-----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, N1lc4K1Wsf+G7ykmRurLmuOl+5CofDoZ0tq0GBuQse7NM89ANO1SnSlHmYo1MRH+ kksr3qIdaHeYb9cfXewGGg== 0000950123-96-003168.txt : 19960624 0000950123-96-003168.hdr.sgml : 19960624 ACCESSION NUMBER: 0000950123-96-003168 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19960620 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: S-3/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-02743 FILM NUMBER: 96583643 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 S-3/A 1 AMENDMENT NO. 1 TO FORM S-3 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 20, 1996 REGISTRATION NO. 333-2743 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 1 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ HANOVER DIRECT, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-0853260 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
1500 HARBOR BOULEVARD WEEHAWKEN, NEW JERSEY 07087 (201) 863-7300 (Address, including zip code, and telephone number, including area code,of registrant's principal executive offices) ------------------------ Copy to: RAKESH K. KAUL MONTE E. WETZLER, ESQ. HANOVER DIRECT, INC. WHITMAN BREED ABBOTT & MORGAN 1500 HARBOR BOULEVARD 200 PARK AVENUE WEEHAWKEN, NEW JERSEY 07087 NEW YORK, NEW YORK 10166 (201) 863-7300 (212) 351-3000 (Name, address, including zip code, and telephone number, including area code, of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable following the effective date of this Registration Statement and the effective date of the Rights Offering described herein. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. / / If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. /X/
CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- TITLE OF EACH CLASS AMOUNT PROPOSED PROPOSED AMOUNT OF OF SECURITIES TO BE MAXIMUM MAXIMUM REGISTRATION FEE TO BE REGISTERED REGISTERED OFFERING PRICE AGGREGATE PER SHARE(1) OFFERING PRICE(1) - ------------------------------------------------------------------------------------------------------------ Common Stock, par value $.66 2/3 per share(2).................................. 51,250,000 $1.71875 $88,085,937.50 $30,375(3) shares - ------------------------------------------------------------------------------------------------------------ Rights to Purchase Shares of Common Stock(4)........................... 26,500,000 -- -- -- rights - ------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant to Rule 457 of the Securities Act of 1933, as amended. (2) Represents the maximum number of shares of Common Stock, par value $.66-2/3 per share, issuable upon the exercise of the Rights to purchase shares of Common Stock to be distributed in connection with the Rights Offering described in this Registration Statement together with the maximum number of shares of Common Stock which may be issued to NAR Group Limited in payment of the Standby Fee and the Take-Up Fee in connection with the Standby Purchase Agreement described in this Registration Statement. (3) Of this amount, $17,672 was paid with the Registration Statement filed with the Securities and Exchange Commission on April 23, 1996. (4) Represents the maximum number of Rights which may be issued in connection with the Rights Offering described in this Registration Statement. ------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS DATED JUNE 20, 1996 PROSPECTUS 50,000,000 SHARES HANOVER DIRECT, INC. COMMON STOCK ------------------------ Hanover Direct, Inc., a Delaware corporation (the "Company" or "Hanover"), is distributing to holders of record of its common stock, par value $.66 2/3 per share (the "Common Stock"), its 6% Series A Convertible Additional Preferred Stock, par value $.01 and stated value $10.00 per share (the "Series A Preferred Stock"), and its Series B Convertible Additional Preferred Stock, par value $.01 and stated value $10.00 per share (the "Series B Preferred Stock" and, together with the Series A Preferred Stock, the "Convertible Preferred Stock") outstanding as of June , 1996 (the "Record Date") transferable subscription rights (the "Rights") to subscribe for and purchase additional shares of Common Stock for a price of $ per share (the "Subscription Price"). Each shareholder will receive . transferable Rights for each share of Common Stock held of record on the Record Date, . transferable Rights for each share of Series A Preferred Stock held of record on the Record Date and . transferable Rights for each share of Series A Preferred Stock held of record on the Record Date. The number of Rights distributed by the Company to each holder of Common Stock and Convertible Preferred Stock will be rounded up to the nearest whole number. Each Right will be exercisable for one share of Common Stock. No fractional Rights or cash in lieu thereof will be issued or paid. Holders of Rights are entitled to purchase for the Subscription Price one share of Common Stock for each Right held (the "Subscription Privilege"). Once a holder of Rights has exercised such Rights, such exercise may not be revoked. The Rights will be evidenced by transferable subscription certificates ("Subscription Certificates"). An aggregate of up to approximately shares of Common Stock (the "Underlying Shares") will be sold upon exercise of the Rights or pursuant to the Standby Purchase Agreement, executed on and dated as of , 1996 (the "Standby Purchase Agreement"), between the Company and NAR Group Limited, a private investment holding company which owns approximately 53% of the Common Stock of the Company as of the date hereof on a fully-diluted basis ("NAR"). The distribution of the Rights and the sale of the shares of Common Stock upon the exercise of the Rights or pursuant to the Standby Purchase Agreement is referred to herein as the "Rights Offering." See "THE RIGHTS OFFERING." The Rights will expire at 5:00 p.m., New York City time, on July , 1996 (the "Expiration Date"). Holders of Rights are encouraged to consider carefully the exercise or sale of the Rights by the Expiration Date. After the Expiration Date, unexercised Rights will be null and void. See "THE RIGHTS OFFERING." NAR has agreed, pursuant to and subject to the terms and conditions of the Standby Purchase Agreement, to purchase, at the Subscription Price, any of the Underlying Shares that are not purchased through the exercise of the Subscription Privilege ("Unsubscribed Shares"). See "THE RIGHTS OFFERING -- STANDBY PURCHASE COMMITMENT." NAR plans to exercise all of the Rights distributed to it. Assuming that all of the holders of Rights exercise such Rights and that NAR exercises the Rights distributed to it, NAR would own approximately 53% of the Common Stock of the Company after the Rights Offering on a fully-diluted basis. Assuming that no Rights are exercised by the holders thereof but that NAR exercises its Rights and purchases all of the Unsubscribed Shares pursuant to the Standby Purchase Agreement, NAR would own approximately 69% of the Common Stock after the Rights Offering on a fully-diluted basis. REFERENCE IS MADE TO "RISK FACTORS" BEGINNING ON PAGE 5 WHICH CONTAINS MATERIAL INFORMATION THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE SECURITIES BEING OFFERED HEREBY. The Common Stock is traded on the American Stock Exchange (the "AMEX") under the symbol HNV. It is anticipated that the Rights will trade on the AMEX and in the over-the-counter market. There can be no assurance, however, that a market for the Rights will develop or as to the price at which the Rights will trade. The last reported sales price of the Common Stock on the American Stock Exchange on June , 1996 was $ per share. See "PRICE RANGE OF COMMON STOCK." THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is June , 1996. 3 NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OTHER PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE. ------------------------ AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-3 (together with any amendments thereto, the "Registration Statement") under the Securities Act with respect to the Shares. This Prospectus does not contain all the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules and regulations of the Commission and certain items of which may be contained in schedules and exhibits to the Registration Statement as permitted by the rules and regulations of the Commission and to which reference is hereby made for further information with respect to the Company and the Common Stock. Items of information omitted from this Prospectus but contained in the Registration Statement may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following regional offices of the Commission: 7 World Trade Center, New York, New York 10048, and Citicorp Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information can be inspected and copied at the public reference facilities maintained by the Commission referred to above. In addition, copies of such reports, proxy statements and other information concerning the Company may also be inspected and copied at the offices of the American Stock Exchange at 86 Trinity Place, New York, New York 10006 on which exchange the Common Stock is listed and traded. INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE The following documents filed by the Company with the Commission are incorporated herein by reference: (a) the Annual Report on Form 10-K for the fiscal year ended December 30, 1995, as amended by Amendments No. 1 and 2 thereto filed April 29, 1996 and April 30, 1996, respectively, and Amendment No. 3 thereto filed June , 1996; (b) the Quarterly Report on Form 10-Q for the quarterly period ended March 30, 1996, as amended by Amendment No. 1 thereto filed June , 1996; (c) the Current Report on Form 8-K dated May 25, 1995, as amended by Amendments No. 1 and 2 thereto dated April 16, 1996 and June , 1996, respectively, and (d) the Registration Statement on Form 8-B (Registration No. 1-12082) filed with the Commission on June 14, 1993. All documents subsequently filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of the offering of the Common Stock shall be deemed to be incorporated by reference in this Prospectus and to be a part hereof from the respective date of filing of each such document. Any statement contained in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or in any other subsequently filed document which also is, or is deemed to be, incorporated by reference herein modifies or supersedes such statement. Any such statement so modified or suspended shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. The Company will provide without charge to each person to whom this Prospectus is delivered, upon written or oral request, a copy of any or all of the documents incorporated by reference herein, other than certain exhibits to such documents. Requests for such documents should be directed to Debra A. Berliner, Vice President -- Investor Relations and Corporate Communications, Hanover Direct, Inc. at 1500 Harbor Boulevard, Weehawken, New Jersey 07087 or telephone number (201) 863-7300. 2 4 THE COMPANY The Company is a leading direct specialty retailer that publishes a portfolio of branded catalogs offering home fashions, general merchandise and apparel. The Company's 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 publishes Gump's(R), a leading upscale catalog of exclusive gifts from the well-known San Francisco retailer acquired by the Company in 1993. The Company also publishes catalogs in the kitchenware segment with Colonial Garden Kitchens(R), a specialty catalog featuring worksaving and lifestyle enhancing items for the kitchen and home, and Kitchen & Home(R), an upscale kitchen and home product catalog. The Company's apparel portfolio includes Tweeds(R), the European inspired women's fashion catalog, International Male(R), offering unique men's fashions with an international flair, Silhouettes, a women's fashion catalog featuring every day, workout, special occasion and career fashions for larger sized women, and Undergear(R), a leader in activewear, workout wear and fashion underwear for men. In 1995, the Company discontinued six catalogs, One 212(R), Simply Tops(R), Essence By Mail(R), Hanover House, Mature Wisdom(R) and Tapestry(R). The Company did not discontinue any catalogs during 1994 or 1993. The Company has no current plans to dispose of any further catalogs in 1996 but reviews its portfolio of catalogs as well as new opportunities to acquire or develop catalogs from time to time. In 1994, Hanover expanded its catalog offerings by entering into a licensing agreement (the "Sears Agreement") with Sears, Roebuck and Co. ("Sears") in which Hanover mails several versions of its catalogs to the more than 20 million mail order and credit card customers of Sears. In 1995, Hanover generated revenues of $81 million and operating income of $3 million from this venture. The Sears Agreement has an initial three-year term with automatic renewals thereafter unless commencing December 31, 1996 either party gives at least 12 months prior written notice that the agreement will terminate at the end of the initial term or the extended term. The Company is obligated to meet various operational performance standards under the Sears Agreement. If the Company is unable to meet these standards (after written notice and a 30-day cure period), Sears would be entitled to terminate the Sears Agreement. The Company is also entitled to terminate the Sears Agreement in certain circumstances, including if Sears fails to comply with any material provision of the Sears Agreement. The Company is currently not meeting certain of the operational standards and Sears has asked the Company for a plan to achieve the service levels and fill rates mandated by the Sears Agreement before the end of 1996. The Company believes it can achieve such levels and rates within such time period. During 1995, Hanover mailed approximately 370 million catalogs, a 2% reduction from the prior year, and had total revenues of approximately $750 million and a net operating loss of approximately $30 million. Hanover maintains a proprietary customer list currently containing approximately 18 million names of customers who have made purchases from at least one of Hanover's catalogs within the past 36 months (down from 19 million in 1994). Over 7 million of the names on the list represent customers who have made purchases from at least one of Hanover's catalogs within the last 12 months. In 1995, Hanover 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 a controlling interest in Austad's(R), a direct marketer of golf equipment and related apparel and accessories. In February 1996, the Company acquired the remaining interest in Austad's(R) in an asset exchange. NAR owns approximately 53% of the Common Stock of Hanover on a fully-diluted basis. NAR, a British Virgin Islands corporation, is a joint venture between the family of Alan G. Quasha, a director and the chairman of the board of Hanover, and Compagnie Financiere Richemont A.G., a Swiss public company engaged in luxury goods, tobacco and other businesses ("Richemont"). Hanover is successor in interest to The Horn & Hardart Company, a restaurant company founded in 1911, and Hanover House Industries, Inc., founded in 1934. Hanover's name was changed in 1993 to reflect its business focus on specialty catalog marketing. 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. 3 5 RECENT DEVELOPMENTS CREDIT ARRANGEMENTS In November 1995, the Company entered into a $75 million secured credit facility (the "Credit Facility") with Congress Financial Corporation ("Congress") consisting of a three-year revolving line of credit of up to $65 million and two two-year term loans aggregating $10 million. The revolving facility carries an interest rate of 1.25% above prime and the term loan carries an interest rate of 1.5% above prime. At March 30, 1996, the Company had approximately $57.1 million of outstanding borrowings under the revolving credit facility (including documentary and standby letters of credit) and approximately $9.7 million outstanding under the term loans. In April 1996, Congress provided the Company with an additional $4 million over the borrowing base formula up to the maximum $75 million limit of the Credit Facility until the closing of the Rights Offering. Under the Credit Facility, the Company is required to comply with certain restrictive debt covenants including maintaining minimum net worth of $80 million and working capital of $26 million as of December 30, 1995. In April 1996, these restrictive debt covenants were revised to $75 million and $21 million, respectively, in an amendment to the Credit Facility. In May 1996, the definitions of consolidated net worth and consolidated working capital were amended to take into account the $25 million advanced by NAR. In November 1995, Intercontinental Mining & Resources Incorporated, an affiliate of NAR ("IMR"), purchased the Company's 9.25% Senior Subordinated Notes due August 1, 1998 (the "9.25% Notes") from a third party in connection with the refinancing of the Company's indebtedness under the Credit Facility. In April 1996, IMR and the Trustee for the 9.25% Notes reduced the working capital requirements and net worth requirements contained in the Indenture relating to the 9.25% Notes by $5 million until the closing of the Rights Offering. In May 1996, the definitions of consolidated net worth and consolidated working capital were amended to take into account the $25 million advanced by NAR. PRE-FUNDING BY NAR The operating losses the Company experienced in the first quarter of 1996 are continuing in the second quarter of 1996. As a result of those losses as well as additional capital requirements of up to $3.0 million for the Company's new fulfillment facility in Roanoke, the Company increased the size of the Rights Offering from $40 million to $50 million and the Company requested that NAR advance and NAR has advanced $25 million against the exercise of all the Rights distributed to it and/or its commitment to purchase all of the Unsubscribed Shares. The Company has executed a subordinated promissory note in the amount of $25 million (the "NAR Promissory Note"). The Company will repay to NAR any amounts outstanding under the NAR Promissory Note on the earlier of December 31, 1996 or the completion of the Rights Offering. The NAR Promissory Note is subordinate to the Credit Facility. ACQUISITIONS AND DISPOSITIONS In May 1995, the Company acquired 67.5% of the outstanding shares of Austad's Holdings, Inc. ("AHI"), which owned The Austad Company ("TAC"), the publisher of the Austad's(R) catalog, featuring golf equipment, apparel and gifts. The Company acquired the remaining interest in AHI in February 1996 by virtue of the surrender by David Austad and certain family members (the "Austad Family") to AHI of their AHI shares, amounting to 32.5% of the outstanding shares, and the payment by the Austad Family of approximately $1.2 million (subject to certain post-closing adjustments) to the Company. In return, the Austad Family received 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(R) stores under license from AHI. The license grants Mr. Austad exclusive retail rights to the Austad's(R) name in 37 states and Canada. AHI retains all direct marketing and other rights. In April 1996, the Company sold the assets of Leichtung Workshops(R), a woodworking and hobby catalog, for approximately $900,000 in cash and short-term notes. 4 6 RISK FACTORS In addition to all the other information contained in this Prospectus and the documents incorporated by reference, prospective purchasers should consider the risk factors set forth below prior to deciding whether to exercise or sell the Rights. OPERATING LOSSES; FUTURE OPERATING RESULTS The Company has recently experienced operating losses. The Company reported a net loss of $9.5 million, or $(.10) per share, for the quarter ended March 30, 1996 compared to a net loss of $4.9 million, or $(.05) per share, in the same period in the prior year. The Company reported a net loss of $30 million, or $(.32) per share, for the year ended December 30, 1995 compared to net income of $14.8 million, or $.16 per share, in the same period in the prior year. Revenues decreased in the quarter ended March 30, 1996 to $166 million from $177 million for the same period in 1995. Revenues decreased in 1995 to $750 million from $769 million in 1994. The Company recorded a loss from operations of $7.7 million in the first quarter of 1996, or (4.7)% of revenues, compared to a loss from operations of $4.1 million, or (2.4)% of revenues, for the same period in 1995. The Company recorded a loss from operations of $22.6 million in 1995, or (3)% of revenues, compared to income from operations of $16 million, or 2.1% of revenues, for the same period in the prior year. As a result of the operating losses incurred in 1995, the Company's financial condition deteriorated. The Company's working capital and long term debt changed from $58.5 million and $35.9 million, respectively, at December 31, 1994 to $28.8 million and $57.3 million, respectively, at December 30, 1995. At March 30, 1996, working capital and long term debt increased to $41.4 million and $79.2 million, respectively, largely due to additional borrowings under the Credit Facility with Congress. The net loss in the first quarter of 1996 was primarily a result of an increase in paper costs, telemarketing and fulfillment costs due to weather related issues and continued operating problems in the new Roanoke fulfillment center and an increase in inventory write-downs while the net loss in 1995 was primarily the result of the cumulative impact of the significant increases in postage and paper prices and weak consumer demand. See "RISK FACTORS -- INCREASES IN COSTS OF MAILING AND PAPER" and "-- CONSUMER SPENDING." In addition, the Company also incurred costs in connection with the consolidation of facilities into its new Roanoke, Virginia fulfillment center and the upgrade of its management information systems. See "RISK FACTORS -- NEW FULFILLMENT FACILITIES" and "-- COMPUTER SYSTEMS CONVERSION." Whether the Company is able to return to positive net income will depend on its ability to increase catalog sales and to effectively monitor and control costs. There can be no assurance that the Company's future operations will generate net income. Furthermore, future operating results depend upon many factors, the unfavorable outcome of which would adversely affect the Company's results of operations. These factors include general economic conditions, the ability of the Company to continue to attract and retain customers successfully, the level of competition and the Company's ability to successfully identify, forecast and respond to customer preferences and fashion trends. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Company's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 1996, as amended, and in the Company's Annual Report on Form 10-K for the fiscal year ended December 30, 1995, as amended. TIGHTENING OF VENDOR CREDIT As a result of the operating losses mentioned above (see "RISK FACTORS -- OPERATING LOSSES, FUTURE OPERATING RESULTS") coupled with a very difficult year for retailers with numerous Chapter 11 filings occurring, the Company experienced a tightening of vendor credit in the fourth quarter of 1995 which impacted the Company's ability to obtain merchandise on a timely basis. This resulted in higher back order levels (unfilled orders) and increased fulfillment costs which negatively impacted the Company's operating results in that quarter. Accordingly, the Company's back order level increased from $10.3 million to $14.6 million from December 31, 1994 to December 30, 1995 and from $10.0 million to $16.0 million from April 1, 1995 to March 30, 1996. These back order levels have negatively affected initial order fulfillment rates which has resulted in higher fulfillment expense due to increased split shipments and warehouse handling costs experienced in 1996. Fulfillment costs (telemarketing, distribution, outbound transportation and credit 5 7 card commission costs) increased from $81.9 million to $91.4 million and from $22.3 million to $23.9 million for the same periods, respectively. Also, in March 1996, the Company concluded that its recent operating results would have a further negative impact on the Company's ability to conduct business on normal trade terms. The Company believes that upon completion of the Rights Offering the Company will return to normal trade terms with all suppliers and will have adequate capital to support its operation. However, there can be no assurance that upon the completion of the Rights Offering normal trade terms will resume nor that the Company's capital will be adequate to support its operations. See "RISK FACTORS -- DEPENDENCE ON SUPPLIERS." LIQUIDITY As of March 30, 1996, the Company had borrowed approximately $66.8 million of the $68.0 million available under the Credit Facility and had approximately $3 million of cash on hand. In April 1996, Congress provided the Company with an additional $4 million over the borrowing base formula up to the maximum $75 million limit of the Credit Facility until the closing of the Rights Offering. In addition, Congress reduced the working capital and net worth requirements contained in the Credit Facility by $5 million for the same period. In May 1996, the definitions of consolidated net worth and consolidated working capital were amended to take into account the $25 million advanced by NAR. Although the Company believes that it will not sustain losses that must be funded with the proceeds of the Rights Offering and that, accordingly, the Rights Offering proceeds will be available to reduce the amounts outstanding under the Credit Facility, there is no assurance that the proceeds of the Rights Offering will be available for such purposes. See "THE COMPANY" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Form 10-Q for the quarterly period ended March 30, 1996 and in the Form 10-K for the fiscal year ended December 30, 1995. If the Company continues to sustain losses that must be funded with the proceeds of the Rights Offering, the Company may be in default under the Credit Facility and would accordingly be required to seek waivers therefrom and amendments thereto. In addition, the Company may be required to borrow additional funds from public or private sources on a long- term or short-term basis or to sell assets. If it is not successful in any of these endeavors, the Company may ultimately need to seek protection under applicable laws from its creditors. However, the Company is not pursuing any of these alternatives at this time. CAPITAL INTENSITY OF MAIL ORDER CATALOG BUSINESS; NEED FOR SELF-FUNDING As a general matter, the capital intensity of the mail order catalog business has increased in recent months requiring companies to make a permanent investment in working capital to fund systems to increase customer service, warehousing to speed delivery time, inventory to increase fill rates and credit to increase customer response rates in order to be competitive. The mail order catalog industry's fixed costs have increased in recent years which has resulted in higher break even rates than previously experienced. At the same time, the sources of financing for mail order catalog companies have shrunk due to the number of bankruptcies in the industry and the high percentage of intangible assets owned by such companies to which traditional lenders frequently will not ascribe value as collateral for purposes of establishing lending limits, requiring such companies to self-fund growth. There is no assurance that the Company will have the funds to invest in working capital or the resources to fund self-growth or to take advantage of opportunities in the industry. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Form 10-Q for the quarterly period ended March 30, 1996 and in the Form 10-K for the fiscal year ended December 30, 1995. IMPORTANCE OF DOMESTICATIONS(R) The Company's Domestications(R) catalog is one of the nation's leading specialty home textile catalogs. It had revenues of approximately $311 million in 1993, which constituted approximately 48% of the Company's revenues in 1993, and revenues of approximately $361 million in 1994, which constituted approximately 47% 6 8 of the Company's revenues in 1994. Domestications(R) revenues were approximately $282 million in 1995, which constituted approximately 38% of the Company's revenues in 1995. Domestications'(R) product margin, which decreased 5 percentage points from December 31, 1995 to March 30, 1996, was significantly impacted by the higher postage and paper costs experienced industry-wide as well as by additional costs in connection with the move of its fulfillment operations into the Company's new Roanoke, Virginia facility. Additionally, Domestications'(R) product margin was adversely impacted by product mix changes, increased promotional activities to maintain its competitive position and higher inventory write-downs. A further decrease in revenues or profitability of Domestications(R) would have a material adverse effect upon the Company's financial position and results of operations. INCREASES IN COSTS OF MAILING AND PAPER The Company mails its catalogs and ships most of its merchandise through the United States Postal Service. In 1995, catalog mailing and product shipment expenses represented approximately 18% of revenues as compared to approximately 15% of revenues in 1994. In January 1995, the United States Postal Service increased postage rates by approximately 14% to 18% which resulted in an increase of the Company's average cost of mailing a catalog by 15% as compared to 1994. The Company also experienced record price increases in 1995 for 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 43% as compared to 1994. Paper costs represented approximately 8% of revenues in 1995 as compared to 7% in 1994. These cost increases (which aggregated $18 million in 1995) adversely impacted the Company's margins and earnings in 1995. Although it is generally the policy of the Company to recover the costs of shipping and handling from its customers, in 1995 it was unable to fully recover such costs. Other than an anticipated 2% to 3% reduction in postal rates on an annualized basis as a result of a reclassification of postal rates that will become effective on July 1, 1996, the Company does not expect a material reduction in these cost levels. Further increases in postal rates or paper costs would have a material negative impact on the Company's results of operations to the extent that the Company is unable to offset such increase by raising selling prices or by implementing more efficient mailing, delivery and order fulfillment systems. INEFFICIENCIES IN CONNECTION WITH NEW FULFILLMENT FACILITIES In 1995, the Company completed construction of its 530,000 square foot facility on a site in Roanoke, Virginia to handle all of Domestications(R) warehouse and fulfillment needs. The total cost of this 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. As a result, all of Domestications(R) warehouse and fulfillment operations were consolidated from several locations into one facility. The Company also completed the consolidation of its apparel catalogs into its Roanoke, Virginia apparel facility in 1995. The consolidation of the fulfillment operations of Gump's(R) from DeSoto, Texas and Improvements(R) from Cleveland, Ohio to other Company facilities was also completed in 1995. The relocation of Austad's(R) fulfillment operations from Sioux Falls, South Dakota to other Company facilities will be completed by mid-1996. The Company experienced operating inefficiencies and down-time, costs and expenses related to maintaining duplicate facilities, moving expenses, lease termination fees and severance expenses and start-up problems in conjunction with bringing various warehouse and distribution facilities into service in 1995 and incurred approximately $2.7 million in costs related thereto. The Company believes it will continue to experience inefficiencies in early 1996. Although the Company has taken and is taking actions which it believes will lead to more efficient operations, there is no assurance that the Company will be able to achieve any improvement in efficiency or reduction in costs. In addition, although the Company maintains business interruption insurance for its primary facilities and other insurance for its business, a partial or total loss of one or more of these consolidated facilities may have a material adverse effect upon the Company's financial position and results of operations. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS" in the Quarterly Report on form 10-Q for the quarterly period ended March 30, 1996 and in the Annual Report on Form 10-K for the fiscal year ended December 30, 1995. 7 9 COSTS ASSOCIATED WITH COMPUTER SYSTEMS CONVERSION 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. 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. The Company brought two catalogs on-line in 1994 and eight additional catalogs on-line in 1995 (during which time it maintained its existing systems for its other catalogs). The Company plans to bring the balance of its catalogs on-line in 1996. The Company will incur approximately $3 million in additional MIS costs in 1996 due primarily to non-cash charges relating to amortization of deferred software costs. The new management information systems have been designed to meet the Company's requirements as a high volume publisher of multiple catalogs and to permit the Company to achieve substantial economies of scale and improvements in the way its financial, merchandising, inventory, telemarketing, fulfillment and accounting functions are performed. Until the new systems are installed Company-wide, the Company will not achieve the full benefits of the new systems. There have been costs associated with maintaining duplicate facilities and certain inefficiencies and difficulties, including lower levels of customer service, in working with the new systems and maintaining duplicate systems as the transition process continues. There is no assurance that the Company will be able to overcome these difficulties and inefficiencies without them having an adverse affect on operations or that the new systems will be implemented as currently scheduled or that they will achieve the goals established by the Company. CONSUMER SPENDING; WEAKNESS IN CONSUMER DEMAND The Company's operations recently have been affected by the weak retail environment in most of the Company's business segments. The Company's product margin at March 30, 1996 was approximately 6.4% and at December 30, 1995 was approximately 6.7%. Product margins have decreased due to greater promotional expenses as a result of generally weak consumer demand. The success of the Company's operations depends upon a number of factors relating to consumer spending, including future economic conditions affecting disposable consumer income such as employment, business conditions, interest rates and taxation. There can be no assurance that weak economic conditions or changes in the retail environment or other economic factors that impact the level of consumer spending would not have a material adverse impact on the Company. CREDIT RISKS Several of the Company's catalogs, including Domestications(R), International Male(R) and Gump's(R), 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. In addition, the Company increasingly offers customers deferred billing arrangements reflecting a trend in the mail order catalog industry. The use of credit cards and deferred billing arrangements could be costly to the Company since it may need to fund such charges under the Credit Facility. The Company's bad debt expense at March 30, 1996 was approximately $1.2 million while at December 30, 1995 it was approximately $4.7 million. There is no assurance that the use of credit cards and deferred billing arrangements will not lead to higher bad debt expenses. COSTS ASSOCIATED WITH DISCONTINUED CATALOGS The Company discontinued six catalogs in 1995 which generated revenues of $87.8 million in 1995 and $117.9 million in 1994 as a result of operating losses of $20 million in 1995 (including a provision for the costs associated with discontinuing these catalogs of $8.6 million) and $4.7 million in 1994 and poor future prospects for these catalogs. As a result of discontinuing catalogs, the Company incurs costs related to write-downs of merchandise in the discontinued catalogs to net realizable value at the time of discontinuance. Such costs are estimated at the time of discontinuance based on factors known at the time. As additional information becomes known, the Company adjusts such estimates. The Company may discontinue additional catalogs although it currently has no plans to do so. 8 10 CHALLENGES ASSOCIATED WITH RECENT ACQUISITIONS AND NEW BUSINESS DEVELOPMENTS The Company acquired certain catalogs in 1995. See NOTE 2 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 30, 1995. None of these catalogs except Improvements(R) and Leichtung Workshops(R) was profitable at the time of its acquisition by the Company. In addition, these acquisitions present relatively new market niches for the Company and the Company must successfully integrate and develop these newly acquired companies. There can be no assurance that the Company will be able to successfully integrate these new businesses or improve their profitability. ADJUSTMENTS IN CARRYING VALUE AND USEFUL LIFE The acquisitions of Improvements(R), Leichtung Workshops(R), The Safety Zone(R) and Austad's(R) 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 value 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 Company assesses the carrying value and the economic useful life of the goodwill on an ongoing basis based on such business' prior and future operating income and estimated net cash flows. There can be no assurance that the Company will not adjust the carrying value and the economic useful life of such goodwill in the future. SEARS AGREEMENT PERFORMANCE STANDARDS In January 1994, the Company entered into the Sears Agreement to produce specialty catalogs for the more than 20 million mail order and credit card customers of Sears. In 1994 and 1995, Hanover generated revenues of $71 million and $81 million, respectively, and operating income of $2.9 million and $3 million, respectively, from this venture. The Sears Agreement contains performance standards which must be met by the Company and which allow Sears to terminate the Sears Agreement upon non-compliance. There can be no assurance that the Company will be able to meet such performance standards. COMPETITION The mail order catalog business is highly competitive. 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. A number of the Company's competitors have substantially greater financial, distribution and marketing resources than the Company. In addition, due to the increased fixed costs experienced by the mail order catalog industry in recent years, the Company may be at a competitive disadvantage as compared to companies with substantially greater financial resources which will have a greater ability to meet these costs than the Company will have due to its limited financial resources. See "RISK FACTORS -- LIQUIDITY." The recent substantial sales growth in the direct marketing industry has encouraged the entry of many new competitors and an increase in competition from established companies. 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. As a result, the fourth quarter is increasing in importance to the Company's results of operations. In the fourth quarter of 1995, the Company observed that customers waited until later in the quarter to order merchandise from the Company's catalogs in order to benefit from promotions, following a trend which affected the retail industry as a whole. In addition, many of such customers elected to take advantage of the Company's deferred billing arrangements or to use the Company's credit cards. Accordingly, and for other reasons that the Company is not able to foresee, there can be no assurance that the Company's fourth quarter operations will be successful. 9 11 DEPENDENCE ON SUPPLIERS Although the Company as a whole is generally not dependent on any one or small group of suppliers, several of its major catalogs are dependent on one or a small group of suppliers. There is no assurance that such suppliers will continue to provide the Company with the quantities of merchandise on the terms currently offered to the Company or that the Company will be able to find alternative suppliers on competitive terms. In addition, the Company's profitability depends upon its obtaining competitive terms from the merchandise vendors for its catalogs. In the fourth quarter of 1995, due to concerns over continuing operating losses at the Company and questions from vendors concerning the Company's continuing viability in light of the very difficult year for retailers with numerous Chapter 11 filings occurring, certain of such vendors tightened the terms available to the Company which resulted in higher back order levels and increased fulfillment costs which negatively impacted the Company's operating results in that quarter. This trend continued in early 1996 after several additional retail companies filed Chapter 11. The Company believes that upon the completion of the Rights Offering, the Company will return to normal trade terms with all suppliers; however, if the Company continues to experience operating losses, the Company may not be able to obtain such terms or sufficient quantities of merchandise on a cost-effective and timely basis to satisfy customer demand. FOREIGN SOURCING Approximately 7% of the Company's merchandise is purchased directly from foreign suppliers located principally in China, Hong Kong, India and Portugal. Such suppliers require the Company to post letters of credit relating to the merchandise purchased by the Company which increases the Company's cost of capital. The Company's business is subject to the risks generally associated with conducting business abroad, including adverse fluctuations in currency exchange rates (particularly those of the U.S. dollar against certain foreign currencies), changes in import duties or quotas, the imposition of taxes or other charges on imports, disruptions or delays in shipments and transportation, labor disputes and strikes. The Company minimizes such risks by making foreign purchases in U.S. dollars and does not generally utilize hedging instruments. The occurrence of any one or more of the foregoing could adversely affect the Company's financial position or results of operations. DEPENDENCE ON MANAGEMENT The success of the Company's operations depends in part on its ability to attract and retain skilled management personnel. The Company recently retained a new President and Chief Executive Officer, Rakesh K. Kaul, who is building a management team. As a result of the turmoil in the mail order catalog business due to the operating difficulties encountered by catalog operators in 1995, including record paper and postage price increases, management turnover at the Company and within the entire industry has been high. The Executive Vice President, Secretary and General Counsel has resigned and the Executive Vice President and Chief Financial Officer has indicated his intention to resign for personal reasons but has agreed to stay with the Company until his replacement can be found. The Company has commenced a search for a new Chief Financial Officer. In addition, the Company's Chief Information Officer has resigned. The Company has adopted various retention programs and the Company believes it will not have problems finding acceptable replacements. TAX LOSS CARRYFORWARDS 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 give that sufficient taxable income will be generated for utilization of NOLs and reversals of temporary differences. See NOTE 10 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 30, 1995. 10 12 RESTRICTIONS ON DIVIDENDS The Company is restricted from paying dividends on its Common Stock or from acquiring any of its capital stock by certain debt covenants contained in agreements to which the Company is a party. Cash dividends have not been paid on the Common Stock since 1967. RELATIONSHIP WITH NAR NAR currently owns approximately 53% of the Company's outstanding Common Stock on a fully diluted basis. Assuming that all of the holders of Rights exercise such Rights and that NAR exercises the Rights distributed to it, NAR would own approximately 53% of the Common Stock of the Company after the Rights Offering on a fully-diluted basis. Assuming that no Rights are exercised by the holders thereof but that NAR exercises its Rights and purchases all of the Unsubscribed Shares pursuant to the Standby Purchase Agreement, NAR would own approximately 69% of the Common Stock after the Rights Offering on a fully- diluted basis. Although pursuant to a stock purchase agreement between the Company and NAR, NAR has agreed to nominate only six of the Company's eleven Directors until July 1996, NAR will have the power to elect the entire Board of Directors and, except as otherwise provided by law or the Company's Certificate of Incorporation, to approve any action requiring shareholder approval without a shareholders' meeting. DEPENDENCE ON NAR As the Company's financial performance has deteriorated, the Company has become increasingly dependent on NAR and its affiliates for financial support. In November 1995, IMR, an affiliate of NAR, purchased the 9.25% Notes from a third party in connection with the refinancing of the Company's indebtedness under the Credit 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 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 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. The Company and NAR have entered into the Standby Purchase Agreement, pursuant to which NAR will be required, subject to the fulfillment of various terms and conditions thereof, to purchase all Unsubscribed Shares in the Rights Offering. If all of the Rights are exercised, NAR will not be required to purchase any of the Common Stock issuable upon the exercise of the Rights. As compensation to NAR for its commitment under the Standby Purchase Agreement, the Company has agreed to pay to NAR, on the Closing Date or at such other time and date as NAR and the Company may agree in writing, certain fees described more fully under the caption "THE RIGHTS OFFERING -- STANDBY PURCHASE COMMITMENT." NAR HAS ADVANCED $25 MILLION AGAINST THE EXERCISE OF ALL OF THE RIGHTS DISTRIBUTED TO IT AN/OR ITS COMMITMENT TO PURCHASE ALL OF THE UNSUBSCRIBED SHARES. SEE "RECENT DEVELOPMENTS -- PRE-FUNDING BY NAR." There is no assurance that NAR or its affiliates will continue to support the Company financially should the Company need such support since NAR and its affiliates are under no obligation to do so. There is no assurance that should NAR or its affiliates cease to provide such financial support, it would not have a material adverse impact on the Company. POTENTIAL CONFLICTS OF INTEREST Alan G. Quasha, a director and chairman of the Board of Directors of the Company, may be deemed to be a beneficial owner of a substantial interest in NAR, the majority shareholder of the Company. There can be no assurance that no conflicts of interest will arise as a result of this affiliated relationship. 11 13 SHARES ELIGIBLE FOR FUTURE SALE In the future, NAR will be able to sell shares of Common Stock owned by it in the open market pursuant to an exemption from registration under the Securities Act or by causing the Company to file a registration statement with respect to such shares. NAR has "piggyback" and demand registration rights as provided in a Registration Rights Agreement between it and the Company. Sales of substantial amounts of Common Stock in the public market could adversely affect the market price. NAR has advised the Company that it does not currently intend to sell any shares of voting stock of the Company owned by it. UNCERTAIN MARKET FOR RIGHTS; MARKET CONDITIONS; MARKET CONSIDERATIONS Because the Rights are new securities, the trading market for the Rights may be volatile. Moreover, there can be no assurance that a market for the Rights will develop or as to the price at which the Rights will trade. The Subscription Price of the Rights has been determined by the Board of Directors of the Company and represents a discount to the market price of the Common Stock at the date of this Prospectus. However, there can be no assurance that the market price for the Common Stock will not decline during the subscription period or that, following the Expiration Date, a subscribing Rights holder will be able to sell shares of Common Stock purchased in the Rights Offering at a price equal to or greater than the Subscription Price. When made, the election of a Rights holder to exercise Rights in the Rights Offering is irrevocable. Moreover, until certificates are delivered, subscribing Rights holders may not be able to sell the Common Stock that they have purchased in the Rights Offering. Certificates representing shares of Common Stock purchased pursuant to the Subscription Privilege will be delivered to subscribers as soon as practicable after the Expiration Date. No interest will be paid to Rights holders on funds delivered to the Subscription Agent pursuant to the exercise of Rights pending delivery of shares of Common Stock acquired upon exercise of Rights. IMPACT OF RIGHTS OFFERING ON HOLDERS OF COMMON STOCK; DILUTION The Rights entitle the holders of shares of Common Stock and Convertible Preferred Stock to purchase shares of Common Stock at a price below the prevailing market price of the Common Stock immediately prior to the commencement of the Rights Offering. Holders of shares of Common Stock and Convertible Preferred Stock who exercise their Rights will preserve their proportionate interest in their equity ownership and voting power of the Company on a fully-diluted basis. Holders who do not exercise their Rights will experience a decrease in their proportionate interest in the equity ownership and voting power of the Company. The sale of the Rights may not compensate a holder for all or any part of the reduction in the market value of such stockholder's shares of Common Stock, if any, resulting from the Rights Offering. Stockholders who do not exercise or sell their Rights will relinquish any value inherent in the Rights. Assuming all of the Rights are exercised and based on 93,590,696 shares of Common Stock, 78,300 shares of Series A Preferred Stock and 634,900 shares of Series B Preferred Stock outstanding on June , 1996, the consummation of the Rights Offering would result (on a pro forma basis as of such date) in an increase of approximately shares of Common Stock. NAR owns approximately 53% of the Common Stock as of such date on a fully diluted basis. Assuming that all of the holders of the Rights exercise such Rights and that NAR exercises the Rights distributed to it, NAR would own approximately 53% of the Common Stock of the Company after the Rights Offering on a fully diluted basis. Assuming that no Rights are exercised by the holders thereof but that NAR exercises its Rights and purchases all of the Unsubscribed Shares pursuant to the Standby Purchase Agreement, NAR would own approximately 69% of the Common Stock after the Rights Offering on a fully diluted basis. CONSTRUCTIVE DISTRIBUTIONS UNDER THE FEDERAL TAX CODE The distribution of Rights pursuant to the Rights Offering has been designed so as not to result in a taxable distribution of property for federal income tax purposes to the Holders of shares of either the Common or Convertible Preferred Stock. However, the provisions of the Internal Revenue Code and the Treasury Regulations issued thereunder relating to the treatment of distributions such as the Rights Offering are not clear as to certain aspects of the analysis required to avoid such a taxable distribution, and the tax 12 14 consequences of the Rights Offering also may be affected by the occurrence of future events. Accordingly, counsel to the Company is unable to render an opinion as to the applicability of such provisions to the Rights Offering. See "CERTAIN FEDERAL TAX CONSEQUENCES TO HOLDER -- CONSTRUCTIVE DISTRIBUTIONS UNDER SECTION 305 OF THE CODE." USE OF PROCEEDS The proceeds available to the Company from the Rights Offering, including NAR's standby purchase commitment, after payment of approximately $1,665,000 of fees and expenses incurred in connection with the Rights Offering, will be approximately $48,335,000. The Company intends to use such net proceeds as follows: (i) to pay all principal and interest on the 9.25% Notes outstanding and owned by IMR, an affiliate of NAR, the Company's majority shareholder, (ii) to repay certain amounts outstanding under the Credit Facility with Congress on the Closing Date, (iii) to repay the amounts outstanding under the NAR Promissory Note, and (iv) for other general corporate purposes. In November 1995, the Company entered into the Credit Facility with Congress consisting of a three-year revolving line of credit of up to $65 million and two two-year term loans aggregating $10 million. The revolving facility carries an interest rate of 1.25% above prime and the term loan carries an interest rate of 1.5% above prime. At March 30, 1996, the Company had approximately $57.1 million of outstanding borrowings under the revolving line of credit (including documentary and standby letters of credit) and approximately $9.7 million outstanding under the term loans. The rates of interest related to the revolving line of credit and the term loans were 9.50% and 9.75%, respectively, at March 30, 1996. In November 1995, IMR, an affiliate of NAR, purchased the 9.25% Notes from a third party in connection with the refinancing of the Company's indebtedness under the Credit Facility. At March 30, 1996, the Company had $14 million of 9.25% Notes outstanding and owned by IMR. Pending any specific application, the net proceeds will be added to working capital and invested in short-term interest-bearing obligations. 13 15 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company at March 30, 1996 and as adjusted to reflect the net proceeds of approximately $48.3 million from the sale of the 50,000,000 shares of the Common Stock offered by the Company assuming a Subscription Price of $1.00. See "USE OF PROCEEDS."
AT MARCH 30, 1996 ------------------------- ACTUAL AS ADJUSTED --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Long-term debt(a): Congress Revolving Credit Facility................................. $ 24,103 $ -- Revolving Term Notes............................................... 20,000 20,000 Term Financing Facility............................................ 9,797 9,797 8.76% Mortgage Note Payable due 2003............................... 1,703 1,703 Industrial Revenue Bonds due 2003.................................. 8,000 8,000 6% Mortgage Notes Payable due 1998................................. 3,098 3,098 9.25% Senior Subordinated Notes due 1998........................... 14,000 -- 7 1/2% Convertible Subordinated Debentures due 2007................ 751 751 Other.............................................................. 19 19 --------- --------- Total long-term debt....................................... 81,471 43,368 Shareholders' equity: 6% Series A Convertible Additional Preferred Stock, $10 stated value, authorized 5,000,000 shares; issued 78,300 shares in 1996............................................................ 806 806 Series B Convertible Additional Preferred Stock, $.01 par value, authorized and issued 634,900 shares in 1996.................... 5,606 5,606 Common Stock, $.66 2/3 par value, authorized 150,000,000 shares; issued 93,757,045 in 1995 and 93,516,651 shares outstanding; 143,757,045 shares issued and 143,516,651 outstanding, as adjusted(b)(c).................................................. 62,504 95,171 Capital in excess of par value(c).................................. 255,397 271,065 Accumulated deficit................................................ (240,868) (240,868) Less: Treasury stock, at cost (1,157,061 shares at March 30, 1996)....... (3,345) (3,345) Notes receivable from sale of Common Stock......................... (1,962) (1,962) Deferred compensation.............................................. (277) (277) --------- --------- Total shareholders' equity...................................... 77,861 126,861 --------- --------- Total capitalization....................................... $ 159,332 $ 170,229 ========= =========
- --------------- (a) The Company intends to repay borrowings under the Credit Facility from Congress with proceeds in excess of the repayment of the 9.25% Note and the NAR Promissary Note. (b) Excludes 5,707,233 shares of Common Stock issuable upon exercise of outstanding options and warrants exercisable within 60 days of June , 1996. (c) The gross proceeds from the Rights Offering are $50 million and the Company estimates incurring approximately $1.7 million in fees associated with the filing, resulting in net proceeds of approximately $48.3 million. 14 16 DIVIDEND POLICY The Company is restricted from paying dividends on its Common Stock or from acquiring any of its capital stock by certain debt covenants contained in agreements to which the Company is a party. Cash dividends have not been paid on the Common Stock since 1967. PRICE RANGE OF COMMON STOCK The Common Stock is traded on the AMEX under the symbol "HNV." The following table sets forth the high and low sale prices of the Common Stock reported on the AMEX Composite Tape for the periods shown.
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 1996 First Quarter.............................................. 1 13/16 1 1/8 Second Quarter (through June )...........................
As of June , 1996, there were approximately 4,825 holders of record of the Common Stock. On June , 1996, the last reported sale price of the Common Stock on the AMEX was $ per share. 15 17 THE RIGHTS OFFERING THE RIGHTS The Company is distributing transferable Rights, at no cost, to the record holders ("Holders") of the Common Stock and Convertible Preferred Stock outstanding as of the Record Date. The Company will distribute . Rights for each share of Common Stock held of record on the Record Date, . Rights for each share of Series A Preferred Stock held of record on the Record Date and . Rights for each share of Series B Preferred Stock held of record on the Record Date. The number of Rights distributable for each share of Series A Preferred Stock and Series B Preferred Stock held on the Record Date was calculated assuming such shares had been converted into Common Stock on the Record Date in accordance with the terms thereof. The Rights will be evidenced by transferable Subscription Certificates. An aggregate of up to approximately Underlying Shares will be sold upon exercise of the Rights or pursuant to the Standby Purchase Agreement between the Company and NAR. On , 1996 (the "Closing Date"), NAR shall purchase from the Company all Unsubscribed Shares pursuant to its standby purchase commitment. See "THE RIGHTS OFFERING -- STANDBY PURCHASE COMMITMENT." No fractional Rights or cash in lieu thereof will be issued or paid. The number of Rights distributed to each Holder will be rounded up to the nearest whole number. No Subscription Certificate may be divided in such a way as to permit the holder to receive a greater number of Rights than the number to which such Subscription Certificate entitles its holder, except that a depositary, bank, trust company, and securities broker or dealer holding shares of Common Stock on the Record Date for more than one beneficial owner may by delivering a written request by 5:00 p.m., New York City time, on , 1996 and, upon proper showing to the Subscription Agent, exchange its Subscription Certificate to obtain a Subscription Certificate for the number of Rights to which all such beneficial owners in the aggregate would have been entitled had each been a Holder on the Record Date. The Company reserves the right to refuse to issue any such Subscription Certificate if such issuance would be inconsistent with the principle that each beneficial owner's holders will be rounded up to the nearest whole Right. Because the number of the Rights distributed to each Holder will be rounded up to the nearest whole number, beneficial owners of Common Stock who are also the record holders of such shares will receive more Rights under certain circumstances than beneficial owners of Common Stock who are not the record holders of their shares and who do not obtain (or cause the record owner of their shares of Common Stock to obtain) a separate Subscription Certificate with respect to the shares beneficially owned by them, including shares held in an investment advisory or similar account. To the extent that record holders of Common Stock or beneficial owners of Common Stock who obtain a separate Subscription Certificate receive more Rights, they will be able to subscribe for more shares pursuant to the Subscription Privilege. EXPIRATION DATE The Rights will expire at 5:00 p.m., New York City time, on the Expiration Date. After the Expiration Date, unexercised Rights will be null and void. The Company will not be obligated to honor any purported exercise of Rights received by the Subscription Agent after the Expiration Date, regardless of when the documents relating to such exercise were sent, except pursuant to the Guaranteed Delivery Procedures described below. SUBSCRIPTION PRIVILEGE Pursuant to the Subscription Privilege, each Right will entitle the holder thereof to receive, upon payment of the Subscription Price, one share of Common Stock. Certificates representing shares of Common Stock purchased pursuant to the Subscription Privilege will be delivered to subscribers as soon as practicable after the Expiration Date. In the event that the conditions precedent to NAR's obligation to exercise its standby purchase commitment are not satisfied or otherwise waived by NAR, the Subscription Price shall be returned to the subscribers as soon as practicable after the Expiration Date and no Underlying Shares will be sold by the Company. However, in the event that NAR waives the conditions precedent that are not satisfied, it will 16 18 have a purchase commitment for all of the Unsubscribed Shares. See "THE RIGHTS OFFERING -- STANDBY PURCHASE COMMITMENT." EXERCISE OF RIGHTS Rights may be exercised by delivering to American Stock Transfer & Trust Company, as the Subscription Agent, on or prior to 5:00 p.m., New York City time, on the Expiration Date, the properly completed and executed Subscription Certificate evidencing such Rights with any required signatures guaranteed, together with payment in full of the Subscription Price for each Underlying Share subscribed for pursuant to the Subscription Privilege. Such payment in full must be by (a) check or bank draft drawn upon a U.S. bank or postal, telegraphic or express money order payable to American Stock Transfer & Trust Company, as Subscription Agent, or (b) wire transfer of funds to the account maintained by the Subscription Agent for such purpose at Bank, Account No. ; ABA No. . The Subscription Price will be deemed to have been received by the Subscription Agent only upon (i) clearance of any uncertified check, (ii) receipt by the Subscription Agent of any certified check or bank draft drawn upon a U.S. bank or any postal, telegraphic or express money order or (iii) receipt of good funds in the Subscription Agent's account designated above. If paying by uncertified personal check, please note that the funds paid thereby may take at least five business days to clear. Accordingly, holders of Rights who wish to pay the Subscription Price by means of uncertified personal check are urged to make payment sufficiently in advance of the Expiration Date to ensure that such payment is received and clears by such date and are urged to consider payment by means of certified or cashier's check, money order or wire transfer of funds. The address to which the Subscription Certificates and payment of the Subscription Price should be delivered is: AMERICAN STOCK TRANSFER & TRUST COMPANY By Mail: By Facsimile By Hand: American Stock Transfer & Trust Transmission: American Stock Transfer & Trust Company (718) 234-5001 Company 40 Wall Street, 46th Floor 40 Wall Street, 46th Floor New York, New York 10005 New York, New York 10005
To Confirm Receipt and For General Information: (Call Collect) (212) 936-5100 (718) 921-8200 If a Rights holder wishes to exercise Rights, but time will not permit such holder to cause the Subscription Certificate or Subscription Certificates evidencing such Rights to reach the Subscription Agent on or prior to the Expiration Date, such Rights may nevertheless be exercised if all of the following conditions (the "Guaranteed Delivery Procedures") are met: (i) such holder has caused payment in full of the Subscription Price for each Underlying Share being subscribed for pursuant to the Subscription Privilege to be received (in the manner set forth above) by the Subscription Agent on or prior to the Expiration Date; (ii) the Subscription Agent receives, on or prior to the Expiration Date, a guarantee notice (a "Notice of Guaranteed Delivery"), substantially in the form provided with the Instruction as to Use of Hanover Direct, Inc. Subscription Certificates (the "Instructions") distributed with the Subscription Certificates, from a member firm of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. (the "NASD"), or from a commercial bank or trust company having an office or correspondent in the United States (each, an "Eligible Institution"), stating the name of the exercising Rights holder, the number of Rights represented by the Subscription Certificate or Subscription Certificates held by such exercising Rights holder, the number of Underlying Shares being subscribed for pursuant to the Subscription Privilege, and guaranteeing the delivery to the Subscription 17 19 Agent of any Subscription Certificate evidencing such Rights within five American Stock Exchange trading days following the date of the Notice of Guaranteed Delivery; and (iii) the properly completed Subscription Certificate or Subscription Certificates evidencing the Rights being exercised, with any required signatures guaranteed, is received by the Subscription Agent within five American Stock Exchange trading days following the date of the Notice of Guaranteed Delivery relating thereto. The Notice of Guaranteed Delivery may be delivered to the Subscription Agent in the same manner as Subscription Certificates at the addresses set forth above, or may be transmitted to the Subscription Agent by telegram or facsimile transmission (telecopy no. (718) 236-4588 or (718) 234-5001). Additional copies of the form of Notice of Guaranteed Delivery are available upon request from the Information Agent, whose address and telephone numbers are set forth under "INFORMATION AGENT." Unless a Subscription Certificate (i) provides that the shares of Common Stock to be issued pursuant to the exercise of Rights represented thereby are to be delivered to the holder of such Rights or (ii) is submitted for the account of an Eligible Institution, signatures on such Subscription Certificate must be guaranteed by an Eligible Institution. Holders who hold shares of Common Stock for the account of others, such as brokers, trustees or depositaries for securities, should notify the respective beneficial owners of such shares as soon as possible to ascertain such beneficial owners' intentions and to obtain instructions with respect to the Rights. If the beneficial owner so instructs, the record holder of such Right should complete Subscription Certificates and submit them to the Subscription Agent with the proper payment. In addition, beneficial owners of Common Stock or Rights held through such a holder should contact the holder and request the holder to effect transactions in accordance with the beneficial owner's instructions. The instructions accompanying the Subscription Certificates should be read carefully and followed in detail. DO NOT SEND SUBSCRIPTION CERTIFICATES TO THE COMPANY. THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF THE RIGHTS HOLDERS, BUT IF SENT BY MAIL IT IS RECOMMENDED THAT SUCH CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS. All questions concerning the timeliness, validity, form and eligibility of any exercise of Rights will be determined by the Company, whose determinations will be final and binding. The Company in its sole discretion may waive any defect or irregularity, or permit a defect or irregularity to be corrected within such time as it may determine, or reject the purported exercise of any Right. Subscriptions will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as the Company determines in its sole discretion. Neither the Company nor the Subscription Agent will be under any duty to give notification of any defect or irregularity in connection with the submission of Subscription Certificates or incur any liability for failure to give such notification. Any questions or requests for assistance concerning the method of exercising Rights or requests for additional copies of this Prospectus, the Instructions or the Notice of Guaranteed Delivery should be directed to the Information Agent, Morrow & Co., Inc. at its address set forth under "Information Agent" (telephone (800) 533-7254). 18 20 NO REVOCATION ONCE A HOLDER OF RIGHTS HAS EXERCISED THE SUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY NOT BE REVOKED. METHOD OF TRANSFERRING RIGHTS Rights may be purchased or sold through usual investment channels, including banks and brokers. The Rights may be traded on the American Stock Exchange and in the over-the-counter market. It is anticipated that the Rights will trade on a "when issued" basis up to and including the American Stock Exchange trading day immediately following the Record Date. The Rights evidenced by a single Subscription Certificate may be transferred in whole by endorsing the Subscription Certificate for transfer in accordance with the accompanying Instructions. A portion of the Rights evidenced by a single Subscription Certificate (but not fractional Rights) may be transferred by delivering to the Subscription Agent a Subscription Certificate properly endorsed for transfer, with instructions to register such portion of the Rights evidenced thereby in the name of the transferee (and to issue a new Subscription Certificate to the transferee evidencing such transferred Rights). In such event, a new Subscription Certificate evidencing the balance of the Rights will be issued to the Rights holder or, if the Rights holder so instructs, to an additional transferee. The Rights evidenced by a Subscription Certificate also may be sold, in whole or in part, through the Subscription Agent by delivering to the Subscription Agent such Subscription Certificate properly executed for sale by the Subscription Agent. If only a portion of the Rights evidenced by a single Subscription Certificate are to be sold by the Subscription Agent, such Subscription Certificate must be accompanied by instructions setting forth the action to be taken with respect to the Rights that are not to be sold. Promptly following the Expiration Date, the Subscription Agent will send the Rights holder a check for the net proceeds from the sale of any Rights sold. If the Rights can be sold, sales of such Rights will be deemed to have been effected at the weighted average price received by the Subscription Agent for the sale of all Rights through the Subscription Agent, less any applicable brokerage commissions, taxes and other direct expenses of sale. The Company will pay the fees charged by the Subscription Agent for effecting such sales. Orders to sell Rights must be received by the Subscription Agent prior to 11:00 a.m., New York City time, on , 1996 and the Subscription Agent's obligation to execute orders is subject to its ability to find buyers. Holders wishing to transfer all or a portion of their Rights (but not fractional Rights) should allow a sufficient amount of time prior to the Expiration Date for (i) the transfer instructions to be received and processed by the Subscription Agent, (ii) a new Subscription Certificate to be issued and transmitted to the transferee or transferees with respect to transferred Rights, and to the transferor with respect to retained Rights, if any, and (iii) the Rights evidenced by such new Subscription Certificates to be exercised or sold by the recipients thereof. Neither the Company nor the Subscription Agent shall have any liability to a transferee or transferor of Rights if Subscription Certificates are not received in time for exercise or sale prior to the Expiration Date. Except for the fees charged by the Subscription Agent (which will be paid by the Company as described above), all commissions, fees and other expenses (including brokerage commissions and transfer taxes) incurred in connection with the purchase, sale or exercise of Rights will be for the account of the transferor of the Rights, and none of such commissions, fees or expenses will be paid by the Company or the Subscription Agent. The Company anticipates that the Rights will be eligible for transfer through, and that the exercise of the Subscription Privilege may be effected through, the facilities of the Depository Trust Company. LISTING AND TRADING The outstanding shares of Common Stock are listed and traded on the AMEX. It is anticipated that the Rights will trade on the AMEX and in the over-the-counter market. There can be no assurance, however, that 19 21 a market for the Rights will develop or as to the price at which the Rights will trade. The Company has applied for the listing of the Underlying Shares on the American Stock Exchange. FOREIGN AND CERTAIN OTHER SHAREHOLDERS Subscription Certificates will not be mailed to Holders whose addresses are outside the United States but will be held by the Subscription Agent for their account. To exercise such Rights, such Holders must notify the Subscription Agent on or prior to 11:00 a.m., New York City time, on , 1996, at which time (if no instructions have been received) the Rights represented thereby will be sold, if feasible, and the net proceeds, if any, remitted to such Holders. If the Rights can be sold, sales of such Rights will be deemed to have been effected at the weighted average price received by the Subscription Agent for the sale of all Rights through the Subscription Agent, less any applicable brokerage commissions, taxes and other expenses. STANDBY PURCHASE COMMITMENT The Company and NAR have entered into the Standby Purchase Agreement, pursuant to which NAR will be required, subject to the fulfillment of various terms and conditions thereof, to purchase all Unsubscribed Shares. If all of the Rights are exercised, NAR will not be required to purchase any of the Common Stock issuable upon the exercise of the Rights. The summary of the Standby Purchase Agreement contained herein discusses all the material terms of such agreement, but is qualified in its entirety by reference to the specific provisions of the Standby Purchase Agreement, a copy of which is on file with the Commission. See "AVAILABLE INFORMATION." As compensation to NAR for its commitment under the Standby Purchase Agreement, the Company has agreed to pay to NAR, on the Closing Date or at such other time and date as NAR and the Company may agree in writing, an amount equal to 1% (the "Standby Fee") in respect of the aggregate offering price of the aggregate number of shares of Common Stock issuable upon exercise of the Rights granted to holders of Common Stock and Convertible Preferred Stock plus an additional amount equal to 4% of the aggregate offering price (the "Take-Up Fee") in respect of all shares of Common Stock, if any, purchased by NAR pursuant to its commitment thereunder; provided, however, that the Company shall pay to NAR, on the Closing Date, the Standby Fee and, if any, the Take-Up Fee in cash or shares of Common Stock (with each such share being attributed a value of $ by the parties thereto), or any combination of cash and shares of Common Stock as NAR shall decide in its sole discretion. NAR has not yet decided how it will take such fees. NAR shall communicate its election to receive the Standby Fee and, if any, the Take-Up Fee in cash or shares of Common Stock or combinations of both by delivering a signed writing evidencing such election to the Company on the Closing Date. Notwithstanding the foregoing, NAR shall not be entitled to a Standby Fee with respect to the shares of Common Stock issuable upon exercise of the Rights with respect to the shares of Common Stock owned beneficially by Theodore H. Kruttschnitt as of , 1996 if (i) at the time of the execution of the Standby Purchase Agreement, he has furnished to NAR an undertaking to exercise the Rights distributed to him with respect to such shares of Common Stock and (ii) upon the closing of the Rights Offering, Mr. Kruttschnitt purchases the shares of Common Stock which he undertakes to purchase. Mr. Kruttschnitt [furnished] [did not furnish] such an undertaking [on , 1996]. As additional compensation to NAR for its commitment under the Standby Purchase Agreement, the Company has agreed to amend all warrants to purchase shares of Common Stock held by NAR and its affiliate to permit a "net-issue" exercise. As of March 30, 1996, NAR and its affiliates owned warrants to purchase an aggregate of 5,033,735 shares of Common Stock at exercise prices ranging from $2.19 to $2.91 per share expiring on August 1, 1998. The number of shares for which the warrants may be exercised and the exercise prices thereof will be adjusted as a result of the Rights Offering pursuant to the anti-dilution provisions of such warrants. The Company has agreed that except as otherwise contemplated in this Prospectus, it will not, prior to , 1996, sell or otherwise dispose of any shares of Common Stock or securities convertible into or exchangeable or exercisable for shares of Common Stock pursuant to a registration statement filed after the date hereof with the Commission pursuant to the Securities Act without the prior written consent of NAR. 20 22 The Standby Purchase Agreement provides that the Company will indemnify NAR against certain liabilities incurred in connection with the Rights Offering, including liabilities under the Securities Act, or contribute to payments NAR may be required to make in respect thereof. The obligation of NAR under the Standby Purchase Agreement to purchase Unsubscribed Shares is subject to the following conditions, among others: that the Registration Statement of which this Prospectus is a part shall have been declared effective, and that no stop order with respect thereto shall have been issued; that the Company shall have commenced mailing the Subscription Certificates to record holders of the Common Stock and Convertible Preferred Stock not later than the day following the Record Date and shall have completed such mailing expeditiously, and shall have offered the Common Stock for subscription in accordance with the terms and under the conditions set forth in this Prospectus; that the Company shall have advised NAR daily during the period when the Rights are exercisable of the number of shares of Common Stock subscribed for, and prior to 12:00 Noon, New York City time, on the business day following the Expiration Date, shall have advised NAR of the number of the shares of Common Stock subscribed for and of the number of Unsubscribed Shares; that the Company shall not have experienced any material adverse change in its business (including the results of operations or management) or properties and that the Company affirm as correct certain representations and warranties made to NAR. In addition, NAR in its absolute discretion may elect to terminate its obligations under the Standby Purchase Agreement if trading in the Common Stock has been suspended by the Commission or the American Stock Exchange or trading in securities generally on the American Stock Exchange has been suspended, limited or subject to the establishment of minimum prices. The issuance of Common Stock upon the exercise of Rights to holders of shares of Common Stock and Convertible Preferred Stock to which Rights have been granted is contingent upon the consummation of the purchase by NAR of the Unsubscribed Shares. In the event that the conditions precedent to NAR's obligations to exercise its standby purchase commitment are not satisfied or otherwise waived by NAR, all amounts paid by subscribers upon exercise of Rights shall be returned to such subscribers as soon as practicable after the Expiration Date and no Underlying Shares will be sold by the Company. However, in the event that NAR waives the conditions precedent that are not satisfied, it will have a purchase commitment for all of the Unsubscribed Shares. CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS Whitman Breed Abbott & Morgan, counsel to the Company, has advised the Company that the following summary reflects their opinion as to the material United States federal income tax considerations applicable to Holders upon the distribution of the Rights, and to holders of Rights upon their exercise and disposition. Holders should be aware that certain of the federal income tax consequences relevant to the Holders are unclear under existing law or are dependent on factual considerations that cannot currently be determined and counsel have not rendered an opinion with respect to such consequences. An opinion of counsel represents the legal judgment of such counsel and is not binding on the Internal Revenue Service. There can be no assurance that the Internal Revenue Service will take a similar view as to any of the tax consequences described below. No ruling has been or will be requested from the Internal Revenue Service on any tax matters relating to the Rights Offering or the ownership or disposition of the Common Stock. This summary is based upon the provisions of the Code, the regulations, administrative rulings and judicial decisions now in effect, all of which are subject to change (possibly with retroactive effect) or different interpretations. This summary does not purport to deal with all aspects of federal income taxation that may be relevant to a particular Holder or to certain types of Holders subject to special treatment under the federal income tax laws (for example, banks, dealers in securities, life insurance companies, tax exempt organizations and foreign taxpayers), nor does it discuss any aspect of state, local or foreign tax laws. Foreign persons should see "THE RIGHTS OFFERING -- CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS" below. Furthermore, this summary is limited to persons that have held the Common Stock or Convertible Preferred Stock, as applicable, as capital assets (generally, property held for investment) within the meaning of Section 1221 of the Code. This discussion is not intended as tax advice to the Holders. Holders 21 23 are advised to consult their own tax advisors with respect to the consequences to them of the Rights Offering to their own particular tax situations. Distribution of the Rights. Subject to the discussions in "Constructive Distributions Under Section 305 of the Code," below, Holders will not recognize taxable income, for federal income tax purposes, in connection with the distribution of the Rights. Basis and Holding Period of the Rights. Except as provided in the following sentence, the basis of the Rights received by a Holder as a distribution with respect to such Holder's Common Stock or Convertible Preferred Stock, as applicable, will be zero. If either (i) the fair market value of the Rights on the date of issuance is 15% or more of the fair market value (on the date of issuance) of the Common Stock or Convertible Preferred Stock, as applicable, with respect to which they are received or (ii) the Holder elects, in such Holder's federal income tax return for the taxable year in which the Rights are received, to allocate part of the basis of such Common Stock or Convertible Preferred Stock, as applicable, to the Rights, then upon exercise or transfer of the Rights, the Holder's basis in such Common Stock or Convertible Preferred Stock, as applicable, will be allocated between the Common Stock or Convertible Preferred Stock, as applicable, and the Rights in proportion to the fair market values of each on the date of distribution. The holding period of a Holder with respect to the Rights received as a distribution on such Holder's Common Stock or Convertible Preferred Stock, as applicable, will include the Holder's holding period for the Common Stock or Convertible Preferred Stock, as applicable, with respect to which the Rights were distributed. In the case of a purchaser of Rights, the tax basis of such Rights will be equal to the purchase price paid therefor and the holding period for such Rights will commence on the day following the date of the purchase. Transfer of the Rights. A Holder who sells the Rights received in the distribution prior to exercise will recognize gain or loss equal to the difference between the sale proceeds and such Holder's basis (if any) in the Rights sold. Such gain or loss will be capital gain or loss if gain or loss from a sale of Common Stock or Convertible Preferred Stock, as applicable, held by such Holder would be characterized as capital gain or loss at the time of such sale, and will be long term capital gain or loss if the holding period for the Rights disposed of is more than one year and short term capital gain or loss if such holding period is one year or less. Any gain or loss recognized on a sale of Rights acquired by purchase will be short term capital gain or loss if Common Stock acquired through exercise of such Rights would be a capital asset in the hands of the seller (if acquired by him). Lapse of the Rights. Holders who allow the Rights distributed to them to lapse will not recognize any gain or loss, and no adjustment will be made to the basis of the Common Stock owned by such Holders. Purchasers of the Rights will be entitled to a loss equal to their tax basis in the Rights if such Rights expire unexercised. Any loss recognized on the expiration of Rights acquired by purchase will be a short term capital loss if Common Stock acquired through exercise of such Rights would be a capital asset in the hands of the seller (if acquired by him). Exercise of the Rights; Basis and Holding Period of Common Stock. Holders of Rights will not recognize gain or loss upon the exercise of such Rights. The basis of the Common Stock acquired through exercise of the Rights will be equal to the sum of the Subscription Price therefor and the Rights holder's basis in such Rights (if any). The holding period for the Common Stock acquired through exercise of the Rights will begin on the date the Rights are exercised. Constructive Distributions Under Section 305 of the Code. Section 305 of the Code provides, as a general rule, that a distribution of rights to acquire stock of a corporation made by such corporation to its shareholders with respect to its stock is not a taxable event. However, there are a number of exceptions to this general rule, and a distribution of rights that falls within any one of such exceptions is treated as "a distribution of property to which section 301 applies." Under one of the relevant exceptions, a distribution of stock or stock rights will be treated as a distribution of property to which section 301 applies if it constitutes a "disproportionate distribution" with respect to any class or classes of stock or convertible debt of the corporation. A distribution of stock or stock rights constitutes a "disproportionate distribution" if it is a part of a distribution or a series of distributions 22 24 (including deemed distributions) that has the effect of (i) the receipt of property (including cash) by some shareholders and (ii) an increase in the proportionate interests of other shareholders in the assets or earnings and profits of the distributing corporation. For this purpose, cash dividends paid with respect to stock and debt service payments made with respect to convertible securities (which are treated for this purpose as outstanding stock) may constitute the requisite "receipt of property" by some shareholders irrespective of whether such dividends or payments are related to the distribution of stock or stock rights. Further, a distribution of stock or stock rights that does not maintain the proportionate interests of the various classes of stock and securities (including any conversion rights relating thereto) of the distributing company may constitute the requisite increase in the proportionate interests in the assets or earnings and profits of the shareholders receiving the distribution of stock or stock rights. Under a second relevant exception, a distribution of stock or stock rights by a corporation with respect to its preferred stock generally will be treated as a distribution of property to which section 301 applies unless the distribution is made with respect to convertible preferred stock to take into account a stock dividend, stock split or any similar event (including the sale of stock at less than fair market value pursuant to a rights offering) that would otherwise result in the dilution of the conversion right. The Company has represented that the number and proportion of Rights to be distributed to the holders of Common and Convertible Preferred Stock have been calculated in a manner designed to maintain the relative interests of such Holders in the assets and earnings and profits of the Company. The Company has further represented that the number of Rights to be distributed to the holders of Convertible Preferred Stock (which Convertible Preferred Stock currently does not contain anti-dilution provisions) has been calculated in a manner designed solely to prevent the dilution of the conversion rights of such holders. Accordingly, the distribution of Rights pursuant to the Rights Offering has been designed so as not to be subject to tax pursuant to section 305. However, section 305 and the Treasury Regulations thereunder are not clear as to the methodology to be used in calculating the number of proportion of rights to be issued with respect to convertible stock or securities in order to protect the holders thereof from dilution in the event of a rights offering, and the Internal Revenue Service could take the position that the number of Rights distributed to the holders of Convertible Preferred Stock is more or less than is required merely to protect such Holders from dilution. If the number of Rights distributed to the Holders of Convertible Preferred Stock ultimately is determined to have been more than is required to protect such Holders from dilution, all or a portion of such distribution could be treated as a distribution of property to such Holders to which section 301 applies. If the number of Rights distributed to the holders of Convertible Preferred Stock ultimately is determined to have been less than is required to protect such Holders from dilution, there could be a deemed "disproportionate distribution" to the holders of Common Stock to the extend of such shortfall. Furthermore, future events, such as distributions of stock, stock rights or property (including cash), by the Company, which cannot now be determined, could affect the tax consequences of the Rights Offering. Because the law is unclear in this area and because future events, which cannot now be determined, could affect the tax consequences of the Rights Offering under section 305, counsel is unable to render an opinion as to the applicability of section 305 to the Rights Offering. If the Rights Offering were to result in a distribution of property to which section 301 applies under one of the above-described exceptions, such distribution would be treated as a dividend to the extent of the Company's current or accumulated earnings and profits. Any excess of the distributed amount over such current and accumulated earnings and profits would be treated as a tax-free return of capital to the extent of the recipient's basis in the stock to which such distribution is attributable, and then as an amount received in exchange for such stock. The Company believes that it had a deficit in both current and accumulated earnings and profits as of the close of its taxable year ended December 30, 1995 and for the first quarter of 1996. The amount of earnings and profits, if any, that the Company will earn during 1996 will depend on its future actions and financial performance and cannot currently be determined. However, based upon the Company's current projections, it is not anticipated that the Company will have any current or accumulated earnings and profits for its 1996 tax 23 25 year. In such case the Rights Offering would not result in any dividend income to the holders of Common or Convertible Preferred Stock even if the Rights Offering ultimately is determined to have resulted in a distribution of property to which section 301 applies. If the Company were to generate current earnings and profits for 1996 and the Rights Offering were treated as a distribution of property to which section 301 applies under one of the above-described exceptions, a Holder might ultimately be treated as having received a constructive dividend pursuant to section 305 of the Code as a result of the Rights Offering equal to the lesser of the value of the distribution and such Holder's share of the current and accumulated earnings and profits of the Company. Subject to certain holding period and taxable income requirements imposed by the Code, an actual or constructive distribution to a corporate Holder resulting from the Rights Offering that is treated as a dividend may qualify for the dividends received deduction available under section 246 of the Code. Corporate Holders claiming such a dividends received deduction are advised to consult with their tax advisors as to the potential applicability of Section 1059 to such deduction. Whether or not the Company has current or accumulated earnings and profits, in the event that the Rights Offering is treated as a distribution to which section 301 applies, Holders would receive a basis in the Rights received or other property deemed distributed equal to the amount of such distribution. EACH HOLDER IS URGED TO CONSULT WITH SUCH HOLDER'S OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE RIGHTS OFFERING TO SUCH HOLDER'S OWN PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND OTHER TAX LAWS. FEDERAL INCOME TAX CONSEQUENCES OF RIGHTS OFFERING TO THE COMPANY The Company will not recognize gain or loss on either the distribution or the exercise or lapse of the Rights. CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS The following summary describes the material United States federal tax consequences of the distribution, exercise and disposition of the Rights, and the ownership and disposition of Common Stock acquired upon exercise thereof, by a person (a "non-U.S. holder") who, for United States federal income tax purposes, is a nonresident alien individual, a foreign corporation, foreign partnership, or foreign estate or trust, as such terms are defined in the Code. This summary does not discuss all aspects of federal taxation that may be relevant to a particular non-U.S. holder, nor does it consider specific facts and circumstances that may be relevant to a particular non-U.S. holder's tax position. Issuance or Exercise of the Rights. Subject to the possible application of Section 305 of the Code (see "CERTAIN FEDERAL TAX CONSEQUENCES TO HOLDERS -- CONSTRUCTIVE DISTRIBUTIONS UNDER SECTION 305 OF THE CODE," above), which could cause the Rights Offering to result in the constructive receipt of dividends (which would be taxable as described in "Dividends on Common Stock," below) or of an amount received in exchange for the Common Stock (which would be taxable as described in "Disposition of Rights or Common Stock," below), non-U.S. holders of Common Stock will not recognize taxable income, for United States federal income tax purposes, and will not be subject to withholding of United States federal income tax, in connection with the receipt or exercise of the Rights. Disposition of Rights or Common Stock. A non-U.S. Holder generally will not be subject to United States federal income tax with respect to gain recognized on the disposition of the Rights or Common Stock acquired upon exercise thereof unless (i) the gain is effectively connected with a trade or business of the non-U.S. Holder in the United States, (ii) in the case of a non-U.S. Holder who is a nonresident alien individual and holds either the Rights or such Common Stock as a capital asset, such Holder is present in the United States for 183 or more days in the taxable year of sale, (iii) the non-U.S. Holder has owned, directly or by attribution, more than 5% of the Rights or the Common Stock at any time during the five-year period ending on the date of disposition of such interest and the Rights or such Common Stock, as the case may be, is, at the 24 26 time of disposition, a United States real property interest within the meaning of Section 897(c)(1) of the Code or (iv) a non-U.S. Holder is subject to tax pursuant to certain provisions of the Code applicable to expatriates. Dividends on Common Stock. Dividends paid to a non-U.S. Holder of Common Stock or Convertible Preferred Stock, as applicable, will be subject to withholding of United States federal income tax at a 30% rate or such lower rate as may be specified by an applicable income tax treaty, unless the dividends are effectively connected with the conduct of a trade or business of the non-U.S. Holder within the United States. In order to claim the benefit of an applicable tax treaty rate, a non-U.S. Holder may have to file with the Company or its dividend paying agent an exemption or reduced treaty rate certificate or letter in accordance with the terms of such treaty. Dividends received by a non-U.S. Holder that are effectively connected with the conduct of a trade or business of a non-U.S. holder within the United States are exempt from the withholding tax described above. A non-U.S. holder may claim this exemption by filing Form 4224 (Exemption from Withholding of Tax on Income Effectively Connected with the Conduct of Trade or Business in the United States) with the Company or its dividend paying agent. Dividends that are effectively connected with the conduct of a trade or business within the United States (after reduction by certain deductions) are generally taxed regular United States federal income tax rate and, in the case of foreign corporations, may also be subject to an additional U.S. branch profits tax of 30% (or lower applicable treaty rate). Federal Estate Taxes. Common Stock held by an individual non-U.S. Holder at the time of death will be included in such Holder's gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. U.S. Information Reporting Requirements and Backup Withholding. Under temporary United States Treasury Regulations, United States information reporting requirements and backup withholding tax will not apply to dividends paid on Common Stock to a non-U.S. holder at an address outside the United States. Payment by a United States office of a broker of the proceeds of a sale of the Rights or Common Stock acquired through exercise thereof is subject to both information reporting and backup withholding at a rate of 31% unless the Holder certifies its non-U.S. status under penalties of perjury or otherwise establishes an exemption. Information reporting requirements (but not backup withholding) will also apply to a payment of the proceeds of a sale of the Rights or such Common Stock by a foreign office of a United States broker, or certain foreign brokers, unless the broker has documentary evidence in its records that the Holder is a non-U.S. holder and certain other conditions are met, or the Holder otherwise establishes an exemption. The Internal Revenue Service has issued proposed regulations which, if they become final, would impose new information reporting and certification requirements and possible backup withholding on payments of dividends to non-U.S. Holders. The new rules would be applicable to payments of dividends made after 1997 and current law would remain in effect until then. Non-U.S. holders should consult with their tax advisers as to compliance with the new rules so as to avoid possible information reporting and backup withholding on dividend payments after 1997. A non-U.S. Holder may obtain a refund of any amounts withheld under the backup withholding rules by filing the appropriate claim for refund with the United States Revenue Service. EACH NON-U.S. HOLDER IS URGED TO CONSULT WITH SUCH NON-U.S. HOLDER'S OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE RIGHTS OFFERING TO SUCH NON-U.S. HOLDER'S OWN PARTICULAR TAX SITUATION, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS. DESCRIPTION OF COMMON STOCK For a description of the Common Stock, see "DESCRIPTION OF CAPITAL STOCK." 25 27 SUBSCRIPTION AGENT The Company has appointed American Stock Transfer & Trust Company as Subscription Agent for the Rights Offering. The Subscription Agent's address, which is the address to which the Subscription Certificates and payment of the Subscription Price should be delivered, as well as the address to which the Notice of Guaranteed Delivery must be delivered, is: AMERICAN STOCK TRANSFER & TRUST COMPANY By Mail: By Facsimile Transmission: By Hand: American Stock Transfer & Trust (718) 234-5001 American Stock Transfer & Trust Company Company 40 Wall Street, 46th Floor 40 Wall Street, 46th Floor New York, New York 10005 New York, New York 10005 To Confirm Receipt and For General Information: (212) 936-5100 (718) 921-8200
The Company will pay the fees and expenses of the Subscription Agent, and has also agreed to indemnify the Subscription Agent from any liability which it may incur in connection with the Rights Offering. The Company has been informed by the Subscription Agent that it is a bank within the meaning of Section 3(a)(6) of the Exchange Act. INFORMATION AGENT The Company has appointed Morrow & Co., Inc. as Information Agent for the Rights Offering. Any questions or requests for additional copies of this Prospectus, the Instructions or the Rights Offering Notice of Guaranteed Delivery may be directed to the Information Agent at the telephone numbers and address below. MORROW & CO., INC. 909 Third Avenue 20th Floor New York, NY 10022 (212) 754-8000 TOLL-FREE 1-800-566-9061 Banks and brokerage firms please call 1-800-662-5200 The Company will pay the fees and expenses of the Information Agent and has also agreed to indemnify the Information Agent from certain liabilities which it may incur in connection with the Rights Offering. DESCRIPTION OF CAPITAL STOCK The following general summary of the material terms of the capital stock of the Company does not purport to be complete and is subject to, and qualified in its entirety by reference to, the pertinent portions of the Company's Certificate of Incorporation. GENERAL The authorized capital stock of the Company consists of 150,000,000 shares of Common Stock, 12,270,503 shares of Class B Common Stock, par value $.01 per share (the "Class B Common Stock"), 40,000 shares of Class B 8% Cumulative Preferred Stock, par value $.01 and stated value $1,000 per share (the "Class B Preferred"), 861,900 shares of 7.5% Cumulative Convertible Preferred Stock, par value $.01 and stated value $20 per share (the "7.5% Preferred"), 234,900 shares of Series A Preferred Stock, 634,900 shares of Series B Preferred Stock and 5,000,000 shares of Additional Preferred Stock, par value $.01 per 26 28 share (the "Additional Preferred"). As of , 1996, there were 93,590,696 shares of Common Stock, 78,300 shares of Series A Preferred Stock and 634,900 shares of Series B Preferred Stock outstanding. COMMON STOCK General. There are no redemption or sinking fund provisions applicable to the shares of Common Stock and such shares are not entitled to any preemptive rights. Voting. Each holder of Common Stock is entitled to one vote for each share registered in the holder's name on the books of the Company. Since none of the shares of Common Stock have cumulative voting rights, the holders of more than 50% of the shares can elect all the Directors of the Company in each class of Directors, if they so choose, and, in that event, the holders of the remaining shares will not be able to elect any of the Directors. Dividends. Subject to the prior rights of holders of any then issued and outstanding preferred stock, the holders of Common Stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors of the Company from the assets of the Company which are legally available therefor. The Company is restricted from paying dividends on its Common Stock by certain debt covenants contained in agreements to which the Company is a party. See "DIVIDEND POLICY." Liquidation. Upon the liquidation, dissolution or winding-up of the Company, holders of Common Stock are entitled to receive, pro rata, after the prior rights of creditors and holders of any preferred stock have been satisfied, all the remaining assets of the Company available for distribution. Transfer Agent and Registrar. American Stock Transfer & Trust Company is the Transfer Agent and Registrar for the Common Stock. ADDITIONAL PREFERRED Additional Preferred may be issued at such times, to such persons and for such consideration as the Board of Directors may determine to be in the Company's best interest without (except as otherwise required by law) further authority from the shareholders. Such shares of authorized and unissued Additional Preferred may be issued with such designations, voting powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations and restrictions of such rights, as the Company's Board of Directors may authorize, including but not limited to: (i) the distinctive designation of each series and the number of shares that will constitute such series; (ii) the voting rights, if any, of shares of such series; (iii) the dividend rate on the shares of such series, any restriction, limitation or condition upon the payment of such dividends, whether dividends shall be cumulative and the dates on which dividends are payable; (iv) the prices at which, and the terms and conditions on which, the shares of such series may be redeemed, if such shares are redeemable; (v) the purchase or sinking fund provisions, if any, for the purchase or redemption of shares of such series; (vi) any preferential amount payable upon shares of such series in the event of the liquidation, dissolution or winding-up of the Company or the distribution of its assets; and (vii) the prices or rates of conversion at which, and the terms and conditions on which, the shares of such series may be converted into other securities, if such shares are convertible. SERIES A PREFERRED STOCK Dividends. The holders of record of shares of Series A Preferred Stock are entitled to receive preferential cumulative dividends, when and as declared by the Board of Directors of the Company out of funds legally available therefor, at a rate of 6% of the stated value per annum. Dividends on the Series A Preferred Stock commenced to accrue on September 30, 1993. Liquidation Preference. In the event of any distribution of assets upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Company, the holder of each share of the then outstanding Series A Preferred Stock shall be entitled to receive out of the assets of the Company, whether such assets are capital, surplus or earnings, an amount equal to the then stated value of each share of Series A Preferred Stock, before any 27 29 payments or distributions are made to, or set aside for, any other equity security of the Company other than any other series of preferred stock. If the assets of the Company are insufficient to pay such amounts in full, then the entire assets of the Company shall be distributed pro rata to the holders of shares of preferred stock after the holders of the Class B Preferred and the 7.5% Preferred have been paid in full. Neither a consolidation, merger or other business combination of the Company with or into another corporation or other entity nor a sale or transfer of all or part of the Company assets for cash, securities or other property shall be considered a liquidation, dissolution or winding up of the Company. Conversion. On September 30, 1994, each holder of the Series A Preferred Stock automatically, without any action on the part of such holder, had one-third of each such holders' holdings of Series A Preferred Stock converted into a number of shares of Common Stock of the Company determined by dividing the then stated value of the shares by the Conversion Price (as defined) for such date. On September 30, 1995, each holder of the Series A Preferred Stock automatically, without any action on the part of such holder, had one-third of each such holders' holdings of Series A Preferred Stock converted into a number of shares of Common Stock of the Company determined by dividing the then stated value of the shares by the Conversion Price for such date. On September 30, 1996 (the "Conversion Date"), all shares of the Series A Preferred Stock that remain outstanding (the "Final Conversion Allotment") shall automatically, without any action being required on the part of the holders thereof, be converted into a number of shares of Common Stock determined by dividing the then stated value of the shares by the Conversion Price. The "Conversion Price" shall be an amount equal to the average of the per-share closing prices (regular way) for a round lot of the Common Stock on the AMEX (or, if the Common Stock is then not listed for trading on the AMEX, such other exchange or system on which the Common Stock shall from time to time be traded) on each of the five trading days immediately preceding the Conversion Date. No fractional shares or scrip representing fractional shares of Common Stock shall be issued upon conversion of Series A Preferred Stock. Instead of any fractional share of Common Stock that would otherwise be issuable upon conversion of any shares of Series A Preferred Stock, the Company will pay a cash adjustment in respect of such fractional interest in an amount equal to the same fraction of the Conversion Price per share of Common Stock. Redemption. The Company shall have the right to redeem the Final Conversion Allotment at any time prior to September 20, 1996 at the liquidation value (initial stated value plus accrued but unpaid dividends) of such shares payable in cash. Voting Rights. The holders of the Series A Preferred Stock shall not have any voting rights except as may be required by law. Preemptive Rights. The Series A Preferred Stock is not entitled to any preemptive or subscription rights in respect of any securities of the Company. SERIES B PREFERRED STOCK Dividends. The holders of record of shares of Series A Preferred Stock are entitled to receive dividends, when and as declared by the Board of Directors of the Company out of funds legally available therefor, at a rate of 5% of the stated value per annum from February 15, 1995 through February 15, 1998 provided, however, that Aegis Safety Holdings, Inc. shall have achieved at least One Million Dollars ($1,000,000) of earnings (as computed in accordance with generally accepted accounting principles consistently applied) ("EBIT") during the fiscal year (or portion thereof) in question for which the dividend computation is being made, and 7% of the state value per annum from February 16, 1998 through February 15, 2000 regardless of the EBIT of Aegis Safety Holdings, Inc., each payable in cash in arrears. Liquidation Preference. In the event of any distribution of assets upon any liquidation, dissolution or winding-up of the Company, whether voluntary or involuntary, after payment or provision for payment of the debts and other liabilities of the Company, the holder of each share of the then outstanding Series B Preferred Stock shall be entitled to receive out of the assets of the Company, whether such assets are capital, surplus or earnings, an amount equal to the then stated value of each share of Series B Preferred Stock, before any 28 30 payments or distributions are made to, or set aside for, any other equity security of the Company other than the holders of the 7.5% Preferred, the Class B Preferred, the Series A Preferred and then, pro rata, to the holders of shares of any other series of Additional Preferred Stock. Neither a consolidation, merger or other business combination of the Company with or into another corporation or other entity nor a sale or transfer of all or part of the Company assets for cash, securities or other property shall be considered a liquidation, dissolution or winding up of the Company. Conversion. Each holder of the Series B Preferred shall be entitled at any time and from time to time to convert any or all of his outstanding shares of Series B Preferred into such number of shares of Common Stock determined by dividing the then stated value of the shares by the Conversion Price. The "Conversion Price" shall be $6.66 (subject to adjustment upon the occurrence of a stock split or other subdivision or a combination of outstanding shares of Common Stock, or the reclassification of the Company's capital stock or any other similar event with respect to the Company's Common Stock) ("Adjustment Events"). At any time subsequent to the date upon which the per-share closing price (regular way) for a round lot of the Common Stock on the American Stock Exchange (or such other exchange or system on which the Common Stock shall from time to time be traded) has been greater than $6.66 for 20 trading days in a 30 consecutive trading day period, the Company has the right to require the conversion of all of the outstanding shares of Series B Preferred at the Conversion Price. The Conversion Price will be adjusted upon the occurrence of an Adjustment Event. The Company will provide the holders of the Series B Preferred shares which are to be converted with at least 30 days written notice of the date upon which conversion of the Series B Preferred is required. Redemption. The Company shall redeem all of the outstanding shares of the Series B Preferred on February 15, 2000 in cash or in Common Stock at the option of the Company in either case together with any accrued but unpaid dividends through the February 15, 2000. If the shares Series B Preferred to be redeemed are to be paid in cash, the redemption price per share shall be equal to the Conversion Price on February 15, 2000. If the shares of Series B Preferred to be redeemed are to be paid in Common Stock, the number of shares of Common Stock to be paid upon redemption of each share of Series B Preferred (the "Redemption Shares") shall be determined by dividing the stated value of the shares by the Conversion Price on February 15, 2000. In addition, if the shares of Series B Preferred to be redeemed are to be paid in Common Stock and if the per-share closing price (regular way) on the American Stock Exchange for a round lot of the Common Stock on February 15, 2000 (the "Redemption Date Closing Price") is less than 95% of the Conversion Price on February 15, 2000, each holder of Series B Preferred shall be entitled to receive on February 15, 2000 such additional shares of Common Stock determined by multiplying (x) the difference between 95% of the Conversion Price on February 15, 2000 and the Redemption Date Closing Price and (y) the aggregate number of Redemption Shares to which such holder is entitled, and dividing the product thereof by the Redemption Date Closing Price. No fractional shares shall be issued, but a cash payment in an amount equal to the value of such fractional share shall be made in lieu thereof. Voting Rights. Each share of the Series B Preferred Stock shall be entitled to a number of votes equal to the number of shares of Common Stock that such share of Series B Preferred is convertible into based on the then existing Conversion Price. Except as provided by law, the holders of the Series B Preferred shall vote together with the holders of the Common Stock (and any other class or series which may be similarly entitled to vote with the shares of Common Stock) as one class on all matters submitted to a vote of stockholders of the Company. Preemptive Rights. The Series B Preferred Stock is not entitled to any preemptive or subscription rights in respect of any securities of the Company. 29 31 PLAN OF DISTRIBUTION The Company is distributing transferable Rights, at no cost, to the Holders of the Common Stock and Convertible Preferred Stock outstanding as of the Record Date. See "THE RIGHTS OFFERING -- THE RIGHTS." Each Right will entitle the holder thereof to receive, upon payment of the Subscription Price, one share of Common Stock. See "THE RIGHTS OFFERING -- SUBSCRIPTION PRIVILEGE." NAR has agreed to purchase from the Company all Unsubscribed Shares pursuant to its standby purchase commitment. See "THE RIGHTS OFFERING -- STANDBY PURCHASE COMMITMENT." No underwriters, brokers or dealers have been retained by the Company in connection with the Rights Offering. The Company anticipates receiving approximately $48,335,000 in proceeds from the Rights Offering including NAR's standby purchase commitment, after payment of approximately $1,665,000 of fees and expenses incurred in connection with the Rights Offering. See "USE OF PROCEEDS." EXPERTS The consolidated balance sheets of the Company 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 and schedules incorporated by reference in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. The balance sheets of The Austad Company as of December 31, 1993 and 1994, and the related statements of operations, shareholders' equity and cash flows for each of the two years in the period ended December 31, 1994 incorporated by reference in this Prospectus and elsewhere in the Registration Statement, have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in accounting and auditing in giving said report. LEGAL MATTERS Certain legal matters concerning the offering of the Common Stock will be passed upon for the Company by Whitman Breed Abbott & Morgan, New York, New York. 30 32 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses in connection with the Rights Offering are as follows: SEC registration fee.................................................. $ 30,375.00 AMEX listing fees and expenses........................................ 17,500.00* Printing and engraving expenses....................................... 55,000.00* Legal fees and expenses............................................... 100,000.00* Accounting fees and expenses.......................................... 125,000.00* Blue Sky fees and expenses (including counsel fees)................... 20,000.00* Standby Purchaser's fees.............................................. 1,250,000.00* Subscription Agent's fees and expenses................................ 55,000.00* Information Agent's fees and expenses................................. 7,500.00* Miscellaneous expenses................................................ 4,625.00 ----------- Total....................................................... $1,665,000.00 ===========
- --------------- * Estimated ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Hanover is incorporated under the laws of Delaware. Section 145 of the Delaware General Corporation Law generally provides that a corporation is empowered to indemnify any person who is made a party to any threatened, pending or completed action, suit or proceeding by reason of the fact that he is or was a director, officer, employee or agent of Hanover or is or was serving, at the request of Hanover, in any of such capacities of another corporation or other enterprise, if such director, officer, employee or agent acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of Hanover, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. This statute describes in detail the right of Hanover to indemnify any such person. Article SEVENTH of the Certificate of Incorporation of Hanover (referred to therein as the "Corporation") provides, in pertinent part, as follows: Indemnification. Except as prohibited by Section 145 of the Delaware General Corporation Law, every director and officer of the Corporation shall be entitled as a matter of right to be indemnified by the Corporation against reasonable expense and any liability paid or incurred by such person in connection with any actual or threatened claim, action, suit or proceeding, civil, criminal, administrative, investigative or other, whether brought by or in the right of the Corporation or otherwise, in which he or she may be involved, as a party or otherwise, by reason of such person being or having been a director or officer of the Corporation or by reason of the fact that such person is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or other representative of the Corporation or another corporation, partnership, joint venture, trust, employee benefit plan or other entity (such claim, action, suit or proceeding hereinafter being referred to as an "action"); provided, however, that no such right of indemnification shall exist with respect to an action brought by a director or officer against the Corporation other than in a suit for indemnification as provided hereunder. Such indemnification shall include the right to have expenses incurred by such person in connection with an action paid in advance by the Corporation prior to final disposition of such action, subject to such conditions as may be prescribed by law. As used herein, "expense" shall include, among other things, fees and expenses of counsel selected by such person, and "liability" shall include amounts of judgments, excise taxes, fines and penalties, and amounts paid in settlement. II-1 33 Insurance; Other Funding. The Corporation may purchase and maintain insurance to protect itself and any person eligible to be indemnified hereunder against any liability or expense asserted or incurred by such person in connection with any action, whether or not the Corporation would have the power to indemnify such person against such liability or expense by law or under the provisions of this Article Seventh. The Corporation may make other financial arrangements, which may include, among other things, a trust fund, program of self-insurance, grant of a security interest or other lien on any assets of the Corporation, or establishment of a letter of credit, guaranty or surety, to ensure the payment of such sums as may become necessary to effect indemnification as provided herein. Non-Exclusive; Nature and Extent of Rights. The right of indemnification provided for herein (i) shall not be deemed exclusive of any other rights, whether now existing or hereafter created, to which those seeking indemnification hereunder may be entitled under any agreement, by-law or article provision, vote of the stockholders or directors or otherwise, (ii) shall be deemed to create contractual rights in favor of persons entitled to indemnification hereunder, (iii) shall continue as to persons who have ceased to have the status pursuant to which they were entitled or were designated as entitled to indemnification hereunder and shall inure to the benefit of the heirs and legal representatives of persons entitled to indemnification hereunder and (iv) shall be applicable to actions, suits or proceedings commenced after the adoption of this Article Seventh, whether arising from acts or omissions occurring before or after the adoption hereof. The right of indemnification provided for herein may not be amended, modified or repealed so as to limit in any way the indemnification provided for herein with respect to any acts or omissions occurring prior to the adoption of any such amendment or repeal. Article IV of the Bylaws of Hanover also contains the same provisions relating to the indemnification of directors and officers which are set forth in Article SEVENTH of the Certificate of Incorporation of Hanover. Hanover has agreed to purchase insurance to indemnify its directors and officers against liabilities incurred as a result of serving in such capacity and has agreed to enter into indemnification agreements with its directors. II-2 34 ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES. (a) Exhibits:
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ------- ------------------------------------------------------------------------------------ 1.1 Form of Standby Purchase Agreement between Hanover and NAR 4 Form of Subscription Certificate* 5 Opinion of Whitman Breed Abbott & Morgan as to the legality of the securities being registered* 8 Form of Opinion of Whitman Breed Abbott & Morgan as to the tax consequences to holders 10 Repurchase and Option Agreement, dated as of September 29, 1995, by and among Hanover, IMR and SunAmerica Life Insurance Company 23.1 Consents of Arthur Andersen LLP 23.2 Consent of Whitman Breed Abbott & Morgan (included in the opinion set forth as Exhibit 5 to this Registration Statement)* 24 Powers of Attorney of certain directors and officers of Hanover (included on page II-4 of the Registration Statement (Registration No. 333-2743) filed with the Commission on April 23, 1996) 99.1 Form of Instructions as to use of Subscription Certificates* 99.2 Form of Notice of Guaranteed Delivery for Subscription Certificates* 99.3 Form of Subscription Agency Agreement 99.4 Form of Information Agent Agreement 99.5 Form of Letter to Common Stockholders who are record holders* 99.6 Form of Letter to Common Stockholders whose addresses are outside the U.S.* 99.7 Form of Letter to Common Stockholders who are beneficial holders* 99.8 Form of Letter to Clients of Common Stockholders who are beneficial holders* 99.9 Form of Letter to Series A Preferred Stockholders* 99.10 Form of Letter to Series B Preferred Stockholders*
- --------------- * Previously filed. (b) Financial Statement Schedules: None. ITEM 17. UNDERTAKINGS. (a) Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of Hanover pursuant to the provisions described under Item 20 above, or otherwise, Hanover has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 (the "Act") and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than payment by Hanover of expenses incurred or paid by a director, officer or controlling person of Hanover in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, Hanover will, unless in the opinion of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. (b) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 that is incorporated by reference in the Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 35 (c) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) (sec.230.424(b) of this chapter) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; Provided, however, that paragraphs(e & 1)(i) and (a)(1)(ii) do not apply if the registration statement is on Form S-3 (sec.239.13 of this chapter) or Form S-8 (sec.239.16b of this chapter), and the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (d) The undersigned registrant hereby undertakes to supplement the prospectus, after the expiration of the subscription period, to set forth the results of the subscription offer, the transactions by the underwriters during the subscription period, the amount of unsubscribed securities to be purchased by the underwriters, and the terms of any subsequent reoffering thereof. If any public offering by the underwriters is to be made on terms differing from those set forth on the cover page of the prospectus, a post-effective amendment will be filed to set forth the terms of such offering. II-4 36 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, Hanover Direct, Inc. certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-3 and has duly caused this Amendment No. 1 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Weehawken, State of New Jersey, on the 20th day of June, 1996. HANOVER DIRECT, INC. By: /s/ RAKESH K. KAUL -------------------------------- Rakesh K. Kaul, President and Chief Executive Officer Pursuant to the requirement of the Securities Act of 1933, as amended, this Amendment No. 1 to Registration Statement has been signed below by the following persons, in the capacities indicated on June 20th, 1996.
NAME TITLE - ------------------------------------------ ---------------------------------------------- /s/ ALAN G. QUASHA* Chairman of the Board and Director - ------------------------------------------ Alan G. Quasha /s/ RAKESH K. KAUL Director, President and Chief Executive - ------------------------------------------ Officer Rakesh K. Kaul (principal executive officer) /s/ WAYNE P. GARTEN* Executive Vice President (principal financial - ------------------------------------------ officer) Wayne P. Garten /s/ RALPH DESTINO* Director - ------------------------------------------ Ralph Destino Director - ------------------------------------------ J. David Hakman Director - ------------------------------------------ S. Lee Kling Director - ------------------------------------------ Theodore H. Kruttschnitt /s/ ELIZABETH VALK LONG* Director - ------------------------------------------ Elizabeth Valk Long Director - ------------------------------------------ Edmund R. Manwell /s/ GERALDINE STUTZ* Director - ------------------------------------------ Geraldine Stutz
II-5 37
NAME TITLE - ------------------------------------------ ---------------------------------------------- /s/ JEFFREY LAIKIND* Director - ------------------------------------------ Jeffrey Laikind /s/ ROBERT F. WRIGHT* Director - ------------------------------------------ Robert F. Wright
- --------------- * Edward J. O'Brien, pursuant to a Power of Attorney executed by each of the directors and officers noted above and filed with the Securities and Exchange Commission, by signing his name hereto, does hereby sign and execute this Amendment No. 1 to Registration Statement on Form S-3 on behalf of each of the persons noted above, in the capacities indicated. /s/ Edward J. O'Brien -------------------------------------- Edward J. O'Brien II-6 38 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT PAGE NUMBER - ------- ----------------------------------------------------------------------- ----------- 1.1 Form of Standby Purchase Agreement between Hanover and NAR 4 Form of Subscription Certificate* 5 Opinion of Whitman Breed Abbott & Morgan as to the legality of the securities being registered* 8 Form of Opinion of Whitman Breed Abbott & Morgan as to the tax consequences to holders 10 Repurchase and Option Agreement, dated at of September 29, 1995, by and among Hanover, IMR and SunAmerica Life Insurance Company 23.1 Consents of Arthur Andersen, LLP 23.2 Consent of Whitman Breed Abbott & Morgan (included in the opinion set forth as Exhibit 5 to this Registration Statement)* 24 Powers of Attorney of certain directors and officers of Hanover (included on page II-4 of the Registration Statement (Registration No. 333-2743) filed with the Commission on April 23, 1996) 99.1 Form of Instructions as to use of Subscription Certificates* 99.2 Form of Notice of Guaranteed Delivery for Subscription Certificates* 99.3 Form of Subscription Agency Agreement 99.4 Form of Information Agent Agreement 99.5 Form of Letter to Common Stockholders who are record holders* 99.6 Form of Letter to Common Stockholders whose addresses are outside the U.S.* 99.7 Form of Letter to Common Stockholders who are beneficial holders* 99.8 Form of Letter to Clients of Common Stockholders who are beneficial holders* 99.9 Form of Letter to Series A Preferred Stockholders* 99.10 Form of Letter to Series B Preferred Stockholders*
- --------------- * Previously filed. EX-1.1 2 FORM OF STANDBY PURCHASE AGREEMENT 1 Exhibit 1.1 [Form of Standby Purchase Agreement] Hanover Direct, Inc. [50,000,000] Shares Common Stock ($.66 2/3 par value) Standby Purchase Agreement New York, New York June ___, 1996 NAR Group Limited 127 East 73rd Street New York, New York 10021 Ladies and Gentlemen: Hanover Direct, Inc., a Delaware corporation (the "Company"), proposes to offer approximately [50,000,000] shares of Common Stock, par value $.66 2/3 per share (the "Common Stock"), of the Company, initially for subscription upon the exercise of rights (the "Rights") evidenced by transferable subscription certificates (the "Subscription Certificates") to be issued by the Company to holders of shares of Common Stock of the Company of record at the close of business on __________ __, 1996 (the "Record Date") (all shares issuable upon the exercise of Rights by holders of Common Stock shall be referred to as the "Non-NAR Shares"). The Rights will expire at 5:00 P.M., New York City time, on ______________ __, 1996 (such date and time, the "Expiration Date"). The Company proposes to sell to NAR Group Limited, a British Virgin Islands corporation ("NAR"), or NAR's designee an aggregate of 100% of such number of Non-NAR Shares which, as of the Expiration Date, have not been subscribed for by the holders of Common Stock by the exercise of Rights (the "Securities"). The Company's obligation to sell and deliver the Securities to NAR shall be contingent on NAR's performance of its obligations under this Agreement. The issuance of the Rights, the offering of the Common Stock to be issued by the Company upon exercise of the Rights and the subscription and purchase of Com- 2 mon Stock upon the terms described in the Prospectus (as hereinafter defined), including the purchase of the Securities pursuant to this Agreement, are herein collectively referred to as the "Rights Offering." 1. Representations and Warranties. (a) The Company represents and warrants to, and agrees with, NAR as set forth below in this Section 1(a). Certain terms used in Section 1 are defined in paragraphs (i) and (xx) of this Section 1(a). (i) The Company meets the requirements for use of Form S-3 under the Securities Act of 1933, as amended (the "Act"), and has filed with the Securities and Exchange Commission (the "Commission") a registration statement (registration number 33-_______) on such Form for the registration under the Act of the offering of the Rights and the offering and sale of the Securities. The Company may have filed one or more amendments thereto, each of which has previously been furnished to NAR. The Company will next file with the Commission either (A) prior to effectiveness of such registration statement, a further amendment to such registration statement (including the form of a final prospectus) or (B) after effectiveness of such registration statement, a final prospectus in accordance with Rule 424(b). In the case of clause (B), the Company shall include in such registration statement, as amended at the Effective Date, all information required by the Act and the rules thereunder to be included in the Prospectus with respect to the Rights, the Securities and the offering thereof. As filed, such amendment and the form of final prospectus, or such final prospectus, shall contain all required information with respect to the Rights, the Securities and the offering thereof and, except to the extent NAR shall agree in writing to a modification, shall be in all substantive respects in the form furnished to NAR prior to the Execution Time or, to the extent not completed at the Execution Time, shall contain only such specific additional information and other changes as the Company has advised NAR, prior to the Execution Time, will be included or made therein. The form of prospectus to be used in connection with the offering of the Rights and the offering and sale of the Securities as first filed pursuant to Rule 424(b) or, if no filing pursuant to Rule 424(b) is required, such form of prospectus included in the Registration Statement at the Effective Date, is hereinafter called the "Prospectus." The Prospectus and any related letters from the Company to record or beneficial owners of Common Stock or Rights, related letters from the Company to securities dealers, commercial banks, trust companies and other nominees and other offering materials, in each case disseminated by the Company or by any of its agents with the Company's prior consent, including, without limitation, the -2- 3 Subscription Certificates, the Instructions for Subscription Certificates, the Notices of Guaranteed Delivery, the Form of Letter to the Holders of Common Stock, and the Form of Letter to the Holders of Common Stock whose addresses are outside the United States, and information that the Company may use or authorize for use in connection with the Rights Offering, are collectively referred to hereinafter as the "Offering Materials." Capitalized terms used herein without definition have the meanings assigned to them in the Prospectus. (ii) On the Effective Date, the Registration Statement did or will, and when the Prospectus is first filed (if required) in accordance with Rule 424(b) and on the Closing Date (as hereinafter defined), the Prospectus (and any supplements thereto) will, comply in all material respects with the applicable requirements of the Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the respective rules thereunder; on the Effective Date, the Registration Statement did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading; and on the Effective Date, the Prospectus, if not required to be filed pursuant to Rule 424(b), and the Offering Materials did not or will not, and on the date of any filing pursuant to Rule 424(b) and on the Closing Date, the Prospectus (together with any supplement thereto) and the Offering Materials will not, include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to the information contained in or omitted from the Registration Statement or the Prospectus (or any supplement thereto) in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of NAR or relating to NAR or its affiliates specifically for inclusion in the Registration Statement or the Prospectus (or any supplement thereto). (iii) The Company has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement; and this Agreement has been duly authorized, executed and delivered by the Company and, assuming due execution and delivery of this Agreement by NAR, constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms except (A) as enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and -3- 4 (B) as rights to indemnity and contribution hereunder may be limited by Federal or state securities law and/or public policy. (iv) Arthur Andersen LLP, which has reported upon the audited financial statements and schedules incorporated by reference in the Registration Statement and the Prospectus, are independent public accountants as required by the Act and the Exchange Act. (v) The consolidated financial statements and the related notes of the Company incorporated by reference in the Registration Statement and the Prospectus present fairly in accordance with generally accepted accounting principles the consolidated financial position of the Company as of the dates indicated and the consolidated results of operations and cash flows of the Company for the periods specified. Such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved, except as otherwise noted therein and subject, in the case of interim statements, to normal year-end audit adjustments. The financial statement schedules incorporated by reference in the Registration Statement and the Prospectus present fairly in accordance with generally accepted accounting principles the information required to be stated therein. (vi) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware with full corporate power and corporate authority under such laws to own, lease and operate its properties and conduct its business as described in the Registration Statement and the Prospectus; and the Company is duly qualified to transact business as a foreign corporation and is in good standing in each other jurisdiction in which it owns or leases property of a nature, or transacts business of a type, that would make such qualification necessary, except to the extent that the failure to so qualify or be in good standing would not have a material adverse effect on the Company and its subsidiaries, considered as one enterprise. (vii) All of the outstanding shares of capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; no holder thereof is or will be subject to personal liability by reason of being such a holder; and none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive rights of any stockholder of the Company. (viii) The outstanding shares of Common Stock, the Rights, the Subscription Certificates and the Securities conform in all material respects to the descriptions thereof contained or -4- 5 incorporated by reference in the Registration Statement and the Prospectus. (ix) The Company had, at the date indicated, the shareholders' equity set forth in the Consolidated Balance Sheets contained in the Annual Report on Form 10-K for the fiscal year ended December 30, 1995. (x) Prior to or at the Effective Date, the Company will have entered into a subscription agency agreement (the "Subscription Agency Agreement") with a subscription agent (the "Subscription Agent"), which Subscription Agent shall act on behalf of the Company in connection with, among other things, the issuance, exercise, sale and transfer of Rights as part of the Rights Offering. When executed by the Company, the Subscription Agency Agreement will have been duly authorized, executed and delivered by the Company and, assuming due authorization, execution and delivery by the Subscription Agent, will constitute a valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as enforcement thereof may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law). (xi) The Rights, when issued and delivered in accordance with the terms of the Rights Offering, will be validly issued, and no holder thereof is or will be subject to personal liability by reason of being such a holder; the shares of Common Stock issuable upon the exercise of the Rights and the Securities, when issued or delivered and paid for in accordance with the terms of the Rights Offering, will be validly issued, fully paid and non-assessable, and no holder thereof is or will be subject to personal liability by reason of being such a holder; and the issuance of the shares of Common Stock issuable upon the exercise of the Rights and the Securities will not be subject to the preemptive rights of any stockholder of the Company. (xii) The Company has taken all valid corporate action to duly reserve such number of its authorized and unissued shares of Common Stock as are deliverable upon consummation of purchases pursuant to the Rights Offering. (xiii) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated or described therein or contemplated thereby, there has not been (i) any material adverse change in the condition (financial or otherwise), results of -5- 6 operations, earnings, business affairs or business prospects of the Company, whether or not arising in the ordinary course of business, or (ii) any dividend or distribution of any kind declared, paid or made by the Company on its capital stock other than regular periodic dividends and other than the Rights. (xiv) Except as otherwise stated in the Prospectus or contemplated thereby, none of the Company or any of its subsidiaries is in violation of its certificate of incorporation or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which it is a party or by which it may be bound or to which any of its properties may be subject, except for such defaults that in the aggregate would not have a material adverse effect on the condition (financial or otherwise), results of operations, earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise. The execution and delivery of this Agreement, the issuance and delivery of the Rights and the Securities, the consummation of the Rights Offering and the consummation by the Company of the transaction contemplated in this Agreement, the Registration Statement and the Prospectus, and compliance by the Company with terms of this Agreement do not and will not result in any violation of the charter or by-laws of the Company, and do not and will not conflict with, or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries under (i) any indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which each of them or any of them may be bound or to which any of their respective properties may be subject or (ii) any existing applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or any of their respective properties (except, in the case of (i) and (ii) above, where such conflicts, breaches or defaults or liens, charges or encumbrances in the aggregate would not have a material adverse effect on the condition (financial or otherwise), results of operations, earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise). (xv) Except as otherwise disclosed in the Prospectus, no authorization, approval, consent or license of any government, governmental instrumentality or court, domestic or foreign (other than under the Act and the securities or blue sky law of the various states), is required for the offer of the Rights, the -6- 7 offer and sale by the Company of Securities, the consummation of the Rights Offering as set forth in the Registration Statement and the Prospectus or the consummation by the Company of the transactions contemplated in this Agreement and in the Registration Statement and the Prospectus. (xvi) Except as disclosed in the Prospectus, there is no action, suit or proceeding before or by any government, governmental instrumentality or court, domestic or foreign, now pending or, to the knowledge of the Company, threatened against or affecting the Company or any of its subsidiaries that is required to be disclosed in the Registration Statement and the Prospectus. There are no contracts or documents of a character required to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement or the Prospectus that are not described and filed as required. (xvii) The Company has not taken and will not take, directly or indirectly, any action designed to, or that might be reasonably expected to, cause or result in stabilization or manipulation of the price of the Rights or the Common Stock. (xviii) The Rights are duly authorized for trading on a when-issued and, subject only to official notice of issuance, regular way basis on the American Stock Exchange. The Securities, when issued, will be authorized for listing on said Exchange, subject only to official notice of issuance. (xix) The proceeds of the Rights Offering will be applied as set forth in the Prospectus. (xx) The terms which follow, when used in this Agreement, shall have the meanings indicated. The term "the Effective Date" shall mean each date that the Registration Statement and any post-effective amendment or amendments thereto became or become effective. "Execution Time" shall mean the date and time that this Agreement is executed and delivered by the parties hereto. "Registration Statement" shall mean the registration statement referred to in paragraph (i) above, including exhibits and financial statements, as amended at the Execution Time (or, if not effective at the Execution Time, in the form in which it shall become effective) and, in the event any post-effective amendment thereto becomes effective prior to the Closing Date, shall also mean such registration statement as so amended. "Rule 424" refers to such rule under the Act. Any reference herein to the Registration Statement or the Prospectus shall be deemed to refer to and include the documents incorporated by reference therein which were filed under the Exchange Act on or before the Effective Date of the Registration Statement -7- 8 or the issue date of the Prospectus and any reference herein to the terms "amend", "amendment" or "supplement" with respect to the Registration Statement or the Prospectus shall be deemed to refer to and include the filing of any document under the Exchange Act after the issue date of the Prospectus deemed to be incorporated therein by reference. (b) NAR represents and warrants to, and agrees with, the Company as set forth below in this Section 1(b). (i) NAR has all requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement; and this Agreement has been duly authorized, executed and delivered by NAR and, assuming due execution and delivery of this Agreement by the Company, constitutes a legal, valid and binding obligation of NAR, enforceable against NAR in accordance with its terms except (A) as enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws affecting creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and (B) as rights to indemnity and contribution hereunder may be limited by Federal or state securities laws and/or public policy. (ii) To the extent that the Registration Statement contains any information concerning NAR, on the Effective Date the Registration Statement did or will, and when the prospectus is first filed (if required) in accordance with Rule 424(b) and on the Closing Date (as hereinafter defined), the Prospectus (and any supplements thereto) will, comply in all material respects with the applicable requirements of the Act and the Exchange Act and the respective rules thereunder with respect to such information; to the extent that the Registration Statement contains any information concerning NAR, on the Effective Date, the Registration Statement did not or will not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading with respect to such information; and on the Effective Date, to the extent that the Registration Statement contains any information concerning NAR, the Prospectus, if not required to be filed pursuant to Rule 424(b), did not or will not, and on the date of any filing pursuant to Rule 424(b) and on the Closing Date, the Prospectus (together with any supplement thereto) will not, include any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading with respect to such information. -8- 9 (iii) The execution and delivery of this Agreement, the purchase of the shares of Common Stock to be purchased by NAR hereunder, the consummation by NAR of the transactions contemplated in this Agreement, the Registration Statement and the Prospectus and compliance by NAR with the terms of this Agreement do not and will not result in any violation of the memorandum or articles of association of NAR, and do not and will not conflict with, or result in a breach of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of NAR or any of its subsidiaries under (A) any indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which NAR or any of its subsidiaries is a party or by which each of them or any of them may be bound or to which any of their respective properties may be subject or (B) any existing applicable law, rule, regulation, judgment, order or decree of any government, governmental instrumentality or court, domestic or foreign, having jurisdiction over NAR or any of its subsidiaries or any of their respective properties (except, in the case of (A) and (B) above, where such conflicts, breaches or defaults or liens, charges or encumbrances in the aggregate would not have a material adverse effect on the condition (financial or otherwise), results of operations, earnings, business affairs or business prospects of NAR and its subsidiaries considered as one enterprise). (iv) Except as otherwise disclosed in the Prospectus, no authorization, approval, consent or license of any government, governmental instrumentality or court, domestic or foreign (other than under the Act and the securities or blue sky laws of the various states) is required for the purchase of the shares of Common Stock to be purchased by NAR hereunder as set forth in the Registration Statement and the Prospectus and the consummation by NAR of the transactions contemplated in this Agreement and in the Registration Statement and the Prospectus. 2. Purchase and Sale. Subject to the terms and conditions and in reliance upon the representations and warranties herein set forth, the Company agrees to sell to NAR, and NAR agrees to purchase from the Company at a purchase price per share equal to the subscription price per share specified in the Registration Statement 100% of the Non-NAR Shares, if any, which, as of the Expiration Date, have not been subscribed for by the holders of record of Common Stock by the exercise of Rights. As compensation to NAR for its commitment hereunder, the Company agrees to pay to NAR, on the Closing Date or at such other time and date as NAR and the Company may agree in writing, an amount equal to 1% (the "Standby Fee") in respect of the aggregate offering price of the aggregate number of Non-NAR -9- 10 Shares issuable upon exercise of the Rights granted to holders of Common Stock plus an additional amount equal to 4% of the aggregate offering price (the "Take-Up Fee") in respect of all Non-NAR shares, if any, purchased by NAR pursuant to its commitment hereunder; provided, however, that the Company shall pay to NAR on the Closing Date the Standby Fee and, if any, the Take-Up Fee in cash or shares of the Company's Common Stock (with each such share being attributed a value of $[1.50] by the parties hereto), or any combination of cash and shares of Common Stock as NAR shall decide in its sole discretion. NAR shall communicate its election to receive the Standby Fee and, if any, the Take-Up Fee in cash or shares of Common Stock or combinations of both by delivering a signed writing evidencing such election to the Company on the Closing Date. [Notwithstanding the foregoing, NAR shall not be entitled to a Standby Fee with respect to the shares of Common Stock issuable upon exercise of the Rights with respect to the shares of Common Stock currently owned beneficially by Theodore H. Kruttschnitt as of the date hereof if (i) at the date hereof, he furnishes to NAR an undertaking to exercise the Rights distributed to him with respect to such shares and (ii) upon the closing of the Rights Offering, Mr. Kruttschnitt purchases the shares which he undertakes to purchase.] If the closing for the sale of the Securities shall not occur as a result of (i) any termination of this Agreement pursuant to Section 8 or (ii) any cancellation of this Agreement pursuant to Section 6 if any such cancellation pursuant to Section 6 is the result of any refusal, inability or failure on the part of the Company to perform any material agreement herein or to satisfy any material condition or other provision hereof (other than Section 6(b)(i) with respect to representations contained in paragraphs (xiv), (xv) and (xvi) of Section 1(a)) on its part to be satisfied or the material breach by the Company of any of the representations and warranties contained in Section 1 hereof (other than the representations contained in paragraphs (xiv), (xv) and (xvi) of Section 1(a)), the Company shall pay NAR the entire amount of the Standby Fee. 3. Delivery and Payment. Delivery and payment for the Securities shall be made at 10:00 A.M., New York City time, on the sixth business day following the Expiration Date, which date and time may be postponed (to a date not later than __________ __, 1996) by agreement between NAR and the Company (such date and time of delivery and payment for the Securities being herein called the "Closing Date"). Delivery of the Securities shall be made to NAR against payment by NAR of the respective aggregate purchase prices of the Securities being sold by the Company, by certified or official bank check or checks drawn on or by a New York Clearing House bank or by wire transfer -10- 11 and payable in same day funds to an account or accounts designated in writing by the Company at least two business days before the Closing Date. Delivery of the Securities shall be made at such location as NAR shall reasonably designate at least one business day in advance of the Closing Date and payment for such Securities shall be made at the office of Whitman Breed Abbott & Morgan, 200 Park Avenue, New York, New York 10166. Certificates for the Securities shall be registered in such names and in such denominations as NAR may request not less than forty-eight hours in advance of the Closing Date. The Company agrees to have the Securities available for inspection, checking and packaging by NAR in New York, New York, not later than 1:00 P.M. on the business day prior to the Closing Date. 4. No Offering by NAR. It is understood that NAR does not intend to offer the Common Stock (including, but not limited to, the Securities) for sale to the public. 5. Agreements. (a) The Company agrees with NAR that: (i) The Company will use its best efforts to cause the Registration Statement, if not effective at the Execution Time, and any amendment thereof, including any post-effective amendment, to become effective as soon as practicable. Prior to the termination of the offering of the Rights and the Securities, the Company will not file any amendment to the Registration Statement or supplement to the Prospectus without NAR's prior consent, which consent shall not be unreasonably withheld or delayed. Subject to the foregoing sentence, if filing of the Prospectus is otherwise required under Rule 424(b), the Company will cause the Prospectus, properly completed, and any supplement thereto to be filed with the Commission pursuant to the applicable paragraph of Rule 424(b) within the time period prescribed and will provide evidence satisfactory to NAR of such timely filing. The Company will promptly advise NAR (A) when the Registration Statement, if not effective at the Execution Time, and any amendment thereto, shall have become effective, (B) when the Prospectus, and any supplement thereto, shall have been filed (if required) with the Commission pursuant to Rule 424(b), (C) when, prior to termination of the Rights Offering, any amendment to the Registration Statement shall have been filed or become effective, (D) of any request by the Commission for any amendment of the Registration Statement or supplement to the Prospectus or for any additional information, (E) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the institution or threatening -11- 12 of any proceeding for that purpose, (F) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose and (G) if any of the representations and warranties contained in Section 1 hereof becomes inaccurate in any material respect subsequent to the date hereof. The Company will use its best efforts to prevent the issuance of any such stop order and, if issued, to obtain as soon as possible the withdrawal thereof. (ii) If, at any time when a prospectus relating to the Rights or the Securities is required to be delivered under the Act, any event occurs as a result of which the Prospectus as then supplemented would include any untrue statement of a material fact or omit to state any material fact necessary to make the statements therein in the light of the circumstances under which they were made not misleading, or if it shall be necessary to amend the Registration Statement or supplement the Prospectus to comply with the Act or the rules thereunder (including to comply with Item 512(c) of Regulation S-K under the Act), the Company promptly will prepare and file with the Commission, subject to the second sentence of paragraph (a)(i) of this Section 5, an amendment or supplement which will correct such statement or omission or effect such compliance. (iii) As soon as practicable, the Company will make generally available to its security holders and to NAR an earning statement or statements of the Company and its subsidiaries which will satisfy the provisions of Section 11(a) of the Act and Rule 158 under the Act. (iv) The Company will furnish to NAR without charge, signed copies of the Registration Statement (including exhibits thereto) and as many copies of the Prospectus and any supplement thereto as NAR may reasonably request. The Company will pay the expenses of printing or other production of all documents relating to the Rights Offering. (v) The Company will arrange for the qualification of the Rights for distribution and offering and the Securities for distribution, offering and sale under the laws of such jurisdictions as NAR may designate, and will maintain such qualifications in effect so long as required for the distribution of the Rights or the Securities, as the case may be. (vi) Except as contemplated in the Registration State- ment or the Prospectus, the Company will not, within 90 days -12- 13 of the Effective Date, sell or otherwise dispose of any shares of Common Stock or securities convertible into or exchangeable or exercisable for such number of shares of Common Stock pursuant to a Registration Statement filed after the date hereof with the Commission pursuant to the Act without the prior written consent of NAR. (vii) The Company shall at all times reserve and keep available for issue upon the exercise of the Rights such number of authorized but unissued shares of Common Stock deliverable upon the exercise of the Rights as will be sufficient to permit the exercise in full of all Rights issued. 6. Conditions to Obligations of NAR. The obligations of NAR to purchase the Securities shall be subject to the accuracy of the representations and warranties on the part of the Company contained herein as of the Execution Time and the Closing Date, to the accuracy of the statements of the Company made in any certificates pursuant to the provisions hereof, to the performance by the Company of their obligations hereunder and to the following additional conditions: (a) If the Registration Statement has not become effective prior to the Execution Time, unless NAR agrees in writing to a later time, the Registration Statement shall have become effective not later than 12:00 Noon, New York City time, or such later time as trading in the Common Stock begins on the American Stock Exchange, on ____________ __, 1996; if filing of the Prospectus, or any supplement thereto, is required pursuant to Rule 424(b), the Prospectus, and any such supplement, will be filed in the manner and within the time period required by Rule 424(b); and no stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall have been instituted or threatened. (b) At the Execution Time and at the Closing Date, the Company shall have furnished to NAR certificates of the Company, dated respectively as of the Execution Time and the Closing Date and signed by any two executive officers of the Company, to the effect that the signers of such certificates have carefully examined the Registration Statement, the Prospectus, any supplements to the Prospectus and this Agreement and that: (i) the representations and warranties of the Company in this Agreement are true and correct in all material respects at and as of the Execution Time or on and as of the Closing Date, as the case may be, with the same effect as if made at the Execution Time or on the Closing -13- 14 Date, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the Execution Time or Closing Date, as applicable; (ii) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or, to the Company's knowledge, threatened; and (iii) since the date of the most recent financial statements included in the Prospectus (exclusive of any supplement thereto), there has been no material adverse change in the condition (financial or other), earnings, business, business prospects or properties of the Company and its subsidiaries, whether or not arising from transactions in the ordinary course of business, except as set forth in or contemplated in the Prospectus (exclusive of any supplement thereto). (c) [At the Execution Time and at the Closing Date, Arthur Andersen LLP shall have furnished to NAR letters, dated respectively as of the Execution Time and the Closing Date, in form and substance satisfactory to NAR.] (d) Subsequent to the Execution Time or, if earlier, the date as of which information is given in the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto), there shall not have been any change, or any development involving a prospective change, in or affecting the business (including the results of operations or management) or properties of the Company and its subsidiaries the effect of which is, in the reasonable judgment of NAR, so material and adverse as to make it impractical or inadvisable to proceed with the offering or the delivery of the Securities as contemplated by the Registration Statement (exclusive of any amendment thereof) and the Prospectus (exclusive of any supplement thereto). (e) The Company shall have commenced mailing the Subscription Certificates to record holders of the Common Stock not later than three days following the Record Date and shall have completed such mailing expeditiously, and shall have offered the Common Stock for subscription in accordance with the terms and under the conditions set forth in the Prospectus. The Expiration Date shall have been not later than 5:00 P.M., New York City time, on ____________ __, 1996. The Company shall have advised NAR daily during the period when the Rights are exercis-able of the number of shares of Common Stock subscribed for, and prior to 12:00 Noon, New York City time, on the business day fol- -14- 15 lowing the Expiration Date, shall have advised NAR of the number of shares of Common Stock subscribed for and of the number of Securities. (f) Prior to the Closing Date, the Company shall have furnished to NAR such further information, certificates and documents as NAR may reasonably request. If any of the conditions specified in this Section 6 shall not have been fulfilled in all material respects when and as provided in this Agreement, or if any of the opinions and certificates mentioned above or elsewhere in this Agreement shall not be in all material respects reasonably satisfactory in form and substance to NAR and its counsel, this Agreement and all obligations of NAR hereunder may be canceled at, or at any time prior to, the Closing Date by NAR. Notice of such cancellation shall be given to the Company in writing or by telephone or telegraph confirmed in writing. 7. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless NAR, the directors, officers, partners, employees and agents of NAR and each person who controls NAR within the meaning of either the Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon (i) any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Rights and the Securities as originally filed or in any amendment thereof, or in the Prospectus or any of the Offering Materials, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or (ii) the Rights Offering or the engagement of NAR pursuant to, and the performance by NAR of the services contemplated by, this Agreement, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability (A) arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by NAR specifically for inclusion therein or (B) in the case of clause (a)(ii) of this Section 7, is found in a final judgment by -15- 16 a court of competent jurisdiction to have resulted from the bad faith or gross negligence of such indemnified party or any party related to an indemnified party or to have resulted from a violation of Rule 10b-6, 10b-7 or 10b-8 under the Exchange Act by the indemnified party, other than actions performed at the written request or with the consent of the Company. This indemnity agreement will be in addition to any liability which the Company may otherwise have. The Company also agrees that no indemnified party shall have any liability (whether direct or indirect, in contract or tort or otherwise) to the Company or its security holders or creditors related to or arising out of the engagement of NAR pursuant to, or the performance by NAR of the services contemplated by, this Agreement, except to the extent that any loss, claim, damage or liability is found in a final judgment by a court to have resulted from the indemnified party's bad faith or gross negligence or a breach by NAR of its obligations under this Agreement. (b) NAR agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who signs the Registration Statement, and each person who controls the Company within the meaning of the Act or the Exchange Act, to the same extent as the foregoing indemnity from the Company to NAR, but only with reference to written information relating to NAR furnished to the Company by NAR specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which NAR may otherwise have. The Company acknowledges that the statements set forth in the fifth paragraph under the heading "THE COMPANY" in the Prospectus constitute the only information furnished by or on behalf of NAR for inclusion in the Prospectus, and NAR confirms that such statements are correct. (c) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 7, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent -16- 17 the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be reasonably satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party (it being understood, however, that in connection with such action the indemnifying party shall not be liable for the expenses of more than one separate counsel (in addition to local counsel) in any one action or separate but substantially similar actions in the same jurisdiction arising out of the same general allegations or circumstances, representing the indemnified parties who are parties to such action), (iii) the indemnifying party shall not have employed counsel reasonably satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless (x) such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding or (y) such settlement, compromise or consent involves only the payment of money damages and no other relief. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 7 is unavailable to or insufficient to hold harmless an indemnified party for any reason, the Company and NAR agree to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which the Company, on -17- 18 the one hand, and NAR, on the other hand, may be subject in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and by NAR, on the other hand, from the purchase of the Securities; provided, however, that in no case shall NAR be responsible for any amount in excess of the aggregate compensation paid hereunder to NAR in respect of the Securities purchased by NAR hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the Company, on the one hand, and NAR, on the other hand, shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company, on the one hand, and of NAR, on the other hand, in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company shall be deemed to be equal to the total net proceeds from the Rights Offering (before deducting expenses), as set forth on the cover page of the Prospectus (assuming that all such Rights are exercised), and benefits received by NAR shall be deemed to be equal to the total compensation paid to NAR hereunder. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the Company or NAR. The Company and NAR agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person who controls NAR within the meaning of either the Act or the Exchange Act and each director, officer, partner, employee and agent of NAR shall have the same rights to contribution as NAR, and each person who controls the Company within the meaning of either the Act or the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d). 8. Termination. This Agreement shall be subject to termination in the absolute discretion of NAR, by notice given to the Company prior to delivery of and payment for the Securities, if prior to such time trading in the Company's Common Stock shall have been suspended by the Commission or the American Stock Exchange or trading in securities generally on such Exchange shall have been suspended or limited or minimum prices shall have been established on such Exchange. -18- 19 9. Representations and Indemnities to Survive. The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers and of NAR set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of NAR or the Company or any of the officers, directors or controlling persons referred to in Section 7 hereof, and will survive delivery of and payment for the Securities. The provisions of the third paragraph of Section 2 hereof and the provisions of Section 7 hereof shall survive the termination or cancellation of this Agreement. 10. Notices. All communications hereunder will be in writing and effective only on receipt, and, if sent to NAR, will be mailed, delivered or telegraphed and confirmed to it at Citco Ltd., Citco Building, Wickhams Kay, P.O. Box 662, Road Town, Tortola, British Virgin Islands, or at such other address as NAR may hereafter designate by notice to the Company, with a copy to Quadrant Management, Inc. at 127 East 73rd Street, New York, New York 10021, Attention: Mr. Thomas A. Huser, Facsimile Number 212-439-9450 or, if sent to the Company, will be mailed, delivered or telegraphed and confirmed to it at 1500 Harbor Boulevard, Weehawken, New Jersey 07087, Attention: Executive Vice President-Corporate Affairs, General Counsel and Secretary, Facsimile Number 201-392-5005, or at such other address as the Company may hereafter designate by notice to NAR, with a copy to Whitman Breed Abbott & Morgan, 200 Park Avenue, New York, New York 10166, Attention: Monte E. Wetzler, Esq., Facsimile Number 212-351-3131. 11. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto and their respective successors and the officers and directors and controlling persons referred to in Section 7 hereof, and no other person will have any right or obligation hereunder. No party to this Agreement may assign its rights under this Agreement to any other person without the prior written consent of the other party hereto, except that NAR may assign its rights hereunder to one or more direct or indirect wholly-owned subsidiaries of NAR, provided that NAR shall continue to be obligated to perform all the obligations to be performed by NAR hereunder. 12. Applicable Law. This Agreement will be governed by and construed in accordance with the laws of the State of New York. 13. Business Day. For purposes of this Agreement, "business day" means any day on which the American Stock Exchange is open for trading. -19- 20 14. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. -20- 21 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, all as of the day and year first written above. HANOVER DIRECT, INC. By:______________________________ Name: Title: NAR GROUP LIMITED By:______________________________ Name: Title: -1- EX-8 3 FORM OF OPINION OF WHITMAN BREED ABBOTT & MORGAN 1 Exhibit 8 Whitman Breed Abbott & Morgan 200 Park Avenue New York, New York 10166 (212) 351-3000 June 20, 1996 Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, NJ 07087 Re: 1996 Rights Offering Ladies and Gentlemen: We have acted as counsel to Hanover Direct, Inc., a Delaware corporation (the "Company"), in connection with the distribution to holders of record (the "Holders") of its common stock, par value $.66-2/3 per share ("Common Stock"), its 6% Series A Convertible Additional Preferred Stock, par value $.01 per share, and its Series B Convertible Additional Preferred Stock, par value $.01 per share, outstanding as of a record date to be established of transferable subscription rights (the "Rights") to subscribe for and purchase shares of Common Stock (the "Rights Offering"). We have reviewed the factual information supplied to us by the Company that is set forth in the Registration Statement dated April 23, 1996 and have prepared the statements contained therein under the headings "Certain Federal Tax Consequences to Holders," "Federal Income Tax Consequences of Rights Offering to the Company" and "Certain United States Tax Consequences to Non-United States Holders" (the "Tax Discussion"). In our opinion, the Tax Discussion, to the extent it describes matters of law or legal conclusions, fairly presents the information set forth therein and, except to the extent specifically indicated therein, represents our opinion as to the material United States federal income tax consequences of the Rights Offering. Our opinion is based on laws, regulations, rulings and decisions currently in effect, all of which are subject to change (possibly with retroactive effect) and reinterpretation. Such opinion represents our legal judgment and will not be binding in any manner on the Internal Revenue Service. There can be no 2 Hanover Direct, Inc. -2- June 20, 1996 assurance that the Internal Revenue Service will take a similar view as to any of the tax consequences described in the Tax Discussion. No ruling has been or will be requested from the Internal Revenue Service on any tax matters relating to the Rights Offering or the ownership or disposition of the Common Stock acquired thereby. Very truly yours, WHITMAN BREED ABBOTT & MORGAN EX-10 4 REPURCHASE AND OPTION AGREEMENT 1 Exhibit 10 REPURCHASE AND OPTION AGREEMENT REPURCHASE AND OPTION AGREEMENT, dated as of September 29, 1995 (the "Agreement"), by and among HANOVER DIRECT, INC., a Delaware corporation ("HDI"), INTERCONTINENTAL MINING & RESOURCES INCORPORATED, a British Virgin Islands corporation ("IMR"), and SUNAMERICA LIFE INSURANCE COMPANY, an Arizona corporation ("SunAmerica"). R E C I T A L S: A. HDI is a party to that certain Indenture, dated as of August 17, 1993, as supplemented by a First Supplemental Indenture, dated as of March 28, 1995 (as so supplemented, the "Indenture"), among The Hanover Companies, a Nevada corporation ("Hanover"), The Horn & Hardart Company, a Nevada corporation (the "Guarantor"), the subsidiaries of Hanover that are signatory to the Indenture and First Trust National Association, a national association, as trustee (the "Trustee"); B. Hanover and the Guarantor were merged with and into HDI, pursuant to the provisions of the Agreements and Plans of Merger, dated as of April 15, 1993, between each of Hanover 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, Hanover and the Guarantor, respectively, under the Indenture pursuant to Section 5.2 of the Indenture; C. Pursuant to Sections 6.4 and 9.2 of the Indenture, the obligations of Hanover and the Guarantor under the Indenture have been assumed by HDI as successor by merger to each of Hanover and the Guarantor; D. Pursuant to the Indenture, $14,000,000 aggregate principal amount of HDI's 9.25% Senior Subordinated Notes due August 1, 1998 (the "Notes") currently remain outstanding; E. SunAmerica is the sole holder of all the outstanding Notes; and F. HDI, SunAmerica and IMR desire to enter into an agreement to set forth the terms and conditions pursuant to which (i) HDI shall acquire the right to refinance the Notes held by SunAmerica by payment of the outstanding principal amount of the Notes, plus accrued interest and any amounts otherwise due (excluding prepayment penalties) on the Notes to the date of purchase (the "Purchase Price"), 2 (ii) SunAmerica shall acquire an option to put the Notes to IMR at the Purchase Price and (iii) IMR shall acquire from SunAmerica an option to purchase the Notes from SunAmerica at the Purchase Price. A G R E E M E N T: The parties hereto agree as follows: SECTION 1 REPURCHASE SECTION 1.1. RIGHT TO REPURCHASE THE NOTES. HDI shall use its best efforts to repurchase or arrange for an alternate purchaser to purchase all of the outstanding Notes at the Purchase Price, on or prior to November 10, 1995 (the "Exercise Date"). Prior to the Exercise Date, SunAmerica hereby agrees that HDI shall have the right to repurchase, or an alternate purchaser located by HDI (the "Alternate Purchaser") shall have the right to purchase, all of the outstanding Notes at the Purchase Price. SunAmerica shall not interfere with the exercise of HDI's right to repurchase or arrange for an Alternate Purchaser to purchase all of the outstanding Notes; provided, however, SunAmerica shall have no obligation to transfer the Notes to any entity if it reasonably concludes such transfer would be objectionable to any governmental body and, provided further, that any such party shall not qualify as an Alternate Purchaser. SECTION 1.2. MANNER OF REPURCHASE. (a) In the event that HDI is able to repurchase or has arranged for an Alternate Purchaser to purchase all of the outstanding Notes on or prior to the Exercise Date, HDI shall provide each of SunAmerica and IMR at their respective addresses set forth in Section 8.3 hereof with notice of its intent to repurchase or to have the Alternate Purchaser specified in such notice purchase all of the outstanding Notes (the "Repurchase Notice"). (b) The Repurchase Notice shall specify a date not less than five (5) nor more than thirty (30) days after the date of the Repurchase Notice for the closing of the repurchase of all of the outstanding Notes but in no event later than November 14, 1995 (the "Repurchase Closing Date"). Upon giving the Repurchase Notice, HDI or the Alternate Purchaser shall be entitled to receive, in exchange for payment of the Purchase Price, at the Repurchase Closing (as defined below) all of the outstanding Notes held by SunAmerica, with a form of assignment and indorsement, without recourse, satisfactory to it duly executed with the signature thereon guaranteed by a national bank, in form ready for registration of transfer, free and -2- 3 clear of all liens, charges, encumbrances and claims whatsoever. SECTION 1.3. CLOSING OF THE REPURCHASE. (a) The closing of the repurchase of the Notes (the "Repurchase Closing") shall be held at 10:00 A.M., New York City time on the Repurchase Closing Date at the offices of Whitman Breed Abbott & Morgan, 200 Park Avenue, New York, New York 10166, or during such other time or at such other place as may be agreed upon in writing by HDI or the Alternate Purchaser and SunAmerica. (b) At the Repurchase Closing (i) HDI or the Alternate Purchaser shall (A) pay to SunAmerica the Purchase Price in cash (by wire transfer of immediately available funds to an account designated two (2) business days prior to the Repurchase Closing Date by SunAmerica) and (B) become bound by the terms and conditions of the Subordination Agreement as provided in Section 8.11 and (ii) SunAmerica shall deliver to (A) HDI or the Alternate Purchaser all of the outstanding Notes together with a form of assignment and indorsement, without recourse, satisfactory to it duly executed with the signature thereon guaranteed by a national bank, in form ready for registration of transfer, free and clear of all liens, charges, encumbrances and claims whatsoever and (B) IMR the notice of termination by SunAmerica pursuant to the Three Party Agreement in the form attached hereto as Exhibit A. SECTION 2 PUT OPTION SECTION 2.1. GRANT OF OPTION TO SELL THE NOTES. In the event that HDI is not able to repurchase or has not arranged for an Alternate Purchaser to purchase all of the outstanding Notes on or prior to the Exercise Date or either such party shall fail to repurchase all the outstanding Notes at the Repurchase Closing, IMR hereby irrevocably grants to SunAmerica the option to require IMR to purchase all of the outstanding Notes at the Purchase Price subject to the terms and conditions set forth herein (such right is referred to herein as the "Put Option"). If HDI is not able to repurchase or has not arranged for an Alternate Purchaser to purchase all of the outstanding Notes on or prior to the Exercise Date, SunAmerica shall be deemed to have exercised the Put Option and the closing of the exercise of the Put Option (the "Put Closing Date") shall be held on Tuesday, November 14, 1995. On the Put Closing Date, SunAmerica shall be entitled to receive from IMR at the Put Closing (defined below), upon delivery of all of the outstanding Notes and the notice of termination by SunAmerica called for -3- 4 by Exhibit A attached hereto, payment of the Purchase Price in cash as set forth in Section 2.2. SECTION 2.2. CLOSING OF THE EXERCISE OF THE PUT OPTION. The closing of the exercise of the Put Option and sale of the Notes (the "Put Closing") shall be held at 10:00 A.M., New York City time on the Put Closing Date at the offices of Whitman Breed Abbott & Morgan, 200 Park Avenue, New York, New York 10166, or during such other time or at such other place as may be agreed upon in writing by SunAmerica, IMR and HDI. At the Put Closing, SunAmerica shall deliver to IMR all of the outstanding Notes duly executed, indorsed and assigned without recourse with the signature thereon notarized in form ready for registration of transfer, free and clear of all liens, charges, encumbrances and claims whatsoever and a notice of termination in the form of Exhibit A attached hereto duly executed by an authorized officer in exchange for payment by IMR of the Purchase Price in cash (by wire transfer of immediately available funds to an account designated two (2) days prior to the Put Closing Date by SunAmerica). SECTION 3 CALL OPTION SECTION 3.1. GRANT OF OPTION TO PURCHASE THE NOTES. SunAmerica hereby irrevocably grants to IMR the option to purchase the Notes at the Purchase Price at any time prior to November 10, 1995 (the "Call Expiration Date"), subject to the other terms and conditions set forth herein (such right is referred to herein as the "Call Option"). The obligation of SunAmerica to sell the Notes to IMR as provided in this Section 3.1 shall be absolute and unconditional notwithstanding any defenses, offsets or counterclaims that SunAmerica may have against IMR, other than any defenses, offsets or counterclaims based on any provision of this Agreement. SECTION 3.2. MANNER OF EXERCISE BY IMR. (a) From and after the date hereof and at any time prior to 5:00 P.M., New York City time, on the Call Expiration Date, IMR may exercise the Call Option for all of the outstanding Notes. In order to exercise the Call Option, IMR shall send to each of HDI and SunAmerica at their respective addresses set forth in Section 8.3 hereof a written notice of exercise (the "Call Exercise Notice"). (b) The Call Exercise Notice shall specify a date not less than five (5) days after the date of the Call Exercise Notice for the closing of the exercise of the Call Option, but in no event shall the closing take place later than November 14, 1995 (the "Call Closing Date"). Upon -4- 5 giving of the Call Exercise Notice, IMR shall be entitled to receive at the Call Closing (as defined below), upon payment of the Purchase Price, all of the outstanding Notes, as set forth in Section 3.5 and the notice of termination of SunAmerica called for by Exhibit A attached hereto. SECTION 3.3. NON-EXERCISE OF CALL OPTION. If IMR fails to give the Call Exercise Notice prior to the Call Expiration Date, IMR shall be deemed to have elected not to exercise the Call Option and the Call Option shall expire and be of no further force and effect. SECTION 3.4. WHEN EXERCISE EFFECTIVE. The exercise of the Call Option shall be deemed to have been effected immediately prior to the close of business on the day IMR shall send the Call Exercise Notice. SECTION 3.5. CLOSING OF THE EXERCISE OF THE CALL OPTION. The closing of the exercise of the Call Option and purchase of the Notes (the "Call Closing") shall be held at 10:00 A.M., New York City time on the Call Closing Date at the offices of Whitman Breed Abbott & Morgan, 200 Park Avenue, New York, New York 10166, or during such other time or at such other place as may be agreed upon in writing by SunAmerica, IMR and HDI. At the Call Closing, SunAmerica shall deliver to IMR all of the outstanding Notes duly executed, assigned and indorsed without recourse with the signature thereon guaranteed by a national bank, in form ready for registration of transfer, free and clear of all liens, charges, encumbrances and claims whatsoever in exchange for payment by IMR of the Purchase Price in cash (by wire transfer of immediately available funds to an account designated two (2) days prior to the Call Closing Date by SunAmerica). SECTION 4 PLEDGE OF COLLATERAL BY IMR SECTION 4.1. THE PLEDGE. To secure its obligations under this Agreement, IMR hereby pledges and grants to SunAmerica a first priority security interest in all of IMR's right, title and interest in, to and under the following property, whether now owned by IMR or hereafter acquired and whether now existing or hereafter coming into existence (all being collectively referred to herein as the "Collateral"), all cash, money, equity and debt securities, proceeds therefrom, reinvestment income and interest now and hereafter held in account no. 703815027 maintained at IBJ Schroder Bank ("IBJ"), as more particularly described on Schedule 1 attached hereto (the "Account"), and in any renewals, reinvestments or extensions of the Account. Such -5- 6 arrangements are described in the Three Party Agreement attached hereto as Exhibit B. SECTION 4.2. PRESERVATION OF COLLATERAL. (a) IMR agrees that while this Agreement is in effect, IMR will not cause any withdrawals or reductions from the Account. (b) IMR shall direct IBJ to refuse all withdrawals or reductions from the Account by persons other than SunAmerica until SunAmerica notifies IBJ to the contrary. SECTION 4.3. REMEDIES; SALES OF COLLATERAL. If IMR fails to fulfill its obligations under this Agreement, including, but not limited to, IMR's obligation to purchase all of the outstanding Notes at the Purchase Price upon the Put Closing Date, SunAmerica shall have all of the rights and remedies with respect to the Collateral of a secured party under the Uniform Commercial Code including but not limited to the right to sell, lease, assign or otherwise dispose of all or any part of such Collateral through one or more transactions, at such place or places as SunAmerica deems best, and for cash or on credit or for future delivery (without assuming any credit risk), at a public or private sale, without demand of performance or notice of intention to effect any such disposition or of time or place thereof (except such notice as is required above or by applicable statute and cannot be waived) and SunAmerica may be the purchaser, lessee, assignee or recipient of any or all of the Collateral so disposed of at any public sale (or, to the extent permitted by law, at any private sale), and thereafter hold the same absolutely, free from any claim or right of whatsoever kind, including any right or equity of redemption of IMR, any such demand, notice or right and equity being expressly waived and released. SECTION 4.4 POWER OF ATTORNEY. Should IMR fail to perform its obligations under this Agreement, then, upon not less than three (3) business days notice (the "Notice Period") to IBJ and IMR specifying in detail the specific obligations of IMR which IMR is alleged to have failed to perform (unless within the Notice Period IMR shall send a notice to IBJ and SunAmerica in good faith objecting to or otherwise disputing the allegations made by SunAmerica (the "Objection Notice"), provided, however, that IMR shall not send any such Objection Notice if the alleged obligations specified in the notice to be sent by SunAmerica consist of IMR's failure to pay the amounts due to SunAmerica hereunder and SunAmerica has tendered the Notes to IMR together with the notice of termination as provided in Section 2), SunAmerica shall be appointed the attorney-in-fact of IMR -6- 7 for the purpose of carrying out the provisions of this Section 4 and taking any action and executing any instruments which SunAmerica may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. Without limiting the generality of the foregoing, so long as SunAmerica shall be entitled under this Agreement to make collections in respect of the Collateral, SunAmerica shall have the right and power to receive, endorse and collect all checks made payable to the order of IMR representing any dividend, payment or other distribution in respect of the Collateral or any part thereof and to give full discharge for the same. If IMR shall send the Objection Notice provided for this Section 4.4 to IBJ and SunAmerica, no appointment of SunAmerica as attorney-in-fact of IMR for any purpose whatsoever shall be made hereunder unless and until it is finally determined by a court having jurisdiction that IMR did fail to perform its obligations hereunder, at which point SunAmerica shall be granted the power of attorney described above in this Section 4.4. SECTION 4.5. IMR REPRESENTATIONS AND WARRANTIES REGARDING THE COLLATERAL. IMR hereby represents and warrants that: (a) the aggregate market value of the Account as of this date is $25,000,000. (b) IMR is the sole owner of the Collateral and has not made any other assignment, hypothecation, encumbrance or restriction of any kind or nature of or on the Account or any Collateral covered by this Section 4, apart from those granted in this Section 4. SECTION 4.6. SUBORDINATION. Until the obligations of IMR and HDI under this Agreement have been satisfied in full, any rights of IMR in the Account and the Collateral are hereby fully subordinated to the rights of SunAmerica. SECTION 4.7. DEFICIENCY. If the proceeds of sale, collection or other realization of or upon the Collateral by virtue of the exercise of remedies under this Section 4 are insufficient to cover the costs and expenses of such realization and the payment in full of the Purchase Price of the Notes upon the Put Closing Date, HDI and IMR shall remain liable for any deficiency to the extent HDI and IMR are obligated under the Indenture and this Agreement, respectively. -7- 8 SECTION 4.8. EXCESS. If the proceeds of sale, collection or other realization of or upon the Collateral by virtue of the exercise of remedies under this Section 4 are more than sufficient to cover the costs and expenses of such realization and the payment in full of the Purchase Price of the Notes upon the Put Closing Date, SunAmerica shall be liable to and shall pay IMR in full for any such excess promptly after collection thereof. SECTION 5 REPRESENTATIONS AND WARRANTIES OF HDI SECTION 5.1. VALIDITY OF THIS AGREEMENT. The execution, delivery and performance by HDI of this Agreement and the transactions contemplated hereby have been duly authorized and approved by all necessary corporate action on the part of HDI. This Agreement is a valid and binding agreement of HDI enforceable against HDI in accordance with its terms, subject to bankruptcy, insolvency and other laws of general application affecting the rights of creditors and to general equitable principles. The execution and delivery of this Agreement and the performance by HDI of the transactions contemplated hereby will not constitute a violation of any provision of any law, statute, rule or regulation applicable to HDI, and will not, in any material respect, conflict with or violate, or result in a breach in any material respect of any of the terms of, or constitute a default under, any charter, by-law, agreement, instrument, judgment, decree, writ, order or other restriction to which HDI is a party or by which any of its properties is bound, provided that the consent of NationsBank, National Association (Carolinas) ("NationsBank") as Agent under a certain Credit Facilities and Reimbursement Agreement with HDI is obtained. SECTION 5.2. GOVERNMENTAL CONSENT, ETC. No consent (other than the consent of NationsBank), approval or authorization of, or filing with, any governmental body or other person is required in connection with the execution and delivery of this Agreement or the consummation of any of the transactions contemplated hereby, or any such consent, approval, authorization or filing required has been identified in writing to SunAmerica and IMR and has been obtained or effected. SECTION 5.3. LITIGATION. There are no proceedings pending or, to the knowledge of HDI, threatened before any court or arbitrator or before or by any governmental agency which question the validity or legality of this Agreement or any action taken or to be taken pursuant hereto or which, in any one case or in the -8- 9 aggregate, if decided adversely to the interests of HDI, would interfere with the ability of HDI to enter into this Agreement or perform any of the transactions contemplated hereby. SECTION 6 REPRESENTATIONS AND WARRANTIES OF IMR SECTION 6.1. VALIDITY OF THIS AGREEMENT. The execution, delivery and performance by IMR of this Agreement and the transactions contemplated hereby have been duly authorized and approved by all necessary corporate action on the part of IMR. This Agreement is a valid and binding agreement of IMR enforceable against IMR in accordance with its terms, subject to bankruptcy, insolvency and other laws of general application affecting the rights of creditors and to general equitable principles. The execution and delivery of this Agreement and the performance by IMR of the transactions contemplated hereby will not constitute a violation of any provision of any law, statute, rule or regulation applicable to IMR, and will not conflict with or violate, or result in a breach in any material respect of any of the terms of, or constitute a default under, any charter, by-law, agreement, instrument, judgment, decree, writ, order or other restriction to which IMR is a party or by which any of its properties is bound. SECTION 6.2. GOVERNMENTAL CONSENT, ETC. No consent, approval or authorization of, or filing with, any governmental body or other person is required in connection with the execution and delivery of this Agreement or the consummation of any of the transactions contemplated hereby, or any such consent, approval, authorization or filing required has been identified in writing to HDI and SunAmerica and has been obtained or effected. SECTION 6.3. LITIGATION. There are no proceedings pending or, to the knowledge of IMR, threatened before any court or arbitrator or before or by any governmental agency which question the validity or legality of this Agreement or any action taken or to be taken pursuant hereto or which, in any one case or in the aggregate, if decided adversely to the interests of IMR, would interfere with the ability of IMR to enter into this Agreement or perform any of the transactions contemplated hereby. SECTION 7 REPRESENTATIONS AND WARRANTIES OF SUNAMERICA -9- 10 SECTION 7.1. VALIDITY OF THIS AGREEMENT. The execution, delivery and performance by SunAmerica of this Agreement and the transactions contemplated hereby have been duly authorized and approved by all necessary corporate action on the part of SunAmerica. This Agreement is a valid and binding agreement of SunAmerica enforceable against SunAmerica in accordance with its terms subject to bankruptcy, insolvency and other laws of general application affecting the rights of creditors and to general equitable principles. The execution and delivery of this Agreement and the performance by SunAmerica of the transactions contemplated hereby will not constitute a violation of any provision of any law, statute, rule or regulation applicable to SunAmerica, and will not conflict with or violate, or result in a breach in any material respect of any of the terms of, or constitute a default under, any charter, by-law, agreement, instrument, judgment, decree, writ, order or other restriction to which SunAmerica is a party or by which any of its properties is bound. SECTION 7.2. GOVERNMENTAL CONSENT, ETC. No consent, approval or authorization of, or filing with, any governmental body or other person is required in connection with the execution and delivery of this Agreement or the consummation of any of the transactions contemplated hereby, or any such consent, approval, authorization or filing required has been identified in writing to HDI and IMR and has been obtained or effected. SECTION 7.3. OWNERSHIP AND DELIVERY OF NOTES. SunAmerica at the time of the delivery of the Notes at the Repurchase Closing, the Put Closing or the Call Closing, as the case may be, will be the sole holder of all of the outstanding Notes and will have good title to the Notes. The Notes delivered by SunAmerica to (i) HDI or the Alternate Purchaser at the Repurchase Closing or (ii) IMR at either the Put Closing or the Call Closing, as the case may be, will be free and clear of all liens, pledges, security interests, charges, encumbrances and claims whatsoever, and subject to no restrictions on the sale, transfer or assignment of the Notes, other than as set forth in the Indenture. SECTION 7.4. LITIGATION. There are no proceedings pending or, to the knowledge of SunAmerica, threatened before any court or arbitrator or before or by any governmental agency which question the validity or legality of this Agreement or any action taken or to be taken pursuant hereto or which, in any one case or in the aggregate, if decided adversely to the interests of SunAmerica, would interfere with the ability of SunAmerica to enter into this Agreement or perform any of the transactions contemplated hereby. -10- 11 SECTION 8 MISCELLANEOUS SECTION 8.1. AMENDMENT. This Agreement may be amended only by a written instrument signed by each of the parties hereto. SECTION 8.2. APPLICABLE LAW. This Agreement shall be construed and enforced in accordance with the internal substantive laws of the State of New York, without giving effect to the conflicts of law rules thereof. SECTION 8.3. NOTICES. Any notice pursuant to this Agreement to be given by any party shall be sufficiently given for purposes of this Agreement if sent by first-class mail, postage prepaid, delivered by hand or overnight courier or sent by facsimile, addressed as follows: (i) if to HDI, addressed to: Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, New Jersey 07087 Attn: Michael P. Sherman, Esq. Facsimile Number: 201-392-5005 with a copy to: Monte E. Wetzler, Esq. Whitman Breed Abbott & Morgan 200 Park Avenue New York, New York 10166 Facsimile Number: 212-351-3131 (ii) if to IMR, addressed to: Intercontinental Mining & Resources Incorporated c/o Quadrant Management Company 127 East 73rd Street New York, New York 10021 Attn: Mr. Alan G. Quasha Facsimile Number: 212-753-4974 -11- 12 (iii) if to SunAmerica, addressed to: SunAmerica Life Insurance Company 1 SunAmerica Center Century City Los Angeles, California 90067 Attn: Mr. Michael Thomas Facsimile Number: 310-772-6030 with a copy to: Milbank, Tweed, Hadley & McCloy 601 South Figueroa, 30th Floor Los Angeles, California 90017 Attn: Eric H. Schunk, Esq. Facsimile Number: 213-629-5063 or at such other address as shall be furnished in writing to the other parties. SECTION 8.4. ASSIGNMENT; SUCCESSORS. No party may assign its rights under this Agreement to any other person without the prior written consent of each of the other parties except that SunAmerica may assign its rights to an affiliate or a nationally recognized financial institution with assets of not less than $100,000,000. This Agreement shall be binding upon and shall inure to the benefit of the successors and permitted assigns of the parties hereto. SECTION 8.5. HEADINGS. The Section headings herein are for convenience only, are not part of this Agreement and shall not affect the interpretation hereof. SECTION 8.6. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which counterparts shall for all purposes be deemed to be an original and all of which together shall constitute one and the same instrument. SECTION 8.7. SEVERABILITY; WAIVER. If any provision of this Agreement is found to be illegal or invalid for any reason, the remaining provisions of this Agreement shall remain in full force and effect. No waiver of any term, provision or condition of this Agreement shall be deemed to be or construed as a further or continuing waiver of such term, provision or condition or as a waiver of any other term, condition or provision of this Agreement. SECTION 8.8. ENFORCEMENT OF AGREEMENT. The parties hereto agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or -12- 13 were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof in any federal or state court located in New York County, New York, this being in addition to any other remedy to which they are entitled at law or in equity. SECTION 8.9. EXPENSES. Each party to this Agreement shall bear its own expenses in connection with the transactions contemplated hereby, except that should any party hereto be required to incur legal fees and expenses in connection with the enforcement of this Agreement, then the prevailing party in any such enforcement proceeding shall be entitled to be reimbursed by the party against whom any order is issued enforcing any provision of this Agreement all such legal fees and expenses. Notwithstanding the foregoing, HDI agrees to pay all costs and expenses incurred by SunAmerica (including reasonable legal fees and expenses) in connection with this Agreement or the modification, amendment or enforcement of this Agreement. SECTION 8.10. INDENTURE. Nothing contained herein shall be deemed to be a waiver, modification or amendment of any of the rights of SunAmerica under the Notes, the Indenture and the documents related thereto, and SunAmerica and HDI agree that all such rights may be enforced notwithstanding anything herein. SECTION 8.11. SUBORDINATION AGREEMENT. IMR and HDI hereby acknowledge that the Notes and the documents related thereto are subject to the terms and conditions of the Amended and Restated Subordination Agreement dated as of September 29, 1995 (the "Subordination Agreement") and IMR and HDI hereby agree that in the event they become the holder of the Notes that they will be bound by the terms and conditions of the Subordination Agreement or, if an Alternate Purchaser becomes the holder of the Notes, HDI shall cause such Alternate Purchaser to be bound by the terms and conditions of the Subordination Agreement. SECTION 8.12 (a) GUARANTEE. NAR Group Limited, a British Virgin Islands corporation and the corporate parent of IMR (the "Guarantor"), by its signature hereto, hereby guarantees to SunAmerica, its successors and assigns, the performance by IMR of all its obligations contained in this Agreement (the "Guaranteed Obligations"). This Guarantee is of payment (and not collection) and is irrevocable and unconditional in nature and the Guarantor's liability under this Guarantee shall continue until full satisfaction of all Guaranteed Obligations. -13- 14 (b) ACKNOWLEDGEMENTS, WAIVERS AND CONSENTS. The obligations of the Guarantor under Section 8.12(a) are absolute and unconditional irrespective of the value, genuineness, validity, regularity or enforceability of this Agreement or any other agreement or instrument referred to in this Agreement, including, without limitation, this Section 8.12, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Section 8.12(b) that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. Without limiting the generality of the foregoing, it is agreed that the occurrence of any one or more of the following shall not alter or impair the liability of the Guarantor under this Section 8.12: (i) at any time or from time to time, without notice to the Guarantor, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of this Agreement or any other agreement or instrument referred to in this Agreement shall be done or omitted; (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under this Agreement or any other agreement or instrument referred to in this Agreement shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; (iv) the bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up of, or composition or readjustment of debts of, IMR; or (v) any lien or security interest created or purported to be created under this Agreement or any other lien or security interest granted or purported to be granted to, or in favor of, SunAmerica as security for any of the Guaranteed Obligations shall fail to be valid or perfected or to be senior to any other lien or security interest. -14- 15 The Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever, and any requirement that SunAmerica exhaust any right, power or remedy or proceed against IMR under this Agreement, the Three Party Agreement or any other agreement or instrument referred to in this Agreement or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. (c) UNDERSTANDING WITH RESPECT TO WAIVERS AND CONSENTS. The Guarantor warrants and agrees that each of the waivers and consents set forth in this Section 8.12 are made voluntarily and unconditionally after consultation with outside legal counsel and with full knowledge of their significance and consequences, with the understanding that events giving rise to any defense or right waived may diminish, destroy or otherwise adversely affect rights which any other guarantor otherwise may have against HDI, IMR or any other person or entity or against any collateral. If, notwithstanding the intent of the parties that the terms of this Section 8.12 shall control in any and all circumstances, any such waivers or consents are determined to be unenforceable under applicable law, such waivers and consents shall be effective to the fullest extent permitted by law. (d) SEPARATE ACTION. SunAmerica may bring and prosecute a separate action or actions against the Guarantor whether or not IMR, any other guarantor or any other person or entity is joined in any such action or a separate action or actions are brought against IMR, any other guarantor, any other person or entity, or any collateral for all or any part of the Guaranteed Obligations. The obligations of the Guarantor under, and the effectiveness of, this Section 8.12 are not conditioned upon the existence or continuation of any other guarantee of all or any part of the Guaranteed Obligations. -15- 16 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, as of the day and year first written above. HANOVER DIRECT, INC. By: /s/ Edward J. O'Brien ------------------------ Name: Title: INTERCONTINENTAL MINING & RESOURCES INCORPORATED By: /s/ Thomas A. Huser ------------------------ Name: Title: SUNAMERICA LIFE INSURANCE COMPANY By: /s/ Michael Thomas ------------------------ Name: Title: As to paragraph 8.12 NAR GROUP LIMITED By: /s/ Thomas A. Huser ------------------------ Name: Title: -16- 17 SCHEDULE 1 SECURITIES IN ACCOUNT (9/95)
Issuer and Description Face Value - ---------------------- ---------- General Motors Acceptance Corp. $5,000,000 Medium Term Notes (9.2%) due 12/11/95 RJR Nabisco Discounted Commercial Paper 5,300,000 due 12/19/95 Conagra Inc. Discounted Commercial Paper 5,300,000 due 12/15/95 Sprint Capital Corp. Discounted Commercial 5,300,000 Paper due 12/22/95 Union Oil Co. of California Discounted 4,510,000 Commercial Paper due 12/18/95
-17- 18 Exhibit A FORM OF NOTICE OF DEFAULT [Date] IBJ Schroder Bank & Trust Company One State Street New York, NY 10004 Attn: Corporate Banking Division Gentlemen: Reference is made to (i) that certain Repurchase and Option Agreement dated as of September 29, 1995 (the "Repurchase and Option Agreement") by and among Hanover Direct, Inc., Intercontinental Mining & Resources Incorporated ("IMR") and SunAmerica Life Insurance Company ("SunAmerica") and (ii) that certain Three Party Agreement dated as of September 29, 1995 (the "Three Party Agreement") by and among IMR, SunAmerica and IBJ Schroder Bank & Trust Company. You are hereby notified that IMR is in breach of its obligations under the Repurchase and Option Agreement. As a result, IBJS shall act solely at the direction of SunAmerica as provided in the Three Party Agreement. Very truly yours, SUNAMERICA LIFE INSURANCE COMPANY By:_______________________________ Name: Title: cc: Intercontinental Mining & Resources Incorporated Accepted and Agreed: IBJ SCHRODER BANK & TRUST COMPANY By:______________________________ Name: Title: -2- 19 Exhibit B FORM NOTICE OF TERMINATION [Date] IBJ Schroder Bank & Trust Company One State Street New York, NY 10004 Attn: Corporate Banking Division Gentlemen: Reference is made to (i) that certain Repurchase and Option Agreement dated as of September 29, 1995 (the "Repurchase and Option Agreement") by and among Hanover Direct, Inc., Intercontinental Mining & Resources Incorporated ("IMR") and SunAmerica Life Insurance Company ("SunAmerica") and (ii) that certain Three Party Agreement dated as of September 29, 1995 (the "Three Party Agreement") by and among IMR, SunAmerica and IBJ Schroder Bank & Trust Company. You are hereby notified that SunAmerica has sold all of the outstanding Notes (as defined in the Repurchase and Option Agreement) pursuant to Section 3.2 of the Repurchase and Option Agreement. As a result, the Three Party Agreement is hereby terminated and is of no further force or effect. Very truly yours, SUNAMERICA LIFE INSURANCE COMPANY By:_______________________________ Name: Title: cc: Intercontinental Mining & Resources Incorporated Accepted and Agreed: IBJ SCHRODER BANK & TRUST COMPANY By:______________________________ Name: Title: EX-23.1 5 CONSENTS OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1(A) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use and incorporation by reference in this Amendment No. 1 to registration statement of our reports dated March 29, 1996 (except with respect to the matters discussed in Note 14, as to which the date is March 7, 1996) included therein and in Hanover Direct, Inc.'s Form 10-K for the year ended December 30, 1995. ARTHUR ANDERSEN, LLP New York, New York June 20, 1996 2 EXHIBIT 23.1(B) CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Amendment No. 1 to registration statement of our report dated February 23, 1996 included in Hanover Direct, Inc.'s Form 8-K, as amended by Amendment No. 1 thereto, dated April 16, 1996, and to all references to our Firm included in this Amendment No. 1 to registration statement. ARTHUR ANDERSEN, LLP Minneapolis, Minnesota June 20, 1996 EX-99.3 6 FORM OF SUBSCRIPTION AGENCY AGREEMENT 1 Exhibit 99.3 [Form of Subscription Agency Agreement] SUBSCRIPTION AGENCY AGREEMENT SUBSCRIPTION AGENCY AGREEMENT (this "Agreement"), dated as of June __, 1996, by and between Hanover Direct, Inc., a Delaware corporation (the "Company"), and American Stock Transfer and Trust Company, as Subscription Agent (the "Subscription Agent"). WHEREAS, the Company has caused a Registration Statement on Form S-3 (Registration No. 333-2743) under the Securities Act of 1933, as amended (the "Act"), to be filed with the Securities and Exchange Commission (the "Commission") relating to a proposed distribution by the Company of transferable subscription rights (the "Rights") and sale of newly issued shares of the Company's Common Stock, par value $.662/3 per share (the "Common Stock"), upon the exercise of such Rights (such Registration Statement, in the form in which it first becomes effective under the Act, and as it may thereafter be amended from time to time, is referred to herein as the "Registration Statement"; the distribution of the Rights and the sale of shares of Common Stock upon the exercise thereof as contemplated by the Registration Statement is referred to herein as the "Rights Offering"); WHEREAS, the Rights will be distributed to holders of record of shares of Common Stock as of the close of business on [__________ __], 1996 (the "Record Date") at a rate of [___] of a Right for each share of Common Stock held on the Record Date; WHEREAS, the Company has authorized the issuance of an aggregate number of authorized and unissued or treasury shares of Common Stock (the "Underlying Shares") equal to the aggregate number of rights to be distributed pursuant to the Rights Offering; WHEREAS, Rights holders will be entitled to subscribe to purchase at a per share price of $[________] (the "Subscription Price") one Underlying Share for each Right held (the "Basic Subscription Privilege"); WHEREAS, NAR Group Limited ("NAR") will be entitled to subscribe to purchase any Underlying Shares that are not subscribed for through the Basic Subscription Privilege (the "Standby Purchase Commitment"). The right to subscribe for such Underlying Shares pursuant to the Standby Purchase Commitment is not transferable; and 2 WHEREAS, the Company desires the Subscription Agent to act on its behalf in connection with the Rights Offering as set forth herein, and the Subscription Agent is willing so to act; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereto hereby agree as follows: SECTION 1. Appointment of Subscription Agent. The Company hereby appoints the Subscription Agent to act as agent for the Company in accordance with the instructions set forth in this Agreement, and the Subscription Agent hereby accepts such appointment. The Company may from time to time appoint such co-subscription agents as it may deem necessary or desirable. SECTION 2. Issue of Securities. (a) The Company has authorized the issuance of the Rights and, following the effectiveness of the Registration Statement and the Record Date, will issue such Rights to holders of record of shares of Common Stock as of the close of business on the Record Date as contemplated by the Registration Statement. The Company will promptly notify the Subscription Agent upon the effectiveness of the Registration Statement. As transfer agent and registrar for the shares of Common Stock, the Subscription Agent shall provide such assistance as the Company may require in order to effect the distribution of the Rights to holders of record of shares of Common Stock as of the close of business on the Record Date, including assistance in determining the number of Rights to be distributed to each such record holder and assistance in distributing the Subscription Certificates (as defined in Section 3(b) hereof) evidencing the Rights and all other ancillary documents. (b) The Company has authorized the issuance of and will hold in reserve the Underlying Shares, and upon the valid exercise of Rights, the Company will issue Underlying Shares to validly exercising Rights holders as set forth in the Prospectus. SECTION 3. Subscription Privileges; Form of Subscription Certificates. (a) Pursuant to the Basic Subscription Privilege, each Right grants to the holder thereof, upon the valid exercise of the Right pursuant to Section 7 hereof, the right to purchase from the Company one Underlying Share for the Subscription Price. -2- 3 (b) Pursuant to the Standby Purchase Commitment, each Right grants to NAR, upon the valid exercise of the Right pursuant to Section 7 hereof, the right to purchase from the Company Underlying Shares to the extent that any Underlying Shares are not subscribed for through the Basic Subscription Privilege. (c) The Rights shall be evidenced by subscription certificates (the "Subscription Certificates"). The Subscription Certificates (and the form of election to exercise or transfer rights to be printed on the reverse thereof) shall be substantially in the form attached as Exhibit A hereto. The Subscription Certificates shall be fully transferable. SECTION 4. Signature and Registration. (a) The Subscription Certificates shall be executed on behalf of the Company by its [Chairman] [President] and Chief Executive Officer and by its Secretary by facsimile signature. Any Subscription Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Subscription Certificate, shall be a proper officer of the Company to sign such Subscription Certificate, even if at the date of the execution of this Agreement or the date of the actual issuance of such certificate any such person is not such an officer. (b) The Subscription Agent will keep or cause to be kept, at its principal offices in the State of New York, books for registration and transfer of the Rights issued hereunder. Such books shall show the names and addresses of the respective holders of the Rights and the number of Rights evidenced by each outstanding Subscription Certificate. SECTION 5. Division, Combination and Exchange of Subscription Certificates; Mutilated, Destroyed, Lost or Stolen Subscription Certificates. (a) Subject to the provisions of Section 9 hereof, any Subscription Certificate, or any two or more Subscription Certificates, may be divided, combined or exchanged for any number of Subscription Certificates or for a single Subscription Certificate of different denomination; provided, however, that the aggregate number of Rights evidenced by the Subscription Certificate or Subscription Certificates so issued shall not exceed the aggregate number of Rights evidenced by the Subscription Certificate or Subscription Certificates surrendered in exchange therefor. The foregoing notwithstanding, a bank, trust company, securities dealer or broker holding shares of Common Stock -3- 4 on the Record Date for more than one beneficial owner may, by submitting a written request by 5:00 p.m., New York City time on [_________ __], 1996 and upon proper showing to the Subscription Agent, exchange its Subscription Certificate to obtain Subscription Certificates for the number of Rights which each such beneficial owner would have been entitled to receive pursuant to Section 9(a) hereof had each such beneficial owner been the holder of record of such beneficial owner's shares on the Record Date; provided, however, that the Company reserves the right to refuse to issue any such Subscription Certificate or Subscription Certificates if such issuance would be inconsistent with the principle that each beneficial owner's holding will be rounded up to the nearest whole Right. No Subscription Certificates evidencing fractional Rights will be issued upon division, combination or exchange of other Subscription Certificates, and any instructions to divide, combine or exchange Subscription Certificates which would result in the issuance of Subscription Certificates evidencing fractional Rights shall be rejected. (b) Any holder desiring to divide, combine or exchange any Subscription Certificate or Subscription Certificates shall make such requests in writing to the Subscription Agent, and shall surrender the Subscription Certificate or Subscription Certificates to be divided, combined or exchanged to the Subscription Agent. Thereupon the Subscription Agent shall deliver to the person entitled thereto a Subscription Certificate or Subscription Certificates, as the case may be, as so requested. In all cases of transfer by an attorney-in-fact, the original power of attorney, duly approved, or a copy thereof, duly certified, shall be deposited and remain with the Subscription Agent. In case of transfer by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority satisfactory to the Subscription Agent shall be produced and may be required to be deposited and to remain with the Subscription Agent in its discretion. The Company may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any division, combination or exchange of Subscription Certificates. (c) Upon receipt by the Company and the Subscription Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Subscription Certificate, and, in case of loss, theft or destruction, of indemnity and/or security satisfactory to them, which may be in the form of an open penalty bond, and reimbursement to the Company and the Subscription Agent of all reasonable expenses incidental thereto, and upon surrender and cancellation of the Subscription Certificate if mutilated, the Company will make and deliver a new -4- 5 Subscription Certificate of like tenor to the Subscription Agent for delivery to the registered owner in lieu of the Subscription Certificate so lost, stolen, destroyed or mutilated. If required by the Company or the Subscription Agent an indemnity bond must be sufficient in the judgment of both to protect the Company, the Subscription Agent or any agent thereof from any loss which any of them may suffer if a Subscription Certificate is replaced. SECTION 6. Subsequent Issue of Subscription Certificates. Subsequent to their original issuance, no Subscription Certificates shall be issued except (a) Subscription Certificates issued upon any transfer, combination, division or exchange of Rights pursuant to Section 5(a), Section 5(b) or Section 10 hereof, (b) Subscription Certificates issued in replacement of mutilated, destroyed, lost or stolen Subscription Certificates pursuant to Section 5(c) hereof and (c) Subscription Certificates issued pursuant to Section 7(g) hereof upon the partial exercise of any Subscription Certificate to evidence the unexercised portion of such Subscription Certificate. SECTION 7. Exercise of Rights; Exercise Price; Expiration Date. (a) The holder of any Subscription Certificate may exercise some or all of the Rights evidenced thereby (but not in amounts of less than one Right or an integral multiple thereof) by delivering to the Subscription Agent, on or prior to 5:00 p.m., New York City time, on [_________ __], 1996 (the "Expiration Date"), a properly completed and executed Subscription Certificate evidencing such Rights (with signatures guaranteed, if necessary, by a commercial bank or trust company having an office or correspondent in the United States or a member firm of a national securities exchange or a member of the National Association of Securities Dealers, Inc. (each, an "Eligible Institution")), together with payment of the Subscription Price (as hereinafter defined) for each Underlying Share subscribed for pursuant to the Basic Subscription Privilege and the Standby Purchase Committment. In the case of holders of Rights that are held of record through The Depository Trust Company ("DTC"), exercises of the Basic Subscription Privilege may be effected by instructing DTC to transfer Rights from the DTC account of such holder to the DTC account of the Subscription Agent, together with payment of the Subscription Price for each Underlying Share subscribed for pursuant to the Basic Subscription Privilege. Exercises of the Standby Purchase Committment may be effected by properly executing and delivering to the Subscription Agent a DTC Participant Standby Purchase Committment Exercise Form, together with payment of the -5- 6 appropriate Subscription Price for the number of Underlying Shares for which the Standby Purchase Committment is to be exercised. Alternatively, the holder of any Subscription Certificate may exercise the Rights evidenced thereby by effecting compliance with the procedures for guaranteed delivery set forth in Section 7(b) below. (b) If a holder wishes to exercise Rights, but time will not permit such holder to cause the Subscription Certificate or Subscription Certificates evidencing such Rights to reach the Subscription Agent on or prior to the Expiration Date, such Rights may nevertheless be exercised if all of the following conditions (the "Guaranteed Delivery Procedures") are met: (i) such holder has caused payment in full of the Subscription Price for each Underlying Share being subscribed for pursuant to the Basic Subscription Privilege [and the Standby Purchase Commitment] to be received (in the manner set forth in Section 7(d) hereof) by the Subscription Agent on or prior to the Expiration Date; (ii) the Subscription Agent receives, on or prior to the Expiration Date, a guarantee notice (a "Notice of Guaranteed Delivery"), substantially in the form provided with the Instructions as to Use of Subscription Certificates (the "Instructions") distributed with the Subscription Certificates, from an Eligible Institution, stating the name of the exercising Rights holder, the number of Rights represented by the Subscription Certificate or Subscription Certificates held by such exercising Rights holder, the number of Underlying Shares being subscribed for pursuant to the Basic Subscription Privilege [and the number of Underlying Shares, if any, being subscribed for pursuant to the Standby Purchase Commitment], and guaranteeing the delivery to the Subscription Agent of the Subscription Certificate evidencing such Rights at or prior to 5:00 p.m., New York City time, on the date five National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") trading days following the date of the Notice of Guaranteed Delivery; and (iii) the properly completed Subscription Certificate(s) evidencing the Rights being exercised, with any required signatures guaranteed, are received by the Subscription Agent, or such Rights are transferred into the DTC account of the Subscription Agent, at or prior to -6- 7 5:00 p.m., New York City time, on the date five NASDAQ trading days following the date of the Notice of Guaranteed Delivery relating thereto. The Notice of Guaranteed Delivery may be delivered to the Subscription Agent in the same manner as Subscription Certificates at the addresses set forth above, or may be transmitted to the Subscription Agent by telegram or facsimile transmission (telecopy no. (718) 236-4588 or (718) 234-5001). (c) The Rights shall expire at 5:00 p.m., New York City time, on the Expiration Date. (d) The "Subscription Price" shall be $[_____] per share of Common Stock subscribed for pursuant to the Subscription Privilege payable (in United States dollars) (i) by check or bank draft drawn upon a U.S. bank or postal, telegraphic or express money order payable to the Subscription Agent, as Subscription Agent, or (ii) by wire transfer of funds to the account maintained by the Subscription Agent for such purpose at _______________ Bank, Account No. _____________; ABA No. ______________. The Subscription Price shall be deemed to have been received by the Subscription Agent only upon (i) clearance of any uncertified check, (ii) receipt by the Subscription Agent of any certified check or bank draft or postal, telegraphic or express money order or (iii) receipt of good funds in the Subscription Agent's account designated above, in payment of the Subscription Price. (e) If an exercising Rights holder has not indicated the number of Rights being exercised, or if the Subscription Price payment forwarded by such holder to the Subscription Agent is not sufficient to purchase the number of shares subscribed for, the Rights holder will be deemed to have exercised the Basic Subscription Privilege with respect to the maximum number of whole Rights which may be exercised for the Subscription Price delivered to the Subscription Agent and, to the extent that the Subscription Price payment delivered by such holder exceeds the Subscription Price multiplied by the maximum number of whole Rights which may be exercised (such excess being the "Subscription Excess"), the Subscription Agent, as soon as practicable after such exercise of Rights, shall mail to such Rights holder the Subscription Excess paid by such holder without interest or deduction. (f) The Subscription Agent shall pay to, credit to the account of or otherwise transfer to the Company all funds received by the Subscription Agent in payment of the Subscription Price for Underlying Shares subscribed for -7- 8 pursuant to the Basic Subscription Privilege, as soon as practicable following the Expiration Date. [(g) Funds received in payment of the Subscription Price for Excess Shares subscribed for pursuant to the Standby Purchase Commitment will be held in a segregated account pending issuance of such Excess Shares. If NAR is allocated less than all of the Shares of Common Stock that it wishes to subscribe for pursuant to the Standby Purchase Commitment, the excess funds paid by NAR in respect of the Subscription Price for shares not issued shall be returned by mail without interest or deduction as soon as practicable after the Expiration Date.] (h) In case the holder of any Subscription Certificate shall exercise less than all the Rights evidenced thereby, a new Subscription Certificate evidencing the number of Rights remaining unexercised shall be issued by the Subscription Agent to the registered holder of such Subscription Certificate or to his duly authorized assigns, subject to the provisions of Section 9 hereof. (i) The Subscription Agent is authorized to accept only Subscription Certificates (other than Subscription Certificates delivered in accordance with the procedure for guaranteed delivery set forth in Section 7(b)), or transfers of Rights to its account at DTC, received prior to 5:00 p.m., New York City time, on the Expiration Date. (j) Once a holder of Rights has exercised a Right, such exercise may not be revoked. (k) Unless a Subscription Certificate (i) provides that the Underlying Shares to be issued pursuant to the exercise of Rights represented thereby are to be delivered to the holders of such Rights or (ii) is submitted for the account of an Eligible Institution, signatures on such Subscription Certificate must be guaranteed by an Eligible Institution. SECTION 8. Delivery of Stock Certificates. (a) As soon as practicable after the Expiration Date, the Subscription Agent shall deliver to such exercising Rights holder certificates representing the shares of Common Stock purchased pursuant to the Basic Subscription Privilege. (b) As soon as practicable after the Expiration Date, the Subscription Agent shall deliver to NAR Certificates representing the shares of Common Stock purchased pursuant to the Standby Purchase Commitment. -8- 9 SECTION 9. Fractional Rights and Shares. (a) The Company shall not issue fractions of Rights nor shall the Subscription Agent distribute Subscription Certificates which evidence fractional Rights. The number of Rights issued to each holder will be rounded up to the nearest whole number. All questions as to the validity and eligibility of any rounding of fractional Rights shall be determined by the Company in its sole discretion, and its determination shall be final and binding. (b) The Company shall not issue fractional shares of Common Stock to exercising Rights holders upon exercise and acceptance of Rights. SECTION 10. Transfer of Rights. (a) Any holder may transfer (a) all of the Rights evidenced by a Subscription Certificate by properly endorsing the Subscription Certificate for transfer in accordance with the instructions accompanying the Subscription Certificate or (b) some of the Rights evidenced by a Subscription Certificate (but not fractional Rights) by delivering to the Subscription Agent such Subscription Certificate properly endorsed for transfer, with instructions to register the Rights to be transferred in the name of the transferee (and to issue a new Subscription Certificate to the transferee evidencing such transferred Rights). In such event, the Subscription Agent shall issue a new Subscription Certificate evidencing the balance of the Rights to the holder or, if so instructed, to an additional transferee. (b) Any holder may place an order with the Subscription Agent to sell all or some of the Rights evidenced by a Subscription Certificate by delivering to the Subscription Agent such Subscription Certificate properly executed for sale. If only a portion of the Rights evidenced by a single Subscription Certificate are to be sold, such Subscription Certificate must be accompanied by instructions setting forth the action to be taken with respect to the Rights that are not to be sold. Upon the timely receipt by the Subscription Agent of appropriate instructions to sell Rights, the Subscription Agent will use its best efforts to complete the sale and, promptly following the Expiration Date, the Subscription Agent will send the Rights holder a check for the net proceeds from the sale of any Rights sold. If the Rights can be sold, sales of such Rights will be deemed to have been effected at the weighted average price received on the day such Rights are sold, less any applicable [brokerage] commissions, taxes and other direct expenses of sale. [Holders selling Rights will -9- 10 pay all brokerage commissions incurred by the Subscription Agent.] The Subscription Agent will also attempt to sell all Rights which remain unclaimed as a result of Subscription Certificates being returned by the postal authorities to the Subscription Agent as undeliverable as of the fourth business day prior to the Expiration Date. Such sales will be made net of commissions on behalf of the nonclaiming Rights holders. The Subscription Agent will hold the proceeds from those sales for the benefit of such nonclaiming Rights holders until such proceeds are either claimed or escheat. The Subscription Agent's obligation to execute orders is subject to its ability to find buyers. There can be no assurance that the Subscription Agent will be able to sell any Rights or as to the prices the Subscription Agent may be able to obtain in such sales. In connection therewith, the Subscription Agent agrees that it (i) is acting solely on behalf and for the benefit of such holders who wish to sell their Rights and not as agent, or on behalf, of the Company, (ii) shall not accept any instructions from the Company with respect to the timing of such sales, (iii) shall effect all such sales in accordance with applicable law and (iv) shall not effect any such sales in a manner that would cause a material adverse change in the market for the Rights. SECTION 11. Foreign and Certain Other Stockholders. The Subscription Agent shall not mail Subscription Certificates to holders of Common Stock whose addresses are outside the U.S. The Subscription Agent shall hold such Subscription Certificates for the account of such holders and upon notice from such holders shall exercise the Rights on their behalf. To so exercise such Rights, such stockholders must notify the Subscription Agent not later than 11:00 a.m., New York City time, on ____________ __, 1996. If no instructions have been received, the Rights represented thereby will be delivered by the Subscription Agent to the Subscription Agent who will use its best efforts to sell the Rights. The net proceeds, if any, from the sale of those Rights by the Subscription Agent will be remitted to such holders by the Subscription Agent. If the Rights can be sold, sales of such Rights will be deemed to have been effected at the weighted average price received by the Subscription Agent for the sale of all Rights through the Subscription Agent, less any applicable brokerage commissions, taxes and other expenses. In connection therewith, the Subscription Agent agrees that it (i) is acting solely on behalf and for the benefit of such holders who wish to sell their Rights and not as agent, or on behalf, of the Company, (ii) shall not accept any instructions from the Company with respect to the timing of such sales, (iii) shall effect all such sales in accordance with applicable law and (iv) shall not effect any such sales -10- 11 in a manner that would cause a material adverse change in the market for the Rights. SECTION 12. Reports. The Subscription Agent shall notify both the Company and its designated representatives by telephone as requested during the period commencing with the mailing of Subscription Certificates and ending on the Expiration Date (and in the case of guaranteed deliveries pursuant to Section 7(b), the period ending five NASDAQ trading days after the Expiration Date), which notice shall thereafter be confirmed in writing, of (i) the number of Rights exercised on the day of such request, (ii) the number of Underlying Shares subscribed for pursuant to the Basic Subscription Privilege and the Standby Purchase Commitment, if any, and the number of such Rights for which payment has been received, (iii) the number of Rights subject to guaranteed delivery pursuant to Section 7(b) on such day, (iv) the number of Rights for which defective exercises have been received on such day and (v) cumulative totals derived from the information set forth in clauses (i) through (iv) above. At or before 5:00 p.m., New York City time, on the first NASDAQ trading day following the Expiration Date, the Subscription Agent shall certify in writing to the Company the cumulative totals through the Expiration Date derived from the information set forth in clauses (i) through (iv) above. The Subscription Agent shall also maintain and update a listing of holders who have fully or partially exercised their Rights, holders who have transferred their Rights and their transferees and holders who have not exercised their Rights. The Subscription Agent shall provide the Company or its designated representatives with the information compiled pursuant to this Section 12 as any of them shall request. The Subscription Agent hereby represents, warrants and agrees that the information contained in each notification referred to in this Section 12 shall be accurate in all material respects. SECTION 13. Future Instructions and Interpretation. (a) All questions as to the timeliness, validity, form and eligibility of any exercise of Rights will be determined by the Company whose determinations shall be final and binding. The Company in its sole discretion may waive any defect or irregularity, permit a defect or irregularity to be corrected within such time as it may determine or reject the purported exercise of any Right. Subscriptions will not be deemed to have been received or accepted until all irregularities have been waived or cured within such time as the Company determines in its sole discretion. Neither the Company nor the Subscription Agent shall be under any duty to give notification of any defect or irregularity in connection with the submission of -11- 12 Subscription Certificates or incur any liability for failure to give such notification. (b) The Subscription Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from an authorized officer of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer. SECTION 14. Payment of Taxes. The Company covenants and agrees that it will pay when due and payable all documentary, stamp and other taxes, if any, which may be payable in respect of the issuance or delivery of any Subscription Certificate or of the Underlying Shares; provided, however, that the Company shall not be liable for any tax liability arising out of any transaction which results in, or is deemed to be, an exchange of Rights or shares or a constructive dividend with respect to the Rights or shares and provided further that the Company shall not be required to pay any tax or other governmental charge which may be payable in respect of any transfer involved in the transfer or delivery of any Subscription Certificate or the issuance or delivery of certificates for shares of Common Stock in a name other than that of the registered holder of such Subscription Certificate evidencing the Rights exercised or transferred, and the Subscription Agent shall not register any such transfer or issue any such certificate until such tax or governmental charge, if required, shall have been paid. SECTION 15. Cancellation and Destruction of Subscription Certificates. All Subscription Certificates surrendered for the purpose of exercise, exchange, substitution or transfer shall be canceled by the Subscription Agent, and no Subscription Certificates shall be issued in lieu thereof except as expressly permitted by provisions of this Agreement. The Company shall deliver to the Subscription Agent for cancellation and retirement, and the Subscription Agent shall so cancel and return, any other Subscription Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Subscription Agent shall deliver all canceled Subscription Certificates to the Company, or shall, at the written request of the Company, destroy such canceled Subscription Certificates, and in such case shall deliver a certificate of destruction thereof to the Company. SECTION 16. Right of Action. All rights of action in respect of this Agreement are vested in the Company and the respective registered holders of the -12- 13 Subscription Certificates, and any registered holder of any Subscription Certificate, without the consent of the Subscription Agent or of the holder of any other Subscription Certificate, may, on his own behalf and for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his right to exercise the Rights evidenced by such Subscription Certificate in the manner provided in such Subscription Certificate and in this Agreement. SECTION 17. Concerning the Subscription Agent; Indemnification. (a) The Company agrees to pay to the Subscription Agent compensation in accordance with the fee letter attached hereto as Exhibit B for all services rendered by it hereunder and, from time to time, on demand of the Subscription Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. (b) The Company also agrees to indemnify and hold the Subscription Agent harmless against any losses, claims, damages, liabilities, costs or expenses (including reasonable fees and disbursements of legal counsel) which the Subscription Agent may incur or become subject to arising from or out of any claim or liability resulting from actions taken as Subscription Agent pursuant to this Agreement; provided, however, that such covenant and agreement does not extend to, and the Subscription Agent shall not be indemnified or held harmless with respect to, such losses, claims, damages, liabilities, costs or expenses incurred or suffered by the Subscription Agent as a result, or arising out, of the Subscription Agent's negligence, misconduct, bad faith or breach of this Agreement. In connection therewith: (i) in no case shall the Company be liable with respect to any claim against the Subscription Agent unless the Subscription Agent shall have notified the Company in writing of the assertion of a claim against it or of any action commenced against it, promptly after the Subscription Agent shall have notice of a claim or shall have been served with the summons or other legal process giving information as to the nature and basis of the claim; (ii) the Company shall be entitled to participate at its own expense in the defense of any suit brought to enforce any such claim and, if the Company so elects, it shall assume the defense of any such suit, in which event the Company shall not be liable for the fees and expenses of any additional counsel that the Subscription Agent may retain, so long as the Company shall retain counsel satisfactory to the Subscription Agent, in the exercise of the Subscription -13- 14 Agent's reasonable judgement, to defend such suit; and (iii) the Subscription Agent agrees not to settle any litigation in connection with any claim or liability with respect to which it may seek indemnification from the Company without the prior written consent of the Company. (c) The Subscription Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it without negligence and in good faith in connection with its administration of this Agreement in reliance upon any Subscription Certificate, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement or other paper or document reasonably believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged by the proper person or persons. SECTION 18. Merger or Consolidation of Subscription Agent. Any corporation into which the Subscription Agent or any successor Subscription Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Subscription Agent or any successor Subscription Agent shall be a party, or any corporation succeeding to the corporate trust business of the Subscription Agent or any successor Subscription Agent shall be the successor to the Subscription Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto. SECTION 19. Duties of Subscription Agent. The Subscription Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Subscription Certificates by their acceptance thereof shall be bound: (a) The Subscription Agent may consult with legal counsel (who may be, but is not required to be, legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Subscription Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Subscription Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be -14- 15 conclusively proved and established by a certificate signed by the Chairman of the Board, the President or a Vice President (including any Senior or Executive Vice President) and by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary of the Company and delivered to the Subscription Agent; and such certificate shall be full authorization to the Subscription Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Subscription Agent shall be liable hereunder only for its own negligence or willful misconduct. (d) The Subscription Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Subscription Certificates or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Subscription Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Subscription Agent) or in respect of the validity or execution of any Subscription Certificate; nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Subscription Certificate; nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock to be issued pursuant to this Agreement or any Subscription Certificate or as to whether any shares of Common Stock will, when issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Subscription Agent for the carrying out or performing by the Subscription Agent of the provisions of this Agreement. (g) Nothing herein shall preclude the Subscription Agent from acting in any other capacity for the Company. (h) The Subscription Agent shall comply with the information and backup withholding requirements of the -15- 16 Internal Revenue Code of 1986, as amended (the "Code"), including without limitation, where appropriate, on a timely basis, filing with the Internal Revenue Service and furnishing to holders of Rights duly completed Forms 1099B and 1099DIV. The Subscription Agent shall also collect and duly preserve Forms W-8 and W-9 and other forms or information necessary to comply with the backup withholding requirements of the Code. (i) The Subscription Agent shall withhold from payments made to record owners amounts sufficient to comply with the backup withholding requirements of the Code. For purposes of backup withholding that may be applicable in respect of Rights distributed to record owners other than foreign holders, the Subscription Agent shall withhold and sell Rights on behalf of such record owners in amounts necessary to satisfy such backup withholding requirements. SECTION 20. Notices to the Company, Holders and Subscription Agent. All notices and other communications provided for or permitted hereunder shall be made by hand delivery, prepaid first-class mail, or telecopier: (a) if to the Company, to: Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, New Jersey 07087 Attention: Michael P. Sherman, Esq. Telecopier: (201) 392-5005 (b) if to the Subscription Agent, to: American Stock Transfer & Trust Company 6201 Fifteenth Avenue Brooklyn, New York 11219 Attention: Donna Anesboro Herbert Lemmer Telecopier: (718) 236-4588 or (718) 234-5001 (c) if to a registered holder, at the address shown on the registry books of the Company. All such notices and communications shall be deemed to have been duly given: when delivered by hand, if personally delivered; two business days after being deposited in the mail, postage prepaid, if mailed as aforesaid; and when receipt is acknowledged, if telecopied. SECTION 21. Supplements and Amendments. The Company and the Subscription Agent may from time to time -16- 17 supplement or amend this Agreement without the approval of any holders of Subscription Certificates in order to cure any ambiguity or to correct or supplement any provision maintained herein which may be defective or inconsistent with any other provision herein, or to make any other provisions in regard to matters or questions arising hereunder which the Company and the Subscription Agent may deem necessary or desirable and which shall not adversely affect the interests of the holders of the Subscription Certificates. SECTION 22. Successors. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Subscription Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. SECTION 23. Termination. This Agreement shall terminate at 5:00 p.m., New York City time, on the thirtieth day following the Expiration Date. Upon termination of this Agreement, and provided that all shares of Common Stock for Rights accepted for execution prior to such termination are issued and delivered by the Company, the Company shall be discharged from all obligations under this Agreement except for its obligation to the Subscription Agent under Section 17 hereof and except with respect to the obligation of the Company to provide instruction and direction to the Subscription Agent as may be provided in this Agreement. SECTION 24. Governing Law. This Agreement and each Subscription Certificate shall be deemed to be a contract made under the laws of the State of New York and for all purposes shall be construed in accordance with the internal laws of said State. SECTION 25. Benefits of This Agreement. Nothing in this Agreement shall be construed to give to any person corporation other than the Company, the Subscription Agent and the holders of the Subscription Certificates any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Subscription Agent and the holders of the Subscription Certificates. SECTION 26. Counterparts. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, but all such counterparts shall together constitute one and the same instrument. SECTION 27. Descriptive Headings. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or -17- 18 affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, each of the parties hereto has caused the Agreement to be duly executed as of the date first above written. HANOVER DIRECT, INC. By:___________________________ Title:________________________ AMERICAN STOCK TRANSFER & TRUST COMPANY, Subscription Agent By:___________________________ Title:________________________ -18- 19 EXHIBIT A FORM OF SUBSCRIPTION CERTIFICATE ATTACHED HERETO 20 EXHIBIT B SUBSCRIPTION AGENT'S FEE LETTER EX-99.4 7 FORM OF INFORMATION AGENT AGREEMENT 1 Exhibit 99.4 [Form of Information Agent Agreement] [LETTERHEAD OF MORROW & CO., INC.] June 20, 1996 Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, NJ 07087 This letter will serve as the agreement pursuant to which you will retain us to act as Information Agent in connection with your Rights Offer to Shareholders of Hanover Direct, Inc. (the "Offer"), currently expected to take place in June, 1996. The services we will perform on your behalf will include the following services in connection with your Offer: consultation and preparation, delivery of material to brokers, banks and nominees, acting as Information Agent, receiving calls from shareholders, and telephoning holders of record and non-objecting beneficial owners (NOBOs). For the above services our fee will be $6,500.00. One-half of the fee ($3,250.00) plus an advance against expenses of $5,000.00, is due upon the signing of this agreement. The balance of our fee plus additional out-of-pocket expenses incurred by us on your behalf will be payable upon the expiration of the Offer. Included in our out-of-pocket expenses will be the expenses for incoming and outgoing telephone calls, which will be $5.00 per shareholder. Such charge will include labor, directory assistance and all related telephone expenses. For a service charge of $5.00 per check, we will process and prepare checks for Broker/Nominee invoices submitted for the mailing by them of your materials. A statement listing each of the Broker/Nominee invoices will be furnished by us for your review and payment. 2 Hanover Direct, Inc. June 20, 1996 Page Two By signing this agreement you agree to indemnify and hold us harmless against any loss, damage, expense (including reasonable legal fees and expenses), liability or claim relating to or arising out of our performance of this agreement except where we, or our employees, fail to comply with this agreement. However, you shall not be obliged to indemnify us or hold us harmless against any such loss, damage, expense, liability or claim which results from gross negligence, bad faith or willful misconduct on our part or on the part of any of our employees. At your election you may assume the defense of any such action. We shall promptly advise you in writing of any such liability or claim after receipt of notice of any action or claim for which we may be entitled to indemnification hereunder. This agreement shall be construed and enforced in accordance with the laws of the State of New York and shall inure to the benefit of, and the obligations created hereby shall be binding upon, the successors and assigns of the parties hereto. If any provision of this agreement shall be held illegal, invalid and unenforceable by any court, this agreement shall be construed and enforced as if that provision had not been contained herein and shall be deemed an agreement among us to the full extent permitted by applicable law. Please acknowledge receipt of this agreement and confirm the arrangements herein provided by signing and returning the enclosed copy of the undersigned, whereupon this agreement and your acceptance of the terms and conditions herein provided shall constitute a binding agreement among us. Very truly yours, MORROW & CO., INC. Accepted: By: By: ------------------------------- ------------------------------------ Title: Title: ---------------------------- --------------------------------- Date: ----------------------------- -----END PRIVACY-ENHANCED MESSAGE-----