junior Creditor may receive shares of stock and/or debt securities that are subordinated to the remaining Senior Debt and the stock and debt securities issued to Senior Creditor at least to the same extent and pursuant to the same or more stringent terms as is the Junior Debt, as evidenced by a supplement hereto, executed by the Senior Creditor and the Junior Creditor Representative. -11- 12 (b) In order to enable Senior Creditor to enforce its rights under this Section 3.3, Senior Creditor is hereby irrevocably authorized and empowered (in its own name or in the name of Junior Creditor or otherwise), but shall have no obligation to: (i) enforce claims comprising any of the Junior Debt by proof of debt, proof of claim, suit or otherwise; and (ii) demand, sue for, collect and receive any assets of any Obligor distributed, divided or applied by way of payment, or any other property or interest issued, on account of any of the Junior Debt and apply the same, or the proceeds of any realization upon the same, to any of the Senior Debt. (c) Notwithstanding anything to the contrary in this Section 3.3, in the event of a case under the U.S. Bankruptcy Code involving any Obligor, Junior Creditor shall be entitled, on ten (10) days' prior written notice to Senior Creditor, to file a proof of claim with respect to the Junior Debt if Senior Creditor has elected not to do so and if the failure to file such a proof of claim within the succeeding thirty (30) day or lesser period would result in the claim being barred from assertion; provided, however, such proof of claim expressly states that the Junior Debt has been subordinated in favor of Senior Creditor upon the terms and provisions of this Subordination Agreement and which gives Senior Creditor the right, among other things, to vote such claim of Junior Creditor. (d) Junior Creditor shall execute and deliver to Senior Creditor such powers of attorney as may be necessary so to enable Senior Creditor to effect the filing of a proof of claim in respect of the Junior Debt. 3.4. Payments Received by Junior Creditor. Except for permitted payments received by Junior Creditor as provided in Section 3.2 or through permitted enforcement of the Junior Debt as provided in Sections 2.6 and 3.5 hereof, or distributions permitted under Section 3.3 hereof, if any payment or distribution or security or instrument or proceeds thereof is received by the Junior Creditor in respect of the Junior Debt, or if any sums are recovered in respect of the Junior Debt upon enforcement not permitted pursuant to Sections 2.6 and 3.5 hereof, Junior Creditor shall receive and hold the same in trust, as trustee, for the benefit of Senior Creditor. Junior Creditor shall segregate each such payment, distribution or recovery from all other funds and property of Junior Creditor and shall forthwith deliver such payment, distribution or recovery to Senior Creditor (together with any endorsement or assignment of Junior Creditor where necessary), for application to any of the Senior Debt. In the event of the failure of the Junior Creditor to make any such endorsement or assignment to Senior Creditor, -12- 13 Senior Creditor, or any of its officers or employees, is hereby irrevocably authorized on behalf of Junior Creditor to make the same. 3.5. Permitted Enforcement. (a) If any event of default under the Junior Creditor Agreements has occurred and is continuing, Junior Creditor may (i) accelerate such portion of the Junior Debt as is in default or any other amounts as may otherwise be accelerated pursuant to the terms of the Junior Creditor Agreements, and/or (ii) upon the expiration of any Standstill Period arising with respect to such event of default, commence and prosecute judicial enforcement of the Junior Creditor Agreements and collection of the Junior Debt as against any Obligor or take other actions otherwise prohibited under Section 2.6(a), (b) or (c); provided that no Complete Standstill Event has occurred or thereafter occurs; and further provided that any such enforcement or other action shall be and remain subject to Senior Creditor's prior Liens upon any Collateral as well as Senior Creditor's own enforcement efforts then or thereafter commenced with respect to any Obligor or any Collateral, and all proceeds or amounts realized or collected upon such enforcement against any Collateral shall be delivered to Senior Creditor for application to the Senior Debt. (b) Senior Creditor shall have the right, but not any obligation, to cure for the account of any Obligor any default or event of default under the Junior Creditor Agreements, which cure may be effected at any time during the Standstill Period (on an unaccelerated basis, whether or not there has been an acceleration of any Junior Debt) or, with Junior Creditor's consent, at any time after the expiration of the Standstill Period; provided, however, that at or upon the effectuation of such cure, Junior Creditor receives payment of all regularly scheduled payments of interest and, if applicable, principal payment described in clause (ii) of Section 3.2(a), which have become due (on an unaccelerated basis, whether or not there has been an acceleration of any Junior Debt), plus interest on such overdue payments as provided in the Indenture, prior to or during the Standstill Period up to and through the date of such cure. Any sums paid by Senior Creditor to effect any such cure shall be deemed a loan to Borrowers pursuant to the Financing Agreements and shall be part of the Senior Debt. Upon any such cure, Junior Creditor shall be deemed to have rescinded any acceleration and shall be deemed to have restored the Notes to non-default status and good standing, but nothing in this Section 3.5(b) shall be deemed to prevent Junior Creditor from accelerating the Junior Debt again if there is thereafter another event of default under the Junior Debt, subject to subsequent cure and subject to all other provisions of this Subordination Agreement. No sum paid or other action taken by Senior Creditor in connection with any default or event of default under the Junior Creditor Agreements, -13- 14 or the cure thereof, shall constitute an assumption by Senior Creditor of any obligation or liability to Junior Creditor or any other person. 3.6. Instrument Legend and Notation. (a) Each of the Notes and any other instruments at any time evidencing any Junior Debt, or any portion thereof, shall be permanently marked on its face with a legend conspicuously indicating that payment thereof is subordinated in right of payment to the Senior Debt and is subject to the terms and conditions of this Subordination Agreement; and after being so marked certified copies thereof shall be delivered to Senior Creditor. (b) In the event any legend or endorsement is omitted, Senior Creditor or any of its officers or employees, are hereby irrevocably authorized on behalf of Junior Creditor to make the same. No specific legend, further assignment or endorsement or delivery of notes, guarantees or instruments shall be necessary to subject any Junior Debt to the subordination thereof contained in this Subordination Agreement. 4. COVENANTS, REPRESENTATIONS AND WARRANTIES 4.1. Additional Covenants. Junior Creditor agrees in favor of Senior Creditor that until all Senior Debt has been indefeasibly paid and satisfied in full: (a) except as specifically set forth in Sections 3.2, 3.3 and 3.5 above, Junior Creditor shall not, directly or indirectly, accept or receive any payment of principal or interest or expenses or any prepayment or other payment of principal or any payment pursuant to acceleration or claims of breach or any payment to acquire Junior Debt or otherwise in respect of any Junior Debt; (b) Junior Creditor shall not, directly or indirectly, accept or receive from any Obligor any loan, gift or, except as permitted herein, distribution of assets to Junior Creditor, and Junior Creditor shall not accept or hold any guaranties for the Junior Debt except the Guarantees of the Subsidiary Guarantors whether now existing or as contemplated by the Junior Creditor Agreements as in effect on the date hereof, and shall not hold or acquire any Lien upon the assets of any Obligor, except the Lien on the Customer Lists subject to the provisions of Section 3.5 and any Lien held and obtained to the extent permitted under the exception contained in Section 2.6(b) and subject to the enforcement restrictions of Section 2.6(b); and -14- 15 (c) IMR shall not sell, assign, transfer or encumber any interest in the Notes, except upon terms expressly subject to the terms of this Subordination Agreement, and then only if the Notes and the Guarantees are no longer secured by any property of any Obligor and remain unsecured. 4.2. Additional Representations and Warranties. Junior Creditor represents and warrants to Senior Creditor that: (a) as of the date hereof, the total indebtedness owing by Hanover to Junior Creditor in respect of the debt evidenced by the Notes and by the Subsidiary Guarantors as guarantors thereof, is in the aggregate principal amount of FOURTEEN MILLION ($14,000,000) DOLLARS, all of which is secured by, but only by, the Customer Lists, to the extent provided in the Junior Creditor Agreements as in effect on the date hereof; (b) as of the date hereof, no default or event of default, or event or condition which with notice or passage of time or both would constitute a default or an event of default, exists or has occurred and is continuing under the Junior Creditor Agreements; (c) Junior Creditor is the exclusive legal and beneficial owner of all of the Junior Debt; (d) none of the rights of Junior Creditor in and to the Junior Debt are subject to any lien, security interest, financing statements, subordination, assignment or other claim, except in favor of Senior Creditor; (e) true, correct and complete copies of all Junior Creditor Agreements in effect as of the date hereof have been furnished to Senior Creditor; (f) the execution, delivery and performance of this Agreement is within the corporate powers of Junior Creditor, has been duly authorized by all necessary corporate action of Junior Creditor, and does not contravene any law, any provision of the memorandum or articles of association or other charter document of Junior Creditor or any agreement to which Junior Creditor is a party or by which it or its properties are bound; and (g) this Agreement constitutes the legal, valid and binding obligations of Junior Creditor, enforceable in accordance with its terms. 4.3. Waivers. Notice of acceptance hereof, the making of loans, advances and extensions of credit or other financial accommodations to, and the incurring of any expenses by or in respect of, any Obligor or any other subordinate creditor, by Senior Creditor, and presentment, demand, protest, notice of -15- 16 protest, notice of nonpayment or default and all other notices to which Junior Creditor and any Obligor are or may be entitled are hereby waived (except to the extent, if any, expressly provided for herein). Junior Creditor also waives notice of (a) any amendment, modification, supplement, renewal, restatement or extensions of the Senior Creditor Agreements or any Collateral, or of the time of payment of, or increase or decrease in the amount of, any of the Senior Debt, (b) the taking, exchange, surrender and releasing of Collateral or guarantees now or at any time held by or available to Senior Creditor for the Senior Debt or any other person at any time liable for or in respect of the Senior Debt, (c) the exercise of, or refraining from the exercise of any right against any Obligor or any Collateral, (d) the settlement, compromise or release of, or the waiver of any default with respect to, any of the Senior Debt, and/or (e) Senior Creditor's election, in any proceeding instituted under the U.S. Bankruptcy Code of the application of Section 1111(b)(2) of the U.S. Bankruptcy Code. None of the foregoing shall, in any manner, affect the terms hereof or impair the obligations of Junior Creditor hereunder or give rise to any claim by Junior Creditor against Senior Creditor, whether or not any of the foregoing are or purport to be restricted in any manner under the terms of the Junior Creditor Agreements. All of the Senior Debt shall be deemed to have been made or incurred in reliance upon this Subordination Agreement. Junior Creditor hereby agrees that all payments received by Senior Creditor may be applied, reversed, and reapplied, in whole or in part, to any of the Senior Debt, as Senior Creditor, in its discretion, deems appropriate. 4.4. Subrogation; No Marshaling. After the full and indefeasible payment and satisfaction of all Senior Debt, and after all of the Senior Creditor Agreements have been terminated, Junior Creditor shall be subrogated to the rights of the holders of Senior Debt to receive distributions applicable to the Senior Debt to the extent that distributions otherwise payable to Junior Creditor have been applied to payment of Senior Debt, and any such distributions otherwise payable to Junior Creditor and applied to Senior Debt shall not, as between Hanover and Junior Creditor, constitute a payment by Hanover of Senior Debt. Junior Creditor hereby waives any and all rights to have any of the Collateral held by or granted to Senior Creditor marshaled upon foreclosure or other disposition of such Collateral by Senior Creditor, its agents or by any Obligor with the consent of Senior Creditor. 4.5. Information Concerning Obligors. (a) Junior Creditor hereby assumes sole responsibility for keeping itself informed of the financial condition of Hanover, any and all endorsers and any and all guarantors of the Junior Debt and any other Obligor, and of all other circumstances -16- 17 bearing upon the risk of nonpayment of the Senior Debt and/or the Junior Debt that diligent inquiry would reveal, and Junior Creditor hereby agrees that Senior Creditor shall have no duty to advise Junior Creditor of information known to Senior Creditor regarding such condition or any such circumstances. (b) In the event Senior Creditor, in its discretion, undertakes, at any time or from time to time, to provide any such information to Junior Creditor, Senior Creditor shall be under no obligation (i) to provide any such information to the Junior Creditor on any subsequent occasion or (ii) to undertake any investigation and shall be under no obligation to disclose any information obtained in any investigation, routine or otherwise. 5. MISCELLANEOUS 5.1. Amendments. Any waiver, permit, consent or approval by a Creditor of or under any provision, condition or covenant to this Subordination Agreement must be in writing executed by such Creditor, or its successors and assigns, and shall be effective only to the extent it is set forth in such signed writing and as to the specific facts or circumstances covered thereby. Any amendment of this Subordination Agreement must be in writing and signed by each of the parties to be bound thereby. Execution of any amendment by the Junior Creditor Representative shall bind the Junior Creditor and its successors and assigns, and shall be effective for any Junior Creditor. 5.2. Successors and Assigns. (a) This Subordination Agreement shall be binding upon the parties hereto and their respective successors and assigns and shall inure to the benefit of each of the Creditors and its respective successors, participants and assigns. (b) Senior Creditor reserves the right to grant participations in, or otherwise sell, assign, transfer or negotiate all or any part of, or any interest in, the Senior Debt and the Collateral securing same. (c) In connection with any assignment or transfer of any or all of the Senior Debt, or any or all rights of Senior Creditor in the property of any Obligor, (other than pursuant to a participation), Junior Creditor agrees to execute and deliver an agreement containing terms substantially identical to those contained herein in favor of any such assignee or transferee and, in addition, shall execute and deliver an agreement containing terms substantially identical to those contained herein in favor of any third person who succeeds to or replaces any or all of Senior Creditor's financing of any Borrower which is an Obligor or any other Obligor, whether such successor financing or -17- 18 replacement occurs by transfer, assignment, "takeout" or any other means or vehicle. 5.3. Insolvency. This Subordination Agreement shall be applicable both before and after the filing of any petition by or against any Obligor under the U.S. Bankruptcy Code and all converted or succeeding cases in respect thereof, and all references herein to any Obligor shall be deemed to apply to a trustee for any Obligor as debtor and debtor-in-possession. The relative rights of Senior Creditor and Junior Creditor to payment of the Senior Debt and the Junior Debt, respectively, and in or to any distributions from or in respect of any Obligor or any Collateral or proceeds of Collateral, shall continue after the filing thereof on the same basis as prior to the date of the petition. 5.4. Notices. (a) All notices, requests and demands to or upon the respective parties hereto shall be deemed duly given, made or received if in writing and: if by hand, immediately upon sending; if by Federal Express, Express Mail or any other overnight delivery service, one (1) day after dispatch; and if mailed by certified mail, return receipt requested, five (5) days after mailing to the parties at their addresses set forth below (or to such other addresses as the parties may designate in accordance with the provisions of this Section 5.4): To Senior Creditor: Congress Financial Corporation 1133 Avenue of the Americas New York, New York 10036 Attention: Mr. Mark Fagnani To any Junior Creditor or to the Junior Creditor Representative: First Trust National Association 180 East Fifth Street P.O. Box 64111 St. Paul, Minnesota 55164 Attention: Mr. Scott Strodthoff with a copy to: Intercontinental Mining & Resources Incorporated c/o Quadrant Management Inc. 127 East 73rd Street New York, New York 10021 Attention: Thomas A. Huser, Esq. -18- 19 (b) A Creditor may change the address(es) to which all notices, requests and other communications are to be sent by giving ten (10) days written notice of such address change to the other Creditor in conformity with this Section 5.4, but such change shall not be effective until notice of such change has been received by the other Creditor. 5.5. Counterparts. This Subordination Agreement may be executed in any number of counterparts, each of which shall be an original with the same force and effect as if the signatures thereto and hereto were upon the same instrument. 5.6. Governing Law. The validity, construction and effect of this Subordination Agreement shall be governed by the laws of the State of New York. 5.7. Consent to Jurisdiction; Waiver of Jury Trial. Each of Junior Creditor and Senior Creditor hereby irrevocably consents to the non-exclusive jurisdiction of the Supreme Court of the State of New York and the United States District Court for the Southern District of New York and waives trial by jury in any action or proceeding with respect to this Subordination Agreement or any matter directly or indirectly arising out of or relating to their financing arrangements with any Obligor. 5.8. Complete Agreement. This written Subordination Agreement is intended by the parties as a final expression of their agreement and is intended as a complete statement of the terms and conditions of their agreement. 5.9. No Third Parties Benefitted. This Subordination Agreement is solely for the benefit of the Creditors and their respective successors, participants and assigns, and no other person, including any other creditor or creditor's representative of any Obligor shall have any right, benefit, priority or interest under, or because of the existence of, this Subordination Agreement. 5.10. Disclosures, Non-Reliance. Each Creditor has the means to, and shall in the future remain, fully informed as to the financial condition and other affairs of each Obligor, and neither Creditor shall have any obligation or duty to disclose any such information to the other Creditor. Except as expressly set forth in this Subordination Agreement, the parties hereto have not otherwise made to each other nor do they hereby make to each other any warranties, express or implied, nor do they assume any liability to each other with respect to: (a) the enforceability, validity, value or collectibility of any of the Junior Debt or Senior Debt or any guarantee or security which may have been granted to any of them in connection therewith, or (b) any other matter except as expressly set forth in this Subordination Agreement. -19- 20 5.11. Term. This Subordination Agreement is a continuing agreement and shall remain in full force and effect until the indefeasible satisfaction in full of all Senior Debt and the termination of the Senior Creditor Agreements. 5.12. Severability. If any provision of this Subordination Agreement is held to be invalid or unenforceable, such invalidity or unenforceability shall not invalidate this Subordination Agreement as a whole but this Subordination Agreement 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. 5.13. Senior Creditor's Rights under Indenture. The rights and benefits afforded the Senior Creditor under this Subordination Agreement shall be in addition to any and all rights and benefits which Senior Creditor may have under the terms of the Indenture. The terms and provisions of the Indenture shall in no way limit or impair the rights and benefits of Senior Creditor hereunder or limit or otherwise modify the obligations of, or restrictions upon, Junior Creditor hereunder. 5.14. Indenture Trustee's Compensation Not Prejudiced. Nothing in this Subordination Agreement shall restrict the rights of the Indenture Trustee to sue upon its claims for compensation under the Indenture. 5.15. No Fiduciary Duty to Senior Creditor. Indenture Trustee, by its execution of the Acknowledgment and Agreement hereto, undertakes to perform or observe and be bound by only the terms and provisions hereof applicable to it or applicable to the holders of Junior Debt on whose behalf the Indenture Trustee is acting in that capacity under the Indenture. The Indenture Trustee shall not be deemed to owe any fiduciary duty to Senior Creditor. 5.16. Application of Monies Deposited with Trustee. Nothing in this Subordination Agreement shall (i) prevent the application by the Indenture Trustee or any paying agent of any monies or the proceeds of U.S. government obligations received from Hanover at a time when such payment and receipt thereof by Junior Creditor would not have been prohibited hereunder, or (ii) prevent the application by the Indenture Trustee or any paying agent of any monies or the proceeds of any U.S. government obligations deposited by Hanover under the Indenture to the payment of or on account of the principal of or interest on the Notes if, at the time of such deposit, payment of such amounts by Hanover under the Notes, and the receipt thereof by Junior Creditor, would not have been prohibited by this Subordination Agreement. -20- 21 5.17. Headings. The headings used herein are for convenience only and do not constitute matters to be considered in interpreting this Subordination Agreement. IN WITNESS WHEREOF, the parties have caused this Subordination Agreement to be duly executed as of the day and year first above written. Junior Creditor: INTERCONTINENTAL MINING & RESOURCES INCORPORATED By: /s/ Thomas A. Huser --------------------------- Title: Attorney in Fact Senior Creditor: CONGRESS FINANCIAL CORPORATION By: /s/ Peter R. Seekel ------------------------------ Title: Senior Vice President -21- 22 ACKNOWLEDGMENT AND AGREEMENT BY OBLIGORS The undersigned hereby acknowledge and consent to the foregoing Subordination Agreement. By its signature below, each of the undersigned agrees that it will, together with its successors and assigns, be bound by the provisions thereof. Each of the undersigned acknowledges and agrees that: (i) although it may sign this Acknowledgment and Agreement, it is not a party to the foregoing Subordination Agreement and does not and will not receive any right, benefit, priority or interest under or because of the existence of the foregoing Subordination Agreement and (ii) it will execute and deliver such additional documents and take such additional action as may be necessary or desirable in the opinion of Senior Creditor to effectuate the provisions and purposes of the foregoing Subordination Agreement. HANOVER DIRECT, INC. By: /s/ Edward O'Brien ------------------------- Title: Senior Vice President BRAWN OF CALIFORNIA, INC. By: /s/ Edward O'Brien ------------------------- Title: Senior Vice President HANOVER DIRECT PENNSYLVANIA, INC. By: /s/ Edward O'Brien ------------------------- Title: Senior Vice President GUMP'S BY MAIL, INC. By: /s/ Edward O'Brien ------------------------- Title: Senior Vice President [SIGNATURES CONTINUE ON FOLLOWING PAGE] -22- 23 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] HANOVER SYNDICATION CORP. By: /s/ Edward O'Brien ------------------------- Title: VP HANOVER LIST MANAGEMENT, INC. By: /s/ Edward O'Brien ------------------------- Title: VP YORK FULFILLMENT COMPANY, INC. By: /s/ Edward O'Brien ------------------------- Title: VP GUMP'S HOLDINGS, INC. By: /s/ Edward O'Brien ------------------------- Title: VP HANOVER DIRECT NEW JERSEY, INC. By: /s/ Edward O'Brien ------------------------- Title: VP [SIGNATURES CONTINUE ON FOLLOWING PAGE] -23- 24 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] COMPANY STORE HOLDINGS, INC. By: /s/ Edward O'Brien ------------------------- Title: VP TWEEDS, INC. By: /s/ Edward O'Brien ------------------------- Title: VP HANOVER CASUALS, INC. By: /s/ Edward O'Brien ------------------------- Title: VP HANOVER DIRECT VIRGINIA INC. By: /s/ Edward O'Brien ------------------------- Title: VP HANOVER HOLDINGS INC. By: /s/ Edward O'Brien ------------------------- Title: VP HANOVER VENTURES, INC. By: /s/ Edward O'Brien ------------------------- Title: VP [SIGNATURES CONTINUE ON FOLLOWING PAGE] -24- 25 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] LWI HOLDINGS, INC. By: /s/ Edward O'Brien ------------------------- Title: VP HANOVER REALTY, INC. By: /s/ Edward O'Brien ------------------------- Title: VP HANOVER CATALOG HOLDINGS, INC. By: /s/ Edward O'Brien ------------------------- Title: VP -25- 26 ACKNOWLEDGMENT AND AGREEMENT BY INDENTURE TRUSTEE The undersigned Trustee under the Indenture referred to in the foregoing Subordination Agreement hereby acknowledges and consents to the foregoing Subordination Agreement to the extent its consent is or may be required. The undersigned agrees that it will be bound by the provisions of the Subordination Agreement as applicable to the undersigned as a Junior Creditor (as defined in the Subordination Agreement) in its capacity as Trustee under the Indenture. FIRST TRUST NATIONAL ASSOCIATION, as Indenture Trustee By: /s/ R. Prokofch ------------------------- Title: Trust Officer -26- 27 EXHIBIT A TO SUBORDINATION AGREEMENT Subsidiary Guarantors Hanover Direct Pennsylvania, Inc. Brawn of California, Inc. Gump's By Mail, Inc. Hanover Syndication Corp. Hanover List Management, Inc. York Fulfillment Company, Inc. Gump's Holdings, Inc. Hanover Direct New Jersey, Inc. Company Store Holdings, Inc. Tweeds, Inc. Hanover Casuals, Inc. Hanover Direct Virginia Inc. Hanover Holdings Inc. Hanover Ventures, Inc. LWI Holdings, Inc. Hanover Realty, Inc. Hanover Catalog Holdings, Inc. -27- EX-21.1 13 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21.1 SUBSIDIARIES OF THE REGISTRANT COMPANY INCORPORATION ------- ------------- Aegis Safety Holdings, Inc. Delaware American Down & Textile Company Wisconsin Brawn of California, Inc. California Company Store Holdings, Inc. Delaware Gump's By Mail, Inc. Delaware Gump's Corp. California Hanover Direct Pennsylvania, Inc. Pennsylvania Hanover Direct Virginia Inc. Delaware Hanover Ventures, Inc. Pennsylvania LWI Holdings, Inc. Delaware Scandia Down Corporation Delaware Tweeds, Inc. Delaware EX-23.1 14 CONSENT 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, 33-58758, 33-52687, 33-52059, 33-52061, 2-94286 and 2-92383. New York, New York February 26, 1996 EX-27 15 FINANCIAL DATA SCHEDULE
5 THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HANOVER DIRECT, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME FOR THE TWELVE MONTHS ENDED DECEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY, EXCEPT FOR GROSS ACCOUNTS RECEIVABLE AND THE ALLOWANCE FOR DOUBTFUL ACCOUNTS, BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-30-1995 DEC-30-1995 2,682 0 32,773 (2,597) 37,118 158,727 83,152 (26,090) 279,009 129,953 57,283 6,353 0 62,461 18,396 279,009 749,767 749,767 483,493 772,386 0 0 5,050 (27,150) 1,003 (28,153) 0 (1,837) 0 (29,990) (0.32) (0.32)
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