-----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, OIT/94Vd3v/rGd4cXJ+G5WlmHzEA7Irqlql7nyd2wcbK0pjXXw4c0VrwuLpUlrUK yfJRhBZw5Li75Tgybzl4oQ== 0000950123-97-003183.txt : 19970415 0000950123-97-003183.hdr.sgml : 19970415 ACCESSION NUMBER: 0000950123-97-003183 CONFORMED SUBMISSION TYPE: S-3 PUBLIC DOCUMENT COUNT: 18 FILED AS OF DATE: 19970414 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: HANOVER DIRECT INC CENTRAL INDEX KEY: 0000320333 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 138053260 STATE OF INCORPORATION: NV FISCAL YEAR END: 1227 FILING VALUES: FORM TYPE: S-3 SEC ACT: 1933 Act SEC FILE NUMBER: 333-25141 FILM NUMBER: 97580023 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 1 HANOVER DIRECT, INC. 1 As filed with the Securities and Exchange Commission on April 14, 1997 Registration No. 333-______ ================================================================================ BRMF&S Draft 4/10/97 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- 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 Identification Incorporation or Organization) 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) ---------------- Rakesh K. Kaul Copy to: Hanover Direct, Inc. 1500 Harbor Boulevard Monte E. Wetzler, Esq. Weehawken, New Jersey 07087 Brown Raysman Millstein Felder (201) 863-7300 & Steiner LLP (Name, Address, Including Zip Code, 120 West 45th Street and Telephone Number, Including Area New York, New York 10036 Code, of Agent for Service) (212) 944-1515 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE 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| If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. | | ---------- If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. | | ---------- If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. | | CALCULATION OF REGISTRATION FEE
============================================================================================================================== PROPOSED PROPOSED MAXIMUM MAXIMUM AGGREGATE AGGREGATE AMOUNT OF AMOUNT TO BE PRICE OFFERING REGISTRATION Title of Shares to be Registered REGISTERED PER SHARE(1) PRICE(1) FEE - ------------------------------------------------------------------------------------------------------------------------------ 55,555,556 Common Stock, par value $.66-2/3 per share..... SHARES(2) $.90 $50,000,000 $15,152 - ------------------------------------------------------------------------------------------------------------------------------ Rights to Purchase Shares of Common Stock...... 55,555,556 -- -- -- RIGHTS(3) ==============================================================================================================================
2 (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. (3) 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. ================================================================================ Exhibit Index on Page II-2 3 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 APRIL 14, 1997 PROSPECTUS 55,555,556 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"), and its Series B Convertible Additional Preferred Stock, par value $.01 and stated value $10.00 per share (the "Series B Preferred Stock"), outstanding as of _____ __, 1997 (the "Record Date") transferable subscription rights (the "Rights") to subscribe for and purchase additional shares of Common Stock for a price of $.90 per share (the "Subscription Price"). Each shareholder will receive .3824 transferable Rights for each share of Common Stock held of record on the Record Date and .5742 transferable Rights for each share of Series B Preferred Stock held of record on the Record Date. The number of Rights distributed by the Company to each holder of Common Stock and Series B 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. Record Date stockholders who fully exercise all Rights distributed to them will also be entitled to subscribe at the Subscription Price for shares of Common Stock that are not otherwise purchased pursuant to the exercise of Rights, subject to proration by the Company under certain circumstances. Once a holder of Rights has exercised such Rights pursuant to either subscription privilege, such exercise may not be revoked. The Rights will be evidenced by transferable subscription certificates ("Subscription Certificates"). An aggregate of up to approximately 55,555,556 shares of Common Stock (the "Underlying Shares") will be sold upon exercise of the Rights or pursuant to the Standby Purchase Agreement, dated as of March 26, 1997 (the "Standby Purchase Agreement"), between the Company and Richemont S.A., a Luxembourg public company which is an affiliate of Hanover's majority shareholder (together with its wholly-owned subsidiary Richemont Finance S.A., "Richemont"). 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 [day] ______ __, 1997 (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." Richemont 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 privileges ("Unsubscribed Shares"). NAR Group Limited, a private holding company (together with its affiliates, "NAR") which owns approximately 55.7% of the Common Stock of the Company as of the date hereof, on a fully diluted basis, has irrevocably agreed with the Company, subject to and upon the consummation of the Rights Offering, to exercise at the Subscription Price that number of Rights distributed to it for the purchase of shares of Common Stock having an aggregate purchase price of at least $10 million, the purchase price for such shares to be paid by NAR by the surrender and cancellation of the principal amount of a $10 million promissory note held by one of its affiliates. See "THE RIGHTS OFFERING -- STANDBY PURCHASE COMMITMENT." REFERENCE IS MADE TO "RISK FACTORS" BEGINNING ON PAGE 8 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 April 10, 1997 was $.75 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 _____ __, 1997. 4 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 Rights and the Underlying 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 Commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants, such as the Company, that file electronically with the Commission. The address of the Web site is http://www.sec.gov. 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 28, 1996, as amended by Amendment No. 1 thereto filed April [14], 1997; and (b) 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 Edward J. O'Brien, Secretary, Hanover Direct, Inc. at 1500 Harbor Boulevard, Weehawken, New Jersey 07087 or telephone number (201) 863-7300. -2- 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information and financial statements and notes thereto appearing elsewhere in this Prospectus or incorporated by reference herein. THE COMPANY The Company is a leading direct specialty retailer that markets, via a portfolio of branded specialty catalogs, home fashions, general merchandise, men's and women's apparel and gifts. The Company's catalogs include Domestications(R), a leading specialty home textile catalog, The Company Store(R), an upscale direct marketer of down comforters and other down and related products for the home, Kitchen & Home(R), an upscale kitchen and home product catalog, Improvements(R), a do-it-yourself home improvements catalog, The Safety Zone(R), a direct marketer of safety, prevention and protection products, Colonial Garden Kitchens(R), featuring work saving and lifestyle enhancing items for the kitchen and home, Silhouettes(R), featuring everyday, workout, special occasion and career fashions for larger sized women, Tweeds(R), the European inspired women's fashion catalog, International Male(R), offering unique men's fashions with an international flair, Austad's(R), a direct marketer of golf equipment, apparel and accessories, Undergear(R), a leader in activewear, workout wear and fashion underwear for men, and Gump's By Mail(R), a leading upscale catalog of luxury gifts. During 1996, the Company mailed approximately 332 million catalogs and had total revenues of approximately $700 million. The Company maintains a proprietary customer list currently containing approximately 14 million names of customers who have made purchases from at least one of the Company's catalogs within the past 36 months. Over 6 million of the names on the list represent customers who have made purchases from at least one of the Company's catalogs within the last 12 months. The Company is incorporated in Delaware with its principal executive office at 1500 Harbor Boulevard, Weehawken, New Jersey 07087. The Company's telephone number is (201) 863-7300. RELATIONSHIP WITH NAR AND RICHEMONT NAR owns approximately 55.7% of the Company's common stock on a fully diluted basis. NAR, a private investment holding company, is a joint venture between the family of Alan G. Quasha, a Director and the Chairman of the Board of the Company, and Compagnie Financiere Richemont A.G., a Swiss public company with interests primarily in the fields of luxury goods and tobacco and the sole voting shareholder of Richemont ("CFR"). In its latest financial year ending March 31, 1996, CFR reported a consolidated operating profit of $1.246 billion on consolidated sales of $6.7 billion. CFR has a current market capitalization of $7.7 billion, making it the tenth largest company quoted on the Swiss stock exchange. CFR's tobacco interests are held through Rothmans International. Its interests in the luxury goods industry are held through the Vendome Luxury Group, which owns a portfolio of well-known international brands, including Cartier, Piaget, Baume & Mercier, Alfred Dunhill and Montblanc. See "RISK FACTORS -- RELATIONSHIP WITH NAR." THE RIGHTS OFFERING Rights Each shareholder will receive .3824 transferable Rights for each share of Common Stock held of record on [day], _____ __, 1997, the Record Date, and .5742 transferable Rights for each share of Series B Preferred Stock held of record on the Record Date. The number of Rights distributed by the Company to each holder of Common Stock and Series B 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. The Underlying Shares will be sold upon exercise of the Rights or pursuant to the Standby Purchase Agreement between the Company and Richemont. 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." Basic Subscription Privilege Each Right will be exercisable for one share of Common Stock (the "Basic Subscription Privilege"). The number of Rights distributed by the Company to each holder of Common Stock and Series B Preferred Stock will be rounded up to the nearest whole number. No fractional Rights or cash in lieu thereof will -3- 6 be issued or paid. See "THE RIGHTS OFFERING -- SUBSCRIPTION PRIVILEGES -- BASIC SUBSCRIPTION PRIVILEGE." Oversubscription Privilege Record Date stockholders who fully exercise all Rights distributed to them will also be entitled to subscribe at the Subscription Price for shares of Common Stock that are not otherwise purchased pursuant to the exercise of Rights, subject to proration by the Company under certain circumstances (the "Oversubscription Privilege"). If the Underlying Shares not subscribed for through the Basic Subscription Privilege ("Excess Shares") are not sufficient to satisfy all subscriptions pursuant to the Oversubscription Privilege, the Excess Shares will be allocated pro rata (subject to the elimination of fractional shares) among those holders of Rights exercising the Oversubscription Privilege, in proportion to the number of shares requested by them pursuant to the Oversubscription Privilege. See "THE RIGHTS OFFERING -- SUBSCRIPTION PRIVILEGES -- OVERSUBSCRIPTION PRIVILEGE." Subscription Price $.90 in cash per share of Common Stock subscribed for pursuant to the Basic Subscription Privilege or the Oversubscription Privilege. The Subscription Price of the Rights represents a premium to the market price of the Common Stock at the date of this Prospectus. See "THE RIGHTS OFFERING -- SUBSCRIPTION PRICE." Transferability of Rights The Rights are transferable, and it is anticipated that they will trade on the AMEX and in the over-the-counter market until the close of business on the last trading day prior to the Expiration Date. 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. See "THE RIGHTS OFFERING -- LISTING AND TRADING." The Subscription Agent will endeavor to sell Rights for holders who have so requested by delivering Subscription Certificates with the instruction for sale properly executed to the Subscription Agent by 11:00 a.m., New York City time, on [day], _____ __, 1997. Any brokerage commission, taxes and other direct expenses of sale will be paid by the holder. 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. See "THE RIGHTS OFFERING -- METHOD OF TRANSFERRING RIGHTS." The right to subscribe for additional shares of Common Stock pursuant to the Oversubscription Privilege is not transferable. Rights Ticker Symbol HNVR Record Date [day], _____ __, 1997 Expiration Date [day], _____ __, 1997, at 5:00 p.m., New York City time. Procedure for Exercising Rights Basic Subscription Privileges and Oversubscription Privileges may be exercised by properly completing the Subscription Certificate and forwarding such Subscription Certificate (or following the Guaranteed Delivery Procedures described herein), with payment of the Subscription Price for each Underlying Share subscribed for pursuant to the Basic Subscription Privilege and the Oversubscription Privilege, to the Subscription Agent on or prior to the Expiration Date. If the mail is used to forward Subscription Certificates, it is recommended that insured, registered mail be used. See "THE RIGHTS OFFERING -- EXERCISE OF RIGHTS." -4- 7 ONCE A HOLDER OF RIGHTS HAS EXERCISED THE BASIC SUBSCRIPTION PRIVILEGE AND, IF APPLICABLE, THE OVERSUBSCRIPTION PRIVILEGE, SUCH EXERCISE MAY NOT BE REVOKED. See "THE RIGHTS OFFERING -- NO REVOCATION." Procedure for Exercising Rights by Foreign Stockholders Subscription Certificates will not be mailed to record holders of the Common Stock and Series B Preferred Stock outstanding as of the Record Date 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 [day], _______ __, 1997, 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. See "THE RIGHTS OFFERING -- FOREIGN AND CERTAIN OTHER SHAREHOLDERS." Persons Holding Shares, or Wishing to Exercise Rights, Through Others Persons holding shares of Common Stock and receiving the Rights distributable with respect thereto through a broker, dealer, commercial bank, trust company or other nominee, as well as persons holding certificates representing shares of Common Stock personally who would prefer to have such institutions effect transactions relating to the Rights on their behalf, should contact the appropriate institution or nominee and request it to effect the transaction for them. See "THE RIGHTS OFFERING -- EXERCISE OF RIGHTS." Issuance of Common Stock Certificates representing shares of Common Stock purchased pursuant to the Basic Subscription Privilege will be delivered to subscribers as soon as practicable after the Expiration Date. Certificates representing shares of Common Stock purchased pursuant to the Oversubscription Privilege will be delivered to subscribers as soon as practicable after the Expiration Date and after all prorations have been effected. See "THE RIGHTS OFFERING -- SUBSCRIPTION PRIVILEGES." Pre-Funding by Richemont In order to facilitate vendor shipments and to permit the commencement of the Company's plan to consolidate certain of its warehousing facilities, Richemont has advanced $_____ as of the effective date of the Registration Statement of which this Prospectus is a part against its commitment to purchase all of the Unsubscribed Shares pursuant to the Standby Purchase Agreement. The Company has executed a subordinated promissory note in the amount of up to $30 million to evidence this indebtedness (the "Richemont Promissory Note"). See "RECENT DEVELOPMENTS -- PRE-FUNDING BY RICHEMONT" and "USE OF PROCEEDS." Use of Proceeds The gross cash proceeds from the Rights Offering of $40 million (after giving effect to the acquisition and exercise by NAR of Rights having an aggregate purchase price of $10 million to be paid for by surrender and cancellation of the $10 million promissory note held by one of its affiliates (the "IMR Promissory Note")) will be used to repay the $__ million principal amount outstanding under the Richemont Promissory Note and the balance of the proceeds will be used to repay amounts outstanding under the Credit Facility with Congress. See "USE OF PROCEEDS." Subscription Agent American Stock Transfer & Trust Company (the "Subscription Agent"). The Subscription Agent's telephone number is (212) 936-5100 or (718) 921-8200. -5- 8 Information Agent Morrow & Co., Inc. (the "Information Agent"). The Information Agent's telephone number is 1-800-566-9061. Banks and brokerage firms should call 1-800-662-5200. Standby Commitment Pursuant to the Standby Purchase Agreement Richemont has agreed to purchase, at the Subscription Price, any of the Unsubscribed Shares. NAR has irrevocably agreed with the Company, subject to and upon the consummation of the Rights Offering, to exercise at the Subscription Price that number of Rights distributed to it for the purchase of shares of Common Stock having an aggregate purchase price of at least $10 million, the purchase price for such shares to be paid by NAR by the surrender and cancellation of the IMR Promissory Note. See "THE RIGHTS OFFERING -- STANDBY PURCHASE COMMITMENT." Federal Income Tax Considerations See "THE RIGHTS OFFERING -- CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS" and "THE RIGHTS OFFERING -- CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS." Shares of Common Stock Outstanding after Rights Offering Approximately 200,595,471 shares of Common Stock will be outstanding after the Rights Offering, based on the number of shares outstanding on the Record Date. -6- 9 SUMMARY CONSOLIDATED FINANCIAL DATA The summary consolidated financial data for the fiscal years 1992 through 1996 have been derived from the consolidated financial statements of the Company (successor to The Horn & Hardart Company or "H&H") and its subsidiaries, which statements have been audited by Arthur Andersen LLP, independent public accountants, whose report on certain of such financial statements is included elsewhere and incorporated by reference in this Prospectus. Certain reclassifications have been made to the financial data for the fiscal years prior to 1993 in order to conform with the fiscal 1993 presentation. In September 1993, the Company was formed in connection with the mergers involving the Company, H&H and The Hanover Companies ("THC"), a wholly owned subsidiary of H&H. The mergers were accounted for similarly to a pooling-of-interests, and, accordingly, the Company's summary consolidated financial data include the results of H&H and THC for all applicable periods presented.
1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- (in thousands, except share and per share data) Income Statement Data: Revenues $ 586,562 $ 642,511 $ 768,884 $ 749,767 $ 700,314 Depreciation and amortization 2,681 3,279 6,157 9,020 12,192 Operating (loss) income 14,402 19,076 15,975 (22,619) (94,497) Interest expense, net 13,135 2,757 2,813 4,531 8,398 Income (loss) before extraordinary items and cumulative effect of accounting change for income taxes 1,048 17,337 14,838 (28,153) (103,895) Extraordinary items 9,201 -- -- (1,837) (1,134) Cumulative effect of accounting change for income taxes 10,000 -- -- -- -- ----------- ----------- ----------- ----------- ------------ Net income (loss) $ 20,249 17,337 14,838 (29,990) (105,029) Preferred stock dividends (3,197) (4,093) (135) (240) (225) ----------- ----------- ----------- ----------- ------------ Net income (loss) applicable to common stockholders $ 17,052 $ 13,244 $ 14,703 $ (30,230) $ (105,254) =========== =========== =========== =========== ============ Per Share: Income (loss) before extraordinary items and cumulative effect of accounting change for income taxes $ (.06) $ 0.17 $ 0.16 $ (.30) $ (.93) Extraordinary items .24 -- -- (.02) (.01) Cumulative effect of accounting change for income taxes .26 -- -- -- -- ----------- ----------- ----------- ----------- ------------ Net income (loss) $ .44 $ .17 $ .16 $ (.32) $ (.94) =========== =========== =========== =========== ============ Weighted average number of shares oustanding: Primary 38,467,015 75,625,330 93,285,190 93,029,816 111,441,247 =========== =========== =========== =========== ============ Fully diluted 38,467,015 77,064,131 93,235,190 93,029,816 111,441,247 =========== =========== =========== =========== ============ Balance Sheet Data (end of period): Working capital (deficit) 31,566 25,180 58,501 28,774 (1,507) Total assets 134,352 188,838 262,246 279,009 220,827 Total debt 43,362 35,160 37,915 62,802 65,189 Preferred stock of subsidiary 32,842 -- -- -- -- Shareholders' (deficit) equity (19,758) 45,868 109,725 87,210 31,740
There were no cash dividends declared on the Common Stock in any of the periods. See Notes to Consolidated Financial Statements. -7- 10 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 significant operating losses. The Company reported a net loss of $105 million, or $(.94) per share, for the year ended December 28, 1996 compared to a net loss of $30 million, or $(.32) per share, for the year ended December 30, 1995. In 1995, the Company reported net income of $14.8 million, or $.16 per share. Revenues decreased in the year ended December 28, 1996 to $700 million from $750 million in 1995 and $769 million in 1994. The Company recorded a loss from operations of $94.5 million in 1996, or (13.5)% of revenues, compared to a loss from operations of $22.6 million in 1995, or (3)% of revenues, and income from operations of $16.0 million, or 2.1% of revenues, for the same period in the prior year. As a result of the operating losses incurred in 1995 and 1996, the Company's financial condition deteriorated. The Company's working capital decreased from $58.5 million at December 31, 1994 to $28.8 million at December 30, 1995 and $(1.5) million at December 28, 1996. The Company's total debt increased from $37.9 million at December 31, 1994 to $62.8 million at December 30, 1995 and $65.2 million at December 28, 1996. The Company recorded special charges of $36.7 million consisting of severance expenses, facility exit/relocation costs and fixed asset write-offs related to the previously announced downsizing of the Company as well as the write-off of certain long-lived assets in 1996. The net loss in 1996, without giving effect to such charges, was primarily a result of (i) increased inventory write-downs, (ii) lower response rates and (iii) increased order cancellations due to the Company's inability to properly sustain its inventory in-stock position. The Company's fixed cost infrastructure, which its continuing catalogs could not fully absorb, also contributed to the loss. 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. 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 in 1995. See "RISK FACTORS -- INEFFICIENCIES IN CONNECTION WITH NEW FULFILLMENT FACILITIES" and "-- COSTS ASSOCIATED WITH COMPUTER SYSTEMS CONVERSION." Whether the Company is able to return to positive net income will depend on its ability to increase catalog product contribution margin and to effectively monitor and control costs. In December 1996, the Company announced a plan to reduce its annual operating costs on continuing catalogs by approximately $50 million starting January 1, 1997. The Company's ability to sufficiently improve upon its prior year's performance and implement its business strategy, including realignment of business units and expense reductions, is critical to maintaining adequate liquidity. There can be no assurance that the Company's future operations will generate net income. The generation of net income will depend on 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, the level of competition, the ability of the Company to implement improved inventory procedures to more effectively control its business 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 Annual Report on Form 10-K for the fiscal year ended December 28, 1996. In addition, to the extent the Company's revenues continue to decline, the Company may lose the critical mass it needs to cover fixed overhead costs. IMPORTANCE OF LIQUIDITY TO THE COMPANY'S EXISTENCE As of December 28, 1996, the Company had borrowed approximately $27.2 million of the $55.1 million available under the its credit facility (the "Credit Facility") with Congress Financial Corp. ("Congress") and had approximately $5 million of cash on hand. Remaining availability under the Credit Facility was $26.0 million at December 28, 1996 after deducting certain reserves. As of March 28, 1997, the Company had borrowed approximately $33.5 million of the $44.2 million available under the Credit Facility and had approximately $3 million of cash on hand. Remaining availability under the Credit Facility was $9.1 million at March 28, 1997 after deducting certain reserves. 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, which requires the Company to maintain certain specified levels of working capital and net worth, and would accordingly be required to seek waivers therefrom and amendments thereto. The Company has been successful to date in obtaining waivers with respect to prior defaults including defaults for the 1996 fiscal year but there can be no assurance that the Company will be able to do so in the future. If the Company suffers a default in the future and is not able to obtain waivers and does not have availability under the Credit Facility, 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, -8- 11 the Company may ultimately need to seek protection under applicable insolvency laws affecting creditors' rights. However, the Company is not pursuing any of these alternatives at this time. The Company has substantial indebtedness which will become due in the next twelve months. As of December 28, 1996, the Company had approximately $8.9 million of revolving term loans under the Credit Facility outstanding which are due in November 1997. In addition, the Company had approximately $27.9 million of letters of credit available under the letter of credit facility provided by Richemont. The letters of credit will expire on February 18, 1998 and must be replaced by the Company. TIGHTENING OF VENDOR CREDIT As a result of the operating losses mentioned above (see "RISK FACTORS - -- OPERATING LOSSES; FUTURE OPERATING RESULTS") and the Company's increased lack of liquidity, the Company experienced a tightening of vendor credit which has impacted the Company's ability to obtain merchandise on a timely basis. This has resulted in higher back order levels (unfilled orders) and increased cancellation and fulfillment costs which negatively impacted the Company's operating results in 1996. During 1996, the Company's back order level increased from $14.6 million at December 30, 1995 to $21.3 million at December 28, 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 card commission costs) increased from $91.4 million or 13% of sales to $97.9 million or 14% of sales for the same periods, respectively. Due to continued operating losses, the Company was required to use the proceeds from the $50 million rights offering conducted by the Company in the third quarter of 1996 (the "1996 Rights Offering") to fund such losses and the Company's working capital requirements. The Company believes that upon completion of the Rights Offering, the Company will return to more favorable trade terms with its 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. See "RISK FACTORS -- DEPENDENCE ON SUPPLIERS." The Company has also experienced a general tightening of credit available to it as a result of its poor financial performance. For example, the Company has had difficulty concluding arrangements with equipment lessors in connection with certain equipment leasing transactions. If the Company's financial performance does not improve, to the extent the Company will be able to consummate any such transactions, it will do so at a higher cost than would otherwise be available to it. 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 recently, requiring companies to make a greater investment in working capital and systems which increase customer service (including improved delivery time and increased fill rates) in order to be competitive. The mail order catalog industry's fixed costs have also 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 systems 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 Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. REDUCTION IN CUSTOMER LISTS During 1996, the Company mailed approximately 332 million catalogs. The Company maintains a proprietary customer list currently containing approximately 14 million names of customers who have made purchases from at least one of the Company's catalogs within the past 36 months. This number is down from 18 million names in 1995 and 19 million names in 1994. Over 6 million of the names on the current list represent customers who have made purchases from at least one of the Company's catalogs within the last 12 months. This number is down from 7 million names in each of 1995 and 1994. To the extent the Company's customer list each of continues to decline, it may have a material adverse impact on the Company's future revenues and growth potential. IMPORTANCE OF DOMESTICATIONS(R) The Company's Domestications(R) catalog is one of the nation's leading specialty home textile catalogs. Domestications'(R) revenues decreased from approximately $311 million in 1993 to revenues of approximately $202 million in 1996. Domestications'(R) 1993 revenues constituted approximately 48% of the Company's 1993 revenues -9- 12 while its 1996 revenues constituted approximately 34% of the Company's 1996 revenues from continuing catalogs. Domestications'(R) product contribution margin, which decreased 7 percentage points to (4)% from December 30, 1995 to December 28, 1996, was significantly impacted by additional costs in connection with its fulfillment operations at its home fashions center in Roanoke, Virginia and by the lower recovery rates experienced from accelerated disposition of inventory as a result of poor in-stock positions resulting from liquidity problems. The Company's failure to increase the product contribution margins of Domestications(R) would have a material adverse effect upon its financial condition and results of operations. IMPORTANCE OF THE COMPANY STORE(R) AND IMPROVEMENTS(R) The Company acquired the assets of The Company Store(R) in August 1993 and Improvements(R) in January 1995. The Company Stores'(R) revenues have increased from $53.3 million in 1994 to $81.2 million in 1996 while Improvements'(R) revenues have increased from $33.7 million in 1995 to $42.9 million in 1996. The Company does not anticipate a decline in the performance of these businesses, but if one should occur it could have a material adverse effect on the Company's financial condition 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 1996, catalog mailing and product shipment expenses represented approximately 18% of revenues. Despite the reclassification of postal rates that became effective on July 1, 1996 which resulted in a decrease in such rates, the Company's mailing expenses did not change from 1995 to 1996 due principally to the inefficiencies in its Roanoke, Virginia fulfillment center and the tightening of vendor credit which resulted in a number of split shipments. See "RISK FACTORS -- TIGHTENING OF VENDOR CREDIT." Although it is generally the policy of the Company to recover the costs of shipping and handling from its customers, in 1996 it was unable to fully recover such costs. Paper costs represented approximately 8% of revenues in 1996. The Company does not expect a material reduction in these cost levels in 1997. In fact, the Company anticipates that paper prices will increase in the second half of 1997. The Company also anticipates an increase in postal rates in 1998. Significant increases in postal rates or paper costs would have a material adverse impact on the Company's results of operations to the extent that the Company is unable to offset such increases by raising selling prices or by implementing more efficient mailing, delivery and order fulfillment systems. PAPER SHORTAGE From time to time, direct mail marketers have experienced a shortage of paper supply. Although the Company has in the past been able generally to satisfy its paper requirements, should another paper shortage arise, the Company may be unable to obtain paper in adequate quantities to produce its catalogs. INEFFICIENCIES IN CONNECTION WITH NEW FULFILLMENT FACILITIES The Company consolidated certain warehouse and fulfillment operations in 1995 and 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 in connection therewith. As part of its plan to reduce annual operating costs, the Company intends to consolidate its Roanoke, Virginia and its Hanover, Pennsylvania fulfillment operations into its home fashions distribution center in Roanoke, Virginia. These moves are expected to be completed in the second half of 1997 and are expected to improve throughput and productivity at the facility while reducing the Company's operating costs. However, there is no assurance that the Company will be able to complete such moves on a timely basis, or that they will be executed without disruption to the business of one or more of the Company's catalogs or that additional costs will not be incurred in connection therewith. Although the Company believes its actions 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 Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 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 28, 1996, the Company had invested approximately $17.9 million of capitalized costs in such systems and anticipates capital expenditures of approximately $1 million to complete the conversion. The Company brought two catalogs on-line in 1994, eight catalogs on-line in 1995 and one catalog on-line in 1996 (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 1997. -10- 13 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 a material adverse effect on the results of operations or that the new systems will be implemented as currently scheduled or that they will achieve the goals established by the Company. CALL CENTER SERVICES AGREEMENT In the first quarter of 1997, the Company entered into a three-year call center services agreement with MCI Communications Corp. In connection therewith, the Company agreed to guarantee certain levels of call volume with certain exceptions which will create a liability in the event such levels of call volume are not achieved for whatever reason. In the event such levels of call volume are not achieved, the Company's results of operations may be materially adversely effected. See "THE COMPANY -- TELEMARKETING." IMPLEMENTATION OF IMPROVED INVENTORY PROCEDURES The Company maintained a higher level of inventory than is consistent with satisfactory product contribution margins. In the latter part of 1996, the Company began implementing a plan to reduce the amount of such inventory. Inventories amounted to $67.6 million at the end of 1996 as compared to $79.3 million at December 30, 1995, which represents approximately 38 days of sales and inventory at December 28, 1996 as compared to approximately 40 days at December 30, 1995. The Company has initiated additional procedures such as "open to buy" limitations to reduce its inventory position. There is no assurance that the Company will be able to implement these new procedures, particularly in a new decentralized environment. In the event the Company cannot implement these procedures, there may be an adverse effect on the Company's results of operations. DECREASE IN PRODUCT CONTRIBUTION MARGINS The Company's product contribution margin for the year ended December 28, 1996 was approximately (1.7)% while for the year ended December 30, 1995 it was approximately 6.7%. Product contribution margins have decreased due to additional costs in connection with its fulfillment operations at the Company's home fashions center in Roanoke, Virginia and the lower recovery rates experienced from accelerated disposition of inventory as a result of poor in-stock positions resulting from liquidity problems. If the Company is unable to reverse such product contribution margin declines, its results of operations will be materially adversely effected. CONSUMER SPENDING; WEAKNESS IN CONSUMER RESPONSE 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's financial condition or results of operations. In addition, due to reduced customer satisfaction arising from low fill rates and poor customer service, future response rates to the Company's product offerings could be significantly below past performance. 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, charges under which it finances through its facility with General Electric Credit Corporation. The Company has also utilized deferred billing arrangements for some of its catalogs from time to time but has decreased such use recently due to liquidity issues. The use of credit cards and deferred billing arrangements could be costly to the Company since it may need to fund such charges under available credit facilities. The Company's bad debt expense for the year ended December 28, 1996 was approximately $6.8 million while its bad debt expense for the year ended December 30, 1995 was approximately $4.5 million. There is no assurance that the use of credit cards and deferred billing arrangements will not lead to higher bad debt expenses, which would have a material adverse effect on the Company's results of operations. -11- 14 REVENUES ASSOCIATED WITH DISCONTINUED CATALOGS The Company's revenues in 1996 were reduced by approximately $63 million from $166 million related to discontinued catalogs. 1997 revenues may continue to be adversely impacted as a result of such discontinuance. ADJUSTMENTS IN CARRYING VALUE AND USEFUL LIFE The Company assesses the carrying value and the economic useful life of its long-lived assets on an ongoing basis based on the estimated future net cash flows from such assets. The Company adjusted the carrying value of certain of its assets and took charges in 1996 of approximately $22 million relating thereto. There can be no assurance that the Company will not adjust the carrying value and the economic useful life of such long-lived assets further in the future which could have a material adverse effect on the Company's financial condition and results of operations. COMPETITION The mail order catalog business is highly competitive. Sales growth in the direct marketing industry has encouraged the entry of many new competitors and an increase in competition from established companies. The Company's catalogs compete with other mail order catalogs, both specialty and general, and retail stores, including department stores, specialty stores and discount stores. In addition, new methods of competition, such as the internet, are posing new opportunities and threats to the Company's business. 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 -- IMPORTANCE OF LIQUIDITY TO THE COMPANY'S EXISTENCE." SEASONALITY The Company has experienced substantially increased sales in the fourth quarter of each year as compared to the first three quarters, due primarily to the Company mailing more catalogs in the second part of the year. As a result, the fourth quarter is increasingly important to the Company's results of operations. However, in 1995 and 1996, the Company sustained net losses in such quarter. Accordingly, there can be no assurance that the Company's fourth quarter operations will continue to be more successful than the first three quarters. 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 respective catalogs with the quantities of merchandise on the terms currently offered to the respective catalogs or that the respective catalogs 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 1996, due to concerns over continuing operating losses at the Company and issues concerning the Company's continuing viability in light of the very difficult year for the Company, certain vendors tightened the terms available to the Company which resulted in higher back order levels and increased fulfillment costs which, in turn, negatively impacted the Company's operating results for the year. In addition, in recent weeks, certain factors have refused to extend credit against Company purchases. As a result, the Company has elected to deal directly with certain vendors. However, some of the Company's vendors have refused to ship to the Company on any terms. The Company believes that upon the completion of the Rights Offering, the Company will return to more favorable trade terms with its 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 12% 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 currency risks by making most -12- 15 foreign purchases in U.S. dollars and does not generally utilize hedging instruments. The occurrence of any one or more of the other risks of doing business overseas could materially adversely effect the Company's financial position and its 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. As a result of the Company's losses, management turnover at the Company has been high. The Executive Vice President, Secretary and General Counsel and the Executive Vice President and Chief Financial Officer resigned in 1996. In addition, the Company's Chief Information Officer resigned but has been replaced. The Company recently retained a new President and Chief Executive Officer, Rakesh K. Kaul, who is building a management team, as well as a new Chief Financial Officer, Larry J. Svoboda. The General Counsel position is currently being filled on a part-time basis by an individual who has served as an outside provider of legal services to the Company. The Company does not currently have a retention program for its personnel. The loss of the services of the Company's management personnel could adversely effect the Company's results of operations. TAX LOSS CARRYFORWARDS Realization of certain future tax benefits (for example, certain existing net operating loss carryforwards ("NOLs") and temporary timing differences of the Company) 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 13 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 1996. 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 55.7% of the Company's outstanding Common Stock on a fully diluted basis. Assuming that all of the holders of Rights other than NAR exercise their Rights and that NAR exercises only the Rights distributed to it to purchase shares of Common Stock having an aggregate purchase price of $10 million and Richemont acquires the balance of NAR's shares, NAR would own approximately 46.1% of the Common Stock of the Company after the Rights Offering on a fully-diluted basis and Richemont would own approximately 9.3% after the Rights Offering on a fully-diluted basis. Assuming that no Rights are exercised by the holders thereof other than NAR but that all the conditions of the Standby Purchase Agreement are satisfied or waived and that NAR exercises the Rights only to purchase shares of Common Stock having an aggregate purchase price of $10 million and Richemont purchases all of the Unsubscribed Shares pursuant to the Standby Purchase Agreement, NAR would own approximately 46.1% of the Common Stock after the Rights Offering on a fully-diluted basis and Richemont would own approximately 22.2% after the Rights Offering on a fully-diluted basis. Currently, NAR has 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 AND RICHEMONT As the Company's financial performance has deteriorated, the Company has become increasingly dependent on NAR and its affiliates, including Richemont, for financial support. 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 from a third party in connection with the refinancing of the Company's indebtedness under the Credit Facility. In connection with the 1996 Rights Offering, NAR advanced $25 million to the Company which was repaid out of the proceeds of the 1996 Rights Offering. In addition, in connection with the 1996 Rights Offering, NAR agreed pursuant to a standby purchase agreement between it and the Company to exercise all rights distributed to it and to purchase all unsubscribed shares in the 1996 Rights Offering. As a result of its commitment, NAR acquired an aggregate of 30,914,830 shares of the Company's Common Stock at an aggregate cost to it of approximately $[31,842,275]. In September 1996, IMR loaned the Company $10 million as evidenced by the IMR Promissory Note in the principal amount of $10 million which is due in November 1997. NAR and the Company have agreed that such note will be used to satisfy NAR's agreement to acquire shares of Common Stock having an -13- 16 aggregate purchase price of at least $10 million in the Rights Offering. In December 1996, Richemont provided the Company with a facility for issuing up to approximately $28 million of letters of credit. The Company and Richemont have entered into the Standby Purchase Agreement pursuant to which Richemont will be required, subject to the fulfillment of various terms and conditions thereof, to purchase all Unsubscribed Shares in the Rights Offering. NAR has irrevocably agreed with the Company, subject to and upon the consummation of the Rights Offering, to exercise that number of Rights distributed to it for the purchase of shares of Common Stock having an aggregate purchase price of at least $10 million, the purchase price for such shares to be paid by NAR by the surrender and cancellation of the principal amount of the IMR Promissory Note. If all of the Rights are exercised, Richemont will not be required to purchase any of the Common Stock issuable upon the exercise of the Rights. As compensation to Richemont for its commitment under the Standby Purchase Agreement, the Company has agreed to pay to Richemont, on the Closing Date or at such other time and date as Richemont and the Company may agree in writing, certain fees described more fully under the caption "THE RIGHTS OFFERING -- STANDBY PURCHASE COMMITMENT." Richemont has advanced $__ million against its commitment to purchase all of the Unsubscribed Shares if all of the conditions of the Standby Purchase Agreement are satisfied or waived. See "RECENT DEVELOPMENTS--PRE-FUNDING BY RICHEMONT" and "USE OF PROCEEDS." There is no assurance that NAR, Richemont or their affiliates will continue to support the Company financially should the Company need such support since NAR, Richemont and their affiliates are under no obligation to do so. There is no assurance that should NAR, Richemont or their affiliates cease to provide such financial support, it would not have a material adverse impact on the Company. Further, in the event that the conditions contained in the Standby Purchase Agreement are not met by the Company and are not waived by Richemont, the obligation of Richemont to purchase any Unsubscribed Shares may be cancelled upon notice by Richemont. In the event that the conditions contained in the Standby Purchase Agreement are not met by the Company and are not waived by Richemont, 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. Although the Company believes that Richemont would waive the non-occurrence of any of the conditions, if Richemont does not do so the cancellation by Richemont of its obligation to purchase any Unsubscribed Shares would have a material adverse effect on the Company's financial condition and, in such event, it is possible that the Company may need to seek protection under applicable insolvency laws. See "THE RIGHTS OFFERING--STANDBY PURCHASE COMMITMENT." POTENTIAL CONFLICTS OF INTEREST NAR is the beneficial owner of approximately 55.7% of the Common Stock of the Company as of the date hereof on a fully-diluted basis. Alan G. Quasha, a director and chairman of the Board of Directors of the Company, may be deemed to be an indirect beneficial owner of the securities beneficially owned by NAR, although Mr. Quasha disclaims such beneficial ownership. There can be no assurance that no conflicts of interest will arise as a result of this affiliated relationship. Similarly, Howard M.S. Tanner and Jan P. du Plessis, directors of the Company, may be deemed to be indirect beneficial owners of the Common Stock owned indirectly by Richemont, although they disclaim such beneficial ownership, and to have similar conflicts. SHARES ELIGIBLE FOR FUTURE SALE In the future, Richemont, to the extent it acquires shares pursuant to the Standby Purchase Agreement, and NAR will be able to sell shares of Common Stock owned by them 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 Company and represents a premium to the market price of the Common Stock at the date of this Prospectus. However, there can be no assurance that 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 -14- 17 Common Stock purchased pursuant to the Basic Subscription Privilege will be delivered to subscribers as soon as practicable after the Expiration Date. Certificates representing shares of Common Stock purchased pursuant to the Oversubscription Privilege will be delivered to subscribers as soon as practicable after the Expiration Date and after all prorations have been effected. 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 Series B Preferred Stock to purchase shares of Common Stock at a price above the prevailing market price of the Common Stock immediately prior to the commencement of the Rights Offering. Holders of shares of Common Stock and Series B Preferred Stock who exercise their Rights will preserve, and through the Oversubscription Privilege may increase, 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 145,039,915 shares of Common Stock and 634,900 shares of Series B Preferred Stock outstanding on April 8, 1997, the consummation of the Rights Offering would result (on a pro forma basis as of such date) in an increase of approximately 55,555,556 shares of Common Stock. NAR owns approximately 55.7% of the Common Stock as of such date on a fully diluted basis. Assuming that all of the holders of the Rights other than NAR exercise such Rights and that NAR exercises the Rights distributed to it with respect to shares of Common Stock having an aggregate purchase price of $10 million and all the conditions of the Standby Purchase Agreement are satisfied or waived and that Richemont purchases all of the Unsubscribed Shares pursuant to the Standby Purchase Agreement, NAR would own approximately 46.1% of the Common Stock of the Company after the Rights Offering on a fully diluted basis and Richemont would own approximately 9.3% of the Common Stock after the Rights Offering on a fully diluted basis. Assuming that no Rights are exercised by the holders thereof other than NAR, but that NAR exercises the Rights distributed to it with respect to shares of Common Stock having an aggregate purchase price of $10 million and all the conditions of the Standby Purchase Agreement are satisfied or waived and that Richemont purchases all of the Unsubscribed Shares pursuant to the Standby Purchase Agreement, NAR would own approximately 46.1% of the Common Stock after the Rights Offering on a fully diluted basis and Richemont would own approximately 22.2% 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 should not result in a taxable distribution of property for federal income tax purposes to the holders of shares of Common Stock. The distribution of Rights pursuant to the Rights Offering to holders of Series B Preferred Stock will be treated as a distribution of property to which section 301 of the Internal Revenue Code of 1986, as amended (the "Code"), applies with the amount of such distribution measured by the fair market value of the Rights on the date of distribution. However, the provisions of the 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 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 "THE RIGHTS OFFERING--CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS--Constructive Distributions Under Section 305 of the Code." USE OF PROCEEDS The proceeds available to the Company from the Rights Offering, including Richemont's standby purchase commitment, after payment of approximately $___________ of fees and expenses incurred in connection with the Rights Offering and after giving effect to the surrender and cancellation by NAR of the principal amount of the IMR Promissory Note to pay for shares acquired by it pursuant to the Rights Offering, will be approximately $______________. The Company intends to use such net proceeds to repay the Richemont Promissory Note and to use the balance of the net proceeds to repay amounts outstanding under the Credit Facility with Congress (approximately $__ million under the revolving line of credit as of ___________ __, 1997). On April __, 1997, the Company executed and delivered the Richemont Promissory Note. As of April __, the Company has drawn $__ million thereunder. The Richemont Promissory Note carries an interest rate of 1.5% above prime which is payable in cash. See "RECENT DEVELOPMENTS -- PRE-FUNDING BY RICHEMONT." 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 December 28, 1996, the Company had approximately $27.2 million of outstanding borrowings under the revolving line of credit (including documentary and standby letters of credit) and approximately $8.9 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 December 28, 1996. -15- 18 CAPITALIZATION The following table sets forth the consolidated capitalization of the Company at December 28, 1996 and as adjusted to reflect the gross proceeds of approximately $50 million from the sale of the 55,555,556 shares of the Common Stock offered by the Company at a subscription price of $.90 and the repayment of the principal amount of the IMR Promissory Note. See "USE OF PROCEEDS."
At December 28, 1996 -------------------- As Actual Adjusted ------ -------- (In thousands, except per share information) Total debt (includes the current portion of long-term debt of $11.5 million) (a): Congress Facility ......................................................... $ 22,627 $ 8,917 Term Financing Facility ................................................... 19,000 19,000 IMR Promissory Note ....................................................... 10,000 -- Industrial Revenue Bonds due 2003 ......................................... 8,000 8,000 6% Mortgage Notes Payable due 1998 ........................................ 2,969 2,969 7 1/2% Convertible Subordinated Debentures due 2007 ....................... 751 751 Capital Leases ............................................................ 1,826 1,826 Other ..................................................................... 16 16 --------- --------- Total debt ........................................................... 65,189 41,479 Shareholders' equity: Series B Convertible Additional Preferred Stock, $.01 par value, authorized and issued 634,900 shares in 1996 ......................................... 5,748 5,748 Common Stock $.66 2/3 par value, authorized 225,000,000 shares; issued 145,039,915 in 1996 and outstanding shares issued and 200,595,471 outstanding, as adjusted (b)(c) ........................................... 96,693 133,730 Capital in excess of par value ............................................ 270,097 283,060 Accumulated deficit ....................................................... (336,586) (336,586) Less: Treasury stock, at cost (392,017 shares at December 28, 1996) ............. (813) (813) Notes receivable from sale of Common Stock ................................ (3,399) (3,399) Total shareholders' equity ........................................... 31,740 81,740 --------- --------- Total capitalization ................................................. 96,929 123,219 ========= =========
- ------------------------------- (a) The Company intends to repay approximately $13.7 million of borrowings under the Credit Facility with any proceeds from the Rights Offering in excess of the Richemont Promissory Note. NAR has agreed that the principal amount of the IMR Promissory Note will be used to satisfy NAR's obligation to acquire shares of Common Stock having an aggregate purchase price of at least $10 million. (b) Excludes 6,093,655 shares of Common Stock issuable upon exercise of outstanding options and warrants exercisable within 60 days of April __, 1997. (c) The gross proceeds of the Rights Offering are $50 million and the Company estimates incurring approximately $ in fees associated with the filing, resulting in net cash proceeds of approximately $ . After giving effect to the use by NAR of the principal amount of the IMR Promissory Note to satisfy NAR's obligation to acquire shares of Common Stock having an aggregate purchase price of at least $10 million, the net cash proceeds of the Rights Offering to the Company will be approximately $ . -16- 19 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 ---- --- 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 3/4 1 1/8 Second Quarter...................................... 2 1 1/8 Third Quarter ....................................... 1 5/8 7/8 Fourth Quarter....................................... 1 5/8 1997 First Quarter........................................ 1 1/8 5/8 Second Quarter (through April 10, 1997).............. 3/4 11/16
As of April 8, 1997, there were approximately 4,715 holders of record of the Common Stock. On April 10, 1997, the closing price of the Common Stock on the AMEX was $.75 per share. -17- 20 RECENT DEVELOPMENTS PRE-FUNDING BY RICHEMONT In order to facilitate improved vendor shipments and to permit the commencement of the Company's plan to consolidate certain of its warehousing facilities, the Company requested that Richemont advance up to $30 million from time to time upon the Company's request and Richemont has advanced as of the effective date of the Registration Statement of which this Prospectus is a part $__ million against its commitment to purchase all of the Unsubscribed Shares. In connection therewith, the Company has executed the Richemont Promissory Note. The Company will repay to Richemont any amounts outstanding under the Richemont Promissory Note on the earlier of August 30, 1997 or the completion of the Rights Offering. The Richemont Promissory Note is subordinate to the Credit Facility. CREDIT ARRANGEMENTS In September 1996, IMR loaned the Company $10 million as evidenced by a subordinated promissory note in the amount of $10 million (the IMR Promissory Note). Such loan bears interest at 1.5% above the prime rate, and was due on November 14, 1996. If it is not repaid before May 15, 1997 and if the Rights Offering is not consummated, the IMR Promissory Note is convertible at the option of NAR into shares of Common Stock at the lower of the fair market value thereof on the date of execution or the then current fair market value thereof. The IMR Promissory Note is subordinate to the Credit Facility and excluded from the working capital covenant calculation. By agreement dated March 26, 1997, NAR irrevocably agreed with the Company, subject to and upon the consummation of the Rights Offering, to exercise at the Subscription Price that number of Rights distributed to it for the purchase of shares of Common Stock having an aggregate purchase price of at least $10 million. NAR agreed to pay for and the Company agreed to accept as payment for the aggregate purchase price of such shares at the closing of the Rights Offering the surrender by NAR of the IMR Promissory Note and the cancellation of the principal amount thereof. On December 19, 1996, the Company finalized its agreement (the "Reimbursement Agreement") with Richemont that provided the Company with up to approximately $28 million of letters of credit which were previously issued under the Credit Facility. The Company paid a facility fee equal to 5% of the principle amount of the letters of credit as well as all other fees incurred in connection with providing the facility. The letters of credit will expire on February 18, 1998 and carry an interest rate (currently 11.75%), which is 3.5% above the prime rate, payable only on amounts drawn under the letters of credit. In the event that the Company has not paid in full, by the expiration date, any outstanding balances under the letters of credit, Richemont shall have the option, exercisable at any time prior to payment in full of all amounts outstanding under the letters of credit, to convert such amount into Common Stock of the Company at the mean of the bid and ask prices of the Company's Common Stock on November 8, 1996, or the mean of the bid and ask prices of the Company's Common Stock on each of the thirty days immediately prior to the date of exercise of the conversion privilege. The Reimbursement Agreement is subordinate to the Credit Facility. On December 5, 1996, Richemont advanced the Company $10 million against the anticipated $28 million line of credit. The Company repaid the $10 million loan after the letter of credit agreement was completed on December 19, 1996. SEARS In January 1994, the Company entered into a licensing agreement (the "Sears Agreement") with the direct marketing subsidiary of Sears, Roebuck and Co. ("Sears") to produce specialty catalogs for the more than 20 million mail order and credit card customers of Sears. The catalogs mailed under the program were based on existing Company catalogs and contained a title page with the Sears name and logo. The specialty catalogs included: Show Place, based on the Domestications(R) catalog, Great Kitchens, based on the Colonial Garden Kitchens(R) catalog, and Sears Improvements, based on the Improvements(R) catalog. Show Place and Great Kitchens are trademarks of Sears. The Sears Agreement had an initial three-year term with automatic renewals thereafter unless commencing December 31, 1996 either party gave at least 12 months prior written notice that the agreement would terminate at the end of the initial term or any extended term. The Company was obligated to meet various operational performance standards under the Sears Agreement. If the Company was unable to meet these standards (after written notice and a 30-day cure period), Sears would be entitled to terminate the Sears Agreement. Sears exercised its right to terminate the venture in December 1996, since the Company was not meeting certain of the operational standards, namely the order fulfillment and reporting standards, but the Company and Sears each retain the right to mail catalogs to customers of the venture. The last catalogs were mailed in the first quarter of 1997. The Company estimates that the termination of the venture will not have a material impact on the Company's earnings for 1997. -18- 21 BOARD OF DIRECTORS In conjunction with the Standby Purchase Agreement, the Company named two officers of Richemont, Jan P. du Plessis and Howard M. S. Tanner, to its Board of Directions and Executive Committee, and will nominate a third Richemont representative to the Board at the next annual meeting of shareholders scheduled for June 12, 1997. The new Board members fill positions vacated by the recent resignations of Geraldine Stutz and Jeffrey R. Laikind. In addition, Mr. du Plessis has been named to the Audit Committee of the Board. -19- 22 THE COMPANY The Company is a leading direct specialty retailer that markets, via a portfolio of branded specialty catalogs, home fashions, general merchandise, men's and women's apparel and gifts. In December 1996, the Company regrouped its catalog titles so that all significant decisions, including those regarding market positioning and strategy, merchandising, circulation levels, catalog design, inventory management and cash management, are now made by six newly-created strategic business units -- Home Fashions-Mid-Market, Home Fashions-Upscale, General Merchandise, Women's Apparel, Men's Apparel and Gifts - -- each consisting of one or more catalog operations. All of these business units will continue to utilize the Company's central purchasing, telemarketing, fulfillment, distribution and administrative functions. The Company's home fashions-mid-market strategic business unit includes Domestications(R), a leading specialty home textile catalog. The home fashions-upscale group includes The Company Store(R), an upscale direct marketer of down comforters and other down and related products for the home, and Kitchen & Home(R), an upscale kitchen and home product catalog. The general merchandise group includes Improvements(R), a do-it-yourself home improvements catalog, The Safety Zone(R), a direct marketer of safety, prevention and protection products, and Colonial Garden Kitchens(R), featuring work saving and lifestyle enhancing items for the kitchen and home. The women's apparel group includes Silhouettes(R), featuring everyday, workout, special occasion and career fashions for larger sized women, and Tweeds(R), the European inspired women's fashion catalog. The men's apparel group includes International Male(R), offering unique men's fashions with an international flair, Austad's(R), a direct marketer of golf equipment, apparel and accessories, and Undergear(R), a leader in activewear, workout wear and fashion underwear for men. The gifts group includes Gump's By Mail(R), a leading upscale catalog of luxury gifts, and Gump's, a leading retail store based in San Francisco. During 1996, the Company mailed approximately 332.0 million catalogs. The Company maintains a proprietary customer list currently containing approximately 14 million names of customers who have made purchases from at least one of the Company's catalogs within the past 36 months. Over 6 million of the names on the list represent customers who have made purchases from at least one of the Company's catalogs within the last 12 months. In December 1996, the Company announced a plan to reduce its annual operating costs on continuing catalogs by approximately $50 million starting January 1, 1997. Under the plan, the Company's fixed overhead is to be reduced by approximately $16 million, its marketing expenditures are to be reduced by approximately $21 million and other operating costs are to be reduced by approximately $13 million. The fixed overhead reductions will result primarily from the shutdown of excess telemarketing capacity in the Company's Roanoke, Virginia facility and the consolidation of the Company's apparel distribution facility in Roanoke, Virginia and its warehouse operations in Hanover, Pennsylvania with and into its home fashions distribution center in Roanoke, Virginia. The Company also announced a reduction in the number of full-time employees of approximately 550. The marketing expenditures reduction is primarily driven by elimination of unprofitable circulation and improved customer retention and target segmentation, but does not contemplate the discontinuance of any of the current core catalogs. THE COMPANY'S CATALOGS Each of the Company's specialty catalogs targets distinct market segments offering a focused assortment of merchandise designed to meet the needs and preferences of its target customers. Through market research and ongoing testing of new products and concepts, each strategic business unit determines each catalog's own merchandise strategy, including the appropriate price points, mailing plans and presentation of its products. The Company is continuing its development of exclusive or private label products for a number of its catalogs, including Domestications(R), Tweeds(R), Austad's(R) and The Company Store(R), to further enhance the brand identity of the catalogs. The Company's specialty catalogs typically range in size from 32 to 96 pages with four to twelve new editions per year depending on the seasonality and fashion content of the products offered. Each edition may be mailed several times each season with variations in format and content. Each catalog employs the services of an outside creative agency or has its own creative staff which is responsible for the design, layout, copy, feel and theme of the book. Generally, the initial sourcing of new merchandise for a catalog begins two to six months before the catalog is mailed. The Company reviews its portfolio of catalogs as well as new opportunities to acquire or develop catalogs from time to time. In 1995, the Company discontinued six catalogs, One 212(R), Simply Tops(R), Essence By Mail(R), Hanover House(R), Mature Wisdom(R) and Tapestry(R). No catalogs were discontinued during the 1996 fiscal year. -20- 23 In December 1996, the Company's operations were divided into six strategic business units -- Home Fashions- Mid-Market, Home Fashions-Upscale, General Merchandise, Women's Apparel, Men's Apparel and Gifts -- so that all significant decisions, including those regarding market positioning and strategy, merchandising, circulation levels, catalog design, inventory management and cash management, would be made by the newly-created units in order to create efficiency and bottom-line accountability. Revenues and the percent of total revenues for 1996 and 1995 for each of the Company's six business units are set forth below; all revenues are net of returns:
1996 1995 1996 Percent of 1995 Percent of Revenues Total Revenues Revenues Total Revenues -------- -------------- -------- -------------- (in thousands) Home Fashions Mid-Market ....... $ 202.2 28.9% $ 223.7 29.8% Upscale .......... 97.2 13.9 81.8 10.9 General Merchandise 79.3 11.3 73.5 9.8 Women's Apparel ... 82.7 11.8 76.7 10.2 Men's Apparel ..... 78.4 11.2 77.9 10.4 Gifts ............. 57.7 8.2 50.7 6.8 -------- ----- -------- ----- Total Continuing .. 597.5 85.3 584.3 77.9 Discontinued ...... 102.8 14.7 165.5 22.1 -------- ----- -------- ----- Total Company ..... $ 700.3 100.0% $ 749.8 100.0% ======== ===== ======== =====
The following is a description of the Company's core catalogs in each of the Company's six strategic business units: Home Fashions-Mid-Market Domestications(R) is a leading specialty home textile catalog and a fashion decorating source book for today's value-oriented and style-conscious consumer. Domestications(R) features sheets, towels, comforters, tablecloths, draperies and other items for the home. Many of its products are coordinated with matching accessories. See "RISK FACTORS -- IMPORTANCE OF DOMESTICATIONS(R)." Home Fashions-Upscale The Company Store(R) is a leading upscale home furnishings catalog featuring private label down comforters and related down and feather products. The Company Store(R) also features high quality private label, brand name and custom bed and bath products. See "RISK FACTORS -- DEPENDENCE ON THE COMPANY STORE(R) AND IMPROVEMENTS(R)." Kitchen & Home(R) features upscale, distinctive, functional and fashionable kitchen and home products for entertaining and decorating. General Merchandise Improvements(R) is a leading do-it-yourself home improvement catalog featuring home improvement accessories. See "RISK FACTORS -- DEPENDENCE ON THE COMPANY STORE(R) AND IMPROVEMENTS(R)." The Safety Zone(R) is a direct marketer of safety, protection and prevention products. Colonial Garden Kitchens(R) features work saving and lifestyle enhancing items for the kitchen and home. The Company is developing a new version of the Hanover House(R) catalog which will be test mailed in 1997. Women's Apparel Silhouettes(R) is a women's specialty fashion catalog featuring casual, career and special occasion apparel for larger sized women. Tweeds(R) is a European inspired young women's fashion catalog featuring relaxed, contemporary fashions uniquely designed for the consumer. -21- 24 Men's Apparel International Male(R) offers both trendsetting, high profile urban men's fashions as well as classic American sportswear and European inspired design and casual wear for men, all at reasonable prices. Undergear(R) is aimed at the fitness-oriented customer, offering the largest underwear selection available to men, along with gym-inspired fashions, swimwear, workout clothes and accessories. Austad's(R) is a leading direct marketer of fine pro-line golf equipment, practice aids, accessories and a wide selection of golf apparel. Gifts Gump's By Mail(R) is a leading upscale catalog marketer of luxury gifts, specialized housewares and other unique items. Gump's is the well-known San Francisco retailer which opened its new store in May 1995. MARKETING AND DATABASE MANAGEMENT The Company maintains a proprietary customer list currently containing approximately 14 million names of customers who have purchased from one of the Company's catalogs within the past 36 months. The list contains name, gender, residence and historical transaction data. This database is selectively enhanced with demographic, socioeconomic, lifestyle and purchase behavior overlays from other sources. See "RISK FACTORS -- REDUCTION IN CUSTOMER LISTS." The Company utilizes proprietary modeling and sophisticated segmentation analysis, on a catalog by catalog basis, to devise catalog marketing and circulation strategies that are intended to maximize customer contribution by catalog. This analysis is the basis for the Company's determination of which of the Company's catalogs will be mailed and how frequently to a particular customer, as well as the promotional incentive content of the catalog(s) such customer receives. As part of its plan to reduce annual operating costs, the Company intends to reduce catalog circulation and improve customer retention and target segmentation. The primary source of new customers for the Company's catalogs is lists rented from other mailers and compilers. Prior to mailing these non-proprietary lists, the lists are edited using statistical segmentation tools to enhance their probable performance. Other sources of new customers include space advertisements and promotional inserts in outbound merchandise packages. TELEMARKETING The Company receives approximately 80% of its orders through its toll-free telephone service which offers customer access seven days per week, 24 hours per day. The Company has created a telephone network to link its primary telemarketing facilities in Hanover, Pennsylvania and LaCrosse, Wisconsin. The Company's telemarketing facilities utilize state-of-the-art telephone switching equipment which enables the Company to route calls between telemarketing centers and thus provide prompt customer service. A satellite telemarketing center is also located in San Diego, California. The Company handled approximately 7 million telephone order calls in 1996. As part of its December 1996 plan to reduce operating costs, in February 1997, the Company shut down its telemarketing capacity in its Roanoke, Virginia facility. In the first quarter of 1997, the Company entered into a three-year call center services agreement with MCI Communications Corp. under which it will obtain a material reduction in the rate which it has been paying pursuant to the telecommunications contract now in effect and savings with respect to certain database services to be provided to it, which savings are expected to aggregate approximately $3 million over the term of the contract. In that connection, the Company agreed to guarantee certain levels of call volume with certain exceptions which will create a liability in the event such levels of call volume are not achieved for whatever reason. See "RISK FACTORS -- CALL CENTER SERVICES AGREEMENT." The Company trains its telemarketing service representatives to be courteous, efficient and knowledgeable about the Company's products. Telemarketing service representatives generally receive 40 hours of training in selling products, services, systems and communication skills through simulated as well as actual phone calls. A substantial portion of the evaluation of telemarketing service representatives' performance is based on how well the representative meets customer service standards. While primarily trained with product knowledge to serve customers of one or more specific catalogs, telemarketing service representatives also receive cross-training that enables them to take overflow calls from other catalogs. The Company utilizes customer surveys as an important measure of customer satisfaction. -22- 25 DISTRIBUTION The Company presently operates four distribution centers in three principal locations: two in Roanoke, Virginia for home fashions and apparel, one in Hanover, Pennsylvania for general merchandise including giftware and other hardgoods, and one in LaCrosse, Wisconsin for home fashions. The Company's facilities processed approximately 12.7 million packages in 1996. As part of its plan to reduce annual operating costs, the Company intends to consolidate its Roanoke, Virginia and its Hanover, Pennsylvania fulfillment operations into its home fashions distribution center in Roanoke, Virginia. These moves are expected to be completed in the second half of 1997 and are expected to improve throughput and productivity at the facility while reducing the Company's operating costs. However, there is no assurance that the Company will be able to complete such moves on a timely basis, or that they will be executed without disruption to the business of one or more of the Company's catalogs. See "RISK FACTORS -- INEFFICIENCIES IN CONNECTION WITH NEW FULFILLMENT FACILITIES." The Company mails it catalogs through the United States Postal Service ("USPS") utilizing pre-sort, bulk mail and other discounts. Most of the Company's packages are shipped through the USPS. Overall, catalog mailing and package shipping costs approximated 18% of the Company's net revenues in 1996. The Company obtains rate discounts from the USPS by automatically weighing each parcel and sorting and trucking packages to a number of USPS drop points throughout the country. Some packages are shipped using a consolidator for less frequently used drop points. The Company also utilizes the United Parcel Service, Federal Express and other delivery services. See "RISK FACTORS -- INCREASES IN COSTS OF MAILING AND PAPER." PURCHASING The Company's large sales volume permits it to achieve a variety of purchasing efficiencies, including the ability to obtain prices and terms that are more favorable than those available to smaller companies or than would be available to the Company's individual catalogs were they to operate as independent companies. Major goods and services used by the Company are purchased or leased from selected suppliers by its central buying staff. These goods and services include: paper, catalog printing and printing related services such as order forms and color separations, communication systems including telephone time and switching devices, packaging materials, expedited delivery services, computers and associated network software and hardware. See "RISK FACTORS -- DEPENDENCE ON SUPPLIERS." The Company's telephone telemarketing costs (both inbound and outbound calls) are typically contracted for a three-year period. In the first quarter of 1997, the Company entered into a three-year call center services agreement with MCI Communications Corp. See "THE COMPANY -- TELEMARKETING" and "RISK FACTORS -- CALL CENTER SERVICES AGREEMENT." The Company generally enters into annual arrangements for paper and printing with a limited number of suppliers. These arrangements permit periodic price increases or decreases based on prevailing market conditions, changes in supplier costs and continuous productivity improvements. For 1996, paper costs approximated 8% of the Company's net revenues. The Company anticipates that paper prices will increase in the second half of 1997. The Company hopes to mitigate the effects of these anticipated price increases by utilizing a portion of the proceeds of the Rights Offering to purchase paper in quantity prior to such price increases. See "RISK FACTORS -- INCREASES IN COSTS OF MAILING AND PAPER." MANAGEMENT INFORMATION SYSTEMS The Company is continuing to upgrade its management information systems by implementing new integrated software and migrating from a centralized mainframe to mid-range mini-computers. The migration of the Company's business applications to mid-range mini-computers is an important part of the Company's overall systems plan which defines the mid and long-term systems and computing strategy for the Company. The Company is continuing to modify and install, on a catalog by catalog basis, these new integrated systems for use in managing all phases of the Company's operations. These systems have been designed to meet the Company's requirements as a high volume publisher of multiple catalogs. The new software system is an on-line, real-time system which includes order processing, fulfillment, inventory management, list management and reporting. The software, where implemented, provides the Company with a flexible system that offers data manipulation and in-depth reporting capabilities. The new management information systems are designed to permit the Company to achieve substantial improvements in the way its financial, merchandising, inventory, telemarketing, fulfillment and accounting functions are performed. Until the new system is installed Company-wide, the Company will not achieve the full benefits of the new system. Two -23- 26 catalogs were brought on-line in 1994. The Company brought eight additional catalogs on-line in 1995, and one in 1996. The balance of its catalogs are scheduled to be brought on-line in 1997. As of December 28, 1996, the Company had invested approximately $17.9 million of capitalized costs in such systems and anticipates capital expenditures of approximately $1 million to complete the conversion. The Company experienced various problems with the conversions which have adversely affected its results of operations and although it believes that it has now identified the source of many of these problems, future conversions may encounter similar difficulties. See "RISK FACTORS -- COSTS ASSOCIATED WITH COMPUTER SYSTEMS CONVERSION." CREDIT MANAGEMENT Several of the Company's catalogs, including Domestications(R), International Male(R) and Gump's By Mail(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. The Company has a five year $75 million credit facility with General Electric Credit Corporation ("GECC") expiring in the year 2000, which provides for the sale and servicing of accounts receivable originating from the Company's revolving credit cards. GECC's servicing responsibilities include credit processing, collections, billing/payment processing, reporting and credit card issuance. See "RISK FACTORS -- CREDIT RISKS." INVENTORY MANAGEMENT The Company acquires products for resale in its catalogs from numerous domestic and foreign vendors. No single source supplied more than 5% of the Company's products in 1996. The Company's vendors are selected based on their ability to reliably meet the Company's production and quality requirements, as well as their financial strength and willingness to meet the Company's needs on an ongoing basis. See "RISK FACTORS -- FOREIGN SOURCING" and "-- DEPENDENCE ON SUPPLIERS." Although the Company's inventory management strategy is designed to maintain inventory levels that provide optimum in-stock positions while maximizing inventory turnover rates and minimizing the amount of unsold merchandise at the end of each season, the Company's inventory levels at the end of 1996 were in excess of planned amounts. The Company has initiated additional procedures to reduce its inventory position. The Company manages inventory levels by monitoring sales and fashion trends, making purchasing adjustments as necessary and by promotional sales. Additionally, the Company sells excess inventory in its special sale catalogs, its outlet stores and to jobbers. Due in part to the transition to new management information systems, the Company is currently operating with different systems which increases the difficulty of optimizing inventory levels. See "RISK FACTORS -- IMPLEMENTATION OF IMPROVED INVENTORY PROCEDURES." FINANCING Credit Facility. In November 1995, the Company entered into a $75 million secured credit facility (the "Credit Facility") with Congress Financial Corporation ("Congress") consisting of a three-year revolving line of credit of up to $65 million and two two-year term loans aggregating $10 million. The revolving facility carries an interest rate of 1.25% above prime and the term loan carries an interest rate of 1.5% above prime. The Credit Facility is secured by all assets of the Company. At December 28, 1996, the Company had approximately $18.3 million of outstanding borrowings under the revolving credit facility (including documentary and standby letters of credit) and approximately $8.9 million outstanding under the term loans, which are due in November 1997. Remaining availability under the Congress facility was $26.0 million at December 28, 1996. At March 28, 1996, the amount of such availability was approximately $9.1 million. Under the Credit Facility, the Company was required to comply with certain restrictive debt covenants including maintaining minimum net worth of $80 million and working capital of $26 million as of December 30, 1995. In April 1996, these restrictive debt covenants were revised to $75 million and $21 million, respectively, in an amendment to the Credit Facility and, upon the closing of the 1996 Rights Offering, returned to their previous levels. In December 1996, the minimum net worth covenant was lowered to $70 million and Congress also agreed to address the 1997 net worth covenant level after a review of the Company's business plan. Congress began lowering the advance rate for inventories in November 1996 and continued to reduce it monthly until a new appraisal was completed in March 1997. The current advance rate for inventories is 52%. On March 26, 1997, the Company reached an agreement with Congress under which Congress waived certain defaults and amended the Credit Facility to (a) reduce the aggregate amount of required net worth and working capital to be maintained by the Company to a range of $14.0 million to $11.5 million and $(5.0) million to $(20.0) million, respectively, and (b) amend the covenant relating to material adverse changes so that measurement thereunder will commence from December 28, 1996. 1996 Rights Offering. The Company commenced the 1996 Rights Offering on July 19, 1996. Holders of record of the Company's Common Stock, 6% Series A Convertible Additional Preferred Stock and Series B Convertible Additional Preferred Stock as of July 18, 1996, the record date, were eligible to participate in the 1996 -24- 27 Rights Offering. The Rights were exercisable at a price of $1.03 per share. Shareholders received .51 Rights for each share of Common Stock held, 3.72 rights for each share of Series A Convertible Additional Preferred Stock held and .77 rights for each share of Series B Convertible Additional Preferred Stock held as of the record date. The 1996 Rights Offering closed on August 23, 1996. Due to the Company's continued operating losses, the Company requested that NAR advance up to $25 million against all the Rights distributed to it and/or its commitment to purchase all of the unsubscribed shares. In May 1996, NAR advanced the Company $25 million under a promissory note. Under the provisions of such promissory note, the Company repaid NAR the $25 million advance plus accrued interest upon the closing of the 1996 Rights Offering. The Company issued 48,748,785 shares as a result of the 1996 Rights Offering which generated proceeds of approximately $48 million, net of expenses. NAR received Rights entitling it to purchase 24,015,964 shares in the 1996 Rights Offering and exercised such Rights. In addition, the Company and NAR entered into a Standby Purchase Agreement, pursuant to which NAR purchased 6,898,866 shares not subscribed by shareholders and received approximately $.5 million as a fee. The proceeds of the 1996 Rights Offering were used by the Company: (i) to repay the $14 million principal amount of 9.25% Senior Subordinated Notes ("9.25% Notes") due on August 1, 1998 held by an affiliate of NAR plus accrued interest, (ii) to repay the $25 million principal amount advanced under the promissory note plus accrued interest and (iii) to repay approximately $9 million under the credit facility with Congress. The Company recorded an extraordinary expense related to the early extinguishment of the 9.25% Notes, representing a write-off of the unamortized debt issuance costs of approximately $1.1 million. See "RISK FACTORS -- IMPORTANCE OF LIQUIDITY TO THE COMPANY'S EXISTENCE." EMPLOYEES The Company currently employs approximately 2,800 persons on a full time basis and approximately 900 persons on a part time basis. Approximately 160 employees at one of the Company's subsidiaries are represented by a union. The Company believes its relations with its employees are good. As part of its plan to reduce annual operating costs, the Company intends to reduce the number of full-time employees by approximately 550. 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. See "RISK FACTORS -- SEASONALITY." 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. Competitors also exist in each of the Company's catalog specialty areas of home fashions, general merchandise, women's apparel, men's apparel and gifts. In addition, new methods of competition, such as the internet, are posing new opportunities and threats to the Company's business. A number of the Company's competitors have substantially greater financial, distribution and marketing resources than the Company. The recent substantial sales growth in the direct marketing industry has encouraged the entry of many new competitors and an increase in competition from established companies. The Company believes that the principal basis upon which it competes are quality, value, service, product offerings, catalog design, convenience and efficiency. See "RISK FACTORS -- COMPETITION." TRADEMARKS Each of the Company's catalogs has its own federally registered trademark. The Company also owns numerous trademarks, copyrights and service marks on its logos, products and catalog offerings. The Company has also protected various trademarks internationally. The Company vigorously protects such marks and believes there is substantial goodwill associated with them. GOVERNMENT REGULATION The Company is subject to Federal Trade Commission regulations governing its advertising and trade practices, Consumer Product Safety Commission and Food and Drug Administration regulations governing the safety of the products it sells in its catalogs and other regulations relating to the sale of merchandise to its customers. The Company is also subject to the Department of Treasury-Customs regulations with respect to any goods it directly imports. -25- 28 The imposition of a sales and use tax collection obligation on out-of-state catalog companies in states to which they ship products was the subject of a case decided in 1994 by the United States Supreme Court. While the Court reaffirmed an earlier decision that allowed direct marketers to make sales into states where they do not have a physical presence without collecting sales taxes with respect to such sales, the Court further noted that Congress has the power to change this law. The Company believes that it collects sales tax in all jurisdictions where it is currently required to do so. -26- 29 THE RIGHTS OFFERING THE RIGHTS The Company is distributing transferable Rights, at no cost, to the record holders ("Holders") of the Common Stock and Series B Preferred Stock outstanding as of the Record Date. The Company will distribute .3824 Rights for each share of Common Stock held of record on the Record Date and .5742 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 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 55,555,556 Underlying Shares will be sold upon exercise of the Rights or pursuant to the Standby Purchase Agreement between the Company and Richemont. On [day], __, 1997 (the "Closing Date"), in addition to its exercise of the Rights distributed to it, Richemont shall purchase from the Company all Unsubscribed Shares pursuant to its standby purchase commitment if the conditions of the Standby Purchase Agreement are satisfied or waived by Richemont. In the event that the conditions precedent to Richemont's obligation to exercise its standby purchase commitment are not satisfied or otherwise waived by Richemont, 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. Accordingly, until the Expiration Date, the Subscription Price shall be held in escrow by the Subscription Agent pending receipt of notice from the Company that Richemont has elected to purchase the Unsubscribed Shares. 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 [day], _______ __, 1997 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 Basic Subscription Privilege. SUBSCRIPTION PRICE The Subscription Price is $.90 per Underlying Share subscribed for pursuant to the Basic Subscription Privilege or the Oversubscription Privilege. The Subscription Price of the Rights represents a premium to the market price of the Common Stock at the date of this Prospectus. 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 PRIVILEGES Basic Subscription Privilege. Pursuant to the Basic 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 Basic Subscription Privilege will be delivered to subscribers as soon as practicable after the Expiration Date. -27- 30 Oversubscription Privilege. Subject to the allocation described below, each Right also carries the right to subscribe pursuant to the Oversubscription Privilege at the Subscription Price for a number of additional shares of Common Stock available after satisfaction of all subscriptions pursuant to the Basic Subscription Privilege, subject to proration by the Company under certain circumstances. The right to subscribe for additional shares of Common Stock pursuant to the Oversubscription Privilege is not transferable. Underlying Shares will be available for purchase pursuant to the Oversubscription Privilege only to the extent that any Underlying Shares are not subscribed for through the Basic Subscription Privilege. If the Underlying Shares not subscribed for through the Basic Subscription Privilege ("Excess Shares") are not sufficient to satisfy all subscriptions pursuant to the Oversubscription Privilege, the Excess Shares will be allocated pro rata (subject to the elimination of fractional shares) among those holders of Rights exercising the Oversubscription Privilege, in proportion to the number of shares requested by them pursuant to the Oversubscription Privilege. Only Record Date stockholders who exercise the Basic Subscription Privilege in full will be entitled to exercise the Oversubscription Privilege. Transferees of Rights may not exercise the Oversubscription Privilege with respect to such Rights. Certificates representing shares of Common Stock purchased pursuant to the Oversubscription Privilege will be delivered to subscribers as soon as practicable after the Expiration Date and after all prorations have been effected. Banks, brokers and other nominee holders of Rights who exercise the Basic Subscription Privilege and the Oversubscription Privilege on behalf of beneficial owners of Rights will be required to certify to the Subscription Agent and the Company, in connection with the exercise of the Oversubscription Privilege, as to the aggregate number of Rights that have been exercised and the number of Underlying Shares that are being subscribed for pursuant to the Oversubscription Privilege by each beneficial owner of Rights on whose behalf such nominee holder is acting and that such person was a beneficial owner on the Record Date. In the event that the conditions precedent to Richemont's obligation to exercise its standby purchase commitment are not satisfied or otherwise waived by Richemont, 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. Accordingly, until the Expiration Date, the Subscription Price shall be held in escrow by the Subscription Agent pending receipt of notice from Richemont that it has elected to purchase the Unsubscribed Shares. However, in the event that Richemont waives the conditions precedent that are not satisfied, it will 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 signature guarantees, together with payment in full of the Subscription Price for each Underlying Share subscribed for pursuant to the Basic Subscription Privilege and the Oversubscription 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 [Chase Manhattan Bank, Account No. 323053807; ABA No. 021000021]. 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. In the event that the conditions precedent to Richemont's obligation to exercise its standby purchase commitment are not satisfied or otherwise waived by Richemont, 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. Accordingly, until the Expiration Date, the Subscription Price shall be held in escrow by the Subscription Agent pending receipt of notice from the Company that Richemont has elected to purchase the Unsubscribed Shares. The address to which the Subscription Certificates and payment of the Subscription Price should be delivered is: -28- 31 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 Basic Subscription Privilege and the Oversubscription 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 Basic Subscription Privilege and the number of Underlying Shares, if any, being subscribed for pursuant to the Oversubscription Privilege, and guaranteeing the delivery to the Subscription Agent of any Subscription Certificate evidencing such Rights within three 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 three 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 "THE RIGHTS OFFERING -- INFORMATION AGENT." Funds received in payment of the Subscription Price for Excess Shares subscribed for pursuant to the Oversubscription Privilege will be held in a segregated account pending issuance of such Excess Shares. If a Rights holder exercising the Oversubscription Privilege is allocated less than all of the shares of Common Stock that such holder wished to subscribe for pursuant to the Oversubscription Privilege, the excess funds paid by such holder 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. 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. -29- 32 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). NO REVOCATION ONCE A HOLDER OF RIGHTS HAS EXERCISED THE BASIC SUBSCRIPTION PRIVILEGE AND, IF APPLICABLE, THE OVERSUBSCRIPTION 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 AMEX 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 AMEX 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 [day], __________ __, 1997 and the Subscription Agent's obligation to execute orders is subject to its ability to find buyers. -30- 33 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 Basic Subscription Privilege (but not the Oversubscription Privilege) may be effected through, the facilities of the Depository Trust Company ("DTC"; Rights exercised through DTC are referred to as "DTC Exercised Rights"). The holder of a DTC Exercised Right may exercise the Oversubscription Privilege in respect of such DTC exercised Right by properly executing and delivering to the Subscription Agent, at or prior to 5:00 p.m., New York City time, on the Expiration Date, a DTC Participant Oversubscription Exercise Form, together with payment of the appropriate Subscription Price for the number of Underlying Shares for which the Oversubscription Privilege is to be exercised. Copies of the DTC Participant Oversubscription Exercise Form may be obtained from the Information Agent. LISTING AND TRADING The outstanding shares of Common Stock are listed 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 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 AMEX. 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 [day], ________ ___, 1997, 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 Richemont have entered into the Standby Purchase Agreement, pursuant to which Richemont will be required, subject to the fulfillment of various terms and conditions thereof, to purchase all Unsubscribed Shares. In the event that the conditions contained in the Standby Purchase Agreement are not met and are not waived by Richemont, the obligation of Richemont to purchase any Unsubscribed Shares may be cancelled upon notice by Richemont and 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. Although the Company believes that Richemont would waive the non-occurrence of any of the conditions, if Richemont does not do so, the cancellation by Richemont of its obligation to purchase any Unsubscribed Shares would have an adverse effect on the Company's financial condition and, in such event, it is possible that the Company may need to seek protection under applicable insolvency laws. If all of the Rights are exercised, Richemont 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 Richemont for its commitment under the Standby Purchase Agreement, the Company has agreed to pay to Richemont, on the Closing Date, an amount equal to 1% 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 Series B Preferred Stock other than with respect to the shares of Common Stock held by NAR or its affiliates plus an amount equal to one-half of 1% in respect of the aggregate offering price of the aggregate number of shares of Common Stock issuable upon exercise of the Rights granted to NAR or its affiliates less -31- 34 11,111,111 shares of Common Stock or such greater number of shares of Common Stock as NAR or its affiliates shall acquire upon exercise of their Rights (collectively, the "Standby Fee") plus an additional amount equal to 4% of the aggregate offering price (the "Take-Up Fee") in respect of all Unsubscribed Shares, if any, purchased by Richemont pursuant to its commitment thereunder, each payable in cash. Notwithstanding the foregoing, Richemont 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 March 26, 1997 if (i) [at least five days prior to the Effective Date,] he has furnished to Richemont 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 [day], _________, 1997]. The Company has agreed that except as otherwise contemplated in this Prospectus, it will not prior to [day], ________, 1997 [90 days after the date hereof], 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 Richemont. The Standby Purchase Agreement provides that the Company will indemnify Richemont and each person who controls, or is in common control with, Richemont against certain liabilities incurred in connection with the Rights Offering, including liabilities under the Securities Act, or contribute to payments Richemont may be required to make in respect thereof. The obligation of Richemont 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 Series B Preferred Stock not later than three days following the date hereof 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, prior to 12:00 Noon, New York City time, on the business day following the Expiration Date, shall have advised Richemont of the number of the shares of Common Stock subscribed for and of the number of Unsubscribed Shares; that the Company affirm as correct certain representations and warranties made to Richemont and that NAR shall have exercised its Rights for that number of shares of Common Stock having an aggregate purchase price of at least $10 million, such purchase price to be paid by NAR by the surrender and cancellation of the principal amount of the IMR Promissory Note. In addition, Richemont 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 AMEX or trading in securities generally on the AMEX 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 Series B Preferred Stock to which Rights have been granted is contingent upon the consummation of the purchase by Richemont of the Unsubscribed Shares. In the event that the conditions precedent to Richemont's obligations to exercise its standby purchase commitment are not satisfied or otherwise waived by Richemont, 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. Accordingly, until the Expiration Date, the Subscription Price shall be held in escrow by the Subscription Agent pending receipt of notice from the Company that Richemont has elected to purchase the Unsubscribed Shares. However, in the event that Richemont waives the conditions precedent that are not satisfied, it will have a purchase commitment for all of the Unsubscribed Shares. By agreement dated March 26, 1997, NAR irrevocably agreed with the Company, subject to and upon the consummation of the Rights Offering, to exercise at the Subscription Price that number of Rights distributed to it for the purchase of shares of Common Stock having an aggregate purchase price of at least $10 million. NAR agreed to pay for and the Company agreed to accept as payment for the aggregate purchase price of such shares at the closing of the Rights Offering the surrender by NAR of the principal amount of the IMR Promissory Note and the cancellation thereof. CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS Brown Raysman Millstein Felder & Steiner LLP, 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 -32- 35 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 Series B 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 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 of Common Stock will not recognize taxable income, for federal income tax purposes, in connection with the distribution of the Rights. Holders of Series B Preferred Stock will recognize taxable income, for federal income tax purposes, in connection with the distribution of Rights measured by the fair market value of the Rights distributed to such Holders. Basis and Holding Period of the Rights. The basis of the Rights received by a Holder as a distribution with respect to such Holder's Series B Preferred Stock will be the fair market value of the Rights distributed to such Holder. 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, 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 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 to the Rights, then upon exercise or transfer of the Rights, the Holder's basis in such Common Stock or Series B Preferred Stock, as applicable, will be allocated between the Common Stock 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 will include the Holder's holding period for the Common Stock with respect to which the Rights were distributed. The holding period of a Holder with respect to Rights received as a distribution on such Holder's Series B Preferred Stock will commence on the day of distribution of such Rights. In the case of a purchaser of the Rights, the tax basis of such Rights will be equal to the purchase price paid therefore 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 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 or received by a Holder of Series B Preferred Stock will be short term capital gain or loss if Common Stock would be a capital asset in the hands of the seller (if acquired by him). Lapse of the Rights. Holders who received the Rights in respect of Common Stock 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 or in respect of Series B Preferred Stock. 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 or in respect of Series B Preferred Stock 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. -33- 36 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 (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 Series B 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 Series B Preferred Stock (which Series B 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 to Holders of Common Stock 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 Series B 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 Series B Preferred Stock ultimately is determined to have been less than is required to protect such Holders from dilution, there could be deemed "disproportionate distribution" to the holders of Common Stock to the extent 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 (measured by the fair market value of the Rights distributed) would be treated as a dividend to the extent of the Company's current or 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 28, 1996 and for the first quarter of 1997. The amount of earnings and profits, if any, that the Company will earn during 1997 will depend on its future actions and financial performance and cannot currently be determined. However, it is not anticipated that the Company will have any current or accumulated earnings and profits for its 1997 tax year. In such case the Rights Offering would not result in any dividend income to the holders of Common or Series B 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 1997 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 -34- 37 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 "THE RIGHTS OFFERING -- CERTAIN FEDERAL INCOME 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. On the other hand, non-U.S. holders of Series B Preferred Stock may recognize taxable income, for United States federal income tax purposes, and may be subject to withholding of United States federal income tax, in connection with the receipt (but not the 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 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 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 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 -35- 38 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 at the 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. Generally, United States information reporting requirements and backup withholding tax with respect to dividends paid on Common Stock do not apply to a non-U.S. holder. 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 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." 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: -36- 39 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
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. -37- 40 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 225,000,000 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"), 5,000,000 shares of Additional Preferred Stock, par value $.01 per share (the "Additional Preferred"), of which 234,900 shares have been designated as 6% Series A Convertible Additional Preferred Stock, par value $.01 and stated value $10 per share (the "Series A Preferred Stock"), and 634,900 shares have been designated as Series B Preferred Stock. As of April 8, 1997, there were 144,405,347 shares of Common 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, if they so choose, and, in that event, the holders of the remaining shares will not be able to elect any of the Directors. See "RISK FACTORS -- RELATIONSHIP WITH NAR." 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 -38- 41 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 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, each holder of the Series A Preferred Stock automatically, without any action on the part of such holder, had the shares of Series A Preferred Stock that remained outstanding converted into a number of shares of Common Stock determined by dividing the then stated value of the shares by the Conversion Price (as defined) for such date. The "Conversion Price" was 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 on each of the five trading days immediately preceding the Conversion Date. No fractional shares or scrip representing fractional shares of Common Stock were issued upon conversion of Series A Preferred Stock. Instead of any fractional share of Common Stock that would otherwise have been issuable upon conversion of any shares of Series A Preferred Stock, the Company paid 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 had 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 B 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 stated 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 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 Stock and then, pro rata, to the holders of shares of -39- 42 any other series of Additional Preferred. 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 Stock shall be entitled at any time and from time to time to convert any or all of his outstanding shares of Series B Preferred Stock into such number of shares of Common Stock determined by dividing the then stated value of the shares by the Series B Conversion Price. The "Series B 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 AMEX (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 Stock at the Conversion Price. The Series B Conversion Price will be adjusted upon the occurrence of an Adjustment Event. The Company will provide the holders of the Series B Preferred Stock which are to be converted with at least 30 days written notice of the date upon which conversion of the Series B Preferred Stock is required. Redemption. The Company shall redeem all of the outstanding shares of the Series B Preferred Stock 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 February 15, 2000. If the shares Series B Preferred Stock to be redeemed are to be paid in cash, the redemption price per share shall be equal to the Series B Conversion Price on February 15, 2000. If the shares of Series B Preferred Stock 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 Stock (the "Redemption Shares") shall be determined by dividing the stated value of the shares by the Series B Conversion Price on February 15, 2000. In addition, if the shares of Series B Preferred Stock 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 Series B 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 Stock is convertible into based on the then existing Series B Conversion Price. Except as provided by law, the holders of the Series B Preferred Stock 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. -40- 43 PLAN OF DISTRIBUTION The Company is distributing transferable Rights, at no cost, to the Holders of the Common Stock and Series B 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. Record Date stockholders who fully exercise all Rights distributed to them will also be entitled to subscribe at the Subscription Price for shares of Common Stock that are not otherwise purchased pursuant to the exercise of Rights, subject to proration by the Company under certain circumstances. See "THE RIGHTS OFFERING -SUBSCRIPTION PRIVILEGES." Richemont 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 $ in proceeds from the Rights Offering (after giving effect to the application by NAR of the IMR Promissory Note to the payment of $10,000,000 for the 11,111,111 shares of Common Stock which NAR shall acquire upon exercise of its Rights) including Richemont's standby purchase commitment, after payment of approximately $ 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 28, 1996 and December 30, 1995, 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 28, 1996 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. LEGAL MATTERS The legality of the securities offered hereby will be passed upon for the Company by Brown Raysman Millstein Felder & Steiner LLP, New York, New York. -41- 44 HANOVER DIRECT, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE NO. -------- Index to Financial Statements Report of Independent Public Accountants Hanover Direct, Inc. and Subsidiaries Financial Statements F-2 Consolidated Balance Sheets as of December 30, 1995 and December 28, 1996 F-3 Consolidated Statements of Income (Loss) for the three years ended December 28, 1996 F-5 Consolidated Statements of Shareholders' (Deficit) Equity for the three years ended December 28, 1996 F-6 Consolidated Statements of Cash Flows for the three years ended December 28, 1996 F-7 Notes to Consolidated Financial Statements F-9 Supplementary Data: Selected quarterly financial information (unaudited) for the two fiscal years ended December 28, 1996 F-46
F-1 45 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders of Hanover Direct, Inc.: We have audited the accompanying consolidated balance sheets of Hanover Direct, Inc. (a Delaware corporation) and subsidiaries as of December 28, 1996 and December 30, 1995, and the related consolidated statements of income (loss), shareholders' (deficit) equity and cash flows for each of the three fiscal years in the period ended December 28, 1996. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Hanover Direct, Inc. and subsidiaries as of December 28, 1996 and December 30, 1995, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 28, 1996 in conformity with generally accepted accounting principles. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index to financial statement schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP March 26, 1997 F-2 46 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS As of December 30, 1995 and December 28, 1996
December 30, December 28, 1995 1996 -------- -------- (in thousands) ASSETS Current Assets: Cash and cash equivalents $ 2,682 $ 5,173 Accounts receivable, net of allowance for doubtful accounts of $2,597 in 1995 and $5,030 in 1996 30,176 29,399 Inventories 79,281 67,610 Prepaid catalog costs 37,118 23,401 Deferred tax asset, net 3,300 3,300 Other current assets 6,170 3,148 -------- -------- Total Current Assets 158,727 132,031 -------- -------- Property and Equipment, at cost: Land 4,811 4,797 Buildings and building improvements 19,353 16,554 Leasehold improvements 14,001 9,956 Furniture, fixtures and equipment 39,508 31,510 Construction in progress 5,479 8,315 -------- -------- 83,152 71,132 Accumulated depreciation and amortization (26,090) (22,523) -------- -------- Property and Equipment, net 57,062 48,609 -------- -------- Goodwill 36,586 17,901 Deferred tax asset, net 11,700 11,700 Other assets 14,934 10,586 -------- -------- Total Assets $279,009 $220,827 ======== ========
See Notes to Consolidated Financial Statements. F-3 47 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) As of December 30, 1995 and December 28, 1996
DECEMBER 30, DECEMBER 28, 1995 1996 ------------ ------------ (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Current portion of long-term debt and capital lease obligations $ 3,546 $ 11,452 Accounts payable 93,291 79,587 Accrued liabilities 25,969 37,782 Customer prepayments and credits 7,147 4,717 -------- -------- Total Current Liabilities 129,953 133,538 -------- -------- Noncurrent Liabilities: Long-term debt 57,283 53,255 Capital lease obligations 1,973 482 Other 2,590 1,812 -------- -------- Total Noncurrent Liabilities 61,846 55,549 -------- -------- Total Liabilities 191,799 189,087 -------- -------- Commitments and Contingencies (Note 17) Shareholders' Equity Preferred Stock: 6% Series A Convertible Additional Preferred Stock, $10 stated value, authorized 5,000,000 shares; issued and outstanding 78,300 shares in 1995 795 -- Series B Convertible Additional Preferred Stock, $.01 par value, authorized, issued and outstanding 634,900 shares in 1995 and 1996 5,558 5,748 Common Stock, $.66 2/3 par value, authorized 225,000,000 shares; issued 93,693,162 shares in 1995 and 145,039,915 shares in 1996 62,461 96,693 Capital in excess of par value 255,390 270,097 Accumulated deficit (231,332) (336,586) -------- -------- 92,872 35,952 Less: Treasury stock, at cost (1,157,061 shares in 1995 and 392,017 shares in 1996) (3,345) (813) Notes receivable from sale of Common Stock (2,023) (3,399) Deferred compensation (294) -- -------- -------- Total Shareholders' Equity 87,210 31,740 -------- -------- Total Liabilities and Shareholders' Equity $279,009 $220,827 ======== ========
See Notes to Consolidated Financial Statements F-4 48 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (LOSS) For the years ended December 31, 1994, December 30, 1995 and December 28, 1996
1994 1995 1996 ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues $768,884 $749,767 $ 700,314 -------- -------- --------- Operating costs and expenses: Cost of sales and operating expenses 484,059 483,493 479,155 Write-down of inventory of discontinued catalogs -- 8,580 1,100 Special charges -- 1,563 36,724 Selling expenses 197,436 205,618 195,032 General and administrative expenses 65,257 64,112 70,608 Depreciation and amortization 6,157 9,020 12,192 -------- -------- --------- 752,909 772,386 794,811 -------- -------- --------- INCOME (LOSS) FROM OPERATIONS 15,975 (22,619) (94,497) Interest expense (3,544) (5,050) (8,858) Interest income 731 519 460 Other income (expense) (1,833) -- -- -------- -------- --------- Income (loss) before income taxes 11,329 (27,150) (102,895) Income tax provision (benefit) (3,509) 1,003 1,000 -------- -------- --------- Income (loss) before extraordinary item 14,838 (28,153) (103,895) Extraordinary item (Note 8) -- (1,837) (1,134) -------- -------- --------- NET INCOME (LOSS) 14,838 (29,990) (105,029) Preferred stock dividends (135) (240) (225) -------- -------- --------- Net income (loss) applicable to Common Shareholders $ 14,703 $(30,230) $(105,254) ======== ======== ========= Net income (loss) per share: Income (loss) before extraordinary item $ .16 $ (.30) $ (.93) Extraordinary item -- (.02) (.01) -------- -------- --------- NET INCOME (LOSS) PER SHARE $ .16 $ (.32) $ (.94) ======== ======== ========= Weighted average common shares outstanding 93,285 93,030 111,441 ======== ======== =========
See Notes to Consolidated Financial Statements. F-5 49 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIT) EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996 (in thousands, except share amounts)
Preferred Stock Preferred Stock Series B, Cumulative Series A, 6.0% Shares Amount Shares Amount ---------------------------------------------- Balance at January 1, 1994 0 $ 0 234,900 $2,378 Net income applicable to common shareholders Exercise of warrants Shares issued in Stock Offering Preferred stock dividends (6) Conversion of one-third of the 6% Preferred Stock (78,300) (783) Conversion of note payable Issuance of Common Stock for Employee Benefit Plans, net ---------------------------------------------- Balance at December 31, 1994 0 $ 0 156,600 $1,589 Net income/(loss) applicable to common shareholders Issuance of Preferred Stock 634,900 5,400 Fair market value of warrant extensions Preferred stock dividends and accretion 158 83 Conversion of one-third of the 6% Preferred Stock (78,300) (877) Issuance of Common Stock for Employee Benefit Plans, net ---------------------------------------------- Balance at December 30, 1995 634,900 $5,558 78,300 $ 795 Net income/(loss) applicable to common shareholders Shares issued in Rights Offering Preferred stock dividends and accretion 190 35 Conversion of the 6% Preferred Stock (78,300) (830) Purchase of treasury stock Transfer of treasury stock related to employment agreement Sale of treasury stock Issuance of Common Stock for Employee Benefit Plans, net ---------------------------------------------- Balance at December 28, 1996 634,900 $5,748 0 $ 0 ==============================================
Capital Common Stock in Excess $.66 2/3 par value of Par Accum. Shares Amount Value (Deficit) -------------------------------------------------------- Balance at January 1, 1994 83,136,542 $55,423 $209,834 $(215,805) Net income applicable to common shareholders 14,703 Exercise of warrants 1,309,207 873 (873) Shares issued in Stock Offering 8,045,296 5,364 42,136 Preferred stock dividends Conversion of one-third of the 6% Preferred Stock 189,818 126 657 Conversion of note payable 13,945 9 162 Issuance of Common Stock for Employee Benefit Plans, net 283,426 190 1,294 -------------------------------------------------------- Balance at December 31, 1994 92,978,234 $61,985 $253,210 $(201,102) Net income/(loss) applicable to common shareholders (30,230) Issuance of Preferred Stock Fair market value of warrant extensions 1,200 Preferred stock dividends and accretion Conversion of one-third of the 6% Preferred Stock 427,785 285 592 Issuance of Common Stock for Employee Benefit Plans, net 287,143 191 388 -------------------------------------------------------- Balance at December 30, 1995 93,693,162 $62,461 $255,390 $(231,332) Net income/(loss) applicable to common shareholders (105,254) Shares issued in Rights Offering 48,748,785 32,499 16,467 Preferred stock dividends and accretion Conversion of the 6% Preferred Stock 819,733 546 284 Purchase of treasury stock Transfer of treasury stock related to employment agreement (2,750) Sale of treasury stock 28 Issuance of Common Stock for Employee Benefit Plans, net 1,778,235 1,187 678 -------------------------------------------------------- Balance at December 28, 1996 145,039,915 $96,693 $270,097 $(336,586) ========================================================
Notes Receivable From Sale Treasury Stock of Common Deferred Shares Amount Stock Comp. Total ---------------------------------------------------------- Balance at January 1, 1994 (1,120,032) $(3,130) $(1,774) $(1,058) $ 45,868 Net income applicable to common shareholders 14,703 Exercise of warrants 0 Shares issued in Stock Offering 47,500 Preferred stock dividends (6) Conversion of one-third of the 6% Preferred Stock 0 Conversion of note payable 171 Issuance of Common Stock for Employee Benefit Plans, net (37,029) (215) (138) 358 1,489 ---------------------------------------------------------- Balance at December 31, 1994 (1,157,061) $(3,345) $(1,912) $ (700) $ 109,725 Net income/(loss) applicable to common shareholders (30,230) Issuance of Preferred Stock 5,400 Fair market value of warrant extensions 1,200 Preferred stock dividends and accretion 241 Conversion of one-third of the 6% Preferred Stock (0) Issuance of Common Stock for Employee Benefit Plans, net (111) 406 874 ---------------------------------------------------------- Balance at December 30, 1995 (1,157,061) $(3,345) $(2,023) $ (294) $ 87,210 Net income/(loss) applicable to common shareholders (105,254) Shares issued in Rights Offering 48,966 Preferred stock dividends and accretion 225 Conversion of the 6% Preferred Stock 0 Purchase of treasury stock (301,623) (396) (396) Transfer of treasury stock related to employment agreement 916,667 2,750 0 Sale of treasury stock 150,000 178 206 Issuance of Common Stock for Employee Benefit Plans, net (1,376) 294 783 ---------------------------------------------------------- Balance at December 28, 1996 (392,017) $ (813) $(3,399) $ 0 $ 31,740 ==========================================================
See Notes to Consolidated Financial Statements. F-6 50 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1994, December 30, 1995, and December 28, 1996
1994 1995 1996 ---- ---- ---- (in thousands) Cash flows from operating activities: Net income (loss) $ 14,838 $(29,990) $(105,029) Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities: Depreciation and amortization including deferred fees 6,499 9,419 13,277 Provision for doubtful accounts 3,697 4,448 6,805 Provision for catalog and facility closings -- 10,143 14,720 Write-off of long-lived assets -- 500 22,000 Extraordinary item - early extinguishment of debt -- 1,837 1,134 Provision for losses on notes receivable and marketable securities 2,121 -- 888 Deferred transaction costs (837) -- (1,211) Deferred taxes (4,369) -- -- Other, net 43 76 94 Changes in assets and liabilities, net of effects of acquired businesses and dispositions of assets: Accounts receivable, net (9,901) (6,161) (7,863) Inventories (3,424) 8,679 11,671 Prepaid catalog costs (8,154) 206 13,717 Other current assets (1,220) (3,131) 1,332 Accounts payable 10,518 (8,671) (13,704) Accrued liabilities 185 (1,583) 1,219 Customer prepayments and credits (1,389) 3,134 (2,430) -------- -------- --------- Net cash provided (used) by operating activities 8,607 (11,094) (43,380) -------- -------- --------- Cash flows from investing activities: Acquisitions of property and equipment (23,856) (13,686) (8,862) Purchase of businesses -- (13,008) -- Proceeds from sales of businesses -- -- 1,980 Proceeds from investment -- -- 794 Purchase of convertible debt securities (2,693) -- -- Investments in affiliates (3,183) -- -- Advances (2,300) -- -- Other, net (3,293) (1,387) -- -------- -------- --------- Net cash (used by) investing activities (35,325) (28,081) (6,088) -------- -------- ---------
See Notes to Consolidated Financial Statements. F-7 51 HANOVER DIRECT, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31, 1994, December 30, 1995 and December 28, 1996
1994 1995 1996 ---- ---- ---- (in thousands) Cash flows from financing activities: Net proceeds (payments) under revolving credit facility $ (230) $ -- $ 11,699 Proceeds from issuance of debt 10,000 20,685 10,000 Payments of long-term debt and capital lease obligations (8,015) (1,419) (17,625) Cash dividends paid (1,027) -- -- Payment of debt issuance costs (1,458) (2,202) (1,990) Repurchase of Common Stock (215) -- -- Proceeds from issuance of Common Stock 49,305 400 50,653 Other, net (172) 340 (778) ------- -------- -------- Net cash provided by financing activities 48,188 17,804 51,959 ------- -------- -------- Net increase (decrease) in cash and cash equivalents 21,470 (21,371) 2,491 Cash and cash equivalents, beginning of year 2,583 24,053 2,682 ------- -------- -------- Cash and cash equivalents, end of year $24,053 $ 2,682 $ 5,173 ======= ======== ======== Supplemental cash flow disclosure: Interest paid $ 2,923 $ 4,586 $ 6,224 Income taxes paid $ 701 $ 1,318 $ 1,096
See Notes to Consolidated Financial Statements. F-8 52 HANOVER DIRECT, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1994, DECEMBER 30, 1995 AND DECEMBER 28, 1996 1. BACKGROUND OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. Nature of Operations - Hanover Direct, Inc., a Delaware company, ("HDI") is a direct specialty retailer in the United States that publishes a portfolio of branded specialty catalogs offering home fashions, general merchandise, men's and women's apparel and gifts. HDI also operates several retail operations in the United States which comprised approximately 4% of HDI's net revenues for the year ended December 28, 1996. The Company has experienced significant operating losses during 1995 and 1996 which resulted in numerous issues, including liquidity and vendor concern. The Company completed a Rights Offering in August 1996 (Note 9) which helped to alleviate these issues and concerns, however, continued operating losses through the remainder of fiscal 1996 has resulted in the Company proceeding with a 1997 Rights Offering and a modification of the Congress Facility financial covenants to less restrictive terms (Note 18). The Company's ability to significantly improve upon its prior year's performance and implement its business strategy, including realignment of business units and expense reductions, is critical to maintaining adequate liquidity. Principles of Consolidation - The Consolidated Financial Statements include the accounts of HDI and all subsidiaries (the "Company"). Intercompany transactions and balances have been eliminated. Certain prior year amounts have been reclassified to conform to the current year presentation. Fiscal Year - The Company operates on a 52 or 53 week fiscal year. The years ended December 28, 1996, December 30, 1995 and December 31, 1994 were 52 week years. Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories - Inventories consist principally of merchandise held for resale and are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method. The Company considers slow moving inventory to be surplus and calculates a loss on the impairment as the difference between an individual item's cost and the net proceeds anticipated to be received upon disposal. Such inventory is written down to its net realizable value. The costs capitalized by the Company are the costs of the product and freight-in charges. Prepaid Catalog Costs - Costs related to mail order catalogs and promotional material are capitalized and amortized over their estimated productive lives, generally not exceeding six months. Total catalog expense was $193.5 million, $197.3 million and $191.8 million, respectively, in 1996, 1995 and 1994. Depreciation and Amortization - Depreciation and amortization of property and equipment is provided on the straight-line method over the following lives: buildings and building improvements, 30-40 years; furniture, fixtures and equipment, 3-10 years; and leasehold improvements, over the shorter of the estimated useful lives or the terms of the related leases. Expenditures for maintenance and repairs are charged to operations as incurred. F-9 53 Capitalized development costs for the Company's new management information systems aggregated $6.4 million at December 30, 1995. Such costs are included in Other assets and are being amortized over a five year period commencing July 1995. No such costs were capitalized during 1996. Goodwill - Excess of cost over the net assets of acquired businesses is amortized on a straight-line basis over periods of up to forty years. Accumulated amortization was $3.0 million and $5.6 million at December 28, 1996 and December 30, 1995, respectively. Mailing Lists - The costs of acquired mailing lists are amortized over a five year period. Mailing lists, included in Other assets, amounted to $1.2 million and $3.5 million at December 28, 1996 and December 30, 1995, respectively, and are carried net of accumulated amortization of $1.5 million and $1.6 million, respectively. Accounting for the Impairment of Long-Lived Assets - Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" was issued by the Financial Accounting Standards Board in March 1995. This Statement establishes accounting standards for the impairment of long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and for long-lived assets and certain identifiable intangibles to be disposed of. The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in circumstances indicate that the carrying amount of assets may not be recoverable. Based upon the assessment of cash flows for certain underperforming catalogs, the Company recorded a charge related to impaired assets of $22.0 million for the fiscal year ended December 28, 1996 (Note 3). Accounting for Stock Based Compensation - In October 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which is effective in 1996. The Statement encourages entities to adopt the fair value-based method of accounting for employee stock option plans, as opposed to the method which measures compensation cost for those plans using the intrinsic value-based accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." In accordance with the provisions of SFAS No. 123, the Company recorded a compensation charge of $.5 million in fiscal 1996. Accounting for Income Taxes - The Company accounts for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." This pronouncement established financial accounting and reporting standards for the effects of income taxes that result from the Company's activities during the current and preceding years. It requires an asset and liability approach for financial accounting and reporting for income taxes. The provision for income taxes is based upon income after adjustment for those temporary and permanent items which are not considered in the determination of taxable income. Deferred taxes result when the Company recognizes revenue or expenses for income tax purposes in a different year than for financial reporting purposes. Cash and Cash Equivalents - Cash and cash equivalents include cash and all highly liquid investments with original maturities of ninety days or less. F-10 54 Net Income Per Share - Net income per share is computed using the weighted average number of common shares outstanding. The weighted average number of shares used in the calculation for both primary and fully diluted net income per share in 1996, 1995 and 1994 was 111,441,247, 93,029,816 and 93,285,190, shares, respectively. Common share equivalents for purposes of net income per share consist of stock options and warrants. Recently Issued Accounting Standard - Subsequent to December 28, 1996, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share." This statement establishes standards for computing and presenting earnings per share ("EPS"), replacing the presentation of currently required primary EPS with a presentation of Basic EPS. For entities with complex capital structures, the statement requires the dual presentation of both Basic EPS and Diluted EPS on the face of the statement of operations. Under this new standard, Basic EPS is computed based on weighted average shares outstanding and excludes any potential dilution. Diluted EPS reflects potential dilution from the exercise or conversion of securities into common stock or from other contracts to issue common stock and is similar to the currently required fully diluted EPS. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods, and earlier application is not permitted. When adopted, the Company will be required to restate its EPS data for all periods presented. The Company does not expect the impact of the adoption of this statement to be material to previously reported EPS amounts. Revenues - The Company recognizes revenue at the time the merchandise is shipped to the customer. Amounts billed to customers for postage and handling charges are recognized as revenue at the time that the revenues on the product shipment are recognized. The Company provides a reserve for expected future returns at the time the sale is recorded based upon historical experience. Fair Value of Financial Instruments - The fair value of financial instruments does not materially differ from their carrying values. Supplemental Disclosure of Noncash Activities
1994 1995 1996 ------ -------- ------- (IN THOUSANDS) Capital lease obligations .......... $ -- $ 1,155 $ -- ====== ======== ======= Other equity issuances and exchanges $1,823 $ 1,456 $ 2,855 ====== ======== ======= Acquisition of businesses: Fair value of assets acquired .... $ -- $ 45,165 $ -- Fair value of liabilities assumed -- (26,757) -- Preferred stock issued ........... -- (5,400) -- ------ -------- ------- Net cash paid .................... $ -- $ 13,008 $ -- ====== ======== =======
F-11 55 2. ACQUISITIONS AND INVESTMENTS ACQUISITIONS - During fiscal 1995, the Company acquired the entities described below, which were accounted for by the purchase method of accounting. The operating results of these acquired businesses have been included in the consolidated statements of income from the date of acquisition: Improvements--In January 1995, the Company acquired substantially all of the assets of Leichtung, Inc., a direct marketer of wood-working and home improvement tools and related products sold under the Improvements and Leichtung Workshops names, for a purchase price of approximately $12.8 million in cash and the assumption of certain liabilities. The excess purchase price over the fair values of the net assets acquired (goodwill) was $7.3 million. Approximately $1.4 million of customer mailing list intangible assets were also purchased in this transaction. In the first quarter of 1996, the Company sold the assets of the Leichtung Workshops catalog for $.9 million in cash and short-term notes and relocated all Improvements' telemarketing and fulfillment operations to the Company's Hanover, PA facility. There was no gain or loss recognized on the sale of the assets of the Leichtung Workshops catalog. The distribution facility in Ohio, which is being held for sale, was written down to its estimated net realizable value of $.1 million, as of December 28, 1996. In 1996, the Company provided $.7 million, included as a component of special charges, to write-down this facility (Note 3). The Safety Zone--In February 1995, the Company acquired the remaining 80% of the outstanding common stock it did not already own of Aegis Safety Holdings, Inc. ("Aegis"), publisher of The Safety Zone catalog, through the issuance of 634,900 shares of a newly-created Series B Convertible Additional Preferred Stock ("Series B Stock") of the Company with a stated value of $10 per share. Dividends are payable on the Series B Stock at various rates and times and are contingent on specific earnings targets. The Series B Stock is also convertible, subject to antidilution, as discussed in Note 10. The excess purchase price over the fair values of the net assets acquired (goodwill) was $7.1 million. In December 1996, the Company wrote-off the goodwill related to this acquisition in accordance with SFAS No. 121 (Note 3). Austad's--In May 1995, the Company acquired 67.5% of the outstanding shares of Austad's Holdings, Inc. ("Austad's"), which owned The Austad Company ("TAC"), the publisher of the Austad's catalog featuring golf equipment, apparel and gifts, for a purchase price of $1.8 million in cash. The Company also lent TAC, on a subordinated basis, $2.2 million which bears interest at the rate of 10% per annum and is due by May 2000. The Company also provided a $.4 million loan to TAC which bears interest at a fluctuating rate (8.75% at December 28, 1996 and December 30, 1995) and is secured by a second mortgage on TAC's office and warehouse. The excess purchase price over the fair values of the net assets acquired (goodwill) was $4.5 million. Approximately $1.2 million of customer mailing list intangible assets were also acquired in this transaction. In December 1996, the Company wrote-off the goodwill and mailing lists in accordance with SFAS No. 121 (Note 3). F-12 56 On February 16, 1996, former minority shareholders surrendered to Austad's their Austad's shares, amounting to 32.5% of the outstanding shares, and paid approximately $1.1 million in exchange for all the outstanding shares of AGS, Inc. ("AGS"), a South Dakota corporation formed by TAC to hold the existing retail assets and liabilities of TAC. The transaction assumed a value for Austad's and TAC based on the Company's purchase price in the May 1995 acquisition, as adjusted by adding the net income of Austad's and TAC from May 25, 1995 through February 16, 1996. As a result of the reorganization, Austad's became a wholly owned subsidiary of the Company. In connection with the reorganization, TAC was released from all future obligations under all store leases. AGS will operate the four existing retail stores acquired from TAC as Austad's stores under license from Austad's. The customer service and fulfillment operations of Austad's were transferred to other Company facilities in the first quarter of 1996, and the Company sold the Austad's South Dakota warehouse and distribution facility in July 1996 for $2.1 million which approximated its book value. The net proceeds were used to pay the outstanding mortgage on the property (Note 8). TAC had a revolving credit facility that was secured by substantially all of TAC's assets that expired on February 26, 1996. Such facility was paid off at the February 16th closing with the proceeds from the sale of the retail operations and from the Company's revolving credit facility (Note 8). The following represents the unaudited pro forma results of operations for the years ended December 31, 1994 and December 30, 1995 as if these acquisitions had occurred at the beginning of fiscal year 1994.
(In thousands, except per share amounts) (Unaudited) 1994 1995 -------- -------- Revenues $840,295 $763,786 ======== ======== Income (loss) before extraordinary item $ 14,305 $(28,083) ======== ======== Net income (loss) $ 14,170 $(30,160) ======== ======== Per Share: Income (loss) before extraordinary item $ .15 $ (.30) Extraordinary item -- (.02) -------- -------- Net income (loss) $ .15 $ (.32) ======== ========
The pro forma information does not purport to be indicative of the results that actually would have been obtained if the operations were combined during the periods presented and is not intended to be a projection of future results or trends. Per share amounts are expressed after deducting preferred stock dividends of $.1 and $.2 million in 1994 and 1995, respectively. OTHER INVESTMENTS - Other investments, which are recorded in Other assets in the accompanying consolidated balance sheets, include the following: F-13 57 Blue Ridge Associates - In January 1994, the Company purchased for $1.1 million, a 50% interest in Blue Ridge Associates ("Blue Ridge"), a partnership which owns the apparel distribution center in Roanoke, Virginia. The remaining 50% interest is held by an unrelated third party. This investment is accounted for by the equity method of accounting. The Company made annual rent payments to the partnership of approximately $.7 million in both 1996 and 1995 as part of a 15 year lease through 2008. The Company also recorded $.1 million in income for its portion of the partnership income in both 1996 and 1995. The Company's investment in Blue Ridge was approximately $.9 million and $1 million at December 28, 1996 and December 30, 1995, respectively. In December 1996, the Company decided to consolidate this facility into its new Roanoke, Virginia distribution facility. Regal Communications, Inc. - During 1994, the Company invested approximately $2.7 million in convertible debt securities of Regal Communications, Inc. ("Regal"). In September 1994, Regal filed for protection under Chapter 11 of the United States Code. As a result, during 1994, the Company wrote down the convertible debentures to the estimated fair value of $1.7 million. The $1 million decline in fair value of the investment was considered an other- than-temporary impairment and included in the income statement in 1994. The convertible debt matures on June 15, 2008. In December 1995, a plan of reorganization was confirmed by the Bankruptcy Court and the Company expected to recover the $1.7 million carrying value of its investment, however, only $.8 million of distributions were received through 1996. During 1996, a federal income tax refund due to Regal was reviewed by the Internal Revenue Service (the "IRS"), and the results of this review have been submitted to the Joint Committee of the IRS for approval. Due to the uncertainty that recoverability of substantially all of the remaining investment balance is subject to a favorable outcome, in December 1996, the Company wrote-off the remaining $.9 million balance as the decline in fair value was considered an other than temporary impairment. Tiger Direct - In February 1995, the Company entered into an agreement to acquire certain securities of Tiger Direct, Inc. ("Tiger"), a direct marketer of computer software, peripherals and CD-ROM hardware and software. In February 1995, the Company entered into a loan and security agreement with Tiger pursuant to which the Company provided a secured working capital line of credit to Tiger, up to a maximum of $3.0 million, which was loaned under such agreement. In September 1995, due to the continued deterioration of Tiger's financial condition, the Company terminated the securities purchase agreement and sold the loan to a third party and received payment in full for the principal of the loan and interest to the date of sale. During the period from February 1995 to September 1995, the Company provided certain services to Tiger and also incurred certain costs related to entering into the loan and security agreements aggregating $.5 million. Under the terms of the agreement, Tiger is required to reimburse the Company for such costs and services rendered. Tiger refused to reimburse the Company for these costs causing the Company to institute an action to recover such costs, which were carried at their estimated realizable value. In February 1997, the Company recovered $.2 million in settlement of such action. Boston Publishing Company - In February 1994, the Company acquired a 20% equity interest in Boston Publishing Company ("BPC") and provided secured and unsecured loans to BPC. In August 1994, BPC filed for protection under Chapter 11 of the United States Code. F-14 58 In 1995, the Company received inventory and the customer mailing list of BPC in payment of its $1.2 million loan and subsequently realized $.3 million upon disposition of these assets and wrote-off the remaining assets. 3. SPECIAL CHARGES In December 1996, the Company recorded special charges aggregating approximately $36.7 million. These charges consist of severance ($3.2 million) and facility exit/relocation costs and fixed asset write-offs ($11.5 million) related to the previously announced downsizing of the Company, as discussed in its December 1996 press release. In addition, the Company's review of the impairment of its long-lived assets of certain under-performing catalogs led to a write-off of $22.0 million. Severance - The cost of employee severance includes termination benefits for line and supervisory personnel in fulfillment, telemarketing, MIS, merchandising, and various levels of corporate and catalog management. These costs are recorded in Accrued liabilities in the accompanying consolidated balance sheet at December 28, 1996. Facility Exit/Relocation Costs and Fixed Asset Write-Offs - These costs are primarily composed of the Company's decision to relocate from its Weehawken, NJ corporate facility, and consolidate its Roanoke, VA apparel distribution center and Hanover, PA distribution center into its Roanoke home fashion distribution center. The consolidation of these distribution centers and the relocation of the corporate operations is expected to be completed by the end of fiscal 1997. Approximately $6.3 million of these costs are recorded in Accrued liabilities in the accompanying consolidated balance sheet at December 28, 1996. In 1995, the Company incurred costs, aggregating approximately $1.5 million, in connection with the consolidation of its fulfillment facilities. These costs include moving expenses, lease termination fees and severance expenses, substantially all of which were paid in 1995. There were no such charges incurred by the Company in 1994. Impairment of long-lived assets - The Company considers a history of catalog operating losses to be its primary indicator of potential impairment. Assets are grouped and evaluated for impairment at the lowest level for which there are identifiable cash flows that are independent of the cash flows of other groups of assets. The Company has identified the appropriate grouping of assets to be individual catalogs, except where certain catalogs are a part of a group that, together, generate joint cash flows. The assets are deemed to be impaired if a forecast of undiscounted future operating cash flows is less than the carrying amounts. The loss is measured as the amount by which the carrying amount of the assets exceeds its fair value. The Company generally measures fair value by discounting estimated future cash flows. Considerable management judgment is necessary to estimate discounted future cash flows and, accordingly, actual results could vary significantly from such estimates. The impairment loss was approximately $22.0 million and is primarily composed of the write-off of goodwill and mailing lists associated with Tweeds, Austad's and The Safety Zone (Note 2). No such charges were recorded by the Company in 1995 and 1994. F-15 59 4. WRITE-DOWN OF INVENTORY OF DISCONTINUED CATALOGS In 1995, the Company made a decision to discontinue six catalogs. The six discontinued catalogs generated revenues of $20 million, $88 million and $118 million and losses of $5.1 million, $20 million and $4.7 million in 1996, 1995 and 1994, respectively. These losses are attributable to falling revenues due to poor sales on the discontinued catalogs, increasing operating costs and expenses and increasing selling expenses predominantly incurred to create liquidation catalogs. The losses in 1996 and 1995 include provisions of approximately $1.1 million and $8.6 million, respectively, primarily related to the write-down of inventory associated with these catalogs to their net realizable value based on the planned liquidation of such inventory. The $8.6 million write-down in 1995 occurred because the Company anticipated mailing fewer catalogs than originally planned for 1996, which resulted in significantly more merchandise on-hand that needed to be moved through non-catalog channels. The inventory write-down of $1.1 million in 1996 was required due to lower than anticipated recovery rates on liquidation of such inventory. The Company utilizes various methods to dispose of the inventory related to discontinued catalogs, including special sale catalogs, sales sections in other catalogs and liquidations of remaining inventory through off-price merchants. This liquidation process typically takes from six to nine months. These losses represent an incremental provision in excess of the original provision included in cost of sales expense. There were no such charges incurred by the Company in 1994. Fixed overhead expenses, primarily telemarketing and fulfillment costs, that were allocated to the six discontinued catalogs have been absorbed by the operations of the 1995 acquisitions and through cost containment measures instituted by the Company. 5. SEARS LICENSING AGREEMENT In January 1994, the Company entered into a licensing agreement (the "Sears Agreement") with the direct marketing subsidiary of Sears Roebuck and Co. ("Sears") to produce specialty catalogs for customers of the discontinued Sears catalog. The specialty catalogs included: Show Place, based on the Domestications catalog, Great Kitchens, based on the Colonial Garden Kitchens catalog, and Sears Improvements, based on the Improvements catalog. The Sears Agreement had an initial three-year term and was to continue thereafter unless terminated. In December 1996, the Sears Agreement was terminated by Sears with the last catalogs to be mailed in the first quarter of 1997. Sears terminated the agreement based on the Company's non-compliance with certain operating standards in order fulfillment and certain reporting standards. Profits and losses from the venture are shared between the parties on an equal basis until the venture is completed in the first quarter of 1997. In accordance with the Sears Agreement, earnings before interest and taxes ("EBIT") generated by the Sears catalogs is the basis for dividing these profits. The Sears specialty catalogs generated revenues of $82 million, $81 million and $71 million and EBIT of $.3 million, $3.0 million and $2.9 million in 1996, 1995 and 1994, respectively. The Company also issued to Sears a performance warrant to purchase 3.5 million shares of Common Stock in 1999 if the licensed business with Sears had revenues of at least $250 million and EBIT of at least $30 million in 1998. Alternately, Sears would have been entitled to purchase 7 million shares of Common Stock in 1999 if the licensed business with Sears had revenues of at least $500 million and EBIT of at least $60 million in 1998. The warrant exercise F-16 60 price was $10.57 per share. Through 1996, no charges have been recorded in connection with the warrants. Due to the termination of the Sears Agreement, the Company believes that the venture wind-up activities will not generate sufficient financial performance to enable Sears to exercise these warrants. The Company believes that the termination of this venture will not have a material impact on the Company's 1997 operating results. 6. ACCOUNTS RECEIVABLE, NET. The Company currently maintains an agreement with an unrelated third party which provides for the sale and servicing of accounts receivable originating from the Company's revolving credit cards. The agreement expires in December 2000. The Company remains obligated to repurchase uncollectible accounts pursuant to the recourse provisions of the agreement and is required to maintain a specified percentage of all outstanding receivables sold under the program as a deposit with the third party to secure its obligations under the agreement. The Company is required to maintain certain financial covenants related to this agreement and has received a waiver for the events of default at December 28, 1996. The proceeds to the Company relating to the sale of receivables for 1996, 1995 and 1994 were $39.2 million, $46.2 million and $56.1 million, respectively. At December 28, 1996 and December 30, 1995, the uncollected balances under this program were $33.5 million and $38.6 million, respectively, of which $4.8 million, and $5.5 million respectively, represent deposits under the agreement which are included in Accounts receivable, net. The total reserve balance maintained for the repurchase of uncollectible accounts was $2.5 million and $2.4 million at December 28, 1996 and December 30, 1995, respectively, of which $1.4 million in both years is included in Accrued liabilities and the remaining balance is included in the allowance for doubtful accounts. Receivables sold under this agreement are considered financial instruments with off-balance sheet risk as defined in Statement of Financial Accounting Standards No. 105. Because the Company's sales are primarily made to individual customers located throughout the United States, the Company believes there are no concentrations of credit risks. F-17 61 7. ACCRUED LIABILITIES. Accrued liabilities consist of the following (in thousands):
December 30, December 28, 1995 1996 ---- ---- Restructuring $ -- $ 9,504 Reserve for future sales returns 5,535 9,036 Compensation 5,795 3,968 Taxes 3,007 2,696 Reserve for repurchase of accounts receivable sold with recourse 1,391 1,389 Other 10,241 11,189 ------- ------- Total $25,969 $37,782 ======= =======
8. LONG-TERM DEBT. Long-term debt consists of the following (in thousands):
December 30, December 28, 1995 1996 ---- ---- Congress Facility $ 9,931 $22,627 Term Financing Facility 20,000 19,000 TAC Revolving Credit Facility 2,011 -- NAR Promissory Note -- 10,000 6% Mortgage Notes Payable due 1998 3,139 2,969 Industrial Revenue Bonds with variable interest rates averaging 4.1% in 1995 and 3.6% in 1996 due 2003 8,000 8,000 7.5% Convertible Subordinate Debentures due 2007 751 751 8.75% Mortgage Note Payable due 2003 1,718 -- 9.25% Senior Subordinated Notes due 1998 14,000 -- Other 19 16 ------- ------- 59,569 63,363 Less current portion 2,286 10,108 ------- ------- $57,283 $53,255 ======= =======
In November 1995, the Company replaced their previous $80 million unsecured revolving credit facility (the "Revolver") with a new $75 million secured credit facility (the "Congress Facility") with Congress Financial Corporation ("Congress"), and repaid all amounts outstanding under the Revolver. In addition, all standby letters of credit issued under the previous arrangement were replaced with letters of credit issued by Congress under the Congress Facility. F-18 62 Congress Facility - The Congress Facility is comprised of a revolving line of credit of up to $65 million with a three year term ("Congress Revolving Credit Facility") and two year term loans aggregating $10 million ("Revolving Term Notes"). The amount that can be borrowed under the Congress Facility is based on percentages of eligible inventory and accounts receivable from time to time. Beginning in November 1996, Congress lowered the advance rate by which the available inventory is calculated by $4.4 million. This calculation was further reduced by $2.0 million, pending completion of a new inventory appraisal which was completed in March 1997. The Congress Revolving Credit Facility bears interest at 1.25% above CoreStates' prime rate and the Revolving Term Notes bears interest at 1.5% above CoreStates' prime rate. The Congress Facility is secured by all assets of the Company, and the Company was required to maintain a minimum net worth of $80 million, and working capital of $26 million. In addition, the Congress Facility places limitations on the incurrence of additional indebtedness. The rates of interest related to the Congress Revolving Credit Facility and Revolving Term Notes at such dates were 9.50% and 9.75%, respectively. At December 28, 1996 and December 30, 1995, the Company had $13.7 million and no outstanding borrowings under the Congress Revolving Credit Facility and $8.9 million and $9.9 million outstanding under the Revolving Term Notes, respectively. The face amount of unexpired documentary letters of credit at December 28, 1996 and December 30, 1995, were $4.5 million and $4.2 million, respectively. At December 28, 1996 unused borrowing capacity under the Congress Facility was $26.0 million. In 1995, the Company issued under the Congress Facility, $31.2 million of standby letters of credit which included $8.6 million related to the Industrial Revenue Bonds due 2003, and $20.3 million related to the Term Financing Facility. The Congress Facility was amended in February 1996 to permit the reorganization of Austad's (Note 2) and was further amended in April 1996 to permit borrowings of an additional $4 million over the borrowing base formula until the closing of the Company's $50 million rights offering (the "Rights Offering") in August 1996 (Note 9), subject to the $75 million limit of the Congress Facility. Also in April 1996, the minimum working capital and net worth requirements contained in the Congress Facility and in the indenture relating to the 9.25% Senior Subordinated Notes due 1998 ("9.25% Notes") were reduced by $5 million to $21 million and $75 million, respectively. In May 1996, the net worth and working capital covenants were further amended to take into account a $25 million advance by NAR Group Limited ("NAR") until its repayment with the proceeds of the Rights Offering in August 1996 (Note 9). In September 1996, working capital was amended again to take into account the $10 million advance by Intercontinental Mining & Resources Incorporated, an affiliate of NAR ("IMR"). The net worth covenant was further amended to $70 million in December 1996 and Congress agreed to address the 1997 net worth covenant level after a review of the Company's business plan. As a result of the operating losses incurred in 1996, the Company was not in compliance with the working capital and net worth covenants for which the Company received waivers from Congress (Note 18). Term Financing Facility - The Company borrowed $10 million in each of 1994 and 1995 under a Term Financing Facility. The interest rate on the Term Financing Facility is based on the equivalent rate of A-1 commercial paper existing at the time of each borrowing. The face rate ranged from 5.47% to 5.73%, and 5.73% to 6.02% at December 28, 1996 and December 30, 1995, respectively. The Term Financing Facility was reduced by an annual sinking fund payment of $1.0 million in October 1996 and requires annual sinking fund payments of $1.0 million from October 1997 though October 1999 with this amount increasing to $1.6 million for each of the ten years thereafter. The Term Financing Facility continues to be outstanding and in effect under its original terms. F-19 63 In December 1996, the Company finalized its agreement (the "Reimbursement Agreement") with Richemont Finance S.A. ("Richemont"), who along with the family of Alan G. Quasha, Chairman of the Board of the Company, jointly own NAR, that provided the Company with approximately $27.9 million of letters of credit through Swiss Bank Corporation's, New York Branch, to replace letters of credit which were issued under the Congress Facility. These letters of credit were issued for $8.6 million related to the Industrial Revenue Bonds due 2003 and $19.3 million related to the Term Financing Facility. The letters of credit will expire on February 18, 1998 and carry an interest rate of 3.5% above the prime rate, currently 11.75%, payable to Richemont quarterly on amounts drawn under the letters of credit. The Company paid a facility fee of $1.4 million which was equal to 5% of the principle amount of the letters of credit as well as other fees incurred in connection with providing the facility as of December 28, 1996. In the event that the Company has not paid in full, by the expiration date, any outstanding balances under the letters of credit, Richemont shall have the option, exercisable at any time prior to payment in full of all amounts outstanding under the letters of credit to convert such amount into common stock of the Company at the mean of the bid and ask prices of the Company's Common Stock on November 8, 1996, or the mean of the bid and ask prices of the Company's Common Stock on each of the thirty days immediately prior to the date of exercise of the conversion privilege. The Reimbursement Agreement is subordinate to the Congress Facility. On December 5, 1996, Richemont advanced the Company $10 million against the anticipated $27.9 million line of credit. The Company repaid the $10 million loan after the letter of credit agreement was in place on December 19, 1996. The TAC Revolving Credit Facility - The TAC Revolving Credit Facility was paid off with the proceeds from the Congress Facility and with the proceeds from the sale of the retail operations, on February 16, 1996 (Note 2), and was classified as a long-term obligation at December 30, 1995. NAR Promissory Note - In September 1996, IMR loaned the Company $10 million as evidenced by a subordinated promissory note (the "NAR Promissory Note"). This loan bears interest at prime plus 1.5%, was due on November 14, 1996 and, if it is not repaid before May 15, 1997, is convertible at the option of NAR into shares of Common Stock at the lower of the fair market value thereof on the date of execution or the then current fair market value thereof. The NAR Promissory Note is subordinate to the Congress Facility and is excluded from the working capital covenant calculation. NAR has agreed to apply $10 million of the Company's indebtedness to acquire $10 million of the Company's Common Stock pursuant to the 1997 Rights Offering (Note 18). As a result, the classification of this debt remains long-term. 6% Mortgage Notes Payable due 1998 - In connection with The Company Store acquisition, subsidiaries of the Company executed and delivered two secured notes in the aggregate amount of $3.5 million with interest at 6% per annum with principal and interest payments payable monthly on a fifteen-year amortization schedule with the remaining balance due in August 1998. The mortgage notes payable are non-recourse notes and are not guaranteed by the Company. The mortgage notes payable are secured by the manufacturing and office facilities of The Company Store. The amounts outstanding were $3.0 million and $3.1 million at December 28, 1996 and December 30, 1995, respectively. Industrial Revenue Bonds due 2003 - The Industrial Revenue Bonds are due on December 1, 2003 and are secured by the related assets purchased from the proceeds of the bonds and by F-20 64 an irrevocable letter of credit in the amount of $8.6 million. The obligations are guaranteed by the Company. 8.75% Mortgage Note Payable due 2003 - TAC's 8.75% Mortgage Note Payable is reflected as an obligation of the Company at December 30, 1995 in consequence of the corporate reorganization, completed in February 1996 (Note 2). Pursuant to the reorganization, TAC's retail business was split off to Mr. David Austad and certain of his family members, in exchange for their 32.5% interest in Austad's (and a cash payment of $1.1 million) and the Company became the owner of all the outstanding capital shares of TAC. The 8.75% Mortgage Note Payable was secured by the TAC warehouse and distribution facility in South Dakota. That facility's operations were largely transferred to other Company facilities. This note was paid in July 1996 from the proceeds of the sale of the facility. 9.25% Senior Subordinated Notes due 1998 - At December 28, 1996 and December 30, 1995, the Company had $0 and $14.0 million of 9.25% Notes outstanding, respectively. In August 1996, the principal amount due under the 9.25% Notes was repaid from the proceeds of the Rights Offering (Note 9). In November 1995, IMR purchased the 9.25% Notes from a third party in connection with the refinancing of the indebtedness under the Congress Facility. The Company paid NAR a commitment fee of $105,000 upon the signing of a repurchase and option agreement and a fee of $210,000 (1.5% of the outstanding principal amount of the 9.25% Notes acquired by IMR) upon the funding, as well as all expenses incurred by NAR in performing its obligation. The Company also extended by two years the terms of the warrants to purchase 5,033,735 shares held by NAR and IMR to August 1, 1998. The Company recorded as debt issuance costs approximately $1.2 million, representing the fair value of the warrant extensions as determined using the Black Scholes model. Such costs were being amortized over the life of the 9.25% Notes. The Company has also agreed to indemnify NAR against any and all claims or losses asserted against it or incurred by it relating to the transactions contemplated by the repurchase and option agreement. Extraordinary Items - As a result of the replacement of the Revolver, the purchase by IMR of the 9.25% Notes and early repayment of 9.25% Notes from the proceeds of the Rights Offering, the Company wrote-off approximately $1.8 million and $1.1 million of unamortized debt issuance costs as extraordinary items due to the early extinguishment of debt for 1995 and 1996, respectively. General - At December 28, 1996, the aggregate annual principal and sinking fund payments required on all long-term debt instruments are as follows (in thousands): 1997 - $10,102; 1998 - $27,497; 1999 - $1,000; 2000 - $1,600; 2001 - $1,600 and thereafter - $21,551. 9. RIGHTS OFFERING. The Company commenced its $50 million Rights Offering on July 19, 1996. Holders of record of the Company's Common Stock, 6% Series A Convertible Additional Preferred Stock and Series B Convertible Additional Preferred Stock as of July 18, 1996, were eligible to participate in the Rights Offering. The Rights were exercisable at a price of $1.03 per share. F-21 65 Shareholders received 0.51 Rights for each share of Common Stock held, 3.72 rights for each share of Series A Convertible Additional Preferred Stock held and 0.77 rights for each share of Series B Convertible Additional Preferred Stock held as of the record date. The Rights Offering closed on August 23, 1996. Due to the Company's continued operating losses, the Company requested that NAR advance up to $25 million against all the Rights distributed to it and/or its commitment to purchase all of the unsubscribed shares. In May 1996, NAR advanced the Company $25 million under a promissory note (Note 8). Under the provisions of the promissory note, the Company repaid NAR the $25 million advance plus accrued interest upon the closing of the Rights Offering. The Company issued 48,748,785 shares pursuant to the Rights Offering which generated proceeds of approximately $48 million, net of expenses. NAR received rights entitling it to purchase 24,015,964 shares in the Rights Offering and exercised such rights. In addition, the Company and NAR entered into a Standby Purchase Agreement, pursuant to which NAR purchased 6,898,866 shares not subscribed by shareholders and received approximately $.5 million as a fee. The proceeds of the Rights Offering were used by the Company: (i) to repay the $14 million principal amount of 9.25% Notes held by an affiliate of NAR plus accrued interest, (ii) to repay the $25 million principal amount advanced under the promissory note plus accrued interest and (iii) to repay approximately $9 million under the Congress Facility. The Company recorded an extraordinary expense related to the early extinguishment of the 9.25% Notes, representing a write-off of the unamortized debt issuance costs of approximately $1.1 million. 10. CAPITAL STOCK. 6% Series A Convertible Additional Preferred Stock - In December 1993, in connection with the Company's acquisition of Tweeds, Inc. ("Tweeds"), the Company entered into an exchange agreement with a major vendor of Tweeds. Under the exchange agreement, the Company issued 234,900 shares of its 6% Series A Convertible Additional Preferred Stock ("6% Preferred Stock") for an installment note, dated March 29, 1993, as amended, in the amount of approximately $2.4 million previously issued by Tweeds. Dividends began accruing on September 30, 1993. The 6% Preferred Stock was convertible into Common Stock of the Company over a three year period in equal amounts on September 30, 1994, 1995 and 1996. The conversion price was an amount equal to the average of the per share closing prices for the five trading days preceding the conversion dates. The Company converted each of the one third equal portions of the 234,900 issued shares of the 6% Preferred Stock into 819,733, 427,785 and 189,818 shares of Common Stock plus accrued dividends on September 30, 1996,1995 and 1994, respectively. The Company elected to pay cash dividends of $.1 million related to the September 1994 conversion. Series B Convertible Additional Preferred Stock - In February 1995, the Company issued 634,900 shares of its Class B Convertible Additional Preferred Stock ("Series B Stock") to acquire the remaining 80% of the outstanding common stock of Aegis Safety Holdings, Inc. ("Aegis"), publisher of The Safety Zone catalog. The Series B Stock has a stated value of $10 F-22 66 per share. Non-cumulative dividends will accrue and be paid at 5% per annum during each of the first three years if Aegis attains at least $1 million in earnings before interest and taxes each year. In years four and five, dividends are cumulative and will accrue and be paid at 7% per annum and are not contingent on the achievement of any earnings target. Dividends were not paid in 1996 and 1995 based on The Safety Zone catalog's operating results in each respective year. The Series B Stock is convertible at any time, at $6.66 per share, subject to antidilution, at the option of the holder and is convertible at the Company's option if the market value of the Company's Common Stock is greater than $6.66 per share, subject to antidilution, for 20 trading days in any consecutive 30 day trading period or at the holder's option from time to time. If, after five years, the Series B Stock is not converted, it is mandatorily redeemable, at the Company's option, in cash or for 952,352 shares of the Company's Common Stock provided the market value of the stock is at least $6.33 per share, subject to antidilution. If the market value of the Company's Common Stock does not meet this minimum, the redemption rate is subject to adjustment which would increase the number of shares for which the Series B Stock is redeemed. In December 1996, the Company filed a registration statement on form S-3 with the Securities and Exchange Commission registering 952,352 shares of the Company's Common Stock related to the future conversion of the Series B Stock. The fair value of the Series B Stock, which is based on an independent appraisal, was $.9 million less than the stated value at February 1995. This discount is being amortized over a five year period and resulted in a charge of $.2 million to preferred stock dividends in the statement of income in 1996 and 1995. Warrants - The warrants outstanding at December 28, 1996 are as follows:
WARRANTS EXERCISE EXPIRATION ISSUED PRICE DATE --------- -------- ---------- 1,728,923 $2.16 8/01/98 3,542,292 2.59 8/01/98 375,275 1.95 8/01/98 --------- 5,646,490 =========
All of the above issued warrants are held by NAR and its affiliates. The Company agreed to extend the terms of the warrants held by NAR and its affiliates by two years in consideration of IMR's purchase of the 9.25% Notes from a third party in November of 1995 (Note 8). The original terms of these warrant agreements contain certain antidilution provisions which increased, in aggregate, the warrants by 612,755 from 5,033,735 to 5,646,490 due to the Rights Offering (Note 9). The antidilution provisions resulted in an adjustment to the previous exercise prices of $2.42, $2.91 and $2.49, respectively. General - At December 28, 1996, there were 144,647,898 shares of Common Stock and 634,900 shares of Series B Stock outstanding. Additionally, an aggregate of 18,810,956 shares of Common Stock were reserved for issuance pursuant to (i) the exercise of outstanding options 11,045,000, (ii) the exercise of outstanding warrants 5,646,490, (iii) the Executive Equity Incentive Plan 640,498, and (iv) the All Employee Equity Investment Plan 1,478,968. F-23 67 Dividend Restrictions - The Company is restricted from paying dividends on its Common Stock or from acquiring its capital stock by certain debt covenants contained in agreements to which the Company is a party. 11. STOCK BASED COMPENSATION PLANS At December 28, 1996, the Company has thirteen stock based compensation plans. In accordance with the provisions of SFAS No.123, the Company has recorded a compensation charge of $.5 million. The effects of applying SFAS No. 123 for recognizing compensation costs are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to 1996 and additional awards in the future are anticipated. The information below details each of the respective plans, including the changes during the years presented. 1978 Stock Option Plan - Pursuant to the Company's Stock Option Plan (the "1978 Plan"), an aggregate of 2,830,519 shares were approved for issuance to employees and consultants of the Company. The option price and the periods over which an option is exercisable are specified by the Compensation Committee of the Board of Directors. Options expire five years from the date of grant and generally vest over three to four years. Payment for shares purchased upon the exercise of an option shall be in cash or stock of the Company. If paid in cash, a partial payment may be made with the remainder in installments evidenced by promissory notes at the discretion of the Compensation Committee. Changes in options outstanding, expressed in numbers of shares, are as follows:
1994 1994 1995 1995 1996 1996 ---- ---- ---- ---- ---- ---- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ ----- ------ ----- ------ ----- Options outstanding, beginning of period 365,250 $3.95 496,050 $3.60 90,000 $2.42 Granted 162,000 $3.50 70,000 $2.11 -- -- Exercised (1,000) $5.00 -- -- -- -- Forfeited (9,500) $5.00 (142,000) $3.50 -- -- Expired (20,700) $8.29 (334,050) $3.65 (20,000) $3.50 ------- -------- ------- Options outstanding, end of period 496,050 $3.60 90,000 $2.42 70,000 $2.11 ======== ======== ======= Options exercisable, end of period 334,050 $3.65 20,000 $3.50 23,333 $2.11 ======== ======== =======
F-24 68 The options outstanding at December 28, 1996 have exercise prices between $1.75 and $2.25 with a weighted average contractual life of 3.8 years. In June 1994, one director was granted non-qualified options to purchase shares at an exercise price of $6.125 per share, of which 50,000 shares will expire in March 2000. In September 1992, six directors were granted options to purchase 20,000 shares each, at the market price, which at the time was $1.75 per share. These option grants were approved at the 1993 Annual Meeting of Shareholders and the options expire in 1997. Executive Equity Incentive Plan - In December 1992, the Board of Directors adopted the 1993 Executive Equity Incentive Plan (the "Incentive Plan"). The Incentive Plan was approved by shareholders at the 1993 Annual Meeting. Pursuant to the Incentive Plan, options to purchase shares of the Company's Common Stock will be granted from time to time by the Compensation Committee of the Board of Directors to selected executives of the Company or its affiliates. For each such option granted up to a maximum of 250,000, the selected executive will receive the right to purchase on a specified date (the "Tandem Investment Date") a number of shares of the Company's Common Stock ("Tandem Shares") equal to one-half the maximum number of shares of the Company's Common Stock covered by such option. An aggregate of 2,400,000 shares of F-25 69 the Company's Common Stock have been reserved for issuance under the Incentive Plan. Company financing is available under the Incentive Plan to pay for the purchase price of the Tandem Shares. Changes in shares and options outstanding, expressed in numbers of shares, for the Incentive Plan are as follows:
1994 1994 1995 1995 1996 1996 ---- ---- ---- ---- ---- ---- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ ----- ------ ----- ------ ----- Shares outstanding, beginning of period 663,830 753,830 877,163 Shares purchased 90,000 143,333 200,000 Shares forfeited -- (20,000) (16,667) --------- --------- ---------- Shares outstanding, end of period 753,830 877,163 1,060,496 ========= ========= ========== Options outstanding, beginning of period 1,101,000 $2.69 1,073,836 $2.98 1,021,170 $2.66 Granted 180,000 $4.56 286,666 $2.53 350,000 $1.00 Forfeited (207,164) $2.70 (339,332) $3.59 (730,672) $2.68 --------- --------- ---------- Options outstanding, end of period 1,073,836 $2.98 1,021,170 $2.66 640,498 $1.73 ========= ========= ========== Options exercisable, end of period -- -- -- -- 173,832 $2.56 ========= ========= ========== Weighted average fair value of options granted during the year $ .67 --
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1996: risk free interest rate of 6.06% - 6.37%, expected lives of 6 years, expected volatility of 39.07% - 40.81%, expected dividends of $0. F-26 70 The following table summarizes information about stock options outstanding at December 28, 1996:
Options Outstanding Options Exercisable Weighted Average Range of Number Outstanding Remaining Weighted Average Number Exercisable Weighted Average Exercise Prices at 12/28/96 Contractual Life Exercise Price at 12/28/96 Exercise Price - --------------- ----------- ---------------- -------------- ----------- -------------- $1.00 350,000 5.5 $1.00 0 $1.00 $2.50 to $3.00 290,498 3.1 $2.61 173,832 $2.56 $1.00 to $3.00 640,498 4.4 $1.73 173,832 $2.56
Options granted under the Incentive Plan become exercisable three years after the dates of grant and expire six years from the dates of grant. The purchase price shall be paid in full at the time of purchase in cash or shares of the Company's Common Stock valued at their fair market value or in a combination thereof. The amount of amortization charged to expense was approximately $(.3) million, $.1 million and $.1 million for 1996, 1995 and 1994, respectively, net of forfeitures. Changes to the notes receivable related to the Incentive Plan are as follows:
1994 1995 1996 ---------- ---------- ---------- Notes receivable balance beginning of period $1,424,000 $1,522,000 $1,651,000 Additions 328,000 229,000 200,000 Payments (230,000) (100,000) (111,000) ---------- ---------- ---------- Notes receivable end of period $1,522,000 $1,651,000 $1,740,000 ========== ========== ==========
Under the terms of the Incentive Plan, the purchase price for shares is based upon the market price at the date of purchase, and payment is made in the form of a 20% cash down payment and a six year note that bears interest at the mid-term applicable federal rate, as determined by the Internal Revenue Service, as of the month of grant of such shares. The Incentive Plan participants purchased shares at prices ranging from $1.00 to $4.94 with the Company accepting notes bearing interest at rates ranging from 5.00% to 7.75%. All Employee Equity Investment Plan - In December 1992, the Board of Directors adopted the 1993 All Employee Equity Investment Plan (the "Investment Plan"). Such plan was approved by the shareholders at the 1993 Annual Meeting. Each full-time or permanent part-time employee of the Company or its affiliates who has attained the age of 18, has met certain standards of continuous service with the Company or an affiliate of the Company and is not covered by a collective bargaining agreement may participate in the Investment Plan. An eligible employee will be granted a right to purchase a specific number of shares of the Company's Common Stock by the Compensation Committee, based on the eligible employee's salary level. The purchase price of the Company's Common Stock in the Investment Plan shall be the average F-27 71 market value of a share of the Company's Common Stock during the 20 days prior to the first day of the subscription period, less a 40% discount. The shares received by such participants are not transferable (other than by will or the laws of descent and distribution) until the vesting date or when such participant attains the age of 65, dies or becomes permanently disabled, and are subject to forfeiture in the event the participant ceases to be an employee prior to that date. The employees who choose to participate in the Investment Plan vest in their shares equally over a three-year period beginning with the first anniversary of the day subsequent to the final day of the subscription period or when they reach the age of 65, die or become permanently disabled. An aggregate of 2,000,000 shares of the Company's Common Stock have been reserved for issuance under the Investment Plan. Changes in shares outstanding and available for grant, expressed in numbers of shares for the Investment Plan are as follows:
1994 1995 1996 --------- --------- --------- Shares outstanding, beginning of period 211,883 380,563 508,134 Shares purchased 260,124 216,931 80,550 Shares Forfeited (91,444) (89,360) (67,652) --------- --------- --------- Shares outstanding end of period 380,563 508,134 521,032 ========= ========= ========= Shares available for grant, end of period 1,619,437 1,491,866 1,478,968 ========= ========= =========
The difference between the market price and the discounted price aggregated approximately $0, $.2 million and $.4 million in 1996, 1995 and 1994, respectively. These amounts have been reduced by approximately $.3 million in 1996 and $.2 million in 1995 and have been charged to amortization expense. Restricted Stock Award Plan - In December 1992, the Board of Directors adopted the 1993 Restricted Stock Award Plan (the "Restricted Stock Plan"). An aggregate of 500,000 shares of the Company's Common Stock have been reserved for issuance under the Restricted Stock Plan. During 1993, 224,300 shares were awarded to participants aggregating $.8 million. Such amount has been amortized over a three-year vesting period. The amount of amortization charged to expense was approximately $.2 million in 1995, net of forfeitures. Incentive Compensation Plan - Bonus arrangements with certain executives and key employees generally provide for additional compensation based upon the attainment of certain profit levels, as well as other performance measures. These bonuses approximated an aggregate of $.5 million, $1.5 million and $1.1 million in 1996, 1995 and 1994, respectively. Under the bonus plan, 25% of the bonus is deferred and payable in cash or restricted stock that vests over a three year period. F-28 72 The Chief Executive Officer (the "CEO") Tandem Plan - Pursuant to the Company's Tandem Plan (the "Tandem Plan") the right to purchase an aggregate of 1,000,000 shares of Common Stock and an option to purchase 2,000,000 shares of Common Stock was approved for issuance to the CEO. The option price represents the average of the low and high fair market value of the common stock on August 23, 1996, the date of the closing of the Rights Offering. The option is subject to antidilution provisions and due to the Company's 1996 Rights Offering were adjusted to 1,510,000 shares of Common Stock and 3,020,000 options. The options expire 10 years from the date of grant and vest over four years. Payment for shares purchased upon the exercise of the option shall be in cash or stock of the Company. Options outstanding, granted and the weighted average exercise prices are as follows:
1996 ---- Weighted Average Exercise Shares Price ------ ----- Options outstanding, beginning of period -- Granted 3,020,000 1.16 Forfeited -- -- Expired -- -- ---------- Options outstanding, end of period 3,020,000 1.16 ========== Options exercisable, end of period -- -- Weighted average fair value of options, granted during year $ .77 --
The options outstanding at December 28, 1996 have an exercise price of $1.16 with a weighted average contractual life of 9.25 years. The fair value of each option granted is estimated on the date of grant using the Black- Scholes option-pricing model with the following weighted average assumptions for grants in 1996: risk free interest rate of 6.79%, expected lives of 9.85 years, expected volatility of 45.02% and expected dividends of $0. The CEO Performance Year Plan - Pursuant to the Company's Performance Year Plan (the "Performance Plan") an option to purchase an aggregate of 1,000,000 shares of Common Stock was approved for issuance to the CEO. The option price represents the average of the low and high fair market value of the Common Stock on August 23, 1996, the date of the closing of the Rights Offering. F-29 73 The options expire 10 years from the date of grant and vest over four years. The options are based upon performance as defined by the Compensation Committee of the Board of Directors. Should a performance target not be attained, the option is carried over to the succeeding year in conjunction with that year's option until the expiration date. Payment for shares purchased upon the exercise of the options shall be in cash or stock of the Company. Options outstanding, granted and the weighted average exercise prices are as follows:
1996 ---- Weighted Average Exercise Shares Price ------ ----- Options outstanding, beginning of period -- -- Granted 1,000,000 $1.16 Forfeited -- -- Expired -- -- ---------- Options outstanding, end of period 1,000,000 $1.16 ========== Options exercisable, end of period -- -- Weighted average fair value of options granted during the year $ .77 --
The options outstanding at December 28, 1996 have an exercise price of $1.16 with a weighted average contractual life of 9.25 years. The fair value of each option granted is estimated on the date of grant using the Black- Scholes option-price model with the following weighted average assumptions or grants in 1996: risk free interest rate of 6.79%, expected lives of 9.85 years, expected volatility of 45.02% and expected dividends of $0. The CEO Closing Price Option Plan - Pursuant to the Company's Closing Price Option Plan (the "Closing Price Plan") an option to purchase an aggregate of 2,000,000 shares of Common Stock was approved for issuance to the CEO. The option price represents the average of the low and high fair market value of the Common Stock on August 23, 1996, the date of the closing of the Rights Offering. The options expire 10 years from the date of grant and vest based upon the performance of the Company's stock price over a consecutive 91 calendar day period as defined by the Compensation Committee of the Board of Directors. The performance period has a range of 6 years beginning August 23, 1996, the date of the closing Rights Offering. Payment for shares purchased upon the exercise of the options shall be in cash or stock of the Company. F-30 74 Options outstanding, granted and the weighted average exercise prices are as follows:
1996 ---- Weighted Average Exercise Shares Price ------ ----- Options outstanding, beginning of period -- -- Granted 2,000,000 $1.16 Cancelled -- -- Expired -- -- ---------- Options outstanding, end of period 2,000,000 $1.16 ========== Options exercisable, end of period -- -- Weighted average fair value of options granted during the year $ .17 --
The options outstanding at December 28, 1996 have an exercise price of $1.16 with a weighted average contractual life of 9.25 years. The fair value of each option granted is estimated on the date of grant using the Black Scholes option-price model utilizing a Monte Carlo simulation with the following weighted average assumptions for grants in 1996: risk free interest rate of 6.79%, expected lives of 9.85 years, expected volatility of 45.02% and expected dividends of $0. The CEO Six Year Stock Option Plan - Pursuant to the Company's Six Year Stock Option Plan (the "Six Year Plan") an option to purchase an aggregate of 250,000 shares of Common Stock was approved for issuance to the CEO from NAR. The option price represents the average of the low and high fair market value of the Common Stock on August 23, 1996, the date of the closing of the Rights Offering. The option is subject to antidilution provisions and due to the Company's 1996 Rights Offering was adjusted to 377,500 options. The options expire 6 years from the date of grant and vest after one year. Payment for shares purchased upon the exercise of the options shall be in cash or stock of the Company. F-31 75 Options outstanding, granted and the weighted average exercise prices are as follows:
1996 ---- Weighted Average Exercise Shares Price ------ ----- Options outstanding, beginning of period -- -- Granted 377,500 $1.16 Forfeited -- -- Expired -- -- -------- Options outstanding, end of period 377,500 $1.16 ======== Options exercisable, end of period -- -- Weighted average fair value of options -- -- granted during the year $ .60 --
The options outstanding at December 28, 1996 have an exercise price of $1.16 with a weighted average contractual life of 5.25 years. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1996: risk free interest rate of 6.42%, expected lives of 5.85 years, expected volatility of 45.02% and expected dividends of $0. The CEO Seven Year Stock Option Plan - Pursuant to the Company's Seven Year Stock Option Plan (the "Seven Year Plan") an option to purchase an aggregate of 250,000 shares of Common Stock was approved for issuance to the CEO from NAR. The option price represents the average of the low and high fair market value of the Common Stock on August 23, 1996, the date of the closing of the Rights Offering. The option is subject to antidilution provisions and due to the Company's 1996 Rights Offering was adjusted to 377,500 options. The options expire 7 years from the date of grant and vest after two years. Payment for shares purchased upon the exercise of the options shall be in cash or stock of the Company. F-32 76 Options outstanding, granted and the weighted average exercise prices are as follows:
1996 ---- Weighted Average Exercise Shares Price ------ ----- Options outstanding, beginning of period -- -- Granted 377,500 $1.16 Forfeited -- -- Expired -- -- -------- Options outstanding, end of period 377,500 $1.16 ======== Options exercisable, end of period -- -- Weighted average fair value of options granted during the year $ .65 --
The options outstanding at December 28, 1996 have an exercise price of $1.16 with a weighted average contractual life of 6.25 years. The fair value of each option granted is estimated on the date of grant using the Black - Scholes option-pricing model with the following weighted average assumptions for grants in 1996: risk free interest rate of 6.53%, expected lives of 6.85 years, expected volatility of 45.02% and expected dividends of $0. The CEO Eight Year Stock Option Plan - Pursuant to the Company's Eight Year Stock Option Plan (the "Eight Year Plan") an option to purchase an aggregate of 250,000 shares of Common Stock was approved for issuance to the CEO from NAR. The option price represents the average of the low and high fair market value of the Common Stock on August 23, 1996, the date of the closing of the Rights Offering. The option is subject to antidilution provisions and due to the Company's 1996 Rights Offering was adjusted to 377,500 options. The options expire 8 years from the date of grant and vest after three years. Payment for shares purchased upon the exercise of the options shall be in cash or stock of the Company. F-33 77 Options outstanding, granted and the weighted average exercise prices are as follows:
1996 ---- Weighted Average Exercise Shares Price ------ ----- Options outstanding, beginning of period -- -- Granted 377,500 $1.16 Forfeited -- Expired -- -- -------- Options outstanding, end of period 377,500 $1.16 ======== Options exercisable, end of period -- -- Weighted average fair value of options granted during the year $ .69 --
The options outstanding at December 28, 1996 have an exercise price of $1.16 with a weighted average contractual life of 7.25 years. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1996: risk free interest rate of 6.62%, expected lives of 7.85 years, expected volatility of 45.02% and expected dividends of $0. The CEO Nine Year Stock Option Plan - Pursuant to the Company's Nine Year Stock Option Plan (the "Nine Year Plan") an option to purchase an aggregate of 250,000 shares of common stock was approved for issuance to the CEO from NAR. The option price represents the average of the low and high fair market value of the common stock on August 23, 1996, the date of the closing of the Rights Offering. The option is subject to antidilution provisions and due to the Company's 1996 Rights Offering was adjusted to 377,500 options. The options expire 9 years from the date of grant and vest after four years. Payment for shares purchased upon the exercise of the options shall be in cash or stock of the Company. F-34 78 Options outstanding, granted and the weighted average exercise prices are as follows:
1996 ---- Weighted Average Exercise Shares Price ------ ----- Options outstanding, beginning of period -- -- Granted 377,500 $1.16 Forfeited -- -- Expired -- -------- Options outstanding, end of period 377,500 $1.16 ======== Options exercisable, end of period -- -- Weighted average fair value of options granted during the year $ .74 --
The options outstanding at December 28, 1996 have an exercise price of $1.16 with a weighted average contractual life of 8.25 years. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1996: risk free interest of 6.73%, expected lives of 8.85 years, expected volatility of 45.02% and expected dividends of $0. 1996 Stock Option Plan - Pursuant to the Company's 1996 Stock Option Plan (the "1996 Plan"), an aggregate of 3,445,000 shares were approved for issuance to employees of the Company. The option exercise price shall be the fair market value as of the date of grant. The total options granted to an employee is one half performance based. The changes for each type of option (performance based and non-performance based) are presented in separate tables that follow. Options expire after 10 years, unless an employee owns stock possessing more than 10% of the total combined voting power of all classes of stock, in which case the option would expire after 5 years. Payment for shares purchased upon the exercise of an option shall be in cash or stock of the Company. F-35 79 NON-PERFORMANCE BASED
1996 ---- WEIGHTED AVERAGE EXERCISE SHARES PRICE ------ ----- Options outstanding, beginning of period -- -- Options granted 1,722,500 $.98 Options forfeited -- -- Options expired -- -- ---------- Options outstanding, end of period 1,722,500 $.98 ========== Options exercisable, end of period -- -- Weighted average fair value of options granted during the year $ .67 --
The options outstanding at December 28, 1996 have exercise prices between $.69 and $1.00 with a weighted average contractual life of 9.9 years. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1996: risk free interest rate of 6.80%, expected lives of 7 years, expected volatility of 45.35% and expected dividends of $0. F-36 80 PERFORMANCE BASED
1996 ---- WEIGHTED AVERAGE EXERCISE SHARES PRICE ------ ----- Options outstanding, beginning of period -- -- Options granted 1,722,500 $.98 Options forfeited -- -- Options expired -- -- ---------- Options outstanding, end of period 1,722,500 $.98 ========== Options exercisable, end of period -- -- Weighted average fair value of options granted during the year $ .67 --
The options outstanding at December 28, 1996 have exercise prices between $.69 and $1.00 with a weighted average contractual life of 9.9 years. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for grants in 1996: risk free interest rate of 6.80%, expected lives of 7 years, expected volatility of 45.35% and expected dividends of $0. 12. EMPLOYEE BENEFIT PLANS. Hanover Direct, Inc. Savings Plan - The 401(k) Savings and Retirement Plan (the "401(k) Plan") allows eligible employees to contribute a percentage of their annual compensation to the 401(k) Plan. The Company makes matching contributions of one-third of the employees' pre-tax contributions up to a maximum of 6%. Participants may invest contributions in various investment funds or in the Company's Common Stock. The Company's contributions charged to expense for 1996, 1995 and 1994 were approximately $.4 million, $.6 million and $.6 million, respectively. Supplemental Retirement Plan - The Supplemental Retirement Plan (the "Retirement Plan") allows eligible employees to make contributions to a trust where the contributions are invested by the trust for each participant in a tax free money market fund. The Company makes matching contributions. Company contributions charged to expense in 1996, 1995 and 1994 amounted to approximately $.1 million, $.2 million and $.2 million, respectively. F-37 81 The Retirement Plan permits eligible employees to contribute up to 4% of their salary. The Company matches all participant contributions, up to 50% of their contributions with a cap of 2%. The Retirement Plan is not tax-qualified under the applicable provisions of the Internal Revenue Code of 1986, as amended. 13. INCOME TAXES - At December 28, 1996, the Company had net operating loss carryforwards ("NOLs") totalling $241.2 million, which expire as follows: In the year 2001 - $17.3 million, 2003 - $14.6 million, 2004 - $14.3 million, 2005 - $20.6 million, 2006 - $46.9 million, 2007 - $27.7 million, 2010 - $22.7 million and 2011 - $77.1 million. The Company also has $1 million of general business tax credit carryforwards that expire in 2000 through 2009. The Company's available NOLs for tax purposes consists of $91.4 million of NOLs subject to a $4 million annual limitation under Section 382 of the Internal Revenue Code of 1986 and $149.8 million of NOLs not subject to a limitation. The unused portion of the $4 million annual limitation for any year may be carried forward to succeeding years to increase the annual limitation for those succeeding years. SFAS No. 109 requires that the future tax benefit of such NOLs be recorded as an asset to the extent that management assesses the utilization of such NOLs to be "more likely than not". Despite incurring additional NOLs of $22.7 million in 1995 and $77.1 million in 1996, management believes that the Company will be able to utilize up to $43 million of NOLs based upon the Company's assessment of numerous factors, including its planned restructuring and future operating plans. For the years ended December 30, 1995 and December 28, 1996, the Company maintained its deferred tax asset of $15 million (net of a valuation allowance of $48.5 million in 1995 and $82.6 million in 1996). Management believes that the $15 million net deferred tax asset still represents a reasonable, conservative estimate of the future utilization of the NOLs and the reversal of timing items and will continue to routinely evaluate the likelihood of future profits and the necessity of future adjustments to the deferred tax asset valuation allowance. Realization of the future tax benefits is dependent on the Company's ability to generate taxable income within the carryforward period and the periods in which net temporary differences reverse. Future levels of operating income and taxable income are dependent upon general economic conditions, competitive pressures on sales and margins, postal and other delivery rates, and other factors beyond the Company's control. Accordingly, no assurance can be given that sufficient taxable income will be generated for utilization of NOLs and reversals of temporary differences. The Company's Federal income tax provision was $4.2 million in 1994 and zero in 1995 and 1996. The 1994 provision was offset by utilization of the NOLs. The Company's provision for state income taxes was $.9 million in 1994, $1.0 million in 1995 and $1.0 million in 1996. F-38 82 A reconciliation of the Company's net income for financial statement purposes to taxable income (loss) for the years ended January 1, 1994, December 31, 1994 and December 30, 1995 is as follows (in thousands):
1994 1995 1996 -------- -------- --------- Net income (loss) $ 14,838 $(30,230) $(105,254) Income tax provision (benefit) (3,509) 1,003 1,000 Income (loss) before income taxes 11,329 (29,227) (104,254) Differences between income before taxes for financial statement purposes and taxable income: State income taxes (860) (1,003) (1,000) Utilization of carryovers (12,652) -- -- Differences attributable to subsidiary not included in Company's tax return -- (313) -- Permanent differences 717 1,011 7,630 Net change in temporary differences 1,466 6,881 20,484 -------- -------- --------- (11,329) 6,576 27,114 -------- -------- --------- Taxable income (loss) $ -- $(22,651) $ (77,140) -------- -------- ---------
The components of the net deferred tax asset at December 28, 1996 are as follows (in millions):
Non- Current current Total ------- ------- ----- Federal tax NOL and business tax credit carryforwards ................................... $ -- $85.5 $85.5 Allowance for doubtful accounts .................. 1.6 -- 1.6 Inventories ...................................... 1.9 -- 1.9 Prepaid catalog costs ............................ (3.1) -- (3.1) Property and equipment ........................... -- (1.2) (1.2) Excess of net assets of acquired business ........ -- (2.9) (2.9) Accrued liabilities .............................. 11.3 -- 11.3 Customer prepayments and credits ................. 3.0 -- 3.0 Tax basis in net assets of discontinued operations in excess of financial statement amount ......... 0.8 -- 0.8 Other ............................................ -- 0.7 0.7 ----- ----- ----- Deferred Tax Asset ............................... 15.5 82.1 97.6 Valuation allowance ............................ (12.2) (70.4) (82.6) ----- ----- ----- Deferred Tax Asset, net .......................... 3.3 $11.7 $15.0 ===== ===== =====
The Company has established a valuation allowance for a portion of the deferred tax asset, due to the limitation on the utilization of the NOLs and its estimate of the future utilization of the NOLs. F-39 83 The Company's tax returns for years subsequent to 1984 have not been examined by the Internal Revenue Service ("IRS"). Availability of the NOLs might be challenged by the IRS upon examination of such returns which could affect the availability of NOLs. The Company believes, however, that IRS challenges that would limit the utilization of NOLs will not have a material adverse effect on the Company's financial position. Total tax expense for each of the three fiscal years presented differ from the amount computed by applying the Federal statutory tax rate due to the following:
1994 1995 1996 PERCENT PERCENT PERCENT OF PRE-TAX OF PRE-TAX OF PRE-TAX INCOME LOSS LOSS ---------- ---------- ---------- Tax (benefit) at Federal statutory rate ........... 35.0% (35.0%) (35.0%) State and local taxes ............................. 4.9 2.2 0.6 Reversal of valuation allowance ................... (38.5) -- -- Net increase in (reversal of) temporary differences Depreciation and amortization ................ 3.5 (5.4) 0.3 Deferred compensation ........................ 11.4 -- (0.2) Restructuring reserves ....................... -- -- 8.7 Other ........................................ (10.4) 15.1 (2.0) Utilization of contribution and NOL carryover ..... (39.1) -- -- Tax NOLs for which no benefit could be recognized . -- 25.3 25.9 Other ............................................. 2.2 1.2 2.7 ---- ---- ---- (31.0%) 3.4% 1.0% ==== ==== ====
14. LEASES Certain leases to which the Company is a party, provide for payment of real estate taxes and other expenses. Most leases are operating leases and include various renewal options with specified minimum rentals. Rental expense for operating leases related to continuing operations were as follows (in thousands):
1994 1995 1996 ------- ------- ------- Minimum rentals $13,572 $13,070 $12,931 ======= ======= =======
F-40 84 Future minimum lease payments under noncancellable operating and capital leases relating to continuing operations that have initial or remaining terms in excess of one year, together with the present value of the net minimum lease payments as of December 28, 1996, are as follows (in thousands):
OPERATING CAPITAL YEAR ENDING LEASES LEASES - ----------- --------- ------- 1997 ...................................... $10,646 $1,438 1998 ...................................... 7,493 482 1999 ...................................... 6,257 21 2000 ...................................... 5,129 -- 2001 ...................................... 4,817 -- Thereafter ................................ 33,792 -- ------- ------ Total minimum lease payments .............. $68,134 1,941 ======= ====== Less amount representing interest (a) ..... 115 ------ Present value of minimum lease payments (b) $1,826 ======
(a) Amount necessary to reduce net minimum lease payments to present value calculated at the Company's incremental borrowing rate at the inception of the leases. (b) Reflected in the balance sheet as current and noncurrent capital lease obligations of $1,260,000 and $1,973,000 at December 30, 1995 and $1,344,000 and $482,000 at December 28, 1996, respectively. The future minimum lease payments under noncancellable leases that remain from the discontinued restaurant operations as of December 28, 1996 are as follows: 1997 - $.9 million; 1998 - $.8 million; 1999 - $.8 million; 2000 - $.8 million; 2001 - $.8 million; and thereafter $2.5 million. The above amounts exclude annual sublease income of $1.0 million from subleases which have the same expiration as the underlying leases. In connection with the Company's investment in Blue Ridge, a subsidiary of the Company is contingently liable with respect to the lease obligation related to the apparel distribution center in Roanoke, Virginia. The Company does not guarantee the indebtedness associated with the Roanoke apparel center held by Blue Ridge Associates. 15. CHANGES IN MANAGEMENT AND EMPLOYMENT AGREEMENTS Jack E. Rosenfeld resigned as President and Chief Executive Officer and as a Director of the Company effective December 30, 1995. In connection with such resignation, the Company and Mr. Rosenfeld entered into a Termination of Employment Agreement, dated December 30, 1995 (the "Termination Agreement"), providing for the termination of (i) the Employment Agreement, dated as of October 25, 1991, between the Company and Mr. Rosenfeld, and (ii) all benefits, salary and prerequisites provided for therein except for (a) benefits, salary and prerequisites earned and accrued up to December 30, 1995, (b) salary of $500,000 through December 31, 1996, and (c) benefits including (I) continued disability and term life insurance in amounts not less than the amounts in force F-41 85 on the date of the Termination Agreement for a three-year period and (II) the right to continue to participate in the Company's medical plans to the extent he is eligible for up to three years from the date of the Termination Agreement. The Termination Agreement calls for Mr. Rosenfeld to serve as a Director Emeritus of the Company and will allow Mr. Rosenfeld to attend meetings of the Board of Directors and participate in Board discussions for a one-year period, but Mr. Rosenfeld has no right to vote on any matters that come before the Board of Directors. The Termination Agreement will preclude Mr. Rosenfeld for a one-year period from competing with the Company under certain circumstances. On March 7, 1996, Rakesh K. Kaul was named President and Chief Executive Officer and elected to the Board of Directors of the Company. Effective that date, Mr. Kaul entered into an Executive Employment Agreement (the "Employment Agreement") which provides for an "at will" term commencing on March 7, 1996 at a base salary of $525,000 per year. The Employment Agreement also provides for Mr. Kaul's participation in the Short-Term Incentive Plan for Rakesh K. Kaul. That plan, which was approved by the shareholders at the June 20, 1996 shareholders meeting, provides for an annual bonus of between 0% and 125% of Mr. Kaul's base salary, depending on the attainment of various performance objectives as determined in accordance with the objective formula or standard to be adopted by the Compensation Committee as part of the performance goals for each such year. The Employment Agreement also provides for Mr. Kaul's participation in the Long-Term Incentive Plan for Rakesh K. Kaul. That plan, which was approved by the shareholders at the June 20, 1996 shareholders meeting, provides for the purchase by Mr. Kaul of 1,000,000 shares of Common Stock at their fair market value; an option expiring March 7, 2006 for the purchase of 2,000,000 shares of (the "Tandem Stock Purchase Right") Common Stock; an option expiring March 7, 2006 to purchase 2,000,000 shares of Common Stock (the "Tandem Option") exercisable only upon satisfaction of the condition that the closing price of the Common Stock has attained an average of $7.00 per share during a 91-day period ending on or before March 7, 2002; an option expiring March 7, 2006 to purchase 1,000,000 shares of Common Stock at their fair market value, subject to the attainment of certain objective performance goals to be set by the Compensation Committee; and four options expiring March 7, 2002, and the first three anniversaries thereof, respectively, for the purchase of 250,000 shares of Common Stock each, to be granted by NAR, the Company's majority shareholder ("the NAR Options"). As a result of the Rights Offering, Mr. Kaul was granted an additional .51 shares for each share of Common Stock he was granted under the Tandem Stock Purchase Right, the Tandem Option, and the NAR Options (collectively, the "Award Shares") which resulted in his being granted 1,510,000 shares, 3,020,000 options and 1,510,000 options, respectively. The Employment Agreement also provides for the grant of registration rights under the Securities Act of 1993, as amended (the "Securities Act"), for shares of Common Stock owned by Mr. Kaul. Pursuant to the Employment Agreement, the Company will make Mr. Kaul whole, on an after-tax basis, for various relocation and temporary living expenses related to his employment with the Company. In the event that Mr. Kaul's employment is actually or constructively terminated by the Company, other than for cause, he will be entitled for a 12-month period commencing on the date of his termination to (i) a continuation of his base salary, (ii) continued participation in the Company's medical, dental, life insurance and retirement plans offered to senior executives of the Company, and (iii) a bonus, payable in 12 equal installments, equal to 100% of his base salary (at the rate in effect immediately prior to such termination). In addition, Mr. Kaul will be entitled to receive (i) to the extent not previously paid, the short-term bonus payable to Mr. Kaul F-42 86 for the year preceding the year of termination and (ii) for the year in which Mr. Kaul's employment is terminated, an additional bonus equal to his annual base salary for such year, pro-rated to reflect the portion of such year during which Mr. Kaul is employed. Mr. Kaul's employment will be deemed to be constructively terminated by the Company in the event of a change in control (as defined in the Employment Agreement), the Company's bankruptcy, a material diminution of his responsibilities, or a relocation of the Company's headquarters outside the New York metropolitan area without his prior written consent. In the event that Mr. Kaul's employment terminates other than as a result of a termination by the Company, Mr. Kaul will not be entitled to any payment or bonus, other than any short-term bonus he is entitled to receive from the year prior to termination. In April 1996, the Executive Vice President, Secretary and General Counsel resigned. Also, in April 1996, the Executive Vice President and Chief Financial Officer indicated his intention to resign his position in order to pursue other interests. He remained with the Company until the closing of the Rights Offering. In connection therewith, the Company entered in a settlement of his employment agreement. The Chief Information Officer resigned in June 1996. The General Counsel position is currently being filled on a part-time basis by an individual who has served as a service provider to the Company. The Company has hired a new Chief Financial Officer and promoted an executive to the position of Chief Information Officer. 16. RELATED PARTY TRANSACTIONS At December 28, 1996, current and former officers and executives of the Company owed the Company approximately $3.1 million of which approximately $1.7 million relates to receivables under the Executive Equity Incentive Plan. These amounts due to the Company bear interest at rates ranging from 5.00% to 7.75% and are due from 1999 to 2002. The remaining $1.4 million relates to a receivable under the Long Term Incentive Plan for Rakesh K. Kaul. In May 1996, NAR advanced the Company $25 million under a promissory note against all the Rights distributed to it or its commitment to purchase all unsubscribed shares in the Rights Offering (Notes 8 and 9). NAR purchased 24,015,964 shares available to it pursuant to the terms of the Rights Offering and received a fee of $.5 million for purchasing an additional 6,898,866 shares not subscribed to by other shareholders. On August 23, 1996, the Rights Offering closing date, the Company paid the principle and interest amounts outstanding under the $25 million promissory note and the $14 million of 9.25% Notes held by IMR (Notes 8 and 9). In September 1996, IMR loaned the Company $10 million as evidenced by a subordinated promissory note which is subordinate to the Credit Facility. Such loan bears interest at prime plus 1.5%, was due on November 14, 1996, and, if it is not repaid before May 15,1997, is convertible at the option of IMR into shares of Common Stock (Note 8). NAR has agreed to apply $10 million of the Company's indebtedness to acquire $10 million of the Company's Common Stock pursuant to the 1997 Rights Offering (Note 18). In December 1996, Richemont finalized its agreement with the Company that will provide approximately $27.9 million of letters of credit to replace letters of credit which were issued under the Congress Facility. The Company paid a facility fee of $1.4 million to Richemont in connection F-43 87 with providing the facility. On December 5, 1996, Richemont advanced the Company $10 million against the anticipated $27.9 million line of credit which was repaid after the letter of credit facility was in place on December 19, 1996 (Note 8). Since January 1993, pursuant to a consulting arrangement, a subsidiary of NAR renders management consulting, business advisory and investment banking services to the Company for an annual fee of $750,000. NAR did not collect such a fee in 1996 as no such services were performed and will not collect such a fee in 1997. At December 28, 1996, NAR owned approximately 54% of the Company's outstanding Common Stock and would own 56% upon exercising all of their outstanding warrants. 17. COMMITMENTS AND CONTINGENCIES On or about September 2, 1994, a complaint was filed in the United States District Court for the District of New Jersey by Veronica Zucker, an individual who allegedly purchased shares of Common Stock of the Company in the public offering completed on April 7, 1994, against the Company, all of its directors, certain of its officers, Sun Life Insurance Company of America, Merrill Lynch, Pierce Fenner & Smith Incorporated and Alex. Brown & Sons, Incorporated. The complaint, which was purportedly filed on behalf of a class of all persons who purchased the Common Stock of the Company in the public offering or thereafter through and including August 14, 1994, sought to recover monetary damages the class had allegedly suffered as a result of certain alleged false and materially misleading statements contained in the Company's public offering prospectus dated March 30, 1994. In lieu of an answer, defendants filed a motion to dismiss the complaint in its entirety for failure to state a claim upon which relief can be granted. On May 23, 1995, the United States District Court for District of New Jersey dismissed the plaintiff's claim, with prejudice, for failure to state a claim upon which relief could be granted. On June 22, 1995, plaintiff filed a notice of appeal of the May 23, 1995 decision to the United States Court of Appeals for the Third Circuit. On March 26, 1996, the Court of Appeals rendered its decision affirming the District Court's decision. On or about June 24, 1996, a petition for certiorari was filed by plaintiff with the United States Supreme Court. The Company filed a brief in opposition to the petition on August 12, 1996. In October 7, 1996, the United States Supreme Court denied the plaintiff's petition. The Company is involved in other various routine lawsuits of a nature which are deemed customary and incidental to its business. In the opinion of management, the ultimate disposition of such actions will not have a material adverse effect on the Company's financial position or results of operations. The imposition of a sales and use tax collection obligation on out-of-state catalog companies in states to which they ship products was the subject of a case decided in 1994 by the United States Supreme Court. While the Court reaffirmed an earlier decision that allowed direct marketers to make sales into states where they do not have a physical presence without collecting sales taxes with respect to such sales, the Court further noted that Congress has the power to change this law. The Company believes that it collects sales tax in all jurisdictions where it is currently required to do so. F-44 88 In connection with certain discontinued restaurant transactions, the Company remains contingently liable with respect to lease obligations for 6 restaurant properties, should the buyers fail to perform under the agreements. The future minimum lease payments as of December 28, 1996 are as follows (in thousands): 1997 - $375; 1998 - $375; 1999 - $375; 2000 - $375; 2001 - $365; and thereafter $1,185. 18. SUBSEQUENT EVENTS 1997 Rights Offering - On March 26, 1997, the Company announced that it intends to distribute transferable subscription rights to subscribe for and purchase additional shares of Common Stock to the holders of record of the Company's Common Stock and Series B Convertible Additional Preferred Stock (the "1997 Rights Offering") as soon as it has filed with and has declared effective by the SEC a registration statement with respect thereto. The Rights will be exercisable at a price of $.90 per share. NAR has agreed to apply $10 million of the Company's indebtedness to acquire $10 million of the Company's Common Stock pursuant to the 1997 Rights Offering (Note 18). Richemont has agreed to purchase all shares of Common Stock which have not been subscribed for and purchased by shareholders in the 1997 Rights Offering. Due to the Company's liquidity issues and to alleviate vendor concerns, Richemont has agreed to advance $30 million against its commitment to purchase all of the unsubscribed shares. In connection with the agreement the Company named two Richemont representatives, Messrs. Jan du Plessis and Howard Tanner, to its Board of Directors (the "Board") and Executive Committee, and will nominate a third Richemont representative to the Board at the next annual meeting. The new Board members fill positions vacated by the recent resignations of Geraldine Stutz and Jeffery R. Laikind. In addition, Mr. du Plessis has been named to the Audit Committee of the Board. Waiver and Amendment to the Congress Facility - The Company has received waivers for the December 1996 events of default under the Congress Facility related to the working capital and net worth covenants as of and through December 28, 1996. In addition, the Company received a waiver for any event of default relating to the material adverse change provision that was in effect through and including December 28, 1996. The calculation of the working capital covenant excludes the Congress Revolving Term Notes. The working capital and net worth covenants for fiscal 1997 are as follows (in 000's):
Working Capital Amount --------------- ------ January through May 1997 $ (5,000) June through November 1997 $(10,000) December 1997 thereafter $(20,000) Net Worth Amount --------- ------ January through May 1997 $14,000 June 1997 thereafter $11,500
F-45 89 19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in thousands, except per share amounts) 1995 Revenues $176,592 $182,774 $169,175 $221,227 Gross profit 62,905 63,003 54,285 79,565 Loss from operations (4,147) (5,988) (6,042) (6,442) -------- -------- -------- -------- Net loss (4,903) (7,490) (9,586) (8,011) Preferred stock dividends (45) (59) (66) (70) -------- -------- -------- -------- Net loss applicable to Common Shareholders $ (4,948) $ (7,549) $ (9,652) $ (8,081) ======== ======== ======== ======== Net loss per share $ (.05) $ (.08) $ (.10) $ (.09) ======== ======== ======== ========
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in thousands, except per share amounts) 1996 Revenues $165,527 $180,195 $156,732 $197,860 Gross profit 55,989 59,912 41,152 63,006 Loss from operations (7,733) (9,896) (25,621) (51,247) -------- -------- -------- -------- NET LOSS (9,477) (12,520) (29,565) (53,467) Preferred stock dividends (59) (59) (59) (48) -------- -------- -------- -------- Net loss applicable to Common Shareholders $ (9,536) $(12,579) $(29,624) $(53,515) ======== ======== ======== ======== Net loss per share $ (.10) $ (.13) $ (.26) $ (.37) ======== ======== ======== ========
F-46 90 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 $ 15,152.00 AMEX listing fees and expenses 17,500.00* Printing and engraving expenses 60,000.00* Legal fees and expenses 75,000.00* Accounting fees and expenses 200,000.00* Blue Sky fees and expenses (including counsel fees) 20,000.00* Standby Purchaser's fees 1,000,000.00 Subscription Agent's fees and expenses 55,000.00* Information Agent's fees and expenses 7,500.00* Miscellaneous expenses 4,848.00 ------------- Total $1,455,000.00 =============
- ---------- * Estimated ITEM 15. Indemnification of Directors and Officers. Hanover is incorporated under the laws of the State 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 FIFTH of the Restated 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 II-1 91 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. 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 FIFTH. 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 FIFTH, 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 FIFTH of the Restated 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. ITEM 16. Exhibits. Exhibit Number Description of Exhibit Page Number 1.1 Standby Purchase Agreement, dated March 26, 1997, between Hanover Direct, Inc. and Richemont S.A. 4 Form of Subscription Certificate 5 Opinion of Brown Raysman Millstein Felder & Steiner LLP as to the legality of the securities being registered 8 Opinion of Brown Raysman Millstein Felder & Steiner LLP as to the tax consequences to holders 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Brown Raysman Millstein Felder & Steiner LLP (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-5 of this Registration Statement) II-2 92 99.1 Form of Instructions to Shareholders as to use of Subscription Certificates 99.2 Form of Notice of Guaranteed Delivery for Subscription Certificates and Important Tax Information (See exhibit 99.1) 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 B Preferred Stockholders 99.10 Form of Certification and Request for Additional Rights 99.11 Form of Letter to Participants in the 1994 Bonus Plan 99.12 Form of Letter to Participants in the 1995 Bonus Plan 99.13 Form of Letter to Participants in the All-Employee Equity Investment Plan 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 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. (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) (Section 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; II-3 93 (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 (Section 239.13 of this chapter) or Form S-8 (Section 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-effect 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 offering 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 94 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant 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 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 11th day of April, 1997. HANOVER DIRECT, INC. (Registrant) By:/s/Rakesh K. Kaul ------------------------------------- Rakesh K. Kaul, President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Rakesh K. Kaul, Larry J. Svoboda and Edward J. O'Brien, and each of them, his true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto such attorneys-in-fact and agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that such attorneys-in-fact and agents, or any of them, or their substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirement of the Securities Act of 1933, as amended, this Registration Statement has been signed below by the following persons, in the capacities indicated on April 11, 1997. 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/Larry J. Svoboda Senior Vice President and Chief Financial Officer - ------------------------- Larry J. Svoboda (principal financial officer) Director - ------------------------- Ralph Destino /s/J. David Hakman Director - ------------------------- J. David Hakman Director - ------------------------- S. Lee Kling II-5 95 Director - ------------------------- Theodore H. Kruttschnitt /s/Elizabeth Valk Long Director - ------------------------- Elizabeth Valk Long Director - ------------------------- Edmund R. Manwell /s/Jan du Plessis Director - ------------------------- Jan du Plessis Director - ------------------------- Howard M. S. Tanner /s/Robert F. Wright Director - ------------------------- Robert F. Wright II-6 96 EXHIBIT INDEX Exhibit Number Description of Exhibit Page Number 1.1 Standby Purchase Agreement, dated March 26, 1997, between Hanover Direct, Inc. and Richemont S.A. 4 Form of Subscription Certificate 5 Opinion of Brown Raysman Millstein Felder & Steiner LLP as to the legality of the securities being registered 8 Opinion of Brown Raysman Millstein Felder & Steiner LLP as to the tax consequences to holders 23.1 Consent of Arthur Andersen LLP 23.2 Consent of Brown Raysman Millstein Felder & Steiner LLP (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-5 of this Registration Statement) 99.1 Form of Instructions to Shareholders as to use of Subscription Certificates 99.2 Form of Notice of Guaranteed Delivery for Subscription Certificates and Important Tax Information (See exhibit 99.1) 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 B Preferred Stockholders 99.10 Form of Certification and Request for Additional Rights 99.11 Form of Letter to Participants in the 1994 Bonus Plan 99.12 Form of Letter to Participants in the 1995 Bonus Plan 99.13 Form of Letter to Participants in the All-Employee Equity Investment Plan EX-1.1 2 STANDBY PURCHASE AGREEMENT 1 Exhibit 1.1 Standby Purchase Agreement Hanover Direct, Inc. 55,555,555 Shares Common Stock ($.66 2/3 par value) Standby Purchase Agreement New York, New York March 26, 1997 Richemont S.A. 35 Boulevard Prince Henri L 1724 Luxembourg Attention: Mr. Kurt Nauer Ladies and Gentlemen: Hanover Direct, Inc., a Delaware corporation (the "Company"), proposes to offer approximately 55,555,555 shares (the "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, the 6% Series A Convertible Additional Preferred Stock, par value $.01 and stated value $10.00 per share (the "Series A Preferred Stock"), and the Series B Convertible Preferred Stock, par value $.01 and stated value $10.00 per share (the "Series B Preferred Stock"), of the Company of record at the close of business on a day which shall not be less than three nor more than 30 days prior to the Effective Date, as hereinafter defined (the "Record Date") (all shares issuable upon the exercise of Rights by holders of Common Stock, Series A Preferred Stock and Series B Preferred Stock shall be referred to as the "Securities") for a price of $.90 per share. The number of Rights distributable for each share of Series A Preferred Stock and Series B Preferred Stock held on the Record Date will be calculated assuming such shares have been converted into Common Stock on the Record Date in accordance with the terms thereof. Record Date stockholders who fully exercise all Rights distributed to them will also be 2 entitled to subscribe for shares of Common Stock that are not otherwise purchased pursuant to the exercise of Rights, subject to proration by the Company under certain circumstances. The Rights will expire at 5:00 P.M., New York City time, on a date to be determined by the Company, but which shall not be less than 20 nor more than 40 days following the Effective Date (such date and time, the "Expiration Date"). The Company proposes to sell to Richemont S.A., a Luxembourg corporation ("Richemont"), an aggregate of 100% of such number of Shares which, as of the Expiration Date, have not been subscribed for by the holders of Common Stock, Series A Preferred Stock or Series B Preferred Stock other than the 11,111,111 shares of Common Stock to be subscribed for by NAR Group Limited, a British Virgin Islands corporation ("NAR"), or its affiliates (other than the Company) by the exercise of Rights either through the basic subscription privilege or the oversubscription privilege (the "Unsubscribed Shares"). The Company's obligation to sell and deliver the Securities to Richemont shall be contingent on Richemont'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 either through the basic subscription privilege or the oversubscription privilege and the subscription and purchase of Common Stock upon the terms described in the Prospectus (as hereinafter defined), including the purchase by Richemont 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, Richemont as set forth below in this Section 1(a). Certain terms used in Section 1 are defined in paragraphs (i) and (xix) 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 will file with the Securities and Exchange Commission (the "Commission") as soon as practicable a registration statement 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 will file with the Commission either (A) prior to effectiveness of such registration statement, an 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 - 2 - 3 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 shall be in form and substance reasonably acceptable to Richemont. 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 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 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 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 will not, and on the date of any filing pursuant to Rule 424(b) and on the Closing Date (as hereinafter defined), 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 - 3 - 4 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 Richemont or relating to Richemont or its affiliates (other than the Company) 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 Richemont, 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 (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 as to the Company 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 organized, validly existing and in good standing under the laws of the State of - 4 - 5 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, Series A Preferred Stock, Series B Preferred Stock, the Rights, the Subscription Certificates and the Securities will conform in all material respects to the descriptions thereof contained or 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 28, 1996. (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). - 5 - 6 (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) Prior to the Effective Date, the Company will have 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) 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 (a) such defaults under the Loan and Security Agreement, dated as of November 14, 1995, as amended, with Congress Financial Corporation, which defaults shall have been waived, and (b) such defaults that in the aggregate would not have a material adverse effect on the condition (financial or otherwise), results of operations or earnings 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 - 6 - 7 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 or earnings of the Company and its subsidiaries considered as one enterprise). (xiv) 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 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. (xv) 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 will not be described and filed as required. (xvi) 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. (xvii) The Rights will be 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. (xviii) The proceeds of the Rights Offering will be applied as set forth in the Prospectus. - 7 - 8 (xix) The terms which follow, when used in this Agreement, shall have the meanings indicated. The term "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 time in which it shall become effective) and, in the event any post-effective amendment thereto becomes effective prior to the Closing Date (as hereinafter defined), 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 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) Richemont represents and warrants to, and agrees with, the Company as set forth below in this Section 1(b). (i) Richemont 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 Richemont and, assuming due execution and delivery of this Agreement by the Company, constitutes a legal, valid and binding obligation of Richemont, enforceable against Richemont 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 other national or state or provincial securities laws and/or public policy. (ii) To the extent that the Registration Statement contains any information concerning Richemont furnished in writing to the Company by or on behalf of Richemont specifically for inclusion therein, on the Effective Date the Registration Statement will, and when the prospectus is first filed (if required) in accordance with Rule 424(b) and on the Closing Date - 8 - 9 (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 Richemont furnished in writing to the Company by or on behalf of Richemont specifically for inclusion therein, on the Effective Date, the Registration Statement 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 Richemont furnished in writing to the Company by or on behalf of Richemont specifically for inclusion therein, the Prospectus, if not required to be filed pursuant to Rule 424(b), will not, and on the date of any filing pursuant to Rule 424(b) and on the Closing Date (as hereinafter defined), 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. (iii) The execution and delivery of this Agreement, the purchase of the shares of Common Stock to be purchased by Richemont hereunder, the consummation by Richemont of the transactions contemplated in this Agreement, the Registration Statement and the Prospectus and compliance by Richemont with the terms of this Agreement do not and will not result in any violation of the Statuten of Richemont, 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 Richemont or any of its subsidiaries under (A) any indenture, mortgage, loan agreement, note, lease or other agreement or instrument to which Richemont 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 Richemont 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 or earnings of Richemont and its subsidiaries considered as one enterprise). - 9 - 10 (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 Unsubscribed Shares to be purchased by Richemont hereunder as set forth in the Registration Statement and the Prospectus and the consummation by Richemont 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 Richemont, and Richemont 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 Unsubscribed Shares, if any. As compensation to Richemont for its commitment hereunder, the Company agrees to pay to Richemont, on the Closing Date (as hereinafter defined) or at such other time and date as Richemont and the Company may agree in writing, an amount equal to 1% 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, Series A Preferred Stock and Series B Preferred Stock other than with respect to the shares of Common Stock held by NAR Group Limited, a British Virgin Islands corporation ("NAR"), or its affiliates plus an amount equal to one-half of 1% in respect of the aggregate offering price of the aggregate number of shares of Common Stock issuable upon exercise of the Rights granted to NAR or its affiliates less 11,111,111 shares of Common Stock or such greater number of shares of Common Stock as NAR or its affiliates shall acquire upon exercise of their Rights (collectively, the "Standby Fee"), plus an additional amount equal to 4% of the aggregate offering price (the "Take-Up Fee") in respect of all Unsubscribed Shares, if any, purchased by Richemont pursuant to its commitment hereunder, each payable in cash. Notwithstanding the foregoing, Richemont 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 the date hereof if (i) at least five days prior to the Effective Date, he furnishes to Richemont 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. - 10 - 11 If the closing for the sale of the Unsubscribed Shares 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 (xiii), (xiv) and (xv) of Section 1(a) so long as the Company has made reasonable efforts to comply with such sections) 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 (xiii), (xiv) and (xv) of Section 1(a) so long as the Company has made reasonable efforts to comply with such sections), the Company shall pay Richemont the entire amount of the Standby Fee. 3. Delivery and Payment. Delivery and payment for the Unsubscribed Shares shall be made at 10:00 A.M., New York City time, on the fifth business day following the Expiration Date (which date and time may be postponed to a date not later than 10 business days thereafter by agreement between Richemont 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 Richemont against payment by Richemont of the aggregate purchase price of the Unsubscribed Shares being sold by the Company, by wire transfer 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 Unsubscribed Shares shall be made at such location in the United States as Richemont shall reasonably designate at least one business day in advance of the Closing Date and payment for such Unsubscribed Shares shall be made at the office of Brown Raysman Millstein Felder & Steiner LLP, 120 West 45th Street, New York, New York 10036. Certificates for the Unsubscribed Shares shall be registered in such names and in such denominations as Richemont may request not less than forty-eight hours in advance of the Closing Date. The Company agrees to have the Unsubscribed Shares available for inspection, checking and packaging by Richemont in New York, New York, not later than 1:00 P.M. on the business day prior to the Closing Date. Should the Company so require, Richemont will advance up to $30 million from time to time upon the Company's request against its commitment to purchase all of the Unsubscribed Shares. In return, the Company will execute a subordinated - 11 - 12 promissory note in the amount of such advance which will be repayable on the earlier of August 30, 1997 or the completion of the Rights Offering. Such note will be subordinate to the Loan and Security Agreement, dated as of November 14, 1995, as amended, with Congress Financial Corporation. Should Richemont advance any sums, payment of all or part of the aggregate purchase price of the Unsubscribed Shares may also be made by Richemont by the surrender and cancellation of the aforementioned note. Concurrently therewith, the Company shall pay to Richemont interest on the principal amount outstanding under such note as provided therein at a rate of 1.5% per annum in excess of the prime commercial rate announced from time to time by CoreStates Bank, N.A. 4. No Offering by Richemont. It is understood that Richemont does not intend to offer the shares of Common Stock owned by it (including, but not limited to, the Unsubscribed Shares) for sale to the public. 5. Agreements. (a) The Company agrees with Richemont that: (i) The Company will use its best efforts to cause the Registration Statement, 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 Richemont'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 Richemont of such timely filing. The Company will promptly advise Richemont (A) when the Registration Statement, 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 - 12 - 13 institution or threatening 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 Richemont 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 Richemont without charge, signed copies of the Registration Statement (including exhibits thereto) and as many copies of the Prospectus and any supplement thereto as Richemont 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 Richemont 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. - 13 - 14 (vi) Except as contemplated in the Registration Statement or the Prospectus, the Company will not, within 90 days of the Effective Date, 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 Act without the prior written consent of Richemont which shall not be unreasonably withheld. (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 Richemont. The obligations of Richemont 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 Effective Date 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) 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 the Effective Date; 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 Closing Date, the Company shall have furnished to Richemont certificates of the Company, dated respectively as of the Effective Date 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 Effective Date or on and - 14 - 15 as of the Closing Date, as the case may be, with the same effect as if made at the Effective Date or on the Closing 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 Effective Date or the Closing Date, as applicable; and (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. (c) The Company shall have commenced mailing the Subscription Certificates to record holders of the Common Stock not later than three days following the Effective 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 that day which shall not be less than 20 nor more than 40 days following the Effective Date. Prior to 12:00 Noon, New York City time, on the business day following the Expiration Date, the Company shall have advised Richemont of the number of shares of Common Stock subscribed for and of the number of Non-Richemont Shares. (d) NAR shall have entered into an agreement with the Company providing for the exercise of, and shall have exercised, its Rights for that number of Shares having an aggregate purchase price of at least $10 million. Payment of all or part of the aggregate purchase price of such Shares will be made by NAR by the surrender and cancellation of the Company's subordinated promissory note, dated as of September 11, 1996, in the principal amount of $10 million. Concurrently therewith, the Company shall pay to NAR interest on the principal amount outstanding under such note as provided therein. (e) Prior to the Closing Date, the Company shall have furnished to Richemont such further information, certificates and documents as Richemont 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, this Agreement and all obligations of Richemont hereunder may be canceled at, or at any time prior to, the Closing Date by Richemont. Notice of such cancellation shall be given to the Company in writing or by telephone or telegraph confirmed in writing. - 15 - 16 7. Indemnification and Contribution. (a) The Company agrees to indemnify and hold harmless Richemont, the directors, officers, partners, employees and agents of Richemont and each person who controls, or is in common control with, Richemont 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 Richemont pursuant to, and the performance by Richemont 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 Richemont specifically for inclusion therein or (B) in the case of clause (a)(ii) of this Section 7, is found in a final judgment by 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 Richemont pursuant to, or the performance by Richemont 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 - 16 - 17 bad faith or gross negligence or a breach by Richemont of its obligations under this Agreement. (b) Richemont 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 Richemont, but only with reference to written information relating to Richemont furnished to the Company by Richemont specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which Richemont may otherwise have. (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 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 indem- - 17 - 18 nifying 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 Richemont 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 the one hand, and Richemont, 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 Richemont, on the other hand, from the purchase of the Securities; provided, however, that in no case shall Richemont be responsible for any amount in excess of the aggregate compensation paid hereunder to Richemont in respect of the Securities purchased by Richemont hereunder. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the Company, on the one hand, and Richemont, 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 Richemont, 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 - 18 - 19 benefits received by Richemont shall be deemed to be equal to the total compensation paid to Richemont hereunder. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the Company or Richemont. The Company and Richemont 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 Richemont within the meaning of either the Act or the Exchange Act and each director, officer, partner, employee and agent of Richemont shall have the same rights to contribution as Richemont, 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 Richemont, by notice given to the Company prior to delivery of and payment for the Unsubscribed Shares, if prior to such time trading in the 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. 9. Representations and Indemnities to Survive. The respective agreements, representations, warranties, indemnities and other statements of the Company or its officers and of Richemont 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 Richemont 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 Unsubscribed Shares. 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 Richemont, will be mailed, delivered or telegraphed and confirmed to it at 35 Boulevard Prince Henri, L 1724 Luxembourg, Attention: Mr. Kurt Nauer or at such other address as Richemont may hereafter - 19 - 20 designate by notice to the Company, with a copy to Brobeck Phleger & Harrison LLP, 1633 Broadway, 47th Floor, New York, New York 10019, Attention: Robert P. Wessely, Esq., Facsimile Number 212-586-7878 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: Secretary, Facsimile Number 201-392-5005, or at such other address as the Company may hereafter designate by notice to Richemont, with a copy to Brown Raysman Millstein Felder & Steiner LLP, 120 West 45th Street, 20th Floor, New York, New York 10036, Attention: Monte E. Wetzler, Esq., Facsimile Number 212-840-2429. 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 Richemont may assign its rights hereunder to one or more direct or indirect wholly-owned subsidiaries of Richemont, provided that Richemont shall continue to be obligated to perform all the obligations to be performed by Richemont 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. 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: /s/ Larry J. Svoboda ------------------------------ Name: Larry J. Svoboda Title: Senior Vice President, CFO RICHEMONT S.A. By: /s/ Howard S. Tanner ------------------------------ Name: Howard S. Tanner Title: Director By: /s/ Jan du Plessis ------------------------------ Name: Jan du Plessis Title: Director - 21 - EX-4 3 FORM OF SUBSCRIPTION CERTIFICATE 1
Exhibit 4 SUBSCRIPTION CERTIFICATE NO. SUBSCRIPTION CERTIFICATE FOR SHARES HANOVER DIRECT, INC. SUBSCRIPTION CERTIFICATE REPRESENTING RIGHTS THE TERMS AND CONDITIONS OF THE TO PURCHASE SHARES OF THE COMMON STOCK OF HANOVER SUBSCRIPTION PRICE $.90 PER SHARE RIGHTS OFFERING ARE SET FORTH IN DIRECT, INC. THIS CERTIFICATE OR A NOTICE OF THE COMPANY'S PROSPECTUS DATED GUARANTEED DELIVERY MUST BE RECEIVED BY THE SUBSCRIPTION _____ __, 1997 (THE "PROSPECTUS") AGENT WITH PAYMENT IN FULL BY 5:00 P.M., NEW YORK CUSIP AND ARE INCORPORATED HEREIN BY CITY TIME, ON _________, 1997 (THE "EXPIRATION DATE"). REFERENCE. COPIES OF THE THIS SUBSCRIPTION CERTIFICATE IS TRANSFERABLE AND MAY PROSPECTUS ARE AVAILABLE UPON BE COMBINED OR DIVIDED (BUT ONLY INTO CERTIFICATES REQUEST FROM THE COMPANY AND EVIDENCING A WHOLE NUMBER OF RIGHTS) AT THE OFFICE THE SUBSCRIPTION AGENT. OF THE SUBSCRIPTION AGENT.
NAME AND ADDRESS OF REGISTERED HOLDER: The registered owner whose name is inscribed herein, or assigns, is entitled to subscribe for shares of Common Stock upon the terms and subject to the conditions set forth in the Prospectus and instructions relating thereto. The Rights represented by this Subscription Certificate may be exercised by duly completing Form 1; may be transferred, assigned, exercised or sold through a bank or broker by duly completing Form 2; and may be sold through the Subscription Agent by duly completing Form 3. Rights holders are advised to review the Prospectus and Instructions, copies of which are available from the Subscription Agent, before exercising or selling their Rights. IMPORTANT: Complete appropriate Form and, if applicable, delivery instructions, and SIGN on reverse thereof. Date: - ------------------------------------- ------------------------------------- RAKESH K. KAUL EDWARD J. O'BRIEN President and Chief Executive Officer Senior Vice President, Treasurer and Secretary 2 RIGHTS HOLDERS SHOULD BE AWARE THAT IF THEY CHOOSE TO EXERCISE OR TRANSFER LESS THAN ALL OF THE RIGHTS EVIDENCED HEREBY, THEY MAY NOT RECEIVE A NEW SUBSCRIPTION CERTIFICATE IN SUFFICIENT TIME TO EXERCISE THE REMAINING RIGHTS EVIDENCED THEREBY. FORM I: EXERCISE AND SUBSCRIPTION: The undersigned hereby irrevocably exercises one or more Rights to subscribe for shares of Common Stock as indicated below, on the terms and subject to the conditions specified in the Prospectus, receipt of which is hereby acknowledged. (a) Number of shares subscribed for pursuant to the Subscription Privilege (one Right needed to subscribe for each full share):_________________ (b) Total Subscription Price (total number of shares subscribed for pursuant to the Subscription Privilege times the Subscription Price of $.90): _______________________* METHOD OF PAYMENT (CHECK ONE) [ ] CHECK, BANK DRAFT OR MONEY ORDER PAYABLE TO AMERICAN STOCK TRANSFER & TRUST COMPANY. [ ] WIRE TRANSFER DIRECTED TO [THE CHASE MANHATTAN BANK; ACCOUNT NO. 323053807; ABA NO. 021000021.] (c) if the number of Rights being exercised pursuant to the Subscription Privilege is less than all of the Rights represented by this Subscription Certificate (check only one): [ ] DELIVER TO ME A NEW SUBSCRIPTION CERTIFICATE EVIDENCING THE REMAINING RIGHTS TO WHICH I AM ENTITLED. [ ] DELIVER TO ME A NEW SUBSCRIPTION CERTIFICATE EVIDENCING THE REMAINING RIGHTS IN ACCORDANCE WITH MY FORM 2 INSTRUCTIONS (which include any required signature guarantees). [ ] SELL THE REMAINING UNEXERCISED RIGHTS IN ACCORDANCE WITH MY FORM 3 INSTRUCTIONS. [ ] CHECK HERE IF RIGHTS ARE BEING EXERCISED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY DELIVERED TO THE SUBSCRIPTION AGENT PRIOR TO THE DATE HEREOF AND COMPLETE THE FOLLOWING: Name(s) of Registered Owner(s)_________________________________________ Window Ticket number (if any)__________________________________________ Date of Execution of Notice of Guaranteed Delivery_____________________ Name of Institution which Guaranteed Delivery__________________________ FORM 2 - TO TRANSFER YOUR SUBSCRIPTION CERTIFICATE OR SOME OR ALL OF YOUR RIGHTS OR TO EXERCISE OR SELL RIGHTS THROUGH YOUR BANK OR BROKER. For value received, Rights represented by this Subscription Certificate are hereby assigned to (please print name and address and Social Security No. of transferee in full): Name__________________________________ Address_______________________________ ______________________________________ ______________________________________ Social Security Number [ ] FORM 3 - CHECK HERE TO SELL YOUR UNEXERCISED RIGHTS THROUGH THE SUBSCRIPTION AGENT: Check box if the undersigned hereby authorizes the Subscription Agent to sell any Rights represented by this Subscription Certificate but not exercised hereby and to deliver to the undersigned a check for the net proceeds. FORM 4 - DELIVERY INSTRUCTIONS: Name and/or address for mailing any stock, new Subscription Certificate or cash payment if other than shown on the reverse hereof: Name:___________________________________________________ Address:________________________________________________ ________________________________________________________ EX-5 4 OPINION - BROWN RAYSMAN RE: LEGALITY OF SECURITIES 1 Exhibit 5 Brown Raysman Millstein Felder & Steiner LLP 120 West 45th Street New York, New York 10036 (212) 944-1515 April 14, 1997 Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, New Jersey 07087 Re: Hanover Direct, Inc. Gentlemen: We refer to the Registration Statement on Form S-3 (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act"), filed by Hanover Direct, Inc., a Delaware corporation (the "Company"), with the Securities and Exchange Commission (the "Commission"). The Registration Statement covers (i) rights to purchase (the "Rights") shares of the Company's common stock, par value $.66-2/3 per share (the "Company Common Stock"), (ii) the oversubscription privilege to purchase rights and (iii) shares of Company Common Stock to be issued and sold upon the exercise of the Rights to be distributed in connection with a rights offering (the "Rights Offering"). We have examined the originals, or photostatic or certified copies, of such records of the Company, certificates of officers of the Company and of public officials and such other documents as we have deemed relevant and necessary as the basis for the opinion set forth below. In such examination, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such copies. Based upon our examination mentioned above, subject to the assumptions stated and relying on statements of fact contained in the documents that we have examined, we are of the opinion that the Rights proposed to be issued by the Company and the Company Common Stock proposed to be issued and sold by the Company have been duly authorized for issuance and that the Rights, when issued to holders of the Company Common Stock and Series B Convertible Additional Preferred Stock in accordance with the terms of the Rights Offering, will have been validly issued and will be fully paid and non-assessable. We consent to the filing of this opinion as an Exhibit to the Registration Statement. In giving this consent, we do not admit that we are within the category of persons whose consent is required under Section 7 of the Securities Act or the General Rules and Regulations of the Commission. Very truly yours, Brown Raysman Millstein Felder & Steiner LLP EX-8 5 OPINION OF BROWN RAYSMAN RE: TAX CONSEQUENCES 1 Exhibit 8 Brown Raysman Millstein Felder & Steiner LLP 120 West 45th Street New York, New York 10036 (212) 944-1515 April 14, 1997 Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, NJ 07087 Re: 1997 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"), and its 6% 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 on Form S-3 dated April 11, 1997 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- April 14, 1997 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, Brown Raysman Millstein Felder & Steiner LLP EX-23.1 6 CONSENT OF ARTHUR ANDERSEN LLP 1 Exhibit 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our Firm) included in or made a part of this registration statement. ARTHUR ANDERSEN LLP New York, New York April 11, 1997 EX-99.1 7 FORM OF INSTRUCTIONS TO SHAREHOLDERS 1 Exhibit 99.1 INSTRUCTIONS AS TO USE OF HANOVER DIRECT, INC. SUBSCRIPTION CERTIFICATES --------------- CONSULT THE INFORMATION AGENT, YOUR BANK OR BROKER AS TO ANY QUESTIONS The following instructions relate to a rights offering (the "Rights Offering") by Hanover Direct, Inc., a Delaware corporation (the "Company"), to the holders of its Common Stock, par value $.66 2/3 per Share (the "Common Stock"), and its Series B Convertible Additional Preferred Stock, par value $.01 per share (the "Series B Preferred Stock"), as described in the Company's Prospectus dated _____ ___, 1997 (the "Prospectus"). Holders of record of Common Stock and the Series B Preferred Stock at the close of business on _________, _____ ___, 1997 (the "Record Date") are receiving .3824 transferable subscription rights (the "Rights") for each share of Common Stock held by them on the Record Date while the holders of Series B Preferred Stock are receiving .5742 transferable Rights for each share of Series A Preferred Stock held by them on the Record Date. An aggregate of approximately 55,555,556 Rights exercisable to purchase an aggregate of approximately 55,555,556 shares of Common Stock (the "Underlying Shares") is being distributed in connection with the Rights Offering. Each Right is exercisable, upon payment of $.90 in cash (the "Subscription Price"), to purchase one share of Common Stock (the "Basic Subscription Privilege"). In addition, subject to the allocation described below, Record Date stockholders who fully exercise all Rights distributed to them will also be entitled to subscribe at the Subscription Price for an unlimited number of Additional Shares of Common Stock (the "Oversubscription Privilege"). Transferees of Rights may not exercise the Oversubscription Privilege with respect to such Rights. Underlying Shares will be available for purchase pursuant to the Oversubscription Privilege only to the extent that all the Underlying Shares are not subscribed for through the exercise of the Basic Subscription Privilege by the Expiration Date. If the Underlying Shares so available ("the Excess Shares") are not sufficient to satisfy all subscriptions pursuant to the Oversubscription Privilege, the available Underlying Shares will be allocated pro rata (subject to elimination of fractional shares) among the holders of Rights who exercise the Oversubscription Privilege; provided, however, that if such pro rata allocation results in any holder being allocated a greater number of Excess Shares than such holder subscribed for pursuant to the exercise of such holder's Oversubscription Privilege, then such holder will be allocated only such number of shares of Excess Shares as such holder subscribed for and the remaining Excess Shares will be allocated among all other holders exercising Oversubscription Privileges. See "THE RIGHTS OFFERING - SUBSCRIPTION PRIVILEGES" in the Prospectus. No fractional Rights or cash in lieu thereof will be issued or paid. The number of Rights distributed by the Company has been rounded up to the nearest whole number in order to avoid issuing fractional Rights. The Rights will expire at 5:00 p.m., New York City time, on [day], ______ ___, 1997 (the "Expiration Date"). It is anticipated that the Rights will be traded on the American Stock Exchange and in the over-the-counter market. The number of Rights to which you are entitled is printed on the face of your subscription certificate. You should indicate your wishes with regard to the exercise or sale of your Rights by completing the appropriate form or forms on your subscription certificate and returning the certificate to the Subscription Agent in the envelope provided. PAYMENT OF THE SUBSCRIPTION PRICE AND YOUR SUBSCRIPTION CERTIFICATE MUST BE RECEIVED BY THE SUBSCRIPTION AGENT, OR GUARANTEED DELIVERY REQUIREMENTS WITH RESPECT TO YOUR SUBSCRIPTION CERTIFICATE MUST BE COMPLIED WITH, AND PAYMENT OF THE SUBSCRIPTION PRICE, INCLUDING FINAL CLEARANCE OF ANY CHECKS, 2 MUST BE RECEIVED BY THE SUBSCRIPTION AGENT, ON OR BEFORE 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE, YOU MAY NOT REVOKE ANY EXERCISE OF A RIGHT. 1. SUBSCRIPTION PRIVILEGES. To exercise Rights, complete Form 1 and send your properly completed and executed subscription certificate, together with payment in full of the Subscription Price for each Underlying Share subscribed for pursuant to the Basic Subscription Privilege and the Oversubscription Privilege, to the Subscription Agent. Payment of the Subscription Price must be made in U.S. dollars for the full number of Underlying Shares being subscribed for (a) by 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) by wire transfer of funds to the account maintained by the Subscription Agent for such purpose at the [Chase Manhattan Bank; Account No. 323053807; ABA No. 02100021]. The Subscription Price will be deemed to have been received by the Subscription Agent only upon (i) the clearance of any uncertified check, (ii) the 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) the 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 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. You may also transfer your subscription certificate to your bank or broker in accordance with the procedures specified in paragraph 3(a) below, make arrangements for the delivery of funds on your behalf and request such bank or broker to exercise the Subscription Certificate on your behalf. Alternatively, you may cause a written guarantee substantially in the form of Exhibit A to these instructions (the "Notice of Guaranteed Delivery") from a member firm of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc., or from a commercial bank or trust company having an office or correspondent in the United States (each of the foregoing being an "Eligible Institution") to be received by the Subscription Agent at or prior to the Expiration Date together with payment in full of the applicable Subscription Price. Such Notice of Guaranteed Delivery must state your name, the number of Rights represented by your subscription certificate and the number of Rights being exercised pursuant to the Basic Subscription Privilege and the number of Underlying Shares, if any, being subscribed for pursuant to the Oversubscription Privilege, and will guarantee the delivery to the Subscription Agent of your properly completed and executed subscription certificates within three American Stock Exchange trading days following the date of the Notice of Guaranteed Delivery. If this procedure is followed, your subscription certificates must be received by the Subscription Agent within three American Stock Exchange trading days of the Notice of Guaranteed Delivery. Additional copies of the Notice of Guaranteed Delivery may be obtained upon request from the Information Agent at the address, or by calling the telephone number, indicated below. Banks, brokers and other nominee holders of Rights who exercise Rights and the Oversubscription Privilege on behalf of beneficial owners of Rights will be required to certify to the Subscription Agent and the Company, in connection with the exercise of the Oversubscription Privilege, as to the aggregate number of Rights that have been exercised, and the number of shares that are being subscribed for pursuant to the Oversubscription Privilege, by each beneficial owner of rights on whole behalf such nominee holder is acting. If more Underlying Shares are subscribed for pursuant to the Oversubscription Privilege than are available for sale, Underlying Shares will be allocated, as described above, among persons exercising the Oversubscription Privilege in proportion to the number of shares requested pursuant to the Oversubscription Privilege. In the event that the conditions precedent to the obligation of Richemont S.A., a Luxembourg public company ("Richemont"), to exercise its standby purchase commitment are not satisfied or otherwise waived by Richemont, 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. Accordingly, until the Expiration Date, the Subscription Price -2- 3 shall be held in escrow by the Subscription Agent pending receipt of notice from the Company that Richemont has elected to purchase the Unsubscribed Shares. The address, telephone and telecopier numbers of the Subscription Agent are as follows: By Mail: By Facsimile By Hand: American Stock Transfer Transmission: American Stock Transfer & Trust Company (718) 234-5001 & Trust Company 40 Wall Street, 46th Floor 40 Wall Street, 46th Floor New York, New York 10005 New York, New York 10005 To Confirm Receipt of Facsimile and For General Information: (212) 936-5100 (718) 921-8200 The address and telephone number of Morrow & Co., Inc., the Information Agent, are as follows: 900 Third Avenue 20th Floor New York, New York 10022 (212) 754-8000 TOLL-FREE 1-800-566-9061 Banks and brokerage firms please call 1-800-662-5200 If you exercise less than all of the Rights evidenced by your subscription certificate by so indicating in Form 1 of your subscription certificate, the Subscription Agent either (i) will issue to you a new subscription certificate evidencing the unexercised Rights, (ii) if you so indicate on Form 2 of your subscription certificate, will transfer the unexercised Rights in accordance with your instructions or (iii) if you so indicate in Form 3 of your subscription certificate, will endeavor to sell such unexercised Rights for you. HOWEVER, IF YOU CHOOSE TO HAVE A NEW SUBSCRIPTION CERTIFICATE SENT TO YOU OR TO A TRANSFEREE, YOU OR SUCH TRANSFEREE MAY NOT RECEIVE ANY SUCH NEW SUBSCRIPTION CERTIFICATE IN SUFFICIENT TIME TO PERMIT SALE OR EXERCISE OF THE RIGHTS EVIDENCED THEREBY. IF YOU HAVE NOT INDICATED THE NUMBER OF RIGHTS BEING EXERCISED OR IF YOU HAVE NOT FORWARDED FULL PAYMENT OF THE SUBSCRIPTION PRICE FOR THE NUMBER OF RIGHTS THAT YOU HAVE INDICATED ARE BEING EXERCISED, YOU 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 PAYMENT DELIVERED BY YOU, AND TO THE EXTENT THAT THE SUBSCRIPTION PRICE PAYMENT DELIVERED BY YOU EXCEEDS THE PRODUCT OF THE SUBSCRIPTION PRICE MULTIPLIED BY THE NUMBER OF RIGHTS EVIDENCED BY THE SUBSCRIPTION CERTIFICATES DELIVERED BY YOU (SUCH EXCESS BEING THE "SUBSCRIPTION EXCESS"), YOU WILL BE DEEMED TO HAVE EXERCISED YOUR OVERSUBSCRIPTION PRIVILEGE TO PURCHASE, TO THE EXTENT AVAILABLE, THAT NUMBER OF WHOLE SHARES OF CLASS A COMMON STOCK EQUAL TO THE QUOTIENT OBTAINED BY DIVIDING THE SUBSCRIPTION EXCESS BY THE SUBSCRIPTION PRICE. 2. DELIVERY OF STOCK CERTIFICATE, ETC. The following deliveries and payments will be made to the address shown on the face of your subscription certificate unless you provide instructions to the contrary on Form 4. (a) Basic Subscription Privilege. As soon as practicable after the Expiration Date, the Subscription Agent shall mail to each exercising Rights holder certificates representing shares of Common Stock purchased pursuant to the Basic Subscription Privilege. -3- 4 (b) Oversubscription Privilege. As soon as practicable after the Expiration Date, the Subscription Agent will mail to each Rights holder who validly exercised the Oversubscription Privilege the number of shares of Common Stock allocated to such Rights holder pursuant to the Oversubscription Privilege. See "The Rights Offering -- Subscription Privileges -- Oversubscription Privilege" in the Prospectus. (c) Cash Payments. As soon as practicable after the Expiration Date, the Subscription Agent will mail to each Rights holder who exercises the Oversubscription Privilege any excess funds received in payment of the Subscription Price for Underlying Shares that are subscribed for by such Rights holder but not allocated to such Rights holder pursuant to the Oversubscription Privilege. Promptly following the Expiration Date, the Subscription Agent will mail a check for any Rights sold through the Subscription Agent to the holder of such Rights, less applicable commissions, taxes and other charges. 3. TO SELL OR TRANSFER RIGHTS. (a) Sale of Rights through a Bank or Broker. To sell all Rights evidenced by a subscription certificate through your bank or broker, so indicate on Form 2 and deliver your properly completed and executed subscription certificate to your bank or broker. If Form 2 is completed without designating a transferee, the Subscription Agent may thereafter treat the bearer of the subscription certificate as the absolute owner of all of the Rights evidenced by such subscription certificate for all purposes, and the Subscription Agent shall not be affected by any notice to the contrary. Because your bank or broker cannot issue subscription certificates, if you wish to sell less than all of the Rights evidenced by a subscription certificate, either you or your bank or broker must instruct the Subscription Agent as to the action to be taken with respect to the Rights not sold, or you or your bank or broker must first have your subscription certificate divided into subscription certificates of appropriate denominations by following the instructions in paragraph 4 of these instructions. The subscription certificates evidencing the number of Rights you intend to sell can then be transferred by your bank or broker in accordance with the instructions in this paragraph 3(a). (b) Transfer of Rights to a Designated Transferee. To transfer all of your Rights to a transferee other than a bank or broker, you must complete Form 2 in its entirety, execute the subscription certificate and have your signature guaranteed by an Eligible Institution. A subscription certificate that has been properly transferred in its entirety may be exercised by a new holder without having a new subscription certificate issued. In order to exercise, or otherwise take action with respect to, such a transferred subscription certificate, the new holder should deliver the subscription certificate, together with payment of the applicable Subscription Price and complete separate instructions signed by the new holder, to the Subscription Agent in ample time to permit the Subscription Agent to take the desired action. Because only the Subscription Agent can issue subscription certificates, if you wish to transfer less than all of the Rights evidenced by your subscription certificate to a designated transferee, you must instruct the Subscription Agent as to the action to be taken with respect to the Rights not sold or transferred, or you must divide your subscription certificate into subscription certificates of appropriate smaller denominations by following the instructions in paragraph 4 below. The subscription certificate evidencing the number of Rights you intend to transfer can then be transferred by following the instructions in this paragraph 3(b). (c) Sale of Rights through Subscription Agent. To sell some or all of your Rights through the Subscription Agent, you must check the box in Form 3 and deliver the subscription certificate to the Subscription Agent. Your subscription certificate should be delivered to the Subscription Agent in ample time for it to be sold and exercised, but in no event later than 11:00 a.m., New York City time, on [day], ________, 1997. The Subscription Agent's obligation to execute orders is subject to its ability to find buyers. If you wish to sell less than all of your Rights, you or your bank or broker must instruct the Subscription Agent as to the action to be taken with respect to the Rights not sold. Promptly following the Expiration Date, the Subscription Agent will send you a check for the net proceeds of such sale as described in the Prospectus. If you wish to sell Rights through the Subscription Agent, you should also complete the Substitute Form W-9 referred to in paragraph 8 below. -4- 5 4. TO HAVE A SUBSCRIPTION CERTIFICATE DIVIDED INTO SMALLER DENOMINATIONS. To have a subscription certificate divided into smaller denominations, send your subscription certificate, together with complete separate instructions (including specification of the denominations into which you wish your Rights to be divided) signed by you, to the Subscription Agent, allowing sufficient time for new subscription certificates to be issued and returned so that they can be used prior to the Expiration Date. Alternatively, you may ask a bank or broker to effect such actions on your behalf. Your signature must be guaranteed by an Eligible Institution if any of the new subscription certificates is to be issued in a name other than that in which the old subscription certificate was issued. Subscription certificates may not be divided into fractional Rights, and any instruction to do so will be rejected. AS A RESULT OF DELAYS IN THE MAIL, THE TIME OF THE TRANSMITTAL, THE NECESSARY PROCESSING TIME AND OTHER FACTORS, YOU OR YOUR TRANSFEREE MAY NOT RECEIVE SUCH NEW SUBSCRIPTION CERTIFICATES IN TIME TO ENABLE THE RIGHTS HOLDER TO COMPLETE A SALE OR EXERCISE BY THE EXPIRATION DATE. NEITHER THE COMPANY NOR THE SUBSCRIPTION AGENT WILL BE LIABLE TO EITHER A TRANSFEROR OR TRANSFEREE FOR ANY SUCH DELAYS. 5. EXECUTION. (a) Execution by Registered Holder. The signature on the subscription certificate must correspond with the name of the registered holder exactly as it appears on the face of the subscription certificate without any alteration or change whatsoever. Persons who sign the subscription certificate in a representative or other fiduciary capacity must indicate their capacity when signing and, unless waived by the Subscription Agent in its sole and absolute discretion, must present to the Subscription Agent satisfactory evidence of their authority to so act. (b) Execution by Person Other than Registered Holder. If the subscription certificate is executed by a person other than the holder named on the face of the subscription certificate, proper evidence of authority of the person executing the subscription certificate must accompany the same unless, for good cause, the Subscription Agent dispenses with proof of authority. (c) Signature Guarantees. Your signature must be guaranteed by an Eligible Institution if you wish to transfer your Rights, as specified in paragraph 3(b) above, to a transferee other than a bank or broker, if you wish a new subscription certificate or certificates to be issued in a name other than that in which the old subscription certificate was issued, as specified in paragraph 4 above, or if you specify special payment or delivery instructions pursuant to Form 4. 6. METHOD OF DELIVERY. The method of delivery of subscription certificates and payment of the Exercise Price to the Subscription Agent will be at the election and risk of the Rights holder, but, if sent by mail, it is recommended that they 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 the clearance of any checks sent in payment of the Exercise Price prior to 5:00 p.m., New York City time, on the Expiration Date. 7. SPECIAL PROVISIONS RELATING TO THE DELIVERY OF RIGHTS THROUGH THE DEPOSITORY TRUST COMPANY. In the case of holders of Rights that are held of record through The Depository Trust Company ("DTC"), exercises of the Basic Subscription Privilege (but not the Oversubscription 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. The Oversubscription Privilege in respect of DTC Exercised Rights may not be exercised through DTC. The holder of a DTC Exercised Right may exercise the Oversubscription Privilege in respect of such DTC Right by properly executing and delivering to the Subscription Agent at or prior to 5:00 p.m., New York City time, on the Expiration Date, a DTC Participant Oversubscription Exercise Form, in the form available from the -5- 6 Subscription Agent, together with payment of the appropriate Subscription Price for the number of Underlying Shares for which the Oversubscription Privilege is to be exercised. 8. SUBSTITUTE FORMS W-8 AND W-9. Each Rights holder who elects either to exercise Rights or to have the Subscription Agent endeavor to sell such holder's Rights should provide the Subscription Agent with either a Certificate of Foreign Status on Substitute Form W-8 or a correct Taxpayer Identification Number ("TIN") on Substitute Form W-9, both of which forms are included on the subscription certificate. Additional copies of Substitute Forms W-8 and W-9 may be obtained upon request from the Subscription Agent at the address, or by calling the telephone number, indicated above. Failure to provide the information on these forms may subject such holder to a $50 penalty and to 31% federal income tax withholding with respect to (i) dividends that may be paid by the Company on shares of Common Stock purchased upon the exercise of Rights (for those holders exercising Rights) or (ii) funds to be remitted to Rights holders in respect of Rights sold by the Subscription Agent (for those holders electing to have the Subscription Agent sell their Rights). -6- 7 EXHIBIT A NOTICE OF GUARANTEED DELIVERY FOR SUBSCRIPTION CERTIFICATES ISSUED BY HANOVER DIRECT, INC. This form, or one substantially equivalent hereto, must be used to exercise Rights pursuant to the Rights Offering described in the Prospectus dated ________, 1997 (the "Prospectus") of Hanover Direct, Inc., a Delaware corporation (the "Company"), if a holder of Rights cannot deliver the subscription certificates(s) evidencing the Rights (the "Subscription Certificate(s)") to the Subscription Agent listed below (the "Subscription Agent") at or prior to 5:00 p.m., New York City time, on [day], ________, 1997 (the "Expiration Date"). Such form must be delivered by hand or sent by facsimile transmission or mail to the Subscription Agent, and must be received by the Subscription Agent on or prior to the Expiration Date. See "THE RIGHTS OFFERING - EXERCISE OF RIGHTS" in the Prospectus. Payment of the Subscription Price of $.90 per share for each share of the Company's Common Stock subscribed for upon exercise of such Rights must be received by the Subscription Agent in the manner specified in the Prospectus at or prior to 5:00 p.m., New York City time, on the Expiration Date even if the Subscription Certificate evidencing such Rights is being delivered pursuant to the procedures for guaranteed delivery thereof. The Subscription Agent is: American Stock Transfer & Trust Company By Mail: By Facsimile By Hand: American Stock Transfer Transmission: American Stock Transfer & Trust Company (718) 234-5001 & Trust Company 40 Wall Street, 46th Floor 40 Wall Street, 46th Floor New York, New York 10005 New York, New York 10005 To Confirm Receipt of Facsimile and For General Information: (212) 936-5100 (718) 921-8200 DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. A-1 8 HANOVER DIRECT, INC. Gentlemen: The undersigned hereby represents that he or she is the holder of Subscription Certificate(s) representing Rights and that such Subscription Certificate(s) cannot be delivered to the Subscription Agent at or before 5:00 p.m., New York City time, on the Expiration Date. Upon the terms and subject to the conditions set forth in the Prospectus, receipt of which is hereby acknowledged, the undersigned hereby elects to exercise the Subscription Privilege to subscribe for one share of Common Stock per Right with respect to each of Rights represented by such Subscription Price of $.90 per share for each share of Common Stock subscribed for pursuant to the Subscription Privilege must be received by the Subscription agent at or before 5:00 p.m., New York City time, on the Expiration Date and represents that such payment, in the aggregate amount of $ , either (check appropriate box): [ ] is delivered herewith or [ ] was delivered separately in the manner set forth below (check appropriate box and complete information relating thereto): [ ] wire transfer of funds - name of transferor institution..................................... - date of transfer.................confirmation number (if available) [ ] uncertified check (Payment by uncertified check will not be deemed to have been received by the Subscription Agent until such check has cleared. Holders paying by such means are urged to make payment sufficiently in advance of the Expiration Date to ensure that such payment clears by such date.) [ ] certified check [ ] bank draft (cashier's check) - name of maker...................................................... - date and number of check, draft or money order..................... (date) (number) - bank on which check is drawn or issuer of money order.............. Signature(s). . . . . . . . . Address . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Name(s). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tel. No(s).(...). . . . . . . . . . . . . Please Type or Print Subscription Certificate No(s). (if available).................................. A-2 9 GUARANTEE OF DELIVERY (NOT TO BE USED FOR SUBSCRIPTION CERTIFICATE SIGNATURE GUARANTEE) The undersigned, a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc. or a commercial bank or trust company having an office or correspondent in the United States, guarantees that the undersigned will deliver to the Subscription Agent the certificates representing the Rights being exercised hereby, with any required signature guarantees and any other required documents, all within three American Stock Exchange, Inc. trading days after the date hereof. . . . . . . . . . . . . . . . . Dated: . . . . . . . . . . . . . . . , 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Name of Firm) Address . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Area Code and Telephone Number) (Authorized Signature) The institution which completes this form must communicate the guarantee to the Subscription Agent and must deliver the Subscription Certificate(s) to the Subscription Agent within the time period shown herein. Failure to do so could result in a financial loss to such institution. A-3 10 EXHIBIT B IMPORTANT TAX INFORMATION Under the federal income tax law, (i) dividend payments that may be made by the Company on shares of Common Stock issued upon the exercise of Rights, and (ii) payments that may be remitted by the Subscription Agent to Rights holders in respect of Rights sold on such holders' behalf by the Subscription Agent, may be subject to backup withholding, and each rights holder who either exercises rights or requests the Subscription agent to sell Rights should provide the Subscription Agent (as the Company's agent, in respect of exercised Rights, and as payer with respect to Rights sold by the Subscription Agent) with either a Certificate of Foreign Status on substitute Form W-8 or such Rights holder's correct taxpayer identification number on Substitute Form W-9, both of which forms are included on the subscription certificate. If such Rights holder is an individual, the taxpayer identification number is his social security number. If the Subscription Agent, which is also the transfer agent for the Company, is not provided with either a Certificate of Foreign Status or the correct taxpayer identification number in connection with such payments, the Rights holder may be subject to a $50 penalty imposed by the Internal Revenue Service. Exempt Rights holders (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. In general, in order for a foreign individual to qualify as an exempt recipient, that Rights holder must submit a statement, signed under the penalties of perjury, attesting to that individual's exempt status. Such statements can be obtained from the Subscription Agent. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. If backup withholding applies, the Company or the Subscription Agent, as the case may be, will be required to withhold 31 percent of any such payments made to the Rights holder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained. PURPOSE OF SUBSTITUTE FORMS W-8 AND W-9 To prevent backup withholding, the Rights holder is required either to provide the Subscription Agent with a Certificate of Foreign Status by completing the Substitute Form W-8 which is included on the subscription certificate or to notify the Subscription Agent of his correct taxpayer identification number by completing the Substitute Form W-9 which is included on the subscription certificate certifying that the taxpayer identification number provided on Substitute Form W-9 is correct (or that such Rights holder is awaiting a taxpayer identification number). WHAT NUMBER TO GIVE THE SUBSCRIPTION AGENT The Rights holder is required to give the Subscription Agent the social security number or employer identification number of the record owner of the Rights. If the Rights are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidelines on which number to report. B-1 11 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER. Social Security numbers have nine digits separated by two hyphens: i.e. 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e. 00-0000000. The table below will help determine the number to give the payer.
====================================================================================================================== GIVE THE NAME AND SOCIAL SECURITY FOR THIS TYPE OF ACCOUNT: NUMBER OF- - ---------------------------------------------------------------------------------------------------------------------- 1. Individual The individual - ---------------------------------------------------------------------------------------------------------------------- 2. Two or more individuals (joint account) The actual owner of the account or, if combined funds, the first individual on the account(1) - ---------------------------------------------------------------------------------------------------------------------- 3. Custodian account of a minor (Uniform Gifts to The minor(2) Minors Act) - ---------------------------------------------------------------------------------------------------------------------- 4. a. The usual revocable savings trust (grantor is The grantor-trustee(1) also trustee) - ---------------------------------------------------------------------------------------------------------------------- b. The so-called trust account that is not a The actual owner(1) legal or valid trust under state law - ---------------------------------------------------------------------------------------------------------------------- 5. Sole proprietorship The owner(3) - ---------------------------------------------------------------------------------------------------------------------- GIVE THE NAME AND EMPLOYER IDENTIFICATION FOR THIS TYPE OF ACCOUNT: NUMBER OF- - ---------------------------------------------------------------------------------------------------------------------- 6. A valid trust, estate or pension trust Legal entity (do not furnish the identification number of the personal representative or trustee unless the legal entity itself is not designated in the account title)(4) - ---------------------------------------------------------------------------------------------------------------------- 7. Corporation The corporation - ---------------------------------------------------------------------------------------------------------------------- 8. Association, club, religious, charitable, educational or The organization other tax-exempt organization - ---------------------------------------------------------------------------------------------------------------------- 9. Partnership The partnership - ---------------------------------------------------------------------------------------------------------------------- 10. A broker or registered nominee The broker of nominee - ---------------------------------------------------------------------------------------------------------------------- 11. Account with the Department of Agriculture in the The public entity name of a public entity (such as a State or local government, school district, or prison) that receives agricultural program payments ======================================================================================================================
- -------- (1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Show the name of the owner. You may also enter your business name. (4) List first and circle the name of the legal trust, estate or pension trust. Note: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. B-2 12 Obtaining a Number If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Number Card, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from backup withholding on ALL payments include the following: - A corporation. - A financial institution. - An organization exempt from tax under section 501(a), or an individual retirement plan, or a custodial account under section 403(b)(7). - The United States or any agency or instrumentality thereof. - A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. - A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. - An international organization of any agency or instrumentality thereof. - A dealer in securities or commodities registered in the United States or a possession of the United States. - A real estate investment trust. - A common trust fund operated by a bank under section 584(a). - An exempt charitable remainder trust, or a non-exempt trust described in section 4947(a)(1). - An entity registered at all times under the Investment Company Act of 1940. - A foreign central bank of issue. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: - Payments to nonresident aliens subject to withholding under section 1441. - Payments to partnerships not engaged in a trade or business in the United States and which have at least one nonresident partner. - Payments of patronage dividends where the amount received is not paid in money. - Payments made by certain foreign organizations. Payments of interest not generally subject to backup withholding include the following: - Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. - Payments of tax-exempt interest (including exempt-interest dividends under section 852). - Payments described in section 6049(b)(5) to nonresident aliens. - Payments on tax-free covenant bonds under section 1451. - Payments made by certain foreign organizations. - Mortgage interest paid to you. B-3 13 Exempt payees described above should file Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, SIGN AND DATE THE FORM AND RETURN IT TO THE PAYER. Payments that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6042, 6044, 6045, 6049, 6050A and 6050N. PRIVACY ACT NOTICE. Section 6109 requires most recipients of dividends, interest, or other payments to give taxpayer identification numbers to payers who must report the payments to the IRS. The IRS uses the numbers for identification purposes and to help verify the accuracy of your tax return. Payers must generally withhold 31% of taxable interest, dividends, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. If you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. Falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION, CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. B-4 14 GUIDELINES FOR CERTIFICATION OF FOREIGN STATUS ON SUBSTITUTE FORM W-8 Use Form W-8 to tell a payer, middleman, broker or barter exchange that you are a nonresident alien individual, foreign entity, or exempt foreign person not subject to certain U.S. information return reporting or backup withholding rules. Caution: Form W-8 does not exempt the payee from the 30% (or lower treaty) nonresident withholding rates which may apply. NONRESIDENT ALIEN INDIVIDUAL: For income tax purposes, "nonresident alien individual" means an individual who is neither a U.S. citizen nor resident. Generally, an alien is considered to be a U.S. resident if: - The individual was a lawful permanent resident of the United States at any time during the calendar year, that is, the alien held an immigrant visa (a "green card"), or - The individual was physically present in the United States on: (1) at least 31 days during the calendar year, and (2) 183 days or more during the current year and the 2 preceding calendar years (counting all the days of physical presence in the current year, one-third the number of days of presence in the first preceding year, and only one-sixth of the number of days in the second preceding year). EXEMPT FOREIGN PERSON: For purposes of Form W-8, you are an "exempt foreign person" for a calendar year in which: - You are a nonresident alien individual or a foreign corporation, partnership, estate or trust, - You are an individual who has not been, and plans not to be, present in the United States for a total of 183 days or more during the calendar year, and - You are neither engaged, nor plan to be engaged during the year, in a U.S. trade or business that has effectively connected gains from transactions with a broker or barter exchange. PERMANENT ADDRESS: Enter your complete address in the country where you reside permanently for income tax purposes: If you are: Show the address of: An individual Your permanent residence A partnership or corporation Principal office An estate or trust Permanent resident or principal office of any fiduciary
Also show your current mailing address if it differs from your permanent address. NOTICE OF CHANGE IN STATUS: If you become a U.S. citizen or resident after you have filed Form W-8 or you cease to be an exempt foreign person, you must notify the payer in writing within 30 days of your change of status. FALSE CERTIFICATE: If you file a false certificate when you are not entitled to the exemption from withholding or reporting, you may be subject to fines and/or imprisonment under U.S. perjury laws. FOR ADDITIONAL INFORMATION, CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE B-5 15 HANOVER DIRECT INC. RIGHTS OFFERING DTC PARTICIPANT OVERSUBSCRIPTION EXERCISE FORM THIS FORM IS TO BE USED ONLY BY DEPOSITORY TRUST COMPANY PARTICIPANTS TO EXERCISE THE OVERSUBSCRIPTION PRIVILEGE IN RESPECT OF RIGHTS WITH RESPECT TO WHICH THE BASIC SUBSCRIPTION PRIVILEGE WAS EXERCISED AND DELIVERED THROUGH THE FACILITIES OF THE DEPOSITORY TRUST COMPANY, ALL OTHER EXERCISES OF OVERSUBSCRIPTION PRIVILEGES MUST BE EFFECTED BY THE DELIVERY OF THE SUBSCRIPTION FORMS. ------------ THE TERMS AND CONDITIONS OF THE RIGHTS OFFERING ARE SET FORTH IN THE COMPANY'S PROSPECTUS DATED _______________, 1997 (THE "PROSPECTUS") AND ARE INCORPORATED HEREIN BY REFERENCE, COPIES OF THE PROSPECTUS ARE AVAILABLE UPON REQUEST FROM THE COMPANY, THE INFORMATION AGENT AND THE SUBSCRIPTION AGENT. ------------ VOID UNLESS RECEIVED BY THE SUBSCRIPTION AGENT WITH PAYMENT IN FULL BY 5:00 P.M., NEW YORK CITY TIME, ON ________, 1997 (THE "EXPIRATION DATE"). ------------ 1. The undersigned hereby certifies to the Company and the Subscription Agent that it is a participant in The Depository Trust Company ("DTC") and that it has either (i) exercised the Basic Subscription Privilege in respect of Rights and delivered such exercised Rights to the Subscription Agent by means of transfer to the DTC account of the Subscription Agent or (ii) delivered to the Subscription Agent a Notice of Guaranteed Delivery in respect of the exercise of the Basic Subscription Privilege and will deliver the Subscription Certificate(s) called for in such Notice of Guaranteed Delivery to the Subscription Agent by means of transfer to such DTC account of the Subscription Delivery to the Subscription Agent by means of transfer to such DTC account of the Subscription Agent. The undersigned hereby certifies to the Company and the Subscription Agent that the beneficial holders owned _______ Shares of Common Stock on the Record Date. 2. The undersigned hereby exercises the Oversubscription Privilege to purchase, to the extent available, shares of Common Stock and certifies to the Company and the Subscription Agent that such Oversubscription Privilege is being exercised for the account or accounts of persons (which may include the undersigned) on whose behalf the Basic Subscription Privilege has been exercised in its entirety. 3. The undersigned understands that payment of the Subscription Price of $.90 per share for each share of Common Stock subscribed for pursuant to the Oversubscription Privilege must be received by the Subscription Agent at or before 5:00 p.m. New York City time on the Expiration Date and represents that such payment, in the aggregate amount of $_________, is or was delivered in the manner set forth below (check appropriate box and complete relating thereto): - uncertified check - certified check - bank draft 4. The undersigned understands that in the event it is not allocated the full amount of shares oversubscribed for above, any excess payment to be refunded by the Company will be mailed to it by the Subscription Agent as provided in the Prospectus. B-6 16 ______________________________________ Basic Subscription Confirmation Number ______________________________________ DTC Participant ______________________________________ Name of DTC Participant ______________________________________ By: Name: Title: Contact Name:________________________ Phone Number:________________________ Dated:_______________________________ B-7 EX-99.3 8 FORM OF SUBSCRIPTION AGENCY AGREEMENT 1 Exhibit 99.3 SUBSCRIPTION AGENCY AGREEMENT SUBSCRIPTION AGENCY AGREEMENT (this "Agreement"), dated as of ______ , 1997, 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- ) 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 $.66 2/3 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, the Series B Convertible Additional Preferred Stock, par value $.01 and stated value $10.00 per share (the "Series B Preferred Stock"), as of the close of business on , , 1997 (the "Record Date") at a rate of .3824 Rights for each share of Common Stock and .5742 Rights for each share of Series B Preferred 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 $.90 (the "Subscription Price") one Underlying Share for each Right held (the "Basic Subscription Privilege"); WHEREAS, Rights holders will also be entitled to subscribe to purchase any underlying shares that are not subscribed for through the Basic Subscription Privilege, subject to proration by the Company, if necessary (the "Oversubscription Privilege"). The right to subscribe for such underlying shares pursuant to the Oversubscription Privilege is not transferrable. 2 WHEREAS, Richemont S.A. ("Richemont") will be entitled to subscribe to purchase any Underlying Shares that are not subscribed for through the Basic Subscription Privilege or the Oversubscription Privilege (the "Standby Purchase Commitment"); and 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 and Series B Preferred 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 and Series B Preferred 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 Registration Statement. SECTION 3. Subscription Privileges; Form of Subscription Certificates. -2- 3 (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. (b) Pursuant to the Oversubscription Privilege, each Right grants to the holder thereof, upon the valid exercise of the Right pursuant to Section thereof, 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, subject to proration by the Company under certain circumstances. (c) The Standby Purchase Commitment grants to Richemont 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, or the Oversubscription Privilege. (d) 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 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. -3- 4 (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 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 , , 1997 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 -4- 5 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 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 , 1997 (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, the Oversubscription Privilege and the Standby Purchase Commitment. -5- 6 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 Oversubscription Privilege may be effected by properly executing and delivering to the Subscription Agent a DTC Participant Oversubscription Exercise Form, together with payment of the appropriate Subscription Price for the number of Underlying shares for which the Oversubscription Privilege 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 Oversubscription Privilege 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 Oversubscription Privilege, 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 -6- 7 City time, on the date three American Stock Exchange ("AMEX") 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 5:00 p.m., New York City time, on the date three AMEX 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 $.90 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 the [Chase Manhattan Bank, Account No. 323053807; ABA No. 021000021] (the "Bank Account"). 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 -7- 8 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 pursuant to the Basic Subscription Privilege, as soon as practicable following the Expiration date. (g) Funds received by the Subscription Agent in payment of the Subscription Price for Excess Shares subscribed for pursuant to the Oversubscription Privilege shall be held in a segregated account pending issuance of such excess shares. (h) Upon receipt by the Subscription Agent of a notice of satisfaction or waiver of the conditions to the standby purchase commitment from the Company substantially in the form of Annex A hereto on or before the Expiration Date, the Subscription Agent shall and is hereby directed to withdraw from the Bank Account and pay to, credit to the account of or otherwise transfer to the Company all such funds on , 1997 (the "Closing Date"). Upon receipt by the Subscription Agent of a notice of failure to satisfy or waive the conditions to the standby purchase commitment from the Company substantially in the form of Annex B hereto on or before the Expiration Date, the Subscription Agent shall and is hereby directed to withdraw from the Bank Account and return to exercising Rights holders all such funds as promptly as practicable following the Expiration Date. (i) 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. (j) 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. (k) Once a holder of Rights has exercised a Right, such exercise may not be revoked. -8- 9 (l) 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 and the Oversubscription Privilege, if any. (b) As soon as practicable after the Expiration Date, the Subscription Agent shall deliver to Richemont Certificates representing the shares of Common Stock purchased pursuant to the Standby Purchase Commitment. 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 -9- 10 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 commissions, taxes and other direct expenses of sale. 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 and (iii) shall effect all such sales in accordance with applicable law. 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 , 1997. If no instructions have been received, the Subscription Agent will use its best efforts to sell the Rights. The net proceeds, -10- 11 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 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 (including the Information Agent, Morrow & Co., Inc.) 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 three AMEX 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 Oversubscription Privilege, 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 noon p.m., New York City time, on the first AMEX 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. -11- 12 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 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 -12- 13 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 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 -13- 14 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; provided, however, that the failure of the Subscription Agent to notify the Company in the above manner will absolve the Company of liability only when such failure will result or has resulted in prejudice to the Company with respect to such claim or action; (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 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: -14- 15 (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 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. -15- 16 (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 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: Edward J. O'Brien Telecopier: (201) 392-5005 (b) if to the Subscription Agent, to: -16- 17 American Stock Transfer & Trust Company 6201 Fifteenth Avenue Brooklyn, New York 11219 Attention: Donna Ansbro and 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 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 -17- 18 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 or 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 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 [American Stock Transfer & Trust Company Letterhead] _____ , 1997 Edward J. O'Brien Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, NJ 07087 Dear Mr. O'Brien: This is to confirm that American Stock Transfer & Trust Company will act as Hanover Direct, Inc.'s Subscription Agent and we will perform the following services: - Mailing material to shareholders; - Issuing certificates to subscribing shareholders; - Curing all deficient items; - Collecting checks; - Remitting payments to the company; - Researching all problem items; - Communicating with shareholders; - Communicating with Depository Trust Company and all brokers regarding their respective record date positions; - Changing addresses; and - Reporting to company on daily totals. Our fee will be $ plus out-of-pocket expenses limited to postage, envelopes and 1099 forms. Payment will be due to us upon completion of the offering. Looking forward to working with you. Please rest assured that we will do everything in our power to merit your goodwill and confidence. Very truly yours, AMERICAN STOCK TRANSFER & TRUST COMPANY 21 ANNEX A FORM OF NOTICE Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, New Jersey 07087 _____ , 1997 American Stock Transfer & Trust Company 6201 Fifteenth Avenue Brooklyn, New York 11219 Attention: Donna Ansbro and Herbert Lemmer Re: Disbursement of Funds Dear Sirs: Pursuant to Section 7(h) of the Subscription Agency Agreement, dated as of _____ , 1997 (the "Agreement"), by and between Hanover Direct, Inc., a Delaware public company (the "Company"), and American Stock Transfer and Trust Company, as Subscription Agent (the "Subscription Agent"), you are hereby notified that all the conditions set forth in that certain Standby Purchase Agreement, dated March 26, 1997, between the Company and Richemont S.A., a Luxembourg corporation ("Richemont"), have been satisfied or otherwise waived by Richemont. Capitalized terms used but not defined herein have the meanings set forth in the Agreement. Accordingly you are hereby directed to withdraw from the Bank Account and pay to, credit to the account of or otherwise transfer to the Company all the funds in the Bank Account as promptly as practicable and in no event later than noon on , 1997 as provided in Section 7(h) of the Agreement. IN WITNESS WHEREOF, the Company has duly caused this Notice to be delivered to you in accordance with the terms of the Agreement. HANOVER DIRECT, INC. By:___________________________ Name: Title: 22 ANNEX B FORM OF NOTICE [Company's Letterhead] _____ , 1997 Notice of Failure to Satisfy or Waive Conditions of Standby Purchase American Stock Transfer & Trust Company 6201 Fifteenth Avenue Brooklyn, New York 11219 Attention: Donna Ansbro and Herbert Lemmer Re: Disbursement of Funds Dear Sirs: Pursuant to Section 7(h) of the Subscription Agency Agreement, dated as of _____ , 1997 (the "Agreement"), by and between Hanover Direct, Inc., a Delaware corporation (the "Company"), and American Stock Transfer and Trust Company, as Subscription Agent (the "Subscription Agent"), you are hereby notified that certain of the conditions set forth in that certain Standby Purchase Agreement, dated March 26, 1997, between the Company and Richemont, S.A., a Luxembourg public company ("Richemont"), have not been satisfied or otherwise waived by Richemont. Capitalized terms used but not defined herein have the meanings set forth in the Agreement. Accordingly you are hereby directed to withdraw from the Bank Account and return to exercising Rights holders all such funds as promptly as practicable following the Expiration Date as provided in Section 7(h) of the Agreement. IN WITNESS WHEREOF, the Company has duly caused this Notice to be delivered to you in accordance with the terms of the Agreement. HANOVER DIRECT, INC. By:___________________________ Name: Title: EX-99.4 9 FORM OF INFORMATION AGENT AGREEMENT 1 Exhibit 99.4 [Letterhead of Morrow & Co., Inc.] __________ __, 1997 Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, NJ 07087 Gentlemen: 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 ____________, 1997. 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 disbursements of $5,000.00, is due upon the signing of this agreement. The balance of our fee, plus additional disbursements incurred by us on your behalf, will be payable upon the expiration of the Offer. Included in our disbursements will be our charge 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. The number of shareholders to be called is to be approved by you in advance. 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 Offer materials. A statement listing each of the Broker/Nominee invoices will be furnished by us for your review and payment. 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, 2 Hanover Direct, Inc. Page Two 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 or 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 this letter to 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: HANOVER DIRECT, INC. By: _______________________ By: _________________________ Title: ____________________ Title: ______________________ Date: _____________________ EX-99.5 10 FORM OF LETTER TO COMMON STOCKHOLDERS - RECORD HLD 1 Exhibit 99.5 Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, N.J. 07087 201 863 7300 _______ __, 1997 To Our Shareholders: Hanover Direct, Inc. is distributing to the holders of its outstanding Common Stock, at no cost, Rights to purchase additional shares of Common Stock in a Rights Offering. Shareholders will receive .3824 Rights for each share of Common Stock held by them as of the close of business on [day], ________, 1997. Each whole right will entitle the holder thereof to a Subscription Privilege to purchase one share of Common Stock at $.90 per share. Enclosed herewith is a Subscription Certificate evidencing .3824 transferable Rights for each share of Common Stock that you owned at the close of business on [day], ________, 1997. Your Rights may be exercised, transferred or sold as explained more fully in the accompanying Instructions. If you choose to exercise your Rights, you must submit payment in full of the Subscription Price and appropriate documentation to the Subscription Agent no later than 5:00 p.m., New York City time, on [day], ________, 1997. The enclosed Prospectus provides the details of the Rights Offering and important information concerning the Company and the Common Stock being offered. Please read it carefully. YOU ARE URGED TO ACT PROMPTLY. THE RIGHTS OFFERING AND THE RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [DAY], ________, 1997. Very truly yours, RAKESH K. KAUL President and Chief Executive Officer EX-99.6 11 FORM OF LETTER TO COMMON STOCKHOLDERS - OUTSIDE US 1 Exhibit 99.6 Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, N.J. 07087 201 863 7300 _______, 1997 To Our Shareholders: Hanover Direct, Inc. is distributing to the holders of its outstanding Common Stock, at no cost, Rights to purchase additional shares of Common Stock in a Rights Offering. Shareholders will receive .3824 Rights for each share of Common Stock held by them as of the close of business on [day], _________, 1997. Each whole right will entitle the holder thereof to a Subscription Privilege to purchase one share of Common Stock at $.90 per share. Subscription certificates will not be mailed to shareholders whose addresses are outside the United States. Instead, the Subscription Agent, American Stock Transfer & Trust Company, is holding on your behalf a Subscription Certificate evidencing .3824 transferable Rights for each share of Common Stock that you owned at the close of business on [day], _________, 1997. Your Rights may be exercised, transferred or sold as explained more fully in the accompanying Instructions by instructing the Subscription Agent. If such instructions are not received by the Subscription Agent by 11:00 a.m., New York City time, on [day], _________, 1997, your Rights will, if feasible, be sold, and the net proceeds will be remitted to you, unless prohibited by applicable laws and regulations. Instructions to the Subscription Agent should be directed (1) if by mail, to American Stock Transfer & Trust Company, 40 Wall Street, 46th Floor, New York, New York 10005, or (2) if by telephone, to ___________________ (212) 936-5100. Please act promptly if you choose to exercise, sell or otherwise dispose of your Rights. Please bear in mind that in order for the exercise of the Rights to be valid, the payment of the Subscription Price for the Rights being exercised must be received no later than 5:00 p.m., New York City time, on [day], _________, 1997, and such payments by uncertified check must have cleared by such time. The enclosed Prospectus provides the details of the Rights Offering and important information concerning the Company and the Common Stock being offered. Please read it carefully. YOU ARE URGED TO ACT PROMPTLY. THE RIGHTS OFFERING AND THE RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [DAY], _________, 1997. Very truly yours, RAKESH K. KAUL President and Chief Executive Officer EX-99.7 12 FORM OF LETTER TO COMMON STOCKHOLDERS - BENEFICIAL 1 Exhibit 99.7 Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, N.J. 07087 201 863 7300 ________, 1997 To Our Shareholders: Hanover Direct, Inc. is distributing to the holders of its outstanding Common Stock, at no cost, Rights to purchase additional shares of Common Stock in a Rights Offering. Shareholders will receive .3824 Rights for each share of Common Stock held by them as of the close of business on [day], ________, 1997. Each whole right will entitle the holder thereof to a Subscription Privilege to purchase one share of Common Stock at $.90 per share. Your bank or broker has received on your behalf a Subscription Certificate evidencing .3824 transferable Rights for each share of Common Stock that you owned at the close of business on [day], ________, 1997. Your Rights may be exercised, transferred or sold as explained more fully in the accompanying Instructions. If you choose to exercise your Rights, your bank or broker must submit payment in full of the Subscription Price and appropriate documentation to the Subscription Agent no later than 5:00 p.m., New York City time, on [day], ________, 1997. The enclosed Prospectus provides the details of the Rights Offering and important information concerning the Company and the Common Stock being offered. Please read it carefully. YOU ARE URGED TO ACT PROMPTLY. THE RIGHTS OFFERING AND THE RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [DAY], ________, 1997. Very truly yours, RAKESH K. KAUL President and Chief Executive Officer EX-99.8 13 FORM OF LETTER TO CLIENTS OF COMMON STOCKHOLDERS 1 Exhibit 99.8 RIGHTS OFFERING 55,555,556 HANOVER DIRECT, INC. Common Stock ($.66 2/3 par value) THE RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , , 1997 ONCE A HOLDER HAS PROPERLY EXERCISED A RIGHT SUCH EXERCISE MAY NOT BE REVOKED. To our Clients: Enclosed for your consideration is a prospectus dated , 1997 (the "Prospectus") relating to the offering (the "Rights Offering") of Hanover Direct, Inc. (the "Company"), pursuant to which holders of the Company's Common Stock, par value $.66 2/3 per share (the "Common Stock"), as of the close of business on , , 1997, are being issued, at no cost to such holders, transferable subscription rights (the "Rights") to subscribe for and purchase, for a limited period of time, shares of the Company's Common Stock at a price of $.90 per share (the "Subscription Price"). The terms and conditions of this Rights Offering are set forth in the Prospectus, to which reference is made for a complete description of the Rights Offering. The Prospectus is being forwarded to you as the beneficial owner of the Subscription Certificate carried by us in your account but not registered in your name. An exercise or transfer of such Subscription Certificate may only be made by us as the holder of record and pursuant to your instructions. Accordingly, we request instruction as to whether you wish us to: (a) exercise any or all of the Rights held by us in your account, pursuant to the terms and conditions set forth in the enclosed Prospectus; (b) transfer all or any of such Rights to another party; or (c) attempt to sell such Rights for your account. WE URGE YOU TO READ THE PROSPECTUS CAREFULLY BEFORE INSTRUCTING US AS TO WHETHER OR NOT TO EXERCISE, TRANSFER OR SELL ANY RIGHTS. Your instructions to us should be forwarded as promptly as possible in order to permit us to exercise the rights, and 2 complete and deliver the Subscription Certificate on your behalf in accordance with the provisions of the Rights Offering. This Rights Offering will expire at 5:00 p.m., New York City time, on [day], , 1997 (the "Expiration Time"). Further, if you direct us to sell or transfer your Rights, you must so instruct us sufficiently in advance to permit such sale to be made or such transfer to be effected and a new Subscription Certificate to be issued to the recipient prior to the Expiration Time. If you wish to have us exercise, transfer or sell any or all of your Rights, please so instruct us by completing, executing and returning to us the instruction form on the reverse side hereof. If you exercise Rights, you must contact us in order to arrange for your payment of the Subscription Price. If we do not receive complete written instructions in accordance with the procedures outlined in the prospectus, we will not exercise, transfer or sell your Rights. If you have not indicted the number of Rights being exercised, or if you have not arranged for full payment of the Subscription Price for the number of Rights that you have indicated are being exercised, you will be deemed to have exercised the Subscription Privilege with respect to the maximum number of Rights which may be exercised for the Subscription Price payment arranged for by you. To the extent that the Subscription Price payment arranged for by you exceeds the product of the Subscription Price multiplied by the number of Rights attendant to your Subscription Privilege (such excess being the "Subscription Excess"), you will be deemed to have exercised the oversubscription privilege to purchase, to the extent available, the number of whole shares of Common Stock equal to the quotient obtained by dividing the Subscription Excess by $.90. Any amount remaining after such division will be returned to you or credited to your account from which payment was made. If you merely sign the instruction form without completing it and arranging for any Subscription Price payment, we will deem it to mean that you do not want us to exercise your Rights, but want us to attempt to sell all of your Rights. INSTRUCTIONS AS TO RIGHTS The undersigned acknowledge(s) receipt of your letter and the Prospectus relating to the Rights Offering of Hanover Direct, Inc., and hereby instructs you as follows: 1. EXERCISE OF RIGHTS. Please exercise my rights to subscribe for shares of Common Stock as indicated below: 3 (a) Number of shares subscribed for pursuant to the Basic Subscription Privilege: ----------------------- (b) Number of shares subscribed for pursuant to the Oversubscription Privilege (1): -------------------- (c) Total Subscription Price (total number of shares subscribed for pursuant to both the Basic Subscription Privilege and the Oversubscription Privilege multiplied by the Subscription Price of $.90): $ ------------------- You must contact us to arrange your method of payment of the SUBSCRIPTION PRICE. 2. TRANSFER OF RIGHTS. For value received, ____________________ of my unexercised Rights are hereby transferred to: Name:__________________________________________________________________________ Address:_______________________________________________________________________ _______________________________________________________________________________ (Including Zip Code) Tax Identification or Social Security Number of recipient: _______________________________________________________________________________ 3. SALE OF RIGHTS Please attempt to sell _______________________ of my unexercised Rights. SIGN AND DATE HERE: Dated:__________, 1997 ________________________________________ Signature ________________________________________ Please print name(s) and address(es) below: ________________________________________ - -------- * Each Whole right entitles the holder thereof to subscribe for one share of Common Stock. The number of Rights distributed to each stockholder will be rounded up to the nearest whole number and no fractional Rights or cash in lieu thereof will be issued or paid. EX-99.9 14 FORM OF LETTER TO SERIES B PREFERRED STOCKHOLDERS 1 Exhibit 99.9 Hanover Direct, Inc. 1500 Harbor Boulevard Weehawken, N.J. 07087 201 863 7300 _______ __, 1997 To Our Shareholders: Hanover Direct, Inc. is distributing to the holders of its outstanding Series B Convertible Additional Preferred Stock ("Series B Preferred Stock"), at no cost, Rights to purchase shares of Common Stock in a Rights Offering. Shareholders will receive .5742 Rights for each share of Series B Preferred Stock held by them as of the close of business on [day], __________, 1997. Each whole Right will entitle the holder thereof to a Subscription Privilege to purchase one share of Common Stock at $.90 per share. Enclosed herewith is a Subscription Certificate evidencing .5742 transferable Rights for each share of Series B Preferred Stock that you owned at the close of business on [day], _____________, 1997_. Your Rights may be exercised, transferred or sold as explained more fully in the accompanying Instructions. If you choose to exercise your Rights, you must submit payment in full of the Subscription Price and appropriate documentation to the Subscription Agent no later than 5:00 p.m., New York City time, on [day], _______, 1997. The enclosed Prospectus provides the details of the Rights Offering and important information concerning the Company and the Common Stock being offered. Please read it carefully. YOU ARE URGED TO ACT PROMPTLY. THE RIGHTS OFFERING AND THE RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [DAY],________, 1997. Very truly yours, RAKESH K. KAUL President and Chief Executive Officer EX-99.10 15 FORM OF CERTIFICATION & REQUEST FOR ADD'L RIGHTS 1 Exhibit 99.10 CERTIFICATION AND REQUEST FOR ADDITIONAL RIGHTS To the Subscription Agent: The undersigned hereby certifies that it is a broker-dealer registered with the Securities and Exchange Commission, a commercial bank or trust company, a securities depository or participant therein, or nominee therefor, holding of record ______________________ shares of Common Stock, par value $.66 2/3 per share (the "Common Stock"), of Hanover Direct, Inc. (the "Company") on behalf of ______________________ beneficial owners as of the close of business on [day], ________, 1997, the record date (the "Record Date") for the offering of up to 55,555,556 shares of Common Stock, all as described in a Prospectus dated ______________, 1997, a copy of which the undersigned has received. Such holders shall receive .3824 Rights for each share of Common Stock held of record as of the close of business on the Record Date and any fractional Right will be rounded up to the nearest whole number. The undersigned further certifies that __________________ shares of Common Stock registered in the name of the undersigned are entitled to an additional Right in accordance with the principle that any fractional Right to which a beneficial owner would otherwise be entitled should be rounded up to the nearest whole number. Accordingly, the undersigned requests that upon surrender of its Subscription Certificate evidencing Rights, a Subscription Certificate evidencing _____ Rights (including ___ additional Rights) be issued. The undersigned further certifies that each such beneficial owner is a bona fide beneficial owner of Common Stock as of the close of business on the Record Date, that such beneficial ownership is reflected on the undersigned's records and that all shares of Common Stock which, to the undersigned's knowledge, are beneficially owned by any such beneficial owner through the undersigned have been aggregated in calculating the foregoing. The undersigned agrees to provide the Company or its designee with such additional information as the Company deems necessary to verify the foregoing. __________________________________________ Name of Record Holder By:_______________________________________ Name: Title: Address: Telephone Number: Dated:_________________________, 1997 NOTE: Deliver this form with your Subscription Certificate to: American Stock Transfer & Trust Company, 40 Wall Street, 46th Floor, New York, New York 10005 EX-99.11 16 FORM OF LETTER TO PARTICIPANTS - 1994 BONUS PLAN 1 Exhibit 99.11 _____ __, 1997 To Participants in the 1994 Bonus Plan Hanover Direct, Inc. is distributing to the holders of its outstanding Common Stock, at no cost, Rights to purchase additional shares of Common Stock in a Rights Offering. Shareholders will receive .3824 Rights for each share of Common Stock held by them as of the close of business on [day], ________, 1997. Each whole Right will entitle the holder thereof to a Subscription Privilege to purchase one share of Common Stock at $.90 per share. Enclosed herewith is a Subscription Certificate evidencing .3824 transferable Rights for each of the shares of Common Stock that were awarded to you under the 1994 Bonus Plan and that have not yet vested ("Nonvested Shares"). Your Rights may be exercised, transferred or sold as explained more fully in the accompanying Instructions. If you choose to exercise your Rights, you must submit payment in full of the Subscription Price and appropriate documentation to the Subscription Agent no later than 5:00 p.m., New York City time, on [day], ________, 1997. The enclosed Prospectus provides the details of the Rights Offering and important information concerning the Company and the Common Stock being offered. Please read it carefully. There are certain federal income tax consequences under current law of the distribution of Rights with respect to your Nonvested Shares. The following is a brief summary of such tax consequences. Please note that this summary is not intended to be exhaustive and does not describe state or local tax consequences. - You will be required to include in your gross income, as compensation, the fair market value of the Rights distributed to you with respect to your Nonvested Shares. The Company will include this amount in the taxable wages reported on your 1997 Form W-2. 2 - The exercise of your Rights will not have any immediate tax consequences. Upon a subsequent sale or taxable exchange of the shares you acquire when you exercise your Rights, you will recognize long or short-term capital gain or loss equal to the difference between (i) the amount realized on the sale and (ii) the sum of the Subscription Price you paid to exercise the Rights and the amount that was includible in your gross income as a result of the distribution of the Rights to you. - If you sell you Rights rather than exercise them, you will recognize short-term capital gain or loss equal to the difference between the amount realized on the sale and the amount includible in your gross income as a result of the distribution of the Rights to you. - The Company will be entitled to a deduction for the amount of the compensation income that you recognize in connection with the distribution to you of Rights. The foregoing discussion does not apply to you if, at the time you acquired your Nonvested Shares, you made an election under Section 83(b) of the Internal Revenue Code to accelerate the recognition of income. If you made such an election, you should consult your tax advisor with regard to the tax consequences associated with the distribution to you of Rights. YOU ARE URGED TO ACT PROMPTLY. THE RIGHTS OFFERING AND THE RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [DAY], ________, 1997. Very truly yours, ---------------------------- Rakesh K. Kaul President and Chief Executive Officer EX-99.12 17 FORM OF LETTER TO PARTICIPANTS - EQUITY INV. PLAN 1 Exhibit 99.12 _________________, 1997 To Participants in the 1995 Bonus Plan Hanover Direct, Inc. is distributing to the holders of its outstanding Common Stock, at no cost, Rights to purchase additional shares of Common Stock in a Rights Offering. Shareholders will receive .3824 Rights for each share of Common Stock held by them as of the close of business on [day], _____________, 1997. Each whole Right will entitle the holder thereof to a Subscription Privilege to purchase one share of Common Stock at $.90 per share. Enclosed herewith is a Subscription Certificate evidencing .3824 transferable Rights for each of the shares of Common Stock that were awarded to you under the 1995 Bonus Plan and that have not yet vested ("Nonvested Shares"). Your rights may be exercised, transferred or sold as explained more fully in the accompanying Instructions. If you choose to exercise your Rights, you must submit payment in full of the Subscription Price and appropriate documentation to the Subscription Agent no later than 5:00 p.m., New York City time, on [day], ________________, 1997. The enclosed Prospectus provides the details of the Rights Offering and important information concerning the Company and the Common Stock being offered. Please read it carefully. There are certain federal income tax consequences under current law of the distribution of Rights with respect to your Nonvested Shares. The following is a brief summary of such tax consequences. Please note that this summary is not intended to be exhaustive and does not describe state or local tax consequences. - You will be required to include in your gross income, as compensation, the fair market value of the Rights distributed to you with respect to your Nonvested Shares. The Company will include this amount in the taxable wages reported on your 1997 Form W-2. 2 - The exercise of your Rights will not have any immediate tax consequences. Upon a subsequent sale or taxable exchange of the shares you acquire when you exercise your Rights, you will recognize long or short-term capital gain or loss equal to the difference between (i) the amount realized on the sale and (ii) the sum of the Subscription Price you paid to exercise the Rights and the amount that was includible in your gross income as a result of the distribution of the Rights to you. - If you sell your Rights rather than exercise them, you will recognize short-term capital gain or loss equal to the difference between the amount realized on the sale and the amount includible in your gross income as a result of the distribution of the Rights to you. - The Company will be entitled to a deduction for the amount of the compensation income that you recognize in connection with the distribution to you of Rights. The foregoing discussion does not apply to you if, at the time you acquired your Nonvested Shares, you made an election under Section 83(b) of the Internal Revenue Code to accelerate the recognition of income. If you made such an election, you should consult your tax advisor with regard to the tax consequences associated with the distribution to you of Rights. YOU ARE URGED TO ACT PROMPTLY. THE RIGHTS OFFERING AND THE RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [DAY], ________________, 1997. Very truly yours, ___________________________________ Rakesh K. Kaul President and Chief Executive Officer EX-99.13 18 FORM OF LETTER TO PARTICIPANTS RE: EQUITY INV PLAN 1 Exhibit 99.13 _____ __, 1997 To Participants in the All Employee Equity Investment Plan Hanover Direct, Inc. is distributing to the holders of its outstanding Common Stock, at no cost, Rights to purchase additional shares of Common Stock in a Rights Offering. Shareholders will receive .3824 Rights for each share of Common Stock held by them as of the close of business on [day], ________, 1997. Each whole Right will entitle the holder thereof to a Subscription Privilege to purchase one share of Common Stock at $.90 per share. Enclosed herewith is a Subscription Certificate evidencing .3824 transferable Rights for each of the shares of Common Stock that were awarded to you under the All Employee Equity Investment Plans and that have not yet vested ("Nonvested Shares"). Your Rights may be exercised, transferred or sold as explained more fully in the accompanying Instructions. If you choose to exercise your Rights, you must submit payment in full of the Subscription Price and appropriate documentation to the Subscription Agent no later than 5:00 p.m., New York City time, on [day], ________, 1997. The enclosed Prospectus provides the details of the Rights Offering and important information concerning the Company and the Common Stock being offered. Please read it carefully. There are certain federal income tax consequences under current law of the distribution of Rights with respect to your Nonvested Shares. The following is a brief summary of such tax consequences. Please note that this summary is not intended to be exhaustive and does not describe state or local tax consequences. - You will be required to include in your gross income, as compensation, the fair market value of the Rights distributed to you with respect to your Nonvested Shares. The Company will include this amount in the taxable wages reported on your 1997 Form W-2. 2 - The exercise of your Rights will not have any immediate tax consequences. Upon a subsequent sale or taxable exchange of the shares you acquire when you exercise your Rights, you will recognize long or short-term capital gain or loss equal to the difference between (i) the amount realized on the sale and (ii) the sum of the Subscription Price you paid to exercise the Rights and the amount that was includible in your gross income as a result of the distribution of the Rights to you. - If you sell your Rights rather than exercise them, you will recognize short-term capital gain or loss equal to the difference between the amount realized on the sale and the amount includible in your gross income as a result of the distribution of the Rights to you. - The Company will be entitled to a deduction for the amount of the compensation income that you recognize in connection with the distribution to you of Rights. The foregoing discussion does not apply to you if, at the time you acquired your Nonvested Shares, you made an election under Section 83(b) of the Internal Revenue Code to accelerate the recognition of income. If you made such an election, you should consult your tax advisor with regard to the tax consequences associated with the distribution to you of Rights. YOU ARE URGED TO ACT PROMPTLY. THE RIGHTS OFFERING AND THE RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON [DAY], ________, 1997. Very truly yours, ------------------- Rakesh K. Kaul President and Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----